Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Creating a budget is a crucial task for any business. It helps owners, executives, and managers estimate revenues and expenses, set goals, and closely monitor costs throughout the year.
Of course, budgets are just that — estimates. The final amounts for revenues and expenses at the end of the month, quarter, or year will almost certainly differ from budget projections. Those differences are called variances and analyzing those variances can give leaders a deeper understanding of a company’s financial well-being.
What is variance analysis?
Variance analysis investigates the differences between budgeted and actual results.
For example, if you budget for $1 million in sales and actual sales are $800,000, your variance is $200,000. Comparing your budget to actual results is a helpful first step but investigating the reason for the difference is essential.
These factors and others can contribute to variances, so taking the time to understand why fluctuations occur can help management know what they need to do to change the situation.
What causes budget variances?
Variances can occur for various reasons. Some of the most common include:
How is a variance analysis created?
Modern accounting software makes creating a variance analysis relatively straightforward. Most solutions include a budget-to-actual report that compares actual results to the budget and finds the difference between the two values as a number and a percentage.
You can then export this report to an Excel or Google spreadsheet, adding a column for explanations for any budget deviations.
The following best practices can make this process more manageable.
How often should you prepare variance reports?
The cadence with which you prepare variance reports will depend on the size of your company and management needs. A small business might only go through the process quarterly or annually.
On the other hand, a larger company or one that is experiencing rapid growth might perform the analysis every month.
At a minimum, you should review your budget to actual numbers every month, looking for unexpected discrepancies. This high-level review can help you quickly spot errors or identify trends so you can take action to keep the business on track.
Do you need help analyzing or setting up your variance reports? Give our team a call today to set up a strategy!
Unless you specialize in tax law, you’re probably not an accounting expert, but understanding accounting basics can help lawyers ensure their legal practice complies with ethics rules and accounting regulations.
Unlike other business owners, lawyers need to be familiar with two types of accounting: business and legal. While there is overlap between the two, there are differences, especially when handling client funds.
Differences between business and legal accounting
Business accounting is what law firms have in common with other businesses and includes expenses of running the law practice such as overhead, payroll, office rent, assets, liabilities, and equity.
Legal accounting is specific to law firms. It encompasses matter cost and income accounting — client costs, reimbursements, and fee income — as well as fee advances and retainer accounting.
Properly tracking the posting and reimbursement of matter costs is essential to ensure the firm’s accounting records are compliant. Law firms typically have two types of matter costs:
In accounting terms, any retainers received are liabilities — funds that haven’t yet been earned and still belong to someone else (the client).
Trust accounts are bank accounts set up specifically to hold client retainers.
General tips for accurate legal accounting
Consult with an Expert
Well-prepared and organized financial data not only helps with compliance but also offers critical insights into the operations of a law firm. Accountants can help law firms lay the foundation and establish best practices allowing firm leaders to focus on growing the firm.
Give our team a call if you need help ensuring you meet all of the regulatory requirements for your firm’s financial situation, including:
After the U.S. Supreme Court’s 2017 decision in South Dakota vs. Wayfair, many states quickly enacted laws resembling South Dakota’s to collect sales tax on remote purchases.
While physical nexus remains the first consideration in whether businesses are legally bound to collect and remit sales taxes on online sales, most states have adopted “economic nexus” rules, stating a business’ tax obligations kick in after it crosses a set level of sales in terms of quantity, dollar amounts, or both.
Receiving an audit notice from a state tax authority is one of the worst feelings a small business can have. Unfortunately, as states pursue tax collection, sales and use tax audits have become a standard part of doing business.
If your business is undergoing a sales tax audit or is worried about dealing with one in the future, here are four tips to navigate, prepare for, and avoid a sales tax audit.
How to reduce the risk of a sales tax audit
Several factors can trigger a sales tax audit. Many states use systematic methods and data analytics to identify businesses at risk for underreporting or underpaying their sales taxes. According to Thomson Reuters, some of the most common triggers for a sales tax audit include:
Your business also might be randomly selected for audit, so there’s no sure-fire way to avoid facing a sales tax audit. However, familiarizing yourself with the sales and use tax laws in the states where you do business, analyzing your nexus exposure, and registering and paying taxes in the proper jurisdictions is a good first step.
How to prepare for a sales tax audit
Time is of the essence once you receive notice you’ve been selected for an audit. Gathering and preparing the appropriate records takes time, so you want to start the process immediately.
Documents requested in the IDR typically include:
If any requested items aren’t available or you don’t believe they apply to the audit, be prepared to explain your reasons for not providing them.
In addition to looking for potential underpayments, look for overpayments, such as using a higher sales tax rate or charging tax on non-taxable items. These can potentially offset any underpayments uncovered during the audit.
Being under the microscope of a sales tax audit is stressful and can take up a lot of time. A professional who is well versed in sales and use taxes and knows how to deal with auditors can be an invaluable member of your team. By crafting a game plan for the audit and managing auditor expectations, they can potentially save your business thousands of dollars in taxes and penalties.
These professionals typically know how to answer the auditor’s questions truthfully without volunteering extra information that can invite additional scrutiny.
Have you received notice that you’re a target for a sale tax audit, or are you worried you may be on the radar? Contact us today to help you prepare for and navigate the process!
There’s a valuable tax deduction available to a C corporation when it receives dividends. The “dividends-received deduction” is designed to reduce or eliminate an extra level of tax on dividends received by a corporation. As a result, a corporation will typically be taxed at a lower rate on dividends than on capital gains.
Ordinarily, the deduction is 50% of the dividend, with the result that only 50% of the dividend received is effectively subject to tax. For example, if your corporation receives a $1,000 dividend, it includes $1,000 in income, but after the $500 dividends-received deduction, its taxable income from the dividend is only $500.
The deductible percentage of a dividend will increase to 65% of the dividend if your corporation owns 20% or more (by vote and value) of the payor’s stock. If the payor is a member of an affiliated group (based on an 80% ownership test), dividends from another group member are 100% deductible. (If one or more members of the group is subject to foreign taxes, a special rule requiring consistency of the treatment of foreign taxes applies.) In applying the 20% and 80% ownership percentages, preferred stock isn’t counted if it’s limited and preferred as to dividends, doesn’t participate in corporate growth to a significant extent, isn’t convertible, and has limited redemption and liquidation rights.
If a dividend on stock that hasn’t been held for more than two years is an “extraordinary dividend,” the basis of the stock on which the dividend is paid is reduced by the amount that effectively goes untaxed because of the dividends-received deduction. If the reduction exceeds the basis of the stock, gain is recognized. (A dividend paid on common stock will be an extraordinary dividend if it exceeds 10% of the stock’s basis, treating dividends with ex-dividend dates within the same 85-day period as one.)
Holding period requirement
The dividends-received deduction is only available if the recipient satisfies a minimum holding period requirement. In general, this requires the recipient to own the stock for at least 46 days during the 91-day period beginning 45 days before the ex-dividend date. For dividends on preferred stock attributable to a period of more than 366 days, the required holding period is extended to 91 days during the 181-day period beginning 90 days before the ex-dividend date. Under certain circumstances, periods during which the taxpayer has hedged its risk of loss on the stock are not counted.
Taxable income limitation
The dividends-received deduction is limited to a certain percentage of income. If your corporation owns less than 20% of the paying corporation, the deduction is limited to 50% of your corporation’s taxable income (modified to exclude certain items). However, if allowing the full (50%) dividends-received deduction without the taxable income limitation would result in (or increase) a net operating loss deduction for the year, the limitation doesn’t apply.
Let’s say your corporation receives $50,000 in dividends from a less-than-20% owned corporation and has a $10,000 loss from its regular operations. If there were no loss, the dividends-received deduction would be $25,000 (50% of $50,000). However, since taxable income used in computing the dividends-received deduction is $40,000, the deduction is limited to $20,000 (50% of $40,000).
Other rules apply if the dividend payor is a foreign corporation. Contact us if you’d like to discuss how to take advantage of this deduction.
The Internal Revenue Service will raise the optional standard mileage rate for the final six months of 2022 to help offset the rise in gas prices nationwide.
The new rates to calculate the deductible costs of operating an automobile for business and certain other purposes become effective July 1, 2022, and will remain in place through January 1, 2023. Those revised rates are:
Taxpayers should use the following rates for any miles traveled between January 1, 2022, and June 30, 2022:
The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute.
The IRS, which last made such an increase in 2011, noted it considered depreciation, insurance, and other fixed and variable costs in addition to the rising gas prices when raising the rates mid-year.
Businesses can use the standard mileage rate to calculate the deductible costs of operating qualified automobiles for business, charitable, medical, or moving purposes.
Important reminders and considerations
When reimbursing employees for miles driven, keep in mind the following reminders and considerations:
To review your organization’s mileage reimbursement policy and any alternate methods for calculating appropriate reimbursement amounts, reach out to our team of knowledgeable professionals today.
Here’s an interesting option if your small company or start-up business is planning to claim the research tax credit. Subject to limits, you can elect to apply all or some of any research tax credits that you earn against your payroll taxes instead of your income tax. This payroll tax election may influence some businesses to undertake or increase their research activities. On the other hand, if you’re engaged in or are planning to engage in research activities without regard to tax consequences, be aware that some tax relief could be in your future.
Here are some answers to questions about the option.
Why is the election important?
Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Therefore, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, a wage-paying business, even a new one, has payroll tax liabilities. The payroll tax election is thus an opportunity to get immediate use out of the research credits that a business earns. Because every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that’s a big help in the start-up phase of a business — the time when help is most needed.
Which businesses are eligible?
To qualify for the election a taxpayer:
In making these determinations, the only gross receipts that an individual taxpayer takes into account are from his or her businesses. An individual’s salary, investment income or other income aren’t taken into account. Also, note that neither an entity nor an individual can make the election for more than six years in a row.
Are there limits on the election?
Research credits for which a taxpayer makes the payroll tax election can be applied only against the employer’s old-age, survivors, and disability liability — the OASDI or Social Security portion of FICA taxes. So the election can’t be used to lower 1) the employer’s liability for the Medicare portion of FICA taxes or 2) any FICA taxes that the employer withholds and remits to the government on behalf of employees.
The amount of research credit for which the election can be made can’t annually exceed $250,000. Note too that an individual or C corporation can make the election only for those research credits which, in the absence of an election, would have to be carried forward. In other words, a C corporation can’t make the election for research credits that the taxpayer can use to reduce current or past income tax liabilities.
The above Q&As just cover the basics about the payroll tax election. And, as you may have already experienced, identifying and substantiating expenses eligible for the research credit itself is a complex area. Contact us for more information about the payroll tax election and the research credit.
Attorney trust accounts serve an essential purpose: protecting clients’ funds by segregating them from the law firm’s operating accounts. Keeping client funds separate will help ensure they aren’t used for the attorney’s personal or business expenses — either inadvertently or intentionally.
Attorneys have a professional responsibility to manage these trust accounts in good faith, also known as Interest Only Lawyers Trust Accounts (IOLTA). Failing to do so can have consequences, including disbarment. Since a firm doesn’t own the money in an IOLTA, misusing it is tantamount to theft. Considering the stakes involved, stay abreast of best practices for handling and accounting for client trust accounts.
Client Trust Fund Accounting Options
According to the National Law Review, client trust funds typically are used in three situations:
There are generally two ways to maintain IOLTA funds:
Either way, it’s crucial to keep track of the sources and uses for all funds.
Best Practices for Client Trust Fund Accounting
Following these best practices demonstrates you’re using the money legally and ethically and can help build trust with clients.
Each state has legal requirements for managing client funds and billing, so familiarize yourself with the laws in your state. At a minimum, every transaction in or out of your trust accounts should be accounted for — no matter how small—and you should be able to provide accurate and timely records for all trust accounts to the state bar upon request.
Business travel is back.
COVID restrictions have eased, and in-person conferences are back on the calendar. And as more people return to offices, companies are warming to sending their employees on work trips.
For many businesses, it’s been a minute since they’ve had to account for employee travel expenses. So it might be time for a refresher on which expenses are tax-deductible, which aren’t, and what pandemic-related tax incentives are available.
When is it business travel?
A trip is considered business travel when you travel outside what’s known as your “tax home.” The location of your tax home is the city or area of your primary place of business, regardless of where you live. For expenses to count as deductible travel costs, they have to be incurred away from your tax home for longer than a typical workday — but no longer than one year. Anything considered an “ordinary and necessary expense” of doing business would qualify.
As long as the expenses are business-related, most, if not all, expenses from a typical work trip can receive a tax deduction. So what is deductible?
Business Meals, Beverages
Perhaps the most significant change for business travel is a temporary tax incentive to encourage restaurant spending during the pandemic. Through the end of 2022, food and beverages from restaurants are 100% tax-deductible versus the usual 50% deduction for businesses. The 100% deduction applies to any restaurant meals and drinks purchased after December 31, 2020, and before January 1, 2023.
The IRS defines a restaurant as “a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” The deduction includes:
Non-restaurant meals are still eligible for a 50% deduction, but the 100% deduction excludes prepackaged food and drinks from:
That means if you want to purchase a salad to go, buying it from a restaurant would get you a 100% deduction while buying it from a grocery store is only eligible for a 50% deduction.
Other rules for food and beverage deductions include:
Travel and Transportation
You can deduct 100% of the cost of any travel by airplane, train, bus, or car between your home and business destination. That includes car rental expenses. Also deductible is parking fees, tolls, and fares for taxis, shuttles, ferry rides, and other modes of transportation.
Hotels and Lodging
Hotel stays are tax-deductible, as are tips and fees for hotel staff and baggage carriers. Depending on how you schedule your trip, you may even be able to deduct lodging costs for non-workdays.
You can write off costs for shipping baggage or any materials related to business operations.
Business Calls, Communication
Fees for calls, texts, or Wi-Fi usage during business travel are deductible.
Dry Cleaning, Laundry
Costs to launder work clothes on a business trip get a tax break.
Tips for services related to any of these expenses also qualify.
Gifts of up to $25
Gifts for clients or other business associates are included, although you can deduct no more than $25 per gift recipient. So if two clients each receive a $60 fruit basket, for a total of $120 spent on gifts, the company can write off $50 of the expense.
What Isn’t Deductible?
To make the most of your tax deductions, collect receipts and keep detailed records of all travel expenses. Set a standard meal allowance for traveling employees and write off that amount to make meal tracking easier.
Managing business travel expenses and calculating deductions requires attention to detail, and businesses may be out of practice after two years with little to no travel. If you need help figuring out business travel deductions, our team of professionals can assist your business in getting back on track — and ready for takeoff.
Are you a partner in a business? You may have come across a situation that’s puzzling. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner.
Why does this happen? It’s due to the way partnerships and partners are taxed. Unlike C corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent a partner from currently using his or her share of a partnership’s loss to offset other income.)
Pass through your share
While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions, and credits. This makes it possible to pass through to partners their share of these items.
An information return must be filed by a partnership. On Schedule K of Form 1065, the partnership separately identifies income, deductions, credits, and other items. This is so that each partner can properly treat items that are subject to limits or other rules that could affect their correct treatment at the partner’s level. Examples of such items include capital gains and losses, interest expense on investment debts, and charitable contributions. Each partner gets a Schedule K-1 showing his or her share of partnership items.
Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his or her partnership interest (the determination of which varies depending on how the interest was acquired) is increased by his or her share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners just reduce their basis by the amount of the distribution. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain, which often is a capital gain.
Two people each contribute $10,000 to form a partnership. The partnership has $80,000 of taxable income in the first year, during which it makes no cash distributions to the two partners. Each of them reports $40,000 of taxable income from the partnership as shown on their K-1s. Each has a starting basis of $10,000, which is increased by $40,000 to $50,000. In the second year, the partnership breaks even (has zero taxable income) and distributes $40,000 to each of the two partners. The cash distributed to them is received tax-free. Each of them, however, must reduce the basis in his or her partnership interest from $50,000 to $10,000.
More rules and limits
The example and details above are an overview and, therefore, don’t cover all the rules. For example, many other events require basis adjustments and there are a host of special rules covering noncash distributions, distributions of securities, liquidating distributions, and other matters. Contact us if you’d like to discuss how a partner is taxed.
The State of California now requires businesses with ﬁve or more employees to either offer an employee retirement plan or participate in the CalSavers Retirement Savings Program by June 30, 2022. CalSavers is a state-based payroll withholding savings program using Roth (post-tax) individual retirement accounts. All employers with ﬁve or more employees must either register with CalSavers or offer a qualifying retirement plan.
The CalSavers program has been rolled out in phases, and the state is already issuing penalty notices to businesses that missed the earlier deadlines or failed to allow eligible employees to participate in the retirement savings program. The penalties are significant:
Eligible employers must register with the program via the program website (employer.CalSavers.com) or by calling 855-650-6916.
Employers have the following options:
We can work with you to determine the best retirement solutions to fit your needs. Please contact us at 858.481.7702 for further assistance.
California enacted Assembly Bill 150 (“AB 150”) in late 2021 as a method for deducting state and local taxes in excess of federal deduction limitations. AB 150 allowed passthrough entities (“PTEs”) to have the tax imposed and paid at the entity level rather than at the individual level, which permitted PTE owners to bypass the deduction limitation. For those owners who have elected to participate in this program, PTEs pay the tax on the qualified net income and their owners receive a corresponding credit against the state income tax liability related to their PTE income. Any unused credit at the owner level may be carried forward for up to five years.
Governor Newsom signed Senate Bill 113 (“SB 113”) on February 9, 2022, which modified and expanded the passthrough entity elective tax benefits previously established under AB 150. The goal of SB 113 was to add clarity and conformity to the state’s original objectives for establishing the PTE credit.
The PTE election is made annually on the original filed return, including extensions. For tax years 2022 through 2025, the first PTE installment payment is due June 15th of each year, and is equal to the greater of:
The second PTE elective tax installment is due by the entity’s tax return due date (without extensions), which for most partnerships, LLCs, and S corps will be March 15, 2023.
If a payment is not made by June 15th, the election may not be made and the pass-through entity and owners may not participate in the program for that corresponding tax year.
There are many unanswered questions surrounding the PTE program. For example, since many 2021 returns will not be filed by June 15th, taxpayers may not know what 50% of the 2021 tax will actually be. If a good faith estimate is paid on June 15 but ends up being short of the 50% when the 2021 return is filed, the 2022 PTE election is invalid.
Hamilton Tharp is recommending that taxpayers add more funds to ensure that they do not underpay the tax. If the PTE did not participate in the program for 2021, but the owners of the PTE are fairly certain they will want to participate in the PTE program for 2022, we are recommending the payment be made with all available financial information or the $1,000.
If you have any questions, please contact us. In most cases, if you or your firm qualify to participate in this program, we have already reached out and discussed the payments.
The IRS recently released guidance providing the 2023 inflation-adjusted amounts for Health Savings Accounts (HSAs). High inflation rates will result in next year’s amounts being increased more than they have been in recent years.
An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident, and specific disease insurance).
A high deductible health plan (HDHP) is generally a plan with an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage. In addition, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) can’t exceed $5,000 for self-only coverage and $10,000 for family coverage.
Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.
Inflation adjustments for next year
In Revenue Procedure 2022-24, the IRS released the 2023 inflation-adjusted figures for contributions to HSAs, which are as follows:
Annual contribution limitation. For calendar year 2023, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $3,850. For an individual with family coverage, the amount will be $7,750. This is up from $3,650 and $7,300, respectively, for 2022.
In addition, for both 2022 and 2023, there’s a $1,000 catch-up contribution amount for those who are age 55 and older at the end of the tax year.
High deductible health plan defined. For calendar year 2023, an HDHP will be a health plan with an annual deductible that isn’t less than $1,500 for self-only coverage or $3,000 for family coverage (these amounts are $1,400 and $2,800 for 2022). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $7,500 for self-only coverage or $15,000 for family coverage (up from $7,050 and $14,100, respectively, for 2022).
Reap the rewards
There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax free year after year and can be withdrawn tax free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care, and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. If you have questions about HSAs at your business, contact your employee benefits and tax advisors.
The IRS has begun mailing notices to businesses, financial institutions, and other payers that filed certain returns with information that doesn’t match the agency’s records.
These CP2100 and CP2100A notices are sent by the IRS twice a year to payers who filed information returns that are missing a Taxpayer Identification Number (TIN), have an incorrect name, or have a combination of both.
Each notice has a list of persons who received payments from the business with identified TIN issues.
If you receive one of these notices, you need to compare the accounts listed on the notice with your records and correct or update your records, if necessary. This can also include correcting backup withholding on payments made to payees.
Which returns are involved?
Businesses, financial institutions, and other payers are required to file with the IRS various information returns reporting certain payments they make to independent contractors, customers, and others. These information returns include:
Do you have backup withholding responsibilities?
The CP2100 and CP2100A notices also inform recipients that they’re responsible for backup withholding. Payments reported on the information returns listed above are subject to backup withholding if:
Do you have to report payments to independent contractors?
By January first of the following year, payers must complete Form 1099-NEC, “Nonemployee Compensation,” to report certain payments made to recipients. If the following four conditions are met, you must generally report payments as nonemployee compensation:
Contact us if you receive a CP2100 or CP2100A notice from the IRS or if you have questions about filing Form 1099-NEC. We can help you stay in compliance with all rules.
As a business owner, your company’s financial statements play a significant role in monitoring your company’s performance and financial standing. However, the information presented in financial statements is susceptible to distortion when certain economic factors come into play — notably inflation.
The cumulative impact of a global pandemic, labor shortages, and supply chain disruptions have merged to create the highest inflation rates the United States has seen this century. In fact, the Consumer Price Index (CPI) rose 7.9% between February 2021 and February 2022, representing the most significant annualized growth in CPI inflation since 1982.
While the tangible effects of inflation vary by company and industry, the national and global implications are widespread and generally impact at least some aspects of every business. Even if the obvious effects feel minimal, it’s essential to understand inflation often trickles down to affect the most basic accounting and financial reporting information.
Here are some common ways inflation can affect financial statements and paint a misleading picture of your business.
Inflation can most heavily affect companies’ reported profits with considerable inventories when it comes to financial reporting. Imagine, for example; a widget company reported $100,000 in sales last year with $75,000 in cost of goods sold and a gross profit of $25,000. Since widgets do not expire, the company keeps and sells unsold inventory year after year.
The company sells the same number of widgets the following year, but because of a rising inflation rate, it decides to raise its prices by 5% to offset a 5% increase in its costs of goods. Half of its sales this year were taken from the prior year’s inventory, and the other half comprised the new inventory carrying the 5% production increase.
Because of its 5% increase in both cost of goods sold and widget sales price, the company reports $105,000 in sales and $76,875 in cost of goods sold, totaling $3,750 in gross profits. When you factor in half of the previous year’s inventory, the company still reports an increase of $1,875 in gross profits (because of selling last year’s inventory) even though it sold the same number of widgets as the previous year.
This is called “inflation profit,” meaning the increased profit results from inflation rather than an actual improvement in business performance.
For businesses looking to impress investors or potential purchasers, this is just one example of how inflation could distort financial planning efforts if not properly recognized and considered.
Supply Chain Disruptions
Many businesses rely on a complex network of supply chains to manufacture and deliver goods. These systems become particularly volatile when one or more parts of that supply chain begin raising prices because of factors such as labor shortages, freight costs, increased employee wages, and material costs.
When companies have existing long-term revenue contracts with customers, it may be difficult (or even impossible) to break those contracts and raise prices enough to offset any increase in production costs.
Therefore, companies should consider the monthly implications caused by reduced or negative profitability and the period in which to record the loss, if applicable. Business owners should also be conscientious of the repercussions lost contracts and unstable profits may have on monthly planning and forecasting.
Despite its increased prevalence this past year, inflation always impacts reporting and accounting. Although generally accepted accounting principles (GAAP) largely combat the most glaring discrepancies among financial statements, some variations may still occur based on how your particular business accounts for inflation.
Contact our team today if you need help accommodating inflation into your financial statement preparation, reporting, and analysis.
As U.S. companies struggle to recruit, hire, and retain talent, more businesses are turning to independent contractors instead of full-time employees. But understanding the difference between an employee and an independent contractor can be complex.
Getting it right is critical because misclassifying workers – intentionally or not – can result in penalties including, but not limited to, fines and back taxes. If the IRS believes a misclassification was intentional, there’s also the possibility of criminal and civil penalties.
There’s no single test at the federal level to determine a worker’s classification. Studies show that 10% to 20% of employers misclassify at least one employee. At its most basic level, the question boils down to this: Is the worker an employee or an independent contractor?
What the IRS Says
The IRS defines an independent contractor as someone who performs work for someone else while controlling how the work is done. The Internal Revenue Code defines an employee for employment tax purposes as “any individual who, under the usual common-law rules, applicable in determining the employer-employee relationship, has the status of an employee.”
Under this test, an individual is classified in one of the two buckets after examining relevant facts and circumstances and an application of common law principles. The IRS analyzes the evidence of the degree of control and independence through three overarching categories:
No one factor stands alone in making this determination and the relevant factors will vary depending on the facts and circumstances.
If it is still unclear whether a worker is an employee or an independent contractor after reviewing the three categories of evidence, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. The form may be filed by either the business or the worker, and the IRS will review the facts and circumstances and officially determine the worker’s status.
The IRS cautions it can take at least six months to get a determination.
Penalties for Misclassifying
If the misclassification was unintentional, the employer faces, at a minimum, the following penalties:
If the IRS suspects fraud or intentional misconduct, it can impose additional fines and penalties. The employer could be subject to criminal penalties of up to $10,000 per misclassified worker and one year in prison. In addition, the person responsible for withholding taxes could also be held personally liable for any uncollected tax.
Tips for Employers
Take pre-emptive steps to avoid worker misclassification issues by:
Remember, a worker’s classification may be different under the Fair Labor Standards Act than under various state laws, the National Labor Relations Act, and/or the Internal Revenue Code. Workers who are properly classified as independent contractors under one state’s test may not be properly classified under another’s.
Employers should ensure proper classification of their workers and remain cognizant of and comply with applicable state and local laws, which may be different from federal law.
Does your organization need help classifying or ensuring your workers are classified correctly? Contact our team today!
From Super Bowl commercials to teenage NFT millionaires — and even Elon Musk’s support of the dog meme-inspired currency Dogecoin — cryptoassets have been making a play for mainstream acceptance.
By the end of 2021, the global cryptocurrency market was worth more than $3 trillion, up from $14 billion just five years earlier. About 16% of U.S. adults — approximately 40 million people — have invested in, traded, or used cryptocurrency, according to a White House analysis of findings by The Pew Research Center. And more than 100 countries are exploring or piloting Central Bank Digital Currencies (CBDCs), a digital form of a country’s sovereign currency.
Cryptoassets have been taking off so quickly that President Biden signed an executive order in March outlining a government approach to address the risks and harness the benefits of cryptocurrency while urging the research and development of a U.S. Central Digital Bank Currency.
Yet, for all the attention cryptoassets are receiving, many business leaders are still trying to understand what they are, how they work, and the pros and cons of using them.
What Are Cryptoassets?
Cryptocurrency is any digital or virtual currency that uses encryption to secure and verify transactions. What sets cryptocurrencies apart from traditional forms of currency is that they rely on a decentralized, unregulated system to issue them and record transactions.
Because a central issuing authority such as a bank or regulatory authority like the federal government doesn’t control these currencies, cryptoassets can avoid government manipulation or intervention.
Types of cryptoassets include:
How Do Cryptoassets Work?
Instead of relying on banks, cryptoassets leverage decentralized networks based on blockchain technology for distribution. Blockchain is a distributed public ledger that records all digital and virtual transactions.
Since cryptoassets are not tangible, people who possess them instead own a key — a secret, randomly generated number with hundreds of digits — that allows them to move cryptoassets from one entity to another without the intervention of a financial institution.
What Are the Pros, Cons of Cryptoassets?
Decentralization is one of the key selling points of cryptoassets. Because developers control who uses them, they aren’t beholden to regulatory and government controls and interventions. That means there isn’t one entity that can dictate the currency’s value and distribution.
Other benefits include:
There are also some drawbacks, the least of which is a shortfall of protection. Although cryptoassets proponents prefer the currency because of its lack of government control, that same lack of regulation puts cryptoassets owners at risk of tremendous losses. There is no FDIC protection for cryptocurrency, nor is there a way to safeguard digital assets if a tech issue wipes out your transaction records. Insurance policies are available, but ultimately, it’s up to a business to protect itself against losses.
Other concerns include:
Cryptoassets are still in their infancy, and business leaders who may want to use them are learning as they go. If you’re trying to wrap your head around cryptoassets, our team of professionals can help your business navigate this new form of currency.
Operating as an S corporation may help reduce federal employment taxes for small businesses in the right circumstances. Although S corporations may provide tax advantages over C corporations, there are some potentially costly tax issues that you should assess before making a decision to switch.
Here’s a quick rundown of the most important issues to consider when converting from a C corporation to an S corporation:
Built-in gains tax
Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective if those gains are recognized within 5 years after the corporation becomes an S corporation. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.
S corporations that were formerly C corporations are subject to a special tax if their passive investment income (such as dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.
C corporations that use LIFO inventories have to pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.
If your C corporation has unused net operating losses, the losses can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.
There are other factors to consider in switching from C to S status. Shareholder-employees of S corporations can’t get the full range of tax-free fringe benefits that are available with a C corporation. And there may be complications for shareholders who have outstanding loans from their qualified plans. All of these factors have to be considered to understand the full effect of converting from C to S status.
There are strategies for eliminating or minimizing some of these tax problems and for avoiding unnecessary pitfalls related to them. But a lot depends upon your company’s particular circumstances. Contact us to discuss the effect of these and other potential problems, along with possible strategies for dealing with them.
Typically, businesses want to delay recognition of taxable income into future years and accelerate deductions into the current year. But when is it prudent to do the opposite? And why would you want to?
One reason might be tax law changes that raise tax rates. There have been discussions in Washington about raising the corporate federal income tax rate from its current flat 21%. Another reason may be because you expect your non-corporate pass-through entity business to pay taxes at higher rates in the future because the pass-through income will be taxed on your personal return. There have also been discussions in Washington about raising individual federal income tax rates.
If you believe your business income could be subject to tax rate increases, you might want to accelerate income recognition into the current tax year to benefit from the current lower tax rates. At the same time, you may want to postpone deductions into a later tax year, when rates are higher, and when the deductions will do more tax-saving good.
To accelerate income
Consider these options if you want to accelerate revenue recognition into the current tax year:
To defer deductions
Consider the following actions to postpone deductions into a higher-rate tax year, which will maximize their value:
Contact us to discuss the best tax planning actions in light of your business’s unique tax situation.
The federal government is helping to pick up the tab for certain business meals. Under a provision that’s part of one of the COVID-19 relief laws, the usual deduction for 50% of the cost of business meals is doubled to 100% for food and beverages provided by restaurants in 2022 (and 2021).
So, you can take a customer out for a business meal or order take-out for your team and temporarily write off the entire cost — including the tip, sales tax and any delivery charges.
Despite eliminating deductions for business entertainment expenses in the Tax Cuts and Jobs Act (TCJA), a business taxpayer could still deduct 50% of the cost of qualified business meals, including meals incurred while traveling away from home on business. (The TCJA generally eliminated the 50% deduction for business entertainment expenses incurred after 2017 on a permanent basis.)
To help struggling restaurants during the pandemic, the Consolidated Appropriations Act doubled the business meal deduction temporarily for 2021 and 2022. Unless Congress acts to extend this tax break, it will expire on December 31, 2022.
Currently, the deduction for business meals is allowed if the following requirements are met:
In the event that food and beverages are provided during an entertainment activity, the food and beverages must be purchased separately from the entertainment. Alternatively, the cost can be stated separately from the cost of the entertainment on one or more bills.
So, if you treat a client to a meal and the expense is properly substantiated, you may qualify for a business meal deduction as long as there’s a business purpose to the meal or a reasonable expectation that a benefit to the business will result.
Provided by a restaurant
IRS Notice 2021-25 explains the main rules for qualifying for the 100% deduction for food and beverages provided by a restaurant. Under this guidance, the deduction is available if the restaurant prepares and sells food or beverages to retail customers for immediate consumption on or off the premises. As a result, it applies to both on-site dining and take-out and delivery meals.
However, a “restaurant” doesn’t include a business that mainly sells pre-packaged goods not intended for immediate consumption. So, food and beverage sales are excluded from businesses including:
The restriction also applies to an eating facility located on the employer’s business premises that provides meals excluded from an employee’s taxable income. Business meals purchased from such facilities are limited to a 50% deduction. It doesn’t matter if a third party is operating the facility under a contract with the business.
Keep good records
It’s important to keep track of expenses to maximize tax benefits for business meal expenses.
You should record the:
In addition, ask establishments to divvy up the tab between any entertainment costs and food/ beverages. For additional information, contact your tax advisor.
Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
The start of a new tax filing season often brings with it longer hold times with the IRS, as taxpayers and their tax preparers inundate phone lines with questions and concerns. But the 2022 filing season promises to be particularly challenging.
The IRS continues to work through a backlog of millions of paper-filed returns and correspondence from the 2021 tax filing season. Add staffing challenges and congressional underfunding to the issue and trying to track down a missing refund or deal with an unexpected tax notice is bound to be frustrating.
Roots, Results of the IRS Backlog
As of December 2021, the IRS had a backlog of 6 million unprocessed individual income tax returns, 2.3 million amended returns, and more than 2 million quarterly payroll tax returns, according to a statement from the Taxpayer Advocate Service (TAS).
That backlog stems from a combination of COVID-related shutdowns at many of the agency’s processing centers, budget cuts that forced reduced staff sizes, and the IRS overseeing new initiatives, such as stimulus payments and the expanded Child Tax Credit.
Reaching the IRS via phone hasn’t been easy in recent years, and the problem likely will worsen. According to the TAS report, there was a record 282 million taxpayer calls to the IRS in 2021, but the agency answered just 11% of those calls and those who did get through endured long wait times and frequent disconnects.
Understanding what’s going on behind the scenes isn’t much help when you’re facing missing tax refunds, incorrect notices, and other tax troubles. The following tips can help you navigate the IRS backlog and get the answers you need.
Send a complete copy of the correspondence and any other essential documents to your advisor as soon as you receive the notice. Tax professionals have access to a unique IRS customer service line reserved for practitioners, but delays are common there as well, so don’t wait until the last minute to loop them in.
Finally, have patience. The good news is the IRS is working to catch up by fast-tracking hiring, reassigning workers, and scrapping plans to close a tax processing center in Austin, Texas. In the meantime, stay in touch with your tax advisor to be as proactive as possible.
If your business doesn’t already have a retirement plan, now might be a good time to take the plunge. Current retirement plan rules allow for significant tax-deductible contributions.
For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $61,000 for 2022. If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $61,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2022 by a whopping $19,520 (32% times $61,000).
Other small business retirement plan options include:
Depending on your circumstances, these other types of plans may allow bigger deductible contributions.
Deadlines to establish and contribute
Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year.
Important: The SECURE Act provision didn’t change the deadline to establish a SIMPLE-IRA plan. It remains October 1 of the year for which the plan is to take effect. Also, the SECURE Act change doesn’t override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferral contributions (salary-reduction contributions) under a 401(k) plan. The plan must be in existence before such employee elective deferral contributions can be made.
For example, the deadline for the 2021 tax year for setting up a SEP-IRA for a sole proprietorship business that uses the calendar year for tax purposes is October 17, 2022, if you extend your 2021 tax return. The deadline for making the contribution for the 2021 tax year is also October 17, 2022. However, to make a SIMPLE-IRA contribution for the 2021 tax year, you must have set up the plan by October 1, 2021. So, it’s too late to set up a plan for last year.
While you can delay until next year establishing a tax-favored retirement plan for this year (except for a SIMPLE-IRA plan), why wait? Get it done this year as part of your tax planning and start saving for retirement. We can provide more information on small business retirement plan alternatives. Be aware that, if your business has employees, you may have to make contributions for them, too.
In today’s economy, many small businesses are strapped for cash. They may find it beneficial to barter or trade for goods and services instead of paying cash for them. Bartering is the oldest form of trade and the internet has made it easier to engage with other businesses. But if your business gets involved in bartering, be aware that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.
How it works
Here are some examples:
In these cases, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence.
In addition, if services are exchanged for property, income is realized. For example,
Many businesses join barter clubs that facilitate barter exchanges. These clubs generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.
In general, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year and that each unit is redeemable for $2 in goods and services. In that year, you’ll have $5,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed once on that income.
If you join a barter club, you’ll be asked to provide your Social Security number or Employer Identification Number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club is required to withhold tax from your bartering income at a 24% rate.
Reporting to the IRS
By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.
Conserve cash, reap benefits
By bartering, you can trade away excess inventory or provide services during slow times, all while hanging onto your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties. If you need assistance or would like more information, contact us.
The credit for increasing research activities, often referred to as the research and development (R&D) credit, is a valuable tax break available to eligible businesses. Claiming the credit involves complex calculations, which we can take care of for you. But in addition to the credit itself, be aware that the credit also has two features that are especially favorable to small businesses:
1. Eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability.
2. The credit can be used by certain even smaller startup businesses against the employer’s Social Security payroll tax liability.
Let’s take a look at the second feature. Subject to limits, you can elect to apply all or some of any research tax credit that you earn against your payroll taxes instead of your income tax. This payroll tax election may influence you to undertake or increase your research activities. On the other hand, if you’re engaged in — or are planning to undertake — research activities without regard to tax consequences, be aware that you could receive some tax relief.
Why the election is important
Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Thus, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, any wage-paying business, even a new one, has payroll tax liabilities. Therefore, the payroll tax election is an opportunity to get immediate use out of the research credits that you earn. Because every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that’s a big help in the start-up phase of a business — the time when help is most needed.
To qualify for the election a taxpayer must:
In making these determinations, the only gross receipts that an individual taxpayer takes into account are from the individual’s businesses. An individual’s salary, investment income or other income aren’t taken into account. Also, note that an entity or individual can’t make the election for more than six years in a row.
Limits on the election
The research credit for which the taxpayer makes the payroll tax election can be applied only against the Social Security portion of FICA taxes. It can’t be used to lower the employer’s liability for the “Medicare” portion of FICA taxes or any FICA taxes that the employer withholds and remits to the government on behalf of employees.
The amount of research credit for which the election can be made can’t annually exceed $250,000. Note, too, that an individual or C corporation can make the election only for those research credits which, in the absence of an election, would have to be carried forward. In other words, a C corporation can’t make the election for the research credit that the taxpayer can use to reduce current or past income tax liabilities.
The above are just the basics of the payroll tax election. Keep in mind that identifying and substantiating expenses eligible for the research credit itself is a complex area. Contact us about whether you can benefit from the payroll tax election and the research tax credit.
If you own your own company and travel for business, you may wonder whether you can deduct the costs of having your spouse accompany you on trips.
The rules for deducting a spouse’s travel costs are very restrictive. First of all, to qualify, your spouse must be your employee. This means you can’t deduct the travel costs of a spouse, even if his or her presence has a bona fide business purpose unless the spouse is a bona fide employee of your business. This requirement prevents tax deductibility in most cases.
If your spouse is your employee, then you can deduct his or her travel costs if his or her presence on the trip serves a bona fide business purpose. Merely having your spouse perform some incidental business service, such as typing up notes from a meeting, isn’t enough to establish a business purpose. In general, it isn’t sufficient for his or her presence to be “helpful” to your business pursuits — it must be necessary.
In most cases, a spouse’s participation in social functions, for example as a host or hostess, isn’t enough to establish a business purpose. That is, if his or her purpose is to establish general goodwill for customers or associates, this is usually insufficient. Further, if there’s a vacation element to the trip (for example, if your spouse spends time sightseeing), it will be more difficult to establish a business purpose for his or her presence on the trip. On the other hand, a bona fide business purpose exists if your spouse’s presence is necessary to care for a serious medical condition that you have.
If your spouse’s travel satisfies these tests, the normal deductions for business travel away from home can be claimed. These include the costs of transportation, meals, lodging, and incidental costs such as dry cleaning, phone calls, etc.
A non-employee spouse
Even if your spouse’s travel doesn’t satisfy the requirements, however, you may still be able to deduct a substantial portion of the trip’s costs. This is because the rules don’t require you to allocate 50% of your travel costs to your spouse. You need only allocate any additional costs you incur for him or her. For example, in many hotels, the cost of a single room isn’t that much lower than the cost of a double. If a single would cost you $150 a night and a double would cost you and your spouse $200, the disallowed portion of the cost allocable to your spouse would only be $50. In other words, you can write off the cost of what you would have paid traveling alone. To prove your deduction, ask the hotel for a room rate schedule showing single rates for the days you’re staying.
And if you drive your own car or rent one, the whole cost will be fully deductible even if your spouse is along. Of course, if public transportation is used, and for meals, any separate costs incurred by your spouse wouldn’t be deductible.
Contact us if you have questions about this or other tax-related topics.
Do you want to withdraw cash from your closely held corporation at a minimum tax cost? The simplest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax-efficient since it’s taxable to you to the extent of your corporation’s “earnings and profits.” It’s also not deductible by the corporation.
Fortunately, there are several alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five areas where you may want to take action:
1. Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the debt repayment may be taxed as a dividend. If you make future cash contributions to the corporation, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.
2. Salary. Reasonable compensation that you (or family members) receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient. The same rule applies to any compensation in the form of rent that you receive from the corporation for the use of property. In both cases, the amount of compensation must be reasonable in relation to the services rendered or the value of the property provided. If it’s excessive, the excess will be nondeductible and treated as a corporate distribution.
3. Loans. You may withdraw cash from the corporation tax-free by borrowing from it. However, to avoid having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or a note and be made on terms that are comparable to those on which an unrelated third party would lend money to you. This should include a provision for interest and principal. All interest and principal payments should be made when required under the loan terms. Also, consider the effect of the corporation’s receipt of interest income.
4. Fringe benefits. Consider obtaining the equivalent of a cash withdrawal in fringe benefits that are deductible by the corporation and not taxable to you. Examples are life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other employees of the corporation. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.
5. Property sales. Another way to withdraw cash from the corporation is to sell property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50% owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50% owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those on which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.
Keep taxes low
If you’re interested in discussing any of these approaches, contact us. We’ll help you get the most out of your corporation at the minimum tax cost.
If you’re in business for yourself as a sole proprietor, or you’re planning to start a business, you need to know about the tax aspects of your venture. Here are eight important issues to consider:
1. You report income and expenses on Schedule C of Form 1040. The net income is taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have any losses, they’re generally deductible against your other income, subject to special rules relating to hobby losses, passive activity losses, and losses in activities in which you weren’t “at risk.”
2. You may be eligible for the pass-through deduction. To the extent your business generates qualified business income, you’re eligible to take the 20% pass-through deduction, subject to various limitations. The deduction is taken “below the line,” so it reduces taxable income, rather than being taken “above the line” against gross income. You can take the deduction even if you don’t itemize and instead take the standard deduction.
3. You might be able to deduct home office expenses. If you work from home, perform management or administrative tasks from a home office or store product samples or inventory at home, you may be entitled to deduct an allocable portion of certain costs. And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.
4. You must pay self-employment taxes. For 2022, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your self-employment net earnings of up to $147,000 and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax is imposed on self-employment income in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separately, and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.
5. You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits your medical expense deduction to amounts in excess of 7.5% of your adjusted gross income.
6. You must make quarterly estimated tax payments. For 2022, these are due April 18, June 15, September 15, and January 17, 2023.
7. You should keep complete records of your income and expenses. Carefully record expenses in order to claim all of the deductions to which you are entitled. Certain expenses, such as automobile, travel, meals, and home office expenses, require special attention because they’re subject to special recordkeeping requirements or limits on deductibility.
8. If you hire employees, you need a taxpayer identification number and you must withhold and pay over employment taxes.
We can help
Contact us if you’d like more information or assistance with the tax or recordkeeping aspects of your business.
If you operate a business, or you’re starting a new one, you know you need to keep records of your income and expenses. Specifically, you should carefully record your expenses in order to claim all of the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns in case you’re ever audited by the IRS.
Be aware that there’s no one way to keep business records. But there are strict rules when it comes to keeping records and proving expenses are legitimate for tax purposes. Certain types of expenses, such as automobile, travel, meals and home office costs, require special attention because they’re subject to special recordkeeping requirements or limitations.
Here are two recent court cases to illustrate some of the issues.
Case 1: To claim deductions, an activity must be engaged in for profit
A business expense can be deducted if a taxpayer can establish that the primary objective of the activity is making a profit. The expense must also be substantiated and be an ordinary and necessary business expense. In one case, a taxpayer claimed deductions that created a loss, which she used to shelter other income from tax.
She engaged in various activities including acting in the entertainment industry and selling jewelry. The IRS found her activities weren’t engaged in for profit and it disallowed her deductions.
The taxpayer took her case to the U.S. Tax Court, where she found some success. The court found that she was engaged in the business of acting during the years in issue. However, she didn’t prove that all claimed expenses were ordinary and necessary business expenses. The court did allow deductions for expenses including headshots, casting agency fees, lessons to enhance the taxpayer’s acting skills and part of the compensation for a personal assistant. But the court disallowed other deductions because it found insufficient evidence “to firmly establish a connection” between the expenses and the business.
In addition, the court found that the taxpayer didn’t prove that she engaged in her jewelry sales activity for profit. She didn’t operate it in a businesslike manner, spend sufficient time on it or seek out expertise in the jewelry industry. Therefore, all deductions related to that activity were disallowed. (TC Memo 2021-107)
Case 2: A business must substantiate claimed deductions with records
A taxpayer worked as a contract emergency room doctor at a medical center. He also started a business to provide emergency room physicians overseas. On Schedule C of his tax return, he deducted expenses related to his home office, travel, driving, continuing education, cost of goods sold and interest. The IRS disallowed most of the deductions.
As evidence in Tax Court, the doctor showed charts listing his expenses but didn’t provide receipts or other substantiation showing the expenses were actually paid. He also failed to account for the portion of expenses attributable to personal activity.
The court disallowed the deductions stating that his charts weren’t enough and didn’t substantiate that the expenses were ordinary and necessary in his business. It noted that “even an otherwise deductible expense may be denied without sufficient substantiation.” The doctor also didn’t qualify to take home office deductions because he didn’t prove it was his principal place of business. (TC Memo 2022-1)
We can help
Contact us if you need assistance retaining adequate business records. Taking a meticulous, proactive approach can protect your deductions and help make an audit much less difficult.
Solana Beach, California – January 25, 2022 — Christina Tharp, Managing Partner and CFO of Hamilton Tharp LLP, is pleased to announce the promotion to Partner of Kim Spinardi effective January 1, 2022. Tina noted the significant contributions Kim has made as a senior staff accountant, manager, and senior manager at the firm. Kim has worked for the firm for more than 3.5 years; her election to partnership reflects her dedication to providing the tradition of service, technical expertise, and innovative thinking that has contributed to the firm’s growth.
Kim graduated from San Diego State University (SDSU) in 2010 with a Bachelor of Science in Business Administration in accounting. Kim began her career in the accounting profession with a firm in San Diego, where she spent eight years developing her technical and interpersonal abilities as a trusted advisor. Kim’s experience includes working with small business owners, high-net-worth individuals, professional athletes, and professional service firms. Her technical expertise includes helping clients with stock options, multi-state taxation and residency issues, advanced tax planning strategies, real estate sales and exchanges, taxation of income earned overseas, entity selection, strategies for a business sale, and retirement plan set up.
Kim holds a Certified Public Accountant license, which she earned in March of 2014. Dedicated to serving the community and giving back through volunteerism, Kim is proud to serve on the Alumni Board and Intercollegiate Athletics Committee at her alma mater, SDSU. She also previously volunteered for Rebuilding Together San Diego and Home of Guiding Hands Audit Committee. Kim also plays an active role at Hamilton Tharp with recruiting for the firm and is part of the SDSU Aztec Mentoring program, acting as a mentor to students of all majors at the university.
When she isn’t helping her clients achieve their financial goals, Kim can be found at sporting venues across the country and, most notably, at Aztec basketball and football games. You can find Kim riding her Peloton, on the golf course, or enjoying time with her wife, Michelle, and their two Labradoodles, Callie and Jax.
Founded in 1980, Hamilton Tharp has been serving entrepreneurs, businesses, professional athletes, and high-net-worth individuals with specialized services to help them reach their financial and life goals. The partners are members of the AICPA, the California Society of Certified Public Accountants, and the Solana Beach Chamber of Commerce. For more information about Hamilton Tharp, please call (858) 481-7702 or visit www.ht2cpa.com/.
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Note: Congress is considering proposals that could expand the Work Opportunity Tax Credit for certain qualified groups. We will monitor this development and communicate updates as necessary.
As a business, tax planning can help create increased cash flow that allows management to expand, increase wages, bring in new inventory, and achieve other goals that require more financial flexibility. Business owners often go to tax credits involved with normal business operations but sometimes overlook human resource tax credits. One such tax credit is the Work Opportunity Tax Credit (WOTC).
This hiring-based tax credit was recently extended until Dec. 31, 2025, by the Consolidated Appropriations Act of 2021. Keep reading to learn how to use the WOTC.
What is the WOTC?
The WOTC is an employment-based tax credit the federal government offers to employers who hire from qualified groups and is based on wages paid to qualified employees.
While there is an extensive list of qualified groups a new employee may come from, they most often include groups that otherwise would be overlooked, including veterans, ex-felons, those graduating from rehabilitation programs, and individuals on certain state or federal government assistance programs. You can view the extended list here.
What credits can be taken?
The WOTC allows employers who hire from qualified groups to receive a tax credit for wages paid up to the specified maximum amounts, as shown below.
|Employee Category||Credit Amount||Maximum Wages|
|Qualified employees working 120+ hours a year||25% of first-year wages||$6,000 maximum wages used in calculation of credit|
|Qualified employees working 400+ hours per year||40% of first-year wages||$6,000 maximum wages used in calculation of credit|
|Temporary Assistance for Needy Families (TANF) recipients working 400+ hours per year||40% of first-year wages
50% of second-year wages
|$6,000 maximum wages used in calculation of credit|
|Qualified veterans||25% of first-year wages for employees working 120+ hours a year; 40% of first-year wages for employees working 400+ hours per year||$24,000 maximum wages used in calculation of credit|
|Rehires||0%||Rehires are not eligible for the WOTC|
Claiming the WOTC
There are several steps businesses need to take to claim the WOTC. Both employer and applicant must complete Form 8850 before or on the date an employment offer is made. That form must then be filed with the appropriate state workforce agency within 28 days of the start of work.
The state workforce agency will confirm whether the employee is considered part of a qualified group for the WOTC. If so, the employee can then submit Form 5884 and Form 3800 with their income tax returns to take the appropriate credit amount.
For assistance understanding the WOTC and the nuances involved in calculating the appropriate credit amounts, reach out to our team of tax professionals.
When the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-02 (ASC 842) several years ago, the deadlines for private and public businesses seemed to be far into the future. FASB delayed the reporting requirements for private-sector companies because of COVID-19; however, that delay ended as of Dec. 15, 2021.
All businesses must use financial statements conforming to the new lease accounting standard for any fiscal year beginning after Dec. 15, 2021. If you’re not up to date on the new requirements and how they can impact your business, keep reading to familiarize yourself with ASC 842.
Lease Accounting Updates
Historically, organizations were required to divide their leases into operating leases and capital leases. Capital leases (finance leases) needed to be reflected on the organization’s statement of financial position (balance sheet) as capital assets with related lease debt liabilities. Operating leases, on the other hand, were recognized as expenses as lease costs were incurred but not on the statement of financial position.
Under ASC 842, all organizations must include all lease agreements with lease terms greater than 12 months on the statement of financial position, whether they are finance or operating leases. When reporting, accounting teams must include the following on the balance sheet:
How the shift affects remote work policies
The shift to remote work has changed how many companies conduct business. The new lease accounting standard poses several new questions. If you’re licensing any equipment, such as computers, include these contracts in your lease accounting review.
Also, keep in mind any leases that may need to be renegotiated or canceled if your business stays remote. Do you need less office equipment or space because half of your workforce is fully remote? Are company vehicles no longer in use as your organization has shifted to remote meetings? Are you subsidizing employees for internet or office space? These are all questions to ask when you begin transitioning your lease accounting methods.
Other impacts of the new lease accounting methods
If your business has already transitioned to the new lease accounting method, you may have noticed some financial statistics changes. Financial statements may show an increase in assets or liabilities when leases that previously were recognized off-balance-sheet are moved to the balance sheet. This impact will be greater in businesses with more significant lease activity (by total volume or value of leases).
Things to remember when transitioning
The process of transitioning your lease accounting method can take time if your contracts are not centralized. If your organization hasn’t started the transition, it may be helpful to assign a team to compile the necessary information. As you start, keep in mind these tasks to help make a smoother transition.
Make time to review the lease accounting standard updates and transition lease agreements over to the new process. Waiting until the balance sheets are created and published will leave your teams rushing, which can lead to mistakes and oversights.
For help understanding the changes or creating a new reporting system, reach out to our team of experts to set up a consultation.
The IRS recently released the 2022 mileage rates for businesses to use as guidance when reimbursing workers for applicable miles driven within the year. The rates tend to increase every year to account for rising fuel and vehicle and maintenance costs and insurance rate increases.
Businesses can use the standard mileage rate to calculate the deductible costs of operating qualified automobiles for business, charitable, medical, or moving purposes. Keep reading for the updated mileage rates, as well as some reminders for mileage reimbursements and deductions.
Standard mileage rates for cars, vans, pickups and panel trucks are as follows:
|Use Category||Mileage rate
(as of Jan. 1, 2022)
|Change from previous year|
|Business miles driven||$0.585 per mile||$0.025 increase from 2021|
|Medical or moving miles driven*||$0.18 per mile||$0.02 increase from 2021|
|Miles driven for charitable organizations||$0.14 per mile||Note: Only congress may adjust the mileage rate for service to a charitable organization by a Congress-passed statute.|
*Moving miles reimbursement for qualified active-duty members of the Armed Forces
Important reminders and considerations
When reimbursing employees for miles driven, keep in mind the following reminders and considerations:
To review your organization’s mileage reimbursement policy and any alternate methods for calculating appropriate reimbursement amounts, reach out to our team of knowledgeable professionals today.
Becoming a partner at a law firm is a goal many lawyers spend their careers striving to reach. Once you’re there, however, you must re-evaluate your personal financial and tax strategies as you shift from employee to owner. If you recently were promoted to partner and have reviewed your personal financial strategy, keep reading.
Personal financial considerations for new partners
Many of the personal financial decisions partners need to make depend on two things: the partnership agreement and whether you became an equity (owner) or non-equity partner. The partnership agreement will detail a lot of information about compensation and benefit structures, as well as equity structures and required capital contributions. Factors include:
Tax considerations for partners
Switching from an employee to an owner of a law firm also provides additional tax considerations. You’ll most likely see a change from a Form W-2 employee to a Form K-1 owner when it comes time to file your taxes. Keep the following in mind:
Once you’ve thoroughly reviewed your new partnership agreement, meeting with your tax planner and financial advisor can help you outline a new plan for managing your finances moving forward. Contact us today to get started!
After two years of no increases, the optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up in 2022 by 2.5 cents per mile. The IRS recently announced that the cents-per-mile rate for the business use of a car, van, pickup or panel truck will be 58.5 cents (up from 56 cents for 2021).
The increased tax deduction partly reflects the price of gasoline. On December 21, 2021, the national average price of a gallon of regular gas was $3.29, compared with $2.22 a year earlier, according to AAA Gas Prices.
Don’t want to keep track of actual expenses?
Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.
The cents-per-mile rate is beneficial if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.
Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles a great deal for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.
If you do use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.
How is the rate calculated?
The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear.
When can the cents-per-mile method not be used?
There are some cases when you can’t use the cents-per-mile rate. It partly depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.
As you can see, there are many factors to consider in deciding whether to use the standard mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2022 — or claiming 2021 expenses on your 2021 income tax return.
Do you want to sell commercial or investment real estate that has appreciated significantly? One way to defer a tax bill on the gain is with a Section 1031 “like-kind” exchange where you exchange the property rather than sell it. With real estate prices up in some markets (and higher resulting tax bills), the like-kind exchange strategy may be attractive.
A like-kind exchange is any exchange of real property held for investment or for productive use in your trade or business (relinquished property) for like-kind investment, trade or business real property (replacement property).
For these purposes, like-kind is broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale.
Under the Tax Cuts and Jobs Act, tax-deferred Section 1031 treatment is no longer allowed for exchanges of personal property — such as equipment and certain personal property building components — that are completed after December 31, 2017.
If you’re unsure if the property involved in your exchange is eligible for like-kind treatment, please contact us to discuss the matter.
Assuming the exchange qualifies, here’s how the tax rules work. If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still must report it on Form 8824, “Like-Kind Exchanges.”
Frequently, however, the properties aren’t equal in value, so some cash or other property is tossed into the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property you gave up reduced by the amount of boot you received but increased by the amount of any gain recognized.
An example to illustrate
Let’s say you exchange land (business property) with a basis of $100,000 for a building (business property) valued at $120,000 plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain. That’s the amount of cash (boot) you received. Your basis in your new building (the replacement property) will be $100,000: your original basis in the relinquished property you gave up ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.
Note that no matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.
If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The theory is that if someone takes over your debt, it’s equivalent to the person giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).
Great tax-deferral vehicle
Like-kind exchanges can be a great tax-deferred way to dispose of investment, trade or business real property. Contact us if you have questions or would like to discuss the strategy further.
Many tax limits that affect businesses are annually indexed for inflation, and a number of them have increased for 2022. Here’s a rundown of those that may be important to you and your business.
Social Security tax
The amount of an employee’s earnings that is subject to Social Security tax is capped for 2022 at $147,000 (up from $142,800 in 2021).
In 2022 and 2021, the deduction for eligible business-related food and beverage expenses provided by a restaurant is 100% (up from 50% in 2020).
Other employee benefits
These are only some of the tax limits that may affect your business and additional rules may apply. Contact us if you have questions.
Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
January 17 (The usual deadline of January 15 is a Saturday)
The use of a company vehicle is a valuable fringe benefit for owners and employees of small businesses. This perk results in tax deductions for the employer as well as tax breaks for the owners and employees using the cars. (And of course, they get the nontax benefit of getting a company car.) Plus, current tax law and IRS rules make the benefit even better than it was in the past.
The rules in action
Let’s say you’re the owner-employee of a corporation that’s going to provide you with a company car. You need the car to visit customers, meet with vendors and check on suppliers. You expect to drive the car 8,500 miles a year for business. You also expect to use the car for about 7,000 miles of personal driving, including commuting, running errands and weekend trips. Therefore, your usage of the vehicle will be approximately 55% for business and 45% for personal purposes. You want a nice car to reflect positively on your business, so the corporation buys a new $55,000 luxury sedan.
Your cost for personal use of the vehicle is equal to the tax you pay on the fringe benefit value of your 45% personal mileage. By contrast, if you bought the car yourself to be able to drive the personal miles, you’d be out-of-pocket for the entire purchase cost of the car.
Your personal use will be treated as fringe benefit income. For tax purposes, your corporation will treat the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to your personal use. If the corporation finances the car, the interest it pays on the loan would be deductible as a business expense (unless the business is subject to the business interest expense deduction limitation under the tax code).
In contrast, if you bought the auto yourself, you wouldn’t be entitled to any deductions. Your outlays for the business-related portion of your driving would be unreimbursed employee business expenses that are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if you financed the car yourself, the interest payments would be nondeductible.
And finally, the purchase of the car by your corporation will have no effect on your credit rating.
Providing an auto for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use will have to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.
Despite the necessary valuation and paperwork, a company-provided car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. We can help you stay in compliance with the rules and explain more about this prized perk.
Has your company switched to a remote work or hybrid environment for employees? Government mandates and other health-related concerns at the beginning of the COVID-19 pandemic caused much of the workforce to transition from an office setting to a remote or hybrid work environment. As the pandemic stretched on and companies extended their remote work options, many employees started spreading out to find new locations to work from.
While many employers have researched return-to-work strategies, they’ve decided to allow employees to continue to work remotely either full-time or part-time based on their roles and responsibilities. The benefit is considerable for employees who wish for more flexibility or less time spent commuting to the office, but it may pose tax-withholding complications for companies.
Tax implications of remote workers
Most state and local sales-and-use taxes and payroll taxes are triggered by what’s considered a nexus event, which establishes a presence in a particular state. While a physical building or warehouse is the most widely known nexus, meeting a sales threshold for sales in that state or having an employee residing in the state can also trigger the tax withholding requirements for that state.
This means, if a remote worker moves to another state, it can complicate your organization’s tax situation immensely. For companies who are located near state borders, employees who previously commuted across state lines but are now working from home can change payroll and sales tax liabilities.
During COVID, many states granted exceptions for nexus events, while others loosened requirements. However, those requirements vary by state, sometimes overlap, and some are even coming to an end. This further complicates whether taxes should be withheld and filed in each state, and whether companies should collect and file sales-and-use taxes.
If you have remote workers, consider implementing a policy that includes (at minimum):
Remote workers who move without notifying their employer could open the company up to the consequences of misfiling tax payments.
Consequences of misfiling tax payments
Whether a remote worker moved without the company’s knowledge, or the company was unaware of the laws in place in the new state, the company remains liable for the payments and potential penalties. When payments are missed or misfiled, state and local jurisdictions may have fines and penalties in place.
For companies that have a worker in a new state where they previously did not have to file sales-and-use taxes, their system may be set up to waive sales-and-use taxes for that state or local jurisdiction. In that case, they may find themselves paying out of their revenue for these taxes that were not collected from their customers.
Solutions to manage taxes related to remote workers
Companies should consider several approaches to minimize the risk of misfiling sales-and-use taxes, as well as payroll and income taxes with a remote workforce.
Our team of accounting professionals can help you navigate the tax complexities associated with remote workers! Reach out to set up a consultation.
Don’t let the holiday rush keep you from considering some important steps to reduce your 2021 tax liability. You still have time to execute a few strategies.
Thinking about buying new or used equipment, machinery or office equipment in the new year? Buy them and place them in service by December 31, and you can deduct 100% of the cost as bonus depreciation. Contact us for details on the 100% bonus depreciation break and exactly what types of assets qualify.
Bonus depreciation is also available for certain building improvements. Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property: land improvements other than buildings (for example fencing and parking lots), and “qualified improvement property,” a broad category of internal improvements made to nonresidential buildings after the buildings are placed in service. The TCJA inadvertently eliminated bonus depreciation for qualified improvement property. However, the 2020 CARES Act made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.
Keep in mind that 100% bonus depreciation has reduced the importance of Section 179 expensing. If you’re a small business, you’ve probably benefited from Sec. 179. It’s an elective benefit that, subject to dollar limits, allows an immediate deduction of the cost of equipment, machinery, “off-the-shelf” computer software and some building improvements. Sec. 179 expensing was enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and thus has greatly reduced the cases in which Sec. 179 expensing is useful.
Write off a heavy vehicle
The 100% bonus depreciation deal can have a major tax-saving impact on first-year depreciation deductions for new or used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups and vans are treated for federal income tax purposes as transportation equipment. In turn, that means they qualify for 100% bonus depreciation.
Specifically, 100% bonus depreciation is available when the SUV, pickup or van has a manufacturer’s gross vehicle weight rating above 6,000 pounds. You can verify a vehicle’s weight by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door. If you’re considering buying an eligible vehicle, placing one in service before year end could deliver a significant write-off on this year’s return.
Time deductions and income
If your business operates on a cash basis, you can significantly affect your amount of taxable income by accelerating your deductions into 2021 and deferring income into 2022 (assuming you expect to be taxed at the same or a lower rate next year).
For example, you could put recurring expenses normally paid early in the year on your credit card before January 1 — that way, you can claim the deduction for 2021 even though you don’t pay the credit card bill until 2022. In certain circumstances, you also can prepay some expenses, such as rent or insurance and claim them in 2021.
As for income, wait until close to year-end to send out invoices to customers with reliable payment histories. Accrual-basis businesses can take a similar approach, holding off on the delivery of goods and services until next year.
Consider all angles
Bear in mind that some of these tactics could adversely impact other factors affecting your tax liability, such as the qualified business income deduction. Contact us to make the most of your tax planning opportunities.
The Employee Retention Credit (ERC) was a valuable tax credit that helped employers survive the COVID-19 pandemic. A new law has retroactively terminated it before it was scheduled to end. It now only applies through September 30, 2021 (rather than through December 31, 2021) — unless the employer is a “recovery startup business.”
The Infrastructure Investment and Jobs Act, which was signed by President Biden on November 15, doesn’t have many tax provisions but this one is important for some businesses.
If you anticipated receiving the ERC based on payroll taxes after September 30 and retained payroll taxes, consult with us to determine how and when to repay those taxes and address any other compliance issues.
The American Institute of Certified Public Accountants (AICPA) is asking Congress to direct the IRS to waive payroll tax penalties imposed as a result of the ERC sunsetting. Some employers may face penalties because they retained payroll taxes believing they would receive the credit. Affected businesses will need to pay back the payroll taxes they retained for wages paid after September 30, the AICPA explained. Those employers may also be subject to a 10% penalty for failure to deposit payroll taxes withheld from employees unless the IRS waives the penalties.
The IRS is expected to issue guidance to assist employers in handling any compliance issues.
The ERC was originally enacted in March of 2020 as part of the CARES Act. The goal was to encourage employers to retain employees during the pandemic. Later, Congress passed other laws to extend and modify the credit and make it apply to wages paid before January 1, 2022.
An eligible employer could claim the refundable credit against its share of Medicare taxes (1.45% rate) equal to 70% of the qualified wages paid to each employee (up to a limit of $10,000 of qualified wages per employee per calendar quarter) in the third and fourth calendar quarters of 2021.
For the third and fourth quarters of 2021, a recovery startup business is an employer eligible to claim the ERC. Under previous law, a recovery startup business was defined as a business that:
However, recovery startup businesses are subject to a maximum total credit of $50,000 per quarter for a maximum credit of $100,000 for 2021.
The ERC was retroactively terminated by the new law to apply only to wages paid before October 1, 2021, unless the employer is a recovery startup business. Therefore, for wages paid in the fourth quarter of 2021, other employers can’t claim the credit.
In terms of the availability of the ERC for recovery startup businesses in the fourth quarter, the new law also modifies the recovery startup business definition. Now, a recovery startup business is one that began operating after February 15, 2020, and has average annual gross receipts of less than $1 million. Other changes to recovery startup businesses may also apply.
What to do now?
If you have questions about how to proceed now to minimize penalties, contact us. We can explain the options.
The long-awaited $1 trillion Infrastructure Investment and Jobs Act (IIJA) received the U.S. House of Representatives’ approval Friday, November 5, 2021, to provide funding for improvements to highways, bridges, and other road safety measures. The bill also offers plans to reconnect communities previously divided by highway building and expand national broadband networks.
According to White House projections, investments outlined in the infrastructure act will add approximately 2 million jobs per year over the next decade.
A portion of the original bill was held back, and there were not as many tax provisions as originally expected, which could mean additional changes may be coming in a fiscal year 2022 budget reconciliation.
What’s in the $1T Infrastructure Act?
There are several key tax provisions found in the IIJA.
Other Tax Provisions
What Else is Included?
Here’s a breakdown of what’s included:
Where does the Build Back Better plan stand?
The BBB is set to be the largest social policy bill brought to a vote in recent years, bringing funding to address issues such as climate change, health, education, and paid family and medical leave.
House leaders hope to pass the Build Back Better plan later when they return November 15 after a weeklong recess.
The Build Back Better plan and IIJA have many intricate details. We’ll continue to provide more information as it becomes available.
If you need help understanding how the changes will impact your individual or business tax strategy, please reach out to our team of experts. We’ll help you navigate these changes and make any necessary adjustments to your plan.
Are you planning to launch a business or thinking about changing your business entity? If so, you need to determine which entity will work best for you — a C corporation or a pass-through entity such as a sole-proprietorship, partnership, limited liability company (LLC) or S corporation. There are many factors to consider and proposed federal tax law changes being considered by Congress may affect your decision.
The corporate federal income tax is currently imposed at a flat 21% rate, while the current individual federal income tax rates begin at 10% and go up to 37%. The difference in rates can be mitigated by the qualified business income (QBI) deduction that’s available to eligible pass-through entity owners that are individuals, estates and trusts.
Note that noncorporate taxpayers with modified adjusted gross income above certain levels are subject to an additional 3.8% tax on net investment income.
Organizing a business as a C corporation instead of as a pass-through entity can reduce the current federal income tax on the business’s income. The corporation can still pay reasonable compensation to the shareholders and pay interest on loans from the shareholders. That income will be taxed at higher individual rates, but the overall rate on the corporation’s income can be lower than if the business was operated as a pass-through entity.
Other tax-related factors should also be considered. For example:
These are only some of the many factors involved in operating a business as a certain type of legal entity. For details about how to proceed in your situation, consult with us.
The COVID-19 pandemic caused many families to rethink their child care situation. Nannies became a popular choice for many, as they decreased the risk of sending children to child care centers and provided the benefit of helping those same children through online schooling while their parents worked. As the pandemic has ebbed and flowed, nannies have remained a popular option. Many families, however, were unprepared with how to transition to a household employer.
As a household employer, you’re responsible for paying your employee’s Social Security and Medicare taxes (i.e., the nanny), even if that person works part-time or on a seasonable basis. If you miss the payments or misfile the forms, you could be subject to fines or, worse, tax evasion.
Do you need to pay taxes?
As long as you pay the nanny directly, whether through cash, check, money transfer, etc., you’re considered the employer. If the payments exceed $2,300 for the year (as of 2021), the nanny cannot be considered a contractor, and you can’t use a Form 1099 to report wages.
As a household employer, you must pay Medicare and Social Security taxes (also known as Federal Insurance Contributions Act, or FICA) that are split evenly between your household funds and those the nanny/household employee receives. However, those younger than 18 are exempt from FICA. You may also potentially claim an exemption if the employee is your child and younger than 21 or a parent or spouse who is providing the care.
Household employers should also remember they are not required to withhold federal income taxes unless they and their employee agree to it. Even still, some states will not allow them to withhold state income taxes. Reach out to a knowledgeable tax professional to determine your state’s withholding rules.
Important forms, filings for household employers
Once you confirm you’re considered a household employer, understanding which forms you must file is important. Keep these forms in mind:
Tax credits, deductions
Families with children younger than 13 in child care may be eligible for tax credits and deductions. For starters, if an employer offers a Dependent Care FSA, they can contribute up to $10,500 in 2021 before deducting taxes from their pay. Those funds must be used to cover eligible dependent care expenses.
Any funds not paid for by the FSA may be eligible for the Child and Dependent Care Tax Credit. Qualifying taxpayers are eligible to take a credit for a portion of the cost of care for a qualifying dependent that enables the taxpayer to work or actively look for work, up to $2,100. Click here for more information on the Child and Dependent Care Tax Credit.
Outsourcing payments to mitigate risk
Several options are available for household employers who are new to employing care staff or may not have the time to handle all tax payments and filings properly. Outsourcing a part or all of the process can be done through:
For more information on the nanny tax and how it could affect your household, reach out to our team of tax professionals today.
Tax compliance is an essential aspect of any business, with sales and use tax making up a large portion of overall tax requirements. However, sales and use tax can get complicated very quickly as each state and local tax has its own rules and nuances.
With increased connectivity and remote capabilities, it has become easier than ever for a business to conduct interstate commerce. When a business’ operations expand across state lines, this opens the company to potential tax filing requirements in other cities and states.
Keep reading to understand why sales and use tax compliance is important, how to determine if you have a presence in another state, and solutions for increasing your company’s compliance.
Why is sales and use tax compliance important
There is a heavy administrative burden to sales and use tax compliance. Consider every type of transaction to ensure you use the proper tax categories when calculating sales and use tax liabilities. In addition, you must meet deadlines when filing forms and paying taxes. Your company can be subject to additional filings, penalties, and interest on any underpaid amounts that could total an extra 40% paid on the tax liability.
The costs associated with noncompliance can eat into your profits and affect your ability to pay additional obligations. All of the filings and tax calculations can get even more convoluted if your company has a presence, or nexus, in another state or locality. These days, a nexus is even easier to achieve than in the past.
How to determine if you owe taxes in another state
You may find your business has tax responsibilities in other states without even realizing it. Businesses that have a nexus because of a presence in the state or local region are subject to certain sales and use taxes for that region. This can be established through a remote worker or affiliates living in the state or region, or because of a physical or economic presence in the state.
Keeping track of where your workers live and who your business partners are is important to determine tax liabilities.
Solutions for managing sales and use tax compliance
Keeping abreast of the changing sales and use tax landscape can be time-consuming. While it may seem like hiring an individual internally to manage this process is a better plan, outsourcing the process to a knowledgeable tax professional can be cost-effective.
Firms handling sales and use tax filings for other organizations can take advantage of several benefits
Reach out today if your company would like to chat with our knowledgeable tax professionals to help your organization, whether through an audit of existing processes or by outsourcing your tax handling altogether.
The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $147,000 for 2022 (up from $142,800 for 2021). Wages and self-employment income above this threshold aren’t subject to Social Security tax.
The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers — one for Old Age, Survivors and Disability Insurance, which is commonly known as the Social Security tax, and the other for Hospital Insurance, which is commonly known as the Medicare tax.
There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2022, the FICA tax rate for employers is 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2021).
For 2022, an employee will pay:
For 2022, the self-employment tax imposed on self-employed people is:
More than one employer
What happens if an employee works for your business and has a second job? That employee would have taxes withheld from two different employers. Can the employee ask you to stop withholding Social Security tax once he or she reaches the wage base threshold? Unfortunately, no. Each employer must withhold Social Security taxes from the individual’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employee will get a credit on his or her tax return for any excess withheld.
We can help
Contact us if you have questions about payroll tax filing or payments. We can help ensure you stay in compliance.
If your business is depreciating over a 30-year period the entire cost of constructing the building that houses your operation, you should consider a cost segregation study. It might allow you to accelerate depreciation deductions on certain items, thereby reducing taxes and boosting cash flow. And under current law, the potential benefits of a cost segregation study are now even greater than they were a few years ago due to enhancements to certain depreciation-related tax breaks.
Fundamentals of depreciation
Generally, business buildings have a 39-year depreciation period (27.5 years for residential rental properties). Usually, you depreciate a building’s structural components, including walls, windows, HVAC systems, elevators, plumbing and wiring, along with the building. Personal property — such as equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements, such as fences, outdoor lighting and parking lots, are depreciable over 15 years.
Often, businesses allocate all or most of their buildings’ acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. In some cases — computers or furniture, for example — the distinction between real and personal property is obvious. But the line between the two is frequently less clear. Items that appear to be “part of a building” may in fact be personal property, like removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, signs and decorative lighting.
In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. This includes reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment, or dedicated cooling systems for data processing rooms.
Classify property into the appropriate asset classes
A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment.
The Tax Cuts and Jobs Act (TCJA) enhances certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other things, the act permanently increased limits on Section 179 expensing, which allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.
The TCJA also expanded 15-year-property treatment to apply to qualified improvement property. Previously this break was limited to qualified leasehold improvement, retail improvement and restaurant property. And it temporarily increased first-year bonus depreciation to 100% (from 50%).
The savings can be substantial
Fortunately, it isn’t too late to get the benefit of speedier depreciation for items that were incorrectly assumed to be part of your building for depreciation purposes. You don’t have to amend your past returns (or meet a deadline for claiming tax refunds) to claim the depreciation that you could have already claimed. Instead, you can claim that depreciation by following procedures, in connection with the next tax return that you file, that will result in “automatic” IRS consent to a change in your accounting for depreciation.
Cost segregation studies can yield substantial benefits, but they’re not right for every business. We can judge whether a study will result in overall tax savings greater than the costs of the study itself. Contact us to find out whether this would be worthwhile for you.
Are employees at your business traveling again after months of virtual meetings? In Notice 2021-52, the IRS announced the fiscal 2022 “per diem” rates that became effective October 1, 2021. Taxpayers can use these rates to substantiate the amount of expenses for lodging, meals and incidental expenses when traveling away from home. (Taxpayers in the transportation industry can use a special transportation industry rate.)
A simplified alternative to tracking actual business travel expenses is to use the high-low per diem method. This method provides fixed travel per diems. The amounts are based on rates set by the IRS that vary from locality to locality.
Under the high-low method, the IRS establishes an annual flat rate for certain areas with higher costs of living. All locations within the continental United States that aren’t listed as “high-cost” are automatically considered “low-cost.” The high-low method may be used in lieu of the specific per diem rates for business destinations. Examples of high-cost areas include Boston, San Francisco and Seattle.
Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. There’s also a $5 incidental-expenses-only rate for employees who don’t pay or incur meal expenses for a calendar day (or partial day) of travel.
If your company uses per diem rates, employees don’t have to meet the usual recordkeeping rules required by the IRS. Receipts of expenses generally aren’t required under the per diem method. But employees still must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren’t subject to income or payroll tax withholding or reported on an employee’s Form W-2.
The FY2022 rates
For travel after September 30, 2021, the per diem rate for all high-cost areas within the continental United States is $296. This consists of $222 for lodging and $74 for meals and incidental expenses. For all other areas within the continental United States, the per diem rate is $202 for travel after September 30, 2021 ($138 for lodging and $64 for meals and incidental expenses). Compared to the FY2021 per diems, both the high and low-cost area per diems increased $4.
Important: This method is subject to various rules and restrictions. For example, companies that use the high-low method for an employee must continue using it for all reimbursement of business travel expenses within the continental United States during the calendar year. However, the company may use any permissible method to reimburse that employee for any travel outside the continental United States.
For travel during the last three months of a calendar year, employers must continue to use the same method (per diem or high-low method) for an employee as they used during the first nine months of the calendar year. Also, note that per diem rates can’t be paid to individuals who own 10% or more of the business.
If your employees are traveling, it may be a good time to review the rates and consider switching to the high-low method. It can reduce the time and frustration associated with traditional travel reimbursement. Contact us for more information.
Managing cash flow is essential to business management. Revenue can fluctuate, and expenses need to be paid on time to maintain a positive working relationship with vendors, utility companies, and employees.
Thankfully, there’s a way to know what your cash flow could look like down the road so you can plan appropriately, and forecasting can provide these insights for business leaders.
What is forecasting?
Forecasting is the practice of using existing business data to create a model for what your business looks like now, as well as weeks, months, and even years down the road. This essential reporting is what allows business leaders to make real-time decisions based on the health of the business.
While there are different types of forecasting, rolling forecasting provides more information about the future by using existing data to predict performance in a certain time period. Whichever method you choose, building accurate models using complete data is essential.
Tips for accurate forecasting
As a business leader, you can make decisions on the direction of your business all day. If the data you’re using to make those decisions is not accurate, you could end up with less than stellar results or unexpected cash flow issues. Here are some tips to ensure you have the right numbers to base your decisions on.
What to include in forecasting
When creating your forecasts, you should include certain elements to ensure sure you’re getting the most accurate outlook possible. This includes:
While it’s important to create a budget and stick to it, forecasting is an equally important business function that can help direct the future of your company. Forecasts will allow you to foresee upcoming roadblocks or cash flow concerns so you can plan for and adjust around them.
Our firm is available to help you with regular forecasting data, setting up a system for you to create forecasts, audit your current system, and provide outsourced CFO services. Reach out to us to discuss how we can help you today!
Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have a business in federally declared disaster areas.
Friday, October 15
Monday, November 1
Wednesday, November 10
Wednesday, December 15
Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.
Low interest rates and other factors have caused global merger and acquisition (M&A) activity to reach new highs in 2021, according to Refinitiv, a provider of financial data. It reports that 2021 is set to be the biggest in M&A history, with the United States accounting for $2.14 trillion worth of transactions already this year. If you’re considering buying or selling a business — or you’re in the process of an M&A transaction — it’s important that both parties report it to the IRS and state agencies in the same way. Otherwise, you may increase your chances of being audited.
If a sale involves business assets (as opposed to stock or ownership interests), the buyer and the seller must generally report to the IRS the purchase price allocations that both use. This is done by attaching IRS Form 8594, “Asset Acquisition Statement,” to each of their respective federal income tax returns for the tax year that includes the transaction.
Here’s what must be reported
If you buy business assets in an M&A transaction, you must allocate the total purchase price to the specific assets that are acquired. The amount allocated to each asset then becomes its initial tax basis. For depreciable and amortizable assets, the initial tax basis of each asset determines the depreciation and amortization deductions for that asset after the acquisition. Depreciable and amortizable assets include:
In addition to reporting the items above, you must also disclose on Form 8594 whether the parties entered into a noncompete agreement, management contract or similar agreement, as well as the monetary consideration paid under it.
What the IRS might examine
The IRS may inspect the forms that are filed to see if the buyer and the seller use different allocations. If the tax agency finds that different allocations are used, auditors may dig deeper and the examination could expand beyond the transaction. So, it’s best to ensure that both parties use the same allocations. Consider including this requirement in your asset purchase agreement at the time of the sale.
The tax implications of buying or selling a business are complex. Price allocations are important because they affect future tax benefits. Both the buyer and the seller need to report them to the IRS in an identical way to avoid unwanted attention. To lock in the best results after an acquisition, consult with us before finalizing any transaction.
If you use an automobile in your trade or business, you may wonder how depreciation tax deductions are determined. The rules are complicated, and special limitations that apply to vehicles classified as passenger autos (which include many pickups and SUVs) can result in it taking longer than expected to fully depreciate a vehicle.
Cents-per-mile vs. actual expenses
First, note that separate depreciation calculations for a passenger auto only come into play if you choose to use the actual expense method to calculate deductions. If, instead, you use the standard mileage rate (56 cents per business mile driven for 2021), a depreciation allowance is built into the rate.
If you use the actual expense method to determine your allowable deductions for a passenger auto, you must make a separate depreciation calculation for each year until the vehicle is fully depreciated. According to the general rule, you calculate depreciation over a six-year span as follows: Year 1, 20% of the cost; Year 2, 32%; Year 3, 19.2%; Years 4 and 5, 11.52%; and Year 6, 5.76%. If a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions instead of the percentages listed above.
For a passenger auto that costs more than the applicable amount for the year the vehicle is placed in service, you’re limited to specified annual depreciation ceilings. These are indexed for inflation and may change annually.
Heavy SUVs, pickups, and vans
Much more favorable depreciation rules apply to heavy SUVs, pickups, and vans used over 50% for business, because they’re treated as transportation equipment for depreciation purposes. This means a vehicle with a gross vehicle weight rating (GVWR) above 6,000 pounds. Quite a few SUVs and pickups pass this test. You can usually find the GVWR on a label on the inside edge of the driver-side door.
After-tax cost is what counts
What’s the impact of these depreciation limits on your business vehicle decisions? They change the after-tax cost of passenger autos used for business. That is, the true cost of a business asset is reduced by the tax savings from related depreciation deductions. To the extent depreciation deductions are reduced, and thereby deferred to future years, the value of the related tax savings is also reduced due to time-value-of-money considerations, and the true cost of the asset is therefore that much higher.
The rules are different if you lease an expensive passenger auto used for business. Contact us if you have questions or want more information.
The week of September 13-17 has been declared National Small Business Week by the Small Business Administration. To commemorate the week, here are three tax breaks to consider.
1. Claim bonus depreciation or a Section 179 deduction for asset additions
Under current law, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in calendar year 2021. That means your business might be able to write off the entire cost of some or all asset additions on this year’s return. Consider making acquisitions between now and December 31.
Note: It doesn’t always make sense to claim a 100% bonus depreciation deduction in the first year that qualifying property is placed in service. For example, if you think that tax rates will increase in the future — either due to tax law changes or a change in your income — it might be better to forgo bonus depreciation and instead depreciate your 2021 asset acquisitions over time.
There’s also a Section 179 deduction for eligible asset purchases. The maximum Section 179 deduction is $1.05 million for qualifying property placed in service in 2021. Recent tax laws have enhanced Section 179 and bonus depreciation but most businesses benefit more by claiming bonus depreciation. We can explain the details of these tax breaks and which is right for your business. You don’t have to decide until you file your tax return.
2. Claim bonus depreciation for a heavy vehicle
The 100% first-year bonus depreciation provision can have a sizable, beneficial impact on first-year depreciation deductions for new and used heavy SUVs, pickups and vans used over 50% for business. For federal tax purposes, heavy vehicles are treated as transportation equipment so they qualify for 100% bonus depreciation.
This option is available only when the manufacturer’s gross vehicle weight rating (GVWR) is above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, usually found on the inside edge of the driver’s side door.
Buying an eligible vehicle and placing it in service before the end of the year can deliver a big write-off on this year’s return. Before signing a sales contract, we can help evaluate what’s right for your business.
3. Maximize the QBI deduction for pass-through businesses
A valuable deduction is the one based on qualified business income (QBI) from pass-through entities. For tax years through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI. This deduction is subject to restrictions that can apply at higher income levels and based on the owner’s taxable income.
For QBI deduction purposes, pass-through entities are defined as sole proprietorships, single-member LLCs that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes and S corporations. For these taxpayers, the deduction can also be claimed for up to 20% of income from qualified real estate investment trust dividends and 20% of qualified income from publicly traded partnerships.
Because of various limitations on the QBI deduction, tax planning moves can unexpectedly increase or decrease it. For example, strategies that reduce this year’s taxable income can have the negative side-effect of reducing your QBI deduction.
These are only a few of the tax breaks your small business may be able to claim. Contact us to help evaluate your planning options and optimize your tax results.
A business may be able to claim a federal income tax deduction for a theft loss. But does embezzlement count as theft? In most cases it does but you’ll have to substantiate the loss. A recent U.S. Tax Court decision illustrates how that’s sometimes difficult to do.
Basic rules for theft losses
The tax code allows a deduction for losses sustained during the taxable year and not compensated by insurance or other means. The term “theft” is broadly defined to include larceny, embezzlement and robbery. In general, a loss is regarded as arising from theft only if there’s a criminal element to the appropriation of a taxpayer’s property.
In order to claim a theft loss deduction, a taxpayer must prove:
Facts of the recent court case
Years ago, the taxpayer cofounded an S corporation with another shareholder. At the time of the alleged embezzlement, the other original shareholder was no longer a shareholder, and she wasn’t supposed to be compensated by the business. However, according to court records, she continued to manage the S corporation’s books and records.
The taxpayer suffered an illness that prevented him from working for most of the year in question. During this time, the former shareholder paid herself $166,494. Later, the taxpayer filed a civil suit in a California court alleging that the woman had misappropriated funds from the business.
On an amended tax return, the corporation reported a $166,494 theft loss due to the embezzlement. The IRS denied the deduction. After looking at the embezzlement definition under California state law, the Tax Court agreed with the IRS.
The Tax Court stated that the taxpayer didn’t offer evidence that the former shareholder “acted with the intent to defraud,” and the taxpayer didn’t show that the corporation “experienced a theft meeting the elements of embezzlement under California law.”
The IRS and the court also denied the taxpayer’s alternate argument that the corporation should be allowed to claim a compensation deduction for the amount of money the former shareholder paid herself. The court stated that the taxpayer didn’t provide evidence that the woman was entitled to be paid compensation from the corporation and therefore, the corporation wasn’t entitled to a compensation deduction. (TC Memo 2021-66)
How to proceed if you’re victimized
If your business is victimized by theft, embezzlement or internal fraud, you may be able to claim a tax deduction for the loss. Keep in mind that a deductible loss can only be claimed for the year in which the loss is discovered, and that you must meet other tax-law requirements. Keep records to substantiate the claimed theft loss, including when you discovered the loss. If you receive an insurance payment or other reimbursement for the loss, that amount must be subtracted when computing the deductible loss for tax purposes. Contact us with any questions you may have about theft and casualty loss deductions.
In order to prepare for a business audit, an IRS examiner generally does research about the specific industry and issues on the taxpayer’s return. Examiners may use IRS “Audit Techniques Guides (ATGs).” A little-known secret is that these guides are available to the public on the IRS website. In other words, your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.
Many ATGs target specific industries or businesses, such as construction, aerospace, art galleries, architecture and veterinary medicine. Others address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.
IRS auditors need to examine different types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand various industries or issues, the accounting methods commonly used, how income is received, and areas where taxpayers might not be in compliance.
By using a specific ATG, an auditor may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the business is located.
Updates and revisions
Some guides were written several years ago and others are relatively new. There is not a guide for every industry. Here are some of the guide titles that have been revised or added this year:
Although ATGs were created to help IRS examiners uncover common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. For a complete list of ATGs, visit the IRS website here: https://www.checkpointmarketing.net/newsletter/linkShimRadar.cfm?key=89521691G3971J9396851&l=72457
If you’re a business owner and you’re getting a divorce, tax issues can complicate matters. Your business ownership interest is one of your biggest personal assets and in many cases, your marital property will include all or part of it.
Tax-free property transfers
You can generally divide most assets, including cash and business ownership interests, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under this tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).
Let’s say that under the terms of your divorce agreement, you give your house to your spouse in exchange for keeping 100% of the stock in your business. That asset swap would be tax-free. And the existing basis and holding periods for the home and the stock would carry over to the person who receives them.
Tax-free transfers can occur before a divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they’re made “incident to divorce.” This means transfers that occur within:
More tax issues
Later on, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — when the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold (unless an exception applies).
What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex will continue to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex-spouse ultimately sells the shares, he or she will owe any capital gains taxes. You will owe nothing.
Note that the person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. That’s why you should always take taxes into account when negotiating your divorce agreement.
In addition, the beneficial tax-free transfer rule is now extended to ordinary-income assets, not just to capital-gains assets. For example, if you transfer business receivables or inventory to your ex-spouse in a divorce, these types of ordinary-income assets can also be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.
Plan ahead to avoid surprises
Like many major life events, divorce can have major tax implications. For example, you may receive an unexpected tax bill if you don’t carefully handle the splitting up of qualified retirement plan accounts (such as a 401(k) plan) and IRAs. And if you own a business, the stakes are higher. We can help you minimize the adverse tax consequences of settling your divorce.
Note: We are closely monitoring H.R. 3684, known as the Infrastructure Investment and Jobs Act. The Senate has approved the infrastructure bill and now goes to the House of Representatives for consideration as of the publication. The infrastructure bill would terminate the employee retention credit early, making wages paid after September 30, 2021, ineligible for the credit.
The Employee Retention Credit (ERC) was introduced in 2020 to help businesses that have been affected by the COVID-19 pandemic. Since its release, it has been expanded and modified to help more businesses. Despite all of this, many businesses that are eligible for the credit haven’t filed for it. Did the pandemic impact your business? Don’t assume your business is ineligible. Keep reading to learn more.
What is the Employee Retention Credit?
The ERC allows businesses to claim a refundable credit for qualified employee wages and related expenses if there was a significant disruption to business because of the pandemic. That disruption is measured in a quarterly reduction of gross revenues – 50% reduction in 2020 vs. 2019; and only 20% reduction in 2021 vs. 2019. In addition, there is a “safe harbor” test that allows you to look back a quarter. For example, if your 4th quarter 2020 revenues were down 20% compared to the 4th quarter 2019, you are eligible for the first quarter of 2021, regardless of the first quarter test outcome.
The second disruption is a government shutdown – complete or temporary. For example, a restaurant limited to 75% seating capacity by the governor’s mandate has experienced a partial shutdown.
If you experienced EITHER one of these disruptions, you might be eligible for the employee retention credit.
Eligibility for 2020 includes businesses with 100 or fewer full-time equivalent employees in 2019, in which all wages qualify whether the business was open or (partially) closed because of governmental orders. For businesses with more than 100 employees, only wages paid to employees when they weren’t providing services because the pandemic are eligible.
For 2021 the full-time equivalent threshold increased to 500 employees in 2019.
For 2020 the credit is 50% of the first $10,000 of eligible employees’ earnings for the year – up to $5,000 per employee for the year.
For 2021 the credit is 70% of the first $10,000 of eligible employee earnings per QUARTER – up to $28,000 per employee for the year.
What new guidance was released?
The IRS released Notice 2021-49 on August 4, 2021, which provided additional ERC guidance.
Keep in mind, the ERC is a complex tax credit with ever-changing guidelines and requires interpretation. Reach out to our professional tax team, who are familiar with the credit and most up-to-date guidelines.
What if I missed filing for the ERC?
While some of the newer guidelines are retroactive, others only apply to wages paid more recently. In most cases, employers can file a correction to their quarterly tax documents to receive appropriate credit for qualified wages paid. Keep in mind that wages included in Payroll Protection Plan (PPP) forgiveness are not qualified (no double-dipping).
We have noted a longer processing time for amended returns. This means you’ll see benefits of the credit faster by filing for it with your quarterly returns; however, it could take 90 to 120 days for amended returns.
How can my business receive help?
If you’re like many businesses and need help understanding the ERC and the recent changes, reach out to our team of qualified professionals for help! We can help you:
We look forward to helping you!
What if you decide to, or are asked to, guarantee a loan to your corporation? Before agreeing to act as a guarantor, endorser or indemnitor of a debt obligation of your closely held corporation, be aware of the possible tax consequences. If your corporation defaults on the loan and you’re required to pay principal or interest under the guarantee agreement, you don’t want to be blindsided.
Business vs. nonbusiness
If you’re compelled to make good on the obligation, the payment of principal or interest in discharge of the obligation generally results in a bad debt deduction. This may be either a business or a nonbusiness bad debt deduction. If it’s a business bad debt, it’s deductible against ordinary income. A business bad debt can be either totally or partly worthless. If it’s a nonbusiness bad debt, it’s deductible as a short-term capital loss, which is subject to certain limitations on deductions of capital losses. A nonbusiness bad debt is deductible only if it’s totally worthless.
In order to be treated as a business bad debt, the guarantee must be closely related to your trade or business. If the reason for guaranteeing the corporation loan is to protect your job, the guarantee is considered closely related to your trade or business as an employee. But employment must be the dominant motive. If your annual salary exceeds your investment in the corporation, this tends to show that the dominant motive for the guarantee was to protect your job. On the other hand, if your investment in the corporation substantially exceeds your annual salary, that’s evidence that the guarantee was primarily to protect your investment rather than your job.
Except in the case of job guarantees, it may be difficult to show the guarantee was closely related to your trade or business. You’d have to show that the guarantee was related to your business as a promoter, or that the guarantee was related to some other trade or business separately carried on by you.
If the reason for guaranteeing your corporation’s loan isn’t closely related to your trade or business and you’re required to pay off the loan, you can take a nonbusiness bad debt deduction if you show that your reason for the guarantee was to protect your investment, or you entered the guarantee transaction with a profit motive.
In addition to satisfying the above requirements, a business or nonbusiness bad debt is deductible only if:
- You have a legal duty to make the guaranty payment, although there’s no requirement that a legal action be brought against you;
- The guaranty agreement was entered into before the debt becomes worthless; and
- You received reasonable consideration (not necessarily cash or property) for entering into the guaranty agreement.
Any payment you make on a loan you guaranteed is deductible as a bad debt in the year you make it, unless the agreement (or local law) provides for a right of subrogation against the corporation. If you have this right, or some other right to demand payment from the corporation, you can’t take a bad debt deduction until the rights become partly or totally worthless.
These are only a few of the possible tax consequences of guaranteeing a loan to your closely held corporation. Contact us to learn all the implications in your situation.
If your business receives large amounts of cash or cash equivalents, you may be required to report these transactions to the IRS.
What are the requirements?
Each person who, in the course of operating a trade or business, receives more than $10,000 in cash in one transaction (or two or more related transactions), must file Form 8300. What is considered a “related transaction?” Any transactions conducted in a 24-hour period. Transactions can also be considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.
To complete a Form 8300, you’ll need personal information about the person making the cash payment, including a Social Security or taxpayer identification number.
Why does the government require reporting?
Although many cash transactions are legitimate, the IRS explains that “information reported on (Form 8300) can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”
You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS.
What’s considered “cash” and “cash equivalents?”
For Form 8300 reporting purposes, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders.
Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.
Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.
Can the forms be filed electronically?
Businesses required to file reports of large cash transactions on Form 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic acknowledgment of receipt when they file.
The IRS also reminds businesses that they can “batch file” their reports, which is especially helpful to those required to file many forms.
How can we set up an electronic account?
To file Form 8300 electronically, a business must set up an account with FinCEN’s Bank Secrecy Act E-Filing System. For more information, visit: https://bsaefiling.fincen.treas.gov/AboutBsa.html. Interested businesses can also call the BSA E-Filing Help Desk at 866-346-9478 (Monday through Friday from 8 am to 6 pm EST). Contact us with any questions or for assistance.
Perhaps you operate your small business as a sole proprietorship and want to form a limited liability company (LLC) to protect your assets. Or maybe you are launching a new business and want to know your options for setting it up. Here are the basics of operating as an LLC and why it might be appropriate for your business.
An LLC is somewhat of a hybrid entity because it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide the owners with the best of both worlds.
Personal asset protection
Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) generally aren’t liable for the debts of the business except to the extent of their investment. Thus, the owners can operate the business with the security of knowing that their personal assets are protected from the entity’s creditors. This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.
The owners of an LLC can elect under the “check-the-box” rules to have the entity treated as a partnership for federal tax purposes. This can provide a number of important benefits to the owners. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they “flow through” to the owners, in proportion to the owners’ respective interests in profits, and are reported on the owners’ individual returns and are taxed only once.
To the extent the income passed through to you is qualified business income, you’ll be eligible to take the Code Section 199A pass-through deduction, subject to various limitations. In addition, since you’re actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you and your spouse may have.
An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be an important reason for using an LLC over an S corporation (a form of business that provides tax treatment that’s similar to a partnership). Another reason for using an LLC over an S corporation is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued.
Review your situation
In summary, an LLC can give you corporate-like protection from creditors while providing the benefits of taxation as a partnership. For these reasons, you should consider operating your business as an LLC. Contact us to discuss in more detail how an LLC might benefit you and the other owners.
Do you play a major role in a closely held corporation and sometimes spend money on corporate expenses personally? These costs may wind up being nondeductible both by an officer and the corporation unless proper steps are taken. This issue is more likely to arise in connection with a financially troubled corporation.
Deductible vs. nondeductible expenses
In general, you can’t deduct an expense you incur on behalf of your corporation, even if it’s a legitimate “trade or business” expense and even if the corporation is financially troubled. This is because a taxpayer can only deduct expenses that are his own. And since your corporation’s legal existence as a separate entity must be respected, the corporation’s costs aren’t yours and thus can’t be deducted even if you pay them.
What’s more, the corporation won’t generally be able to deduct them either because it didn’t pay them itself. Accordingly, be advised that it shouldn’t be a practice of your corporation’s officers or major shareholders to cover corporate costs.
When expenses may be deductible
On the other hand, if a corporate executive incurs costs that relate to an essential part of his or her duties as an executive, they may be deductible as ordinary and necessary expenses related to his or her “trade or business” of being an executive. If you wish to set up an arrangement providing for payments to you and safeguarding their deductibility, a provision should be included in your employment contract with the corporation stating the types of expenses which are part of your duties and authorizing you to incur them. For example, you may be authorized to attend out-of-town business conferences on the corporation’s behalf at your personal expense.
Alternatively, to avoid the complete loss of any deductions by both yourself and the corporation, an arrangement should be in place under which the corporation reimburses you for the expenses you incur. Turn the receipts over to the corporation and use an expense reimbursement claim form or system. This will at least allow the corporation to deduct the amount of the reimbursement.
Contact us if you’d like assistance or would like to discuss these issues further.
Did your company receive funds from the Human Health Services (HHS) Cares Act stimulus? If so, you may be required to submit supporting documentation for how the funds were used.
The Human Health Services department calculated relief payments based on 2019 Fee for Services (FFS) Medicare payments and direct deposited them into hospital and medical provider accounts. Any payments of more than $10,000 require additional reporting by the deadline specified in the chart below, per the Terms and Conditions of the payments.
|Period||Payment Received Period (Payments Exceeding $10,000 in Aggregate Received)||Deadline to Use Funds||Reporting Time Period|
|1||From April 10, 2020 to June 30, 2020||June 30, 2021||July 1 to Sept. 30, 2021|
|2||From July 1, 2020 to Dec. 31, 2020||Dec. 31, 2021||Jan. 1 to March 31, 2022|
|3||From Jan. 1, 2021 to June 30, 2021||June 30, 2022||July 1 to Sept. 30, 2022|
|4||From July 1, 2021 to Dec. 31, 2021||Dec. 31, 2022||Jan. 1 to March 31, 2023|
These funds provided by the stimulus payments must be used for eligible expenses and lost revenues to allow hospitals and medical practices to prevent, prepare for, and respond to COVID-19. To provide the necessary reports, Health and Human Services has launched a Provider Relief Fund (PRF) reporting portal.
Before getting started, you may want to gather the following types of information:
You can learn more about the system and reporting requirements here. Our team of professionals is also available to help you sort through the necessary reporting requirements.
Despite the COVID-19 pandemic, government officials are seeing a large increase in the number of new businesses being launched. From June 2020 through June 2021, the U.S. Census Bureau reports that business applications are up 18.6%. The Bureau measures this by the number of businesses applying for an Employer Identification Number.
Entrepreneurs often don’t know that many of the expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your federal tax bill.
How to treat expenses for tax purposes
If you’re starting or planning to launch a new business, keep these three rules in mind:
In general, start-up expenses are those you make to:
To qualify for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.
To be eligible as an “organization expense,” an expense must be related to establishing a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.
If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the election described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.
Are you eligible to take the deduction for qualified business income (QBI)? Here are 10 facts about this valuable tax break, referred to as the pass-through deduction, QBI deduction or Section 199A deduction.
As you can see, this substantial deduction is complex, especially if your taxable income exceeds the thresholds discussed above. Other rules apply. Contact us if you have questions about your situation.
The Employee Retention Tax Credit (ERTC) is a valuable tax break that was extended and modified by the American Rescue Plan Act (ARPA), enacted in March of 2021. Here’s a rundown of the rules.
Back in March of 2020, Congress originally enacted the ERTC in the CARES Act to encourage employers to hire and retain employees during the pandemic. At that time, the ERTC applied to wages paid after March 12, 2020, and before January 1, 2021. However, Congress later modified and extended the ERTC to apply to wages paid before July 1, 2021.
The ARPA again extended and modified the ERTC to apply to wages paid after June 30, 2021, and before January 1, 2022. Thus, an eligible employer can claim the refundable ERTC against “applicable employment taxes” equal to 70% of the qualified wages it pays to employees in the third and fourth quarters of 2021. Except as discussed below, qualified wages are generally limited to $10,000 per employee per 2021 calendar quarter. Thus, the maximum ERTC amount available is generally $7,000 per employee per calendar quarter or $28,000 per employee in 2021.
For purposes of the ERTC, a qualified employer is eligible if it experiences a significant decline in gross receipts or a full or partial suspension of business due to a government order. Employers with up to 500 full-time employees can claim the credit without regard to whether the employees for whom the credit is claimed actually perform services. But, except as explained below, employers with more than 500 full-time employees can only claim the ERTC with respect to employees that don’t perform services.
Employers who got a Payroll Protection Program loan in 2020 can still claim the ERTC. But the same wages can’t be used both for seeking loan forgiveness or satisfying conditions of other COVID relief programs (such as the Restaurant Revitalization Fund program) in calculating the ERTC.
Beginning in the third quarter of 2021, the following modifications apply to the ERTC:
Contact us if you have any questions related to your business claiming the ERTC.
As we continue to come out of the COVID-19 pandemic, you may be traveling again for business. Under tax law, there are a number of rules for deducting the cost of your out-of-town business travel within the United States. These rules apply if the business conducted out of town reasonably requires an overnight stay.
Note that under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses through 2025 on their own tax returns. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025.
However, self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.
Here are some of the rules that come into play.
Transportation and meals
The actual costs of travel (for example, plane fare and cabs to the airport) are deductible for out-of-town business trips. You’re also allowed to deduct the cost of meals and lodging. Your meals are deductible even if they’re not connected to a business conversation or other business function. The Consolidated Appropriations Act includes a provision that removes the 50% limit on deducting eligible business meals for 2021 and 2022. The law allows a 100% deduction for food and beverages provided by a restaurant. Takeout and delivery meals provided by a restaurant are also fully deductible.
Keep in mind that no deduction is allowed for meal or lodging expenses that are “lavish or extravagant,” a term that’s been interpreted to mean “unreasonable.”
Personal entertainment costs on the trip aren’t deductible, but business-related costs such as those for dry cleaning, phone calls and computer rentals can be written off.
Combining business and pleasure
Some allocations may be required if the trip is a combined business/pleasure trip, for example, if you fly to a location for five days of business meetings and stay on for an additional period of vacation. Only the cost of meals, lodging, etc., incurred for the business days are deductible — not those incurred for the personal vacation days.
On the other hand, with respect to the cost of the travel itself (plane fare, etc.), if the trip is “primarily” business, the travel cost can be deducted in its entirety and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. An important factor in determining if the trip is primarily business or personal is the amount of time spent on each (although this isn’’t the sole factor).
If the trip doesn’t involve the actual conduct of business but is for the purpose of attending a convention, seminar, etc., the IRS may check the nature of the meetings carefully to make sure they aren’t vacations in disguise. Retain all material helpful in establishing the business or professional nature of this travel.
The rules for deducting the costs of a spouse who accompanies you on a business trip are very restrictive. No deduction is allowed unless the spouse is an employee of you or your company, and the spouse’s travel is also for a business purpose.
Finally, note that personal expenses you incur at home as a result of taking the trip aren’t deductible. For example, the cost of boarding a pet while you’re away isn’t deductible. Contact us if you have questions about your small business deductions.
Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Monday, August 2
Tuesday, August 10
Wednesday, September 15
If you’re claiming deductions for business meals or auto expenses, expect the IRS to closely review them. In some cases, taxpayers have incomplete documentation or try to create records months (or years) later. In doing so, they fail to meet the strict substantiation requirements set forth under tax law. Tax auditors are adept at rooting out inconsistencies, omissions and errors in taxpayers’ records, as illustrated by one recent U.S. Tax Court case.
Facts of the case
In the case, the taxpayer ran a notary and paralegal business. She deducted business meals and vehicle expenses that she allegedly incurred in connection with her business.
The deductions were denied by the IRS and the court. Tax law “establishes higher substantiation requirements” for these and certain other expenses, the court noted. No deduction is generally allowed “unless the taxpayer substantiates the amount, time and place, business purpose, and business relationship to the taxpayer of the person receiving the benefit” for each expense with adequate records or sufficient evidence.
The taxpayer in this case didn’t provide adequate records or other sufficient evidence to prove the business purpose of her meal expenses. She gave vague testimony that she deducted expenses for meals where she “talked strategies” with people who “wanted her to do some work.” The court found this was insufficient to show the connection between the meals and her business.
When it came to the taxpayer’s vehicle expense deductions, she failed to offer credible evidence showing where she drove her vehicle, the purpose of each trip and her business relationship to the places visited. She also conceded that she used her car for both business and personal activities. (TC Memo 2021-50)
Best practices for business expenses
This case is an example of why it’s critical to maintain meticulous records to support business expenses for meals and vehicle deductions. Here’s a list of “DOs and DON’Ts” to help meet the strict IRS and tax law substantiation requirements for these items:
DO keep detailed, accurate records. For each expense, record the amount, the time and place, the business purpose, and the business relationship of any person to whom you provided a meal. If you have employees who you reimburse for meals and auto expenses, make sure they’re complying with all the rules.
DON’T reconstruct expense logs at year end or wait until you receive a notice from the IRS. Take a moment to record the details in a log or diary or on a receipt at the time of the event or soon after. Require employees to submit monthly expense reports.
DO respect the fine line between personal and business expenses. Be careful about combining business and pleasure. Your business checking account shouldn’t be used for personal expenses.
DON’T be surprised if the IRS asks you to prove your deductions. Meal and auto expenses are a magnet for attention. Be prepared for a challenge.
With organization and guidance from us, your tax records can stand up to scrutiny from the IRS. There may be ways to substantiate your deductions that you haven’t thought of, and there may be a way to estimate certain deductions (“the Cohan rule”), if your records are lost due to a fire, theft, flood or other disaster.
In 2020, there was record-breaking new business growth in the United States. The sheer number of new businesses was 24 percent higher than the prior year, with new employee identification number (EIN) applications breaking records in Quarter 3. This all took place despite the pandemic that has swept around the world. In the 1930s, an Austrian economist described this phenomenon of new business growth in times of uncertainty as “creative destruction.” In short, this creative destruction happens as people come up with new ways to overcome challenges – like the inability to shop in person due to lockdowns or health concerns.
However exciting or successful your new business may be at marketing and sales, it’s hard to know what you don’t know about the finance functions and find the time to manage the books and your other priorities. Brushing important accounting and record-keeping tasks to the side can hurt your bottom line and create stress when tax payments are due. So how do you tackle this problem? Keep reading to find out.
Your business will thrive when the finance functions are in working order. Business owners quickly realize they will either need to carve out the necessary time to manage their organization’s finances or hire someone else to do it.
Hiring a CFO is one option. However, most new businesses do not have forty hours of work for a qualified individual. This is when outsourcing CFO services can be a practical solution.
The benefits of working with an outsourced CFO:
Outsourcing services from your organization can help you operate more effectively. With our requisite knowledge of different organizational structures, we can help you create innovative changes in your organization. If you would like to learn more, please call our office to speak with one of our professionals and learn how our outsourced CFO services can help enhance the success of your business.
Most industries came to a halt last year when the pandemic shut down businesses around the world. When manufacturers adjusted operations, taking necessary precautions to protect employees, it created a ripple effect of shortages in other areas, including lumbar, tile, and other supplies used to build houses. Amidst all the uncertainty, it may seem easier to ignore performance metrics. In this climate, however, they are more important than ever before.
Tracking key performance indicators (KPIs) can help business owners keep their operations running smoothly. KPIs are essentially prioritized metrics that owners and managers need regular access to make decisions. When determining which KPIs are important to track, know that it varies by industry. Keep reading to discover some key metrics to help leaders in the construction industry understand your firm’s performance.
Here are a few KPIs to consider:
In addition to these more traditional KPIs, the following also impact profitability.
While there are many other KPIs that construction firms can choose from, we find that these are often the top indicators of financial health and areas of opportunity. If you would like a second look at your KPIs or help establish some, give our team of professionals a call today.
The last few years have afforded quite a few changes in how the IRS allows businesses to handle meal and entertainment costs in relation to their taxes. The 2018 Tax Cuts and Jobs Act (TCJA) eliminated deductions for most business-related entertainment expenses. Since the pandemic, the IRS has temporarily changed the tax-deductible amount allowed for some business meals to encourage increased sales at restaurants. With the easing of restrictions, businesses may be considering company picnics for employee appreciation or starting up business lunches with clients again.
With all of these changes, putting a system in place to accurately track business food and entertainment expenses becomes essential. Best practices should include requesting detailed receipts and separately tracking which costs fall under the 50 percent deduction, 100 percent deduction, or not deductible categories.
In addition to keeping excellent records, below are some additional things to keep in mind about the business meal and entertainment deduction rules, including a helpful chart highlighting the deduction category particular meal and entertainment expenses fall under.
Meal and entertainment expense changes
Under the TCJA, the IRS no longer allows businesses to deduct most entertainment expenses even if they were a cost of doing business. Food and beverage related to entertainment venues are only covered with detailed receipts separately stating the cost of the meal.
Another change from the TCJA is that spouse or guest meals are not covered from travel unless the business employs the person. So, if your spouse accompanies you on a work trip, their meals are not deductible for the business.
The Consolidated Appropriations Act of 2021 (CAA) has temporarily increased the deduction for business meals provided by restaurants to 100 percent for tax years 2021 and 2022. Not all meals are created equal, however. The 100 percent deduction is only available for meals provided by restaurants, which the IRS defines as: “A business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” Prepackaged food from a grocery, specialty, or convenience store is not eligible for the 100% deduction and would be limited to a 50% deduction.
Also, note that the expenses must be considered ordinary (common and accepted for your business) or necessary (helpful and appropriate) and cannot be considered lavish or extravagant. An employee of the business or the taxpayer must be present during the meal, as well.
A quick guide to business meal deductions
|Expense Category||Deductible Amount||Tax Code Reference|
|Company social events and facilities for employees (e.g., holiday parties, team-building events)||100%||IRC Secs. 274(e)(4) and 274(n)(2)(A)|
|Meals and entertainment included in employee or non-employee compensation||100%||IRC Secs. 274(e)(2) and (9)|
|Reimbursed expenses under an accountable plan||100%||IRC Sec. 274(e)(3)|
|Meals and entertainment made available to the public||100%||IRC Sec. 274(e)(7)|
|Meals and entertainment sold to customers||100%||IRC Sec. 274(e)(8)|
|Business travel meals||50%
100% (1/1/2021 to 12/31/2022)*
|IRC Secs. 274(e)(3) and 274(e)(9)
|Client/customer business meals||50%
100% (1/1/2021 to 12/31/2022)*
|Business meeting meals||50%
100% (1/1/2021 to 12/31/2022)*
|IRC Secs 274(e)(5), 274(k)(1), and 274(e)(6)|
|De minimis food and beverages provided in the workplace (e.g., bottled water, coffee, snacks)||50%
|IRC Sec 274(e)(1)|
|Meals provided for the convenience of the employer||50% (through 12/31/2025)
0% (on or after 1/1/2026)
|IRC Sec. 274(n) and 274(o)|
|Employer-operated eating facilities||50% (through 12/31/2025)
0% (on or after 1/1/2026)
|IRC Sec. 274(n) and 274(o)|
|Meals/beverages associated with entertainment activities when not separated stated on the receipt||0%||Notice 2018-76|
|Personal, lavish, or extravagant meals/beverages in relation to the activity||0%||IRC Secs. 274(k)(1) and 274(k)(2)|
|Entertainment without exception||0%||IRC Secs. 274(a)(1) and 274(e)|
*Meals are only deductible in the 2021 and 2022 tax years if provided by a restaurant, as defined by the IRS in the above article.
If you need help establishing a system to better track expenses or seek clarification on whether certain expenses are tax-deductible, give our team of CPAs a call today.
Cryptocurrency, a type of virtual currency that utilizes cryptography to validate and secure transactions digitally recorded on a distributed ledger, such as a blockchain, has been on the rise over the past several years. ‘ Approximately 14 percent of Americans own at least one share of virtual currency. Therefore, it’s essential to understand the tax implications associated with receiving, buying, and selling these currencies, mainly because the IRS is starting to crack down on reporting for capital gains and losses associated with them.
Keep reading to learn more about the tax implications associated with cryptocurrency and what the IRS is doing to sharpen its focus on crypto transactions.
What you need to know about virtual currency tax reporting:
Much like when you hold investment accounts, cryptocurrency owners must recognize gains and losses when filing their taxes. While gains are typically subject to capital gains taxes, losses can sometimes be used to counteract those gains.
Here are some important details:
What about using virtual currency as a form of payment?
Whether you’re using virtual currency to pay someone or receiving virtual currency as payment for something, there can be tax implications. When reporting virtual currency received, use the fair market value on the day you received payment. Here are a few popular reasons virtual currency can be exchanged between two parties:
While it may seem tedious to track every single purchase, exchange, trade, or receipt of virtual currencies, there are online platforms available that analyze the transactions and report to you when you have gains or losses to recognize.
What the IRS is doing with cryptocurrency reporting:
The IRS is partnering with TaxBit to help verify cryptocurrency tax calculations during an audit. This tax automation company is automating the cryptocurrency transaction analysis process for the IRS to understand how much money was made or lost from transactions. When the IRS is auditing a tax filing with cryptocurrency, they’ll request the report from TaxBit, who will then provide it to the IRS and the taxpayer.
In addition to these reports, which some taxpayers may see beginning next year, the IRS has also added a question to Form 1040 asking if the taxpayer has sold, exchanged, sent, received, or otherwise acquired any financial interest in virtual currency. With the IRS requiring taxpayers to treat virtual currency as property for Federal income tax purposes, it shows they recognize virtual currencies aren’t going away any time soon.
The Treasury is currently exploring the possibility of requiring reporting on any virtual currency transfers over $10,000. We’re monitoring this and will keep you posted as more information comes to light.
For help reporting virtual currencies on your tax filings, reach out to our team of tax professionals today. Establishing a system to track purchases, sales, and transfers before the end of the year will help ease the burden of preparing for tax season.
If your business is organized as a sole proprietorship or as a wholly owned limited liability company (LLC), you’re subject to both income tax and self-employment tax. There may be a way to cut your tax bill by conducting business as an S corporation.
Fundamentals of self-employment tax
The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for Social Security up to a certain maximum ($142,800 for 2021) and at a 2.9% rate for Medicare. No maximum tax limit applies to the Medicare tax. An additional 0.9% Medicare tax is imposed on income exceeding $250,000 for married couples ($125,000 for married persons filing separately) and $200,000 in all other cases.
What if you conduct your business as a partnership in which you’re a general partner? In that case, in addition to income tax, you’re subject to the self-employment tax on your distributive share of the partnership’s income. On the other hand, if you conduct your business as an S corporation, you’ll be subject to income tax, but not self-employment tax, on your share of the S corporation’s income.
An S corporation isn’t subject to tax at the corporate level. Instead, the corporation’s items of income, gain, loss and deduction are passed through to the shareholders. However, the income passed through to the shareholder isn’t treated as self-employment income. Thus, by using an S corporation, you may be able to avoid self-employment income tax.
Keep your salary “reasonable”
Be aware that the IRS requires that the S corporation pay you reasonable compensation for your services to the business. The compensation is treated as wages subject to employment tax (split evenly between the corporation and the employee), which is equivalent to the self-employment tax. If the S corporation doesn’t pay you reasonable compensation for your services, the IRS may treat a portion of the S corporation’s distributions to you as wages and impose Social Security taxes on the amount it considers wages.
There’s no simple formula regarding what’s considered reasonable compensation. Presumably, reasonable compensation is the amount that unrelated employers would pay for comparable services under similar circumstances. There are many factors that should be taken into account in making this determination.
Converting from a C corporation
There may be complications if you convert a C corporation to an S corporation. A “built-in gains tax” may apply when you dispose of appreciated assets held by the C corporation at the time of the conversion. However, there may be ways to minimize its impact.
Many factors to consider
Contact us if you’d like to discuss the factors involved in conducting your business as an S corporation, and how much the business should pay you as compensation.
As a business owner, increasing sales can be a great mood lifter. But what happens if you get a large order and have no way to pay for the supplies? Sales don’t always equal immediate cash in hand, which can put a strain on your business accounts and your ability to deliver on time.
Below, we’ll share what the difference between revenue (sales) and cash flow is, and how it can affect your business.
More revenue, more problems
While the thought of increased revenue causing more problems for a business owner can seem counterintuitive, there are challenges that increased sales can bring forth. But first, let’s talk about what revenue is.
Revenue is the total income generated by business’s sales before expenses are deducted. This is also known as cash inflow. Most often, this is income from your primary operations. Your business may also have non-operating income, which is generated from interest bearing accounts and investments.
When you have sales come in on credit, or terms, it can be weeks or months before you receive the full payment for the order. Additionally, credit card processors can take up to three days to deposit monies from sales, depending on your merchant services provider. Meanwhile, your business still must cover any expenses like building materials, new inventory, or payroll.
That’s where managing your cash flow comes in.
The ins and outs of cash flow
Cash flow is simply how money moves in and out of a business or bank account. Just like you have to budget your paychecks, bills, and expenses in your personal accounts, you have to manage the cash flow for your business.
As stated above, cash inflow is your revenue and your non-operating income. Cash outflow, then, is comprised of anything your business has to pay for (i.e., rent, inventory, supplies, payroll, refunds, and merchant chargebacks).
Creating a forecast for expected expenses and payments, plus when they’re expected to take place, can help you see where any shortages could be expected throughout the month. Keep in mind, the forecast can be affected by delayed sales payments and unexpected expenses.
To create a buffer and give yourself some breathing room in your cash flow, consider:
Managing your cash flow is an essential part of business ownership and can keep your company moving forward while minimizing growing pains. Our team can help you review your cash flow system and identify areas of strength or for improvement; or we can assist you in setting up your cash flow system from scratch. Give us a call to get started today.
If you are in possession of business or investment property, or looking to exchange real property for others, you might want to get acquainted with “like-kind exchanges,” also known as a 1031 exchange. As with all tax code, changes are consistently made to clarify previous unclear areas or adjust the language based on new policy. In 2020, there were some larger changes noted to section 1031 of the tax code, which deals with like-kind exchanges of real property.
Here are some of the bigger changes.
1. Defining “Real Property.” In the past, the definition of real property held more ambiguity, and there was little deference to the state and local definitions. The new language allows real property to be defined by local and state guidelines in addition to the list included in the final regulations, and property that passes a facts and circumstances test. The final regulations include categories such as “land and improvements to land, unsevered natural products of land, and water and airspace superjacent to land.” Note that property previously excluded prior to the 2017 TCJA is still excluded.
2. Inherently Permanent. The “purpose or use test” that was previously required to determine whether the property contributed to unrelated income is no longer applicable. Instead, the final rules state that if the tangible property is both permanently affixed and will remain affixed to the real property indefinitely, it’s considered inherently permanent and a part of the real property. Note, this does not automatically include installed appliances, sheds, carports, Wi-Fi systems, and trade fixtures. In addition, if interconnected assets serve an inherently permanent structure together, they are now analyzed as one distinct asset. (e.g., a gas line powering a heating unit would qualify as part of the heating unit. However, if the gas line solely powered a stove or oven, it would not qualify).
3. Facts and Circumstances Test. For fixtures and assets not automatically included by the Inherently Permanent rule, use the facts and circumstances test to determine if it’s eligible to be considered a part of the real property. For each fixture, ask:
While there is still some room for improvement, the facts and circumstances test are a vast improvement, as the previous rule may have led to costly and inefficient cost segregation studies.
4. Incidental Property. In the past, non-real property that could be transferred as part of an exchange could potentially violate the escrow rules allowing for a Qualified Intermediary to facilitate an exchange not made in real-time (a third-party exchange). The new regulations now allow some leeway, defining that if the fixtures or non-real property is deemed as typical for the type of property transfer, or if the aggravate value does not exceed 15 percent of the fair market value of the real property, it is considered incidental and will not be in violation of the escrow rules. Keep in mind, the real property is still considered a separate transaction and not included in the gains deferment of the exchanged real property.
5. Qualified Intermediaries. The new regulations maintain the transaction must be structured as an exchange and that the seller cannot receive funds from the sale before taking ownership of the new property. Qualified intermediaries can hold the properties or funds in an escrow within the time limit, so that the transaction looks like an exchange.
Most of the time, the sale of any investment property, which is property not considered your primary residence, can result in capital gains tax. Using a 1031 like-kind exchange can help defer that tax until later and possibly result in a lower tax liability down the road.
On April 28, 2021, President Biden introduced a new economic plan that would impact 1031 exchanges. The Biden proposal would abolish 1031 exchanges on real-estate profits of more than $500,000. As we move further into 2021, we will continue to monitor the impact.
If you would like to discuss tax strategies in business or investment properties, give us a call. Our team can help you understand if the decision you are making falls in line with applicable tax laws and if it’s the best strategy for your real property investments.
Many businesses provide education fringe benefits so their employees can improve their skills and gain additional knowledge. An employee can receive, on a tax-free basis, up to $5,250 each year from his or her employer for educational assistance under a “qualified educational assistance program.”
For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, including those normally taken by an individual pursuing a program leading to a business, medical, law or other advanced academic or professional degree.
The educational assistance must be provided under a separate written plan that’s publicized to your employees, and must meet a number of conditions, including nondiscrimination requirements. In other words, it can’t discriminate in favor of highly compensated employees. In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals who (including their spouses or dependents) who own 5% or more of the business.
No deduction or credit can be taken by the employee for any amount excluded from the employee’s income as an education assistance benefit.
If you pay more than $5,250 for educational benefits for an employee during the year, he or she must generally pay tax on the amount over $5,250. Your business should include the amount in income in the employee’s wages. However, in addition to, or instead of applying, the $5,250 exclusion, an employer can satisfy an employee’s educational expenses, on a nontaxable basis, if the educational assistance is job-related. To qualify as job-related, the educational assistance must:
“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for qualification in his or her employment or other trade or business.
Educational assistance meeting the above “job-related” rules is excludable from an employee’s income as a working condition fringe benefit.
In addition to education assistance, some employers offer student loan repayment assistance as a recruitment and retention tool. Recent COVID-19 relief laws may provide your employees with tax-free benefits. Contact us to learn more about setting up an education assistance or student loan repayment plan at your business.
Are you wondering whether alternative energy technologies can help you manage energy costs in your business? If so, there’s a valuable federal income tax benefit (the business energy credit) that applies to the acquisition of many types of alternative energy property.
The credit is intended primarily for business users of alternative energy (other energy tax breaks apply if you use alternative energy in your home or produce energy for sale).
The business energy credit equals 30% of the basis of the following:
The credit equals 10% of the basis of the following:
Pluses and minuses
However, there are several restrictions. For example, the credit isn’t available for property acquired with certain non-recourse financing. Additionally, if the credit is allowable for property, the “basis” is reduced by 50% of the allowable credit.
On the other hand, a favorable aspect is that, for the same property, the credit can sometimes be used in combination with other benefits — for example, federal income tax expensing, state tax credits or utility rebates.
There are business considerations unrelated to the tax and non-tax benefits that may influence your decision to use alternative energy. And even if you choose to use it, you might do so without owning the equipment, which would mean forgoing the business energy credit.
As you can see, there are many issues to consider. We can help you address these alternative energy considerations.
The IRS and Treasury Department provided new information regarding the tax credits available through the American Rescue Plan (ARP). The ARP was created to help small businesses through the pandemic. This new guidance provides information on how eligible businesses can claim the credit for providing paid time off to employees receiving or recovering from the vaccine. Below, we’ve outlined which employers are eligible for the credits and when and how the credits can be taken.
Who is eligible?
Any business with fewer than 500 employees is eligible to take the tax credit. This includes tax-exempt organizations and governmental employers who are not the federal government or not outlined in section 501(c)(1) of the Internal Revenue Code. Self-employed individuals are eligible for similar credits.
What are the paid leave qualifications?
In order to qualify for the tax credit, employers/employees must meet the following guidelines:
For more information on the credits, including how they’re calculated, view the IRS Fact Sheet or reach out to our team of professionals.
Owners of incorporated businesses know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Thus, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.
However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.
Determining reasonable compensation
There’s no easy way to determine what’s reasonable. In an audit, the IRS examines the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.
There are some steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:
You can avoid problems and challenges by planning ahead. If you have questions or concerns about your situation, contact us.
The coronavirus pandemic has forced many businesses and entire industries to move their operations remotely in the interest of employee and customer safety, and this has caused these businesses to change the way they think about their operations. During this time, businesses have had to quickly adapt and implement new technology and processes in order to meet customer and employee demands that did not exist previously. These disruptions can be a source of headache or opportunity for businesses who choose to embrace the virtual business model.
One process that is in the limelight more than ever is virtual outsourced accounting. Virtual outsourced accounting simply means working with an accounting firm that provides services virtually through cloud-based platforms. While many businesses have already made the move the cloud-based accounting platforms, some have resisted or have kept operations in-house due to the lack of incentive to change. However, the pandemic has created an incentive and highlights many of the reasons why a business would want to consider a virtual outsourced accounting option.
Safety – First and foremost is the safety of yourself and your employees. Virtual outsourced accounting allows you to conduct these financial operations remotely keeping you and your employees safe. When we return to our workplaces and safety is less of an issue, you continue to receive the other benefits of virtual accounting.
Security – Virtual accounting allows for heavy encryption of your sensitive and confidential data and frequent backups of information across multiple locations, keeping your records safe in the event of any number of physical or digital threats. Physical filing cabinets or local servers are at increased risk of physical or digital hacking because they often do not have the heavy encryption necessary for protection, nor the multiple back-ups in case of a data breach or natural disaster.
Consistency – Businesses are likely in this for the long-haul with many industries not anticipating a return to workplaces for several more months. When you outsource your accounting to a firm with virtual capabilities, you never have to worry about lost time due to illness or employee turnover. Accounting firms have adapted their workplaces to virtual as well, providing as uninterrupted service as possible.
Knowledge – Outsourcing your accounting provides you with greater access to a deeper bench of highly-skilled and knowledgeable accounting teams to help you bust through roadblocks or troubleshoot issues you are likely facing during the pandemic. When you’re encountering especially difficult and unforeseen challenges, a knowledgeable third-party adviser can help you stay on top of regulatory changes, financing opportunities, and provide guidance on forecasting and budgeting during unpredictable times.
Flexibility – As the pandemic increasingly throws new challenges at businesses, having access to virtual outsourced accountants allows you the flexibility to bring in help where and when you need it. Outsourced accounting teams can serve as a fill-in for your in-house accounting staff where needed due to illness, long-term leave, furloughs/layoffs, or employee turnover.
Remote Access – Working with a virtual accounting team that operates in the cloud allows you greater flexibility to perform tasks and access your numbers. Because data is updated in real time between you and your accountant, you can get a more accurate picture of your business’s financials – crucial during a turbulent time like the pandemic.
Cost Savings – Outsourcing your accounting to a firm that conducts operations virtually provides you with significant cost savings including salary/compensation, employee benefits, and overhead that you would experience by hiring and in-house employee. Furthermore, you never have to worry about turnover costs such as recruiting, hiring, and training a new staff member.
If you haven’t considered virtual accounting, now is the time. You do not have to face these pandemic challenges alone, and your financial processes shouldn’t be stifled due to inadequate operations that fail to consider the virtual world to which we’ve been forced to adapt. Contact us for more information on virtual accounting.
With all of the curveballs 2020 has thrown at the nation, the economy, and businesses, there’s never been a better time to get an early jump on year-end planning for your business. While all the usual year-end tasks are still on the docket, you’ll want to consider implications related to the Paycheck Protection Program (PPP), any disaster loan assistance you received, and changes made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
We’ve put together a checklist of what you need to do now to prepare for a great year-end that includes annual tasks as well as 2020-specific tasks. Keep reading for assistance getting your financials organized, reviewing your tax strategy, and preparing for next year.
1. Bring order to your books – Now is the time to collect, organize, and file all of your receipts for the year if you haven’t been staying on top of it. Get with your CPA to ensure everything is clean and in order before the end of the year to help avoid surprises come tax time.
2. Examine your finances – This includes having your balance sheet, income statement, and cash-flow statements prepared and up to date. Reviewing this information allows you to see where your money went for the year so you can properly prepare for next year.
3. Work with your CPA on your PPP loan forgiveness application – We are currently awaiting further guidance on the PPP’s impact to taxes, but it’s important to work with your CPA on your PPP loan forgiveness application. Knowing where your PPP loan lies can help determine how to spread out your cash flow for the remainder of the year.
4. Organize all disaster loan assistance documentation – This includes your Economic Injury Disaster Loan (EIDL) documentation if you received an advance grant. EIDL advances must be added to your taxable income (unless different guidance is released), but you’ll be able to deduct any expenses paid with this grant.
5. Review your taxes with your CPA – Do not put off your tax planning meeting with your CPA. Especially after the year you’ve had and any potential federal state aid your business received, your tax plan needs a review. Getting a jump on this early, well before the new year, can help you plan for what’s to come on Tax Day. It’s even more imperative to plan early for any tax obligations you may have at tax time as it’s likely the COVID-19 pandemic will continue to create a volatile environment for many industries’ revenue projections.
6. Execute on year-end tax strategy adjustments such as:
7. Prepare your tax documents – Once you’ve met with your CPA, it’s time to line up all the info you need to prepare your final tax documents or have your CPA take care of it. Be sure not to put this off to the last minute as it will be a complicated year for everyone.
8. Automate your tax function – Instead of spending valuable time and energy on manual tasks and repetitive processes this year, consider investing in data analytics and automation tools to optimize and streamline your in-house accounting and tax functions. There’s never been a better time to invest in technology that will help you become more efficient and accurate.
9. Evaluate your goals – There’s no doubt that 2020 likely threw a wrench in many of your goals for the year. However, you should still review the goals you set last year and see if you’ve met or made progress on any of them. This will help with 2021 business planning.
10. Set goals for the new year – No one knows how 2021 will play out, and it’s unlikely the market or business will return to normal in the first part of the year. Take into consideration the challenges you’ve faced so far in the pandemic as you plan for 2021. Work with your trusted advisor to determine several back-up plans for what if scenarios in case of any state or national lockdowns.
In a year like no other, it’s crucial to prepare like no other so you’re not met with any surprises or devastating fees. Contact us today to set up your tax and business planning appointment.
With the M&A market in flux after all the unexpected challenges of 2020, buyers and sellers are likely wondering how their Paycheck Protection Program (PPP) loan comes into play in an M&A transaction. On Oct. 2, we got some answers when the Small Business Administration (SBA) released guidance on what to do if you are buying or selling a business with a PPP loan. The Procedural Notice was addressed to SBA employees and PPP lenders and clarifies how a change of ownership is defined, the steps that need to be taken with a PPP loan, and the obligations of borrowers regardless of change of ownership. Here’s what you need to know:
What defines a change of ownership?
The guidance states that a change of ownership requires at least one of the following conditions to be true for a PPP borrower:
Aggregation of sales and transfers since the date of the approval of the PPP loan is required. Sales or other transfers for publicly traded borrowers must be aggregated when they result in one person or entity holding or owning at least 20% of the common stock or other ownership interest.
What must I do before the ownership change?
1. Notify your lender if you are contemplating a transaction that will change ownership – this must be done in writing and include relevant documentation.
2. If your lender is accepting PPP loan forgiveness applications, submit your application with all required documentation (we can help with this).
3. Set up an interest-bearing escrow account with your PPP lender which will be required in most cases by the SBA.
4. Determine if SBA approval of the change of ownership is required for your transaction.
How do I determine if SBA approval is required for my transaction?
SBA approval is not required for:
SBA approval is required for sales that cannot meet the above criteria. The SBA will have 60 calendar days to review and approve or not approve. The PPP lender is responsible for notifying the SBA within five business days from the completion of the transaction and must submit to the SBA:
What if I don’t set up an escrow account?
Borrowers attempting to make an asset sale with 50% of assets and no escrow account will require a condition of the purchasing entity to assume all of the PPP borrower’s obligations under the PPP loan. The purchaser will then be responsible for compliance with PPP loan terms, and the assumption must be part of the purchase and sale agreement.
What do I do if I end up with two PPP loans?
Transactions resulting in an owner holding two PPP loans will require the owner to segregate and delineate the PPP funds and expenses with documentation demonstrating PPP requirement compliance for both loans. Being thorough and accurate with your documentation is key.
Anything else I should know?
Loans that are repaid in full or are fully forgiven by the SBA have no restrictions for change in ownership. Note that all PPP borrowers are responsible for the performance of PPP loan obligations, certifications related to the PPP loan application including economic necessity, compliance with all PPP requirements, and supporting PPP documentation and forms. Borrowers will be responsible for providing any and all of this documentation to a PPP lender/servicer or the SBA upon request.
For questions and assistance with an M&A transaction and your PPP loan, reach out to us.
If you haven’t converted to cloud-based accounting, it’s likely that COVID-19 may prompt you to make the switch. With more and more businesses and industries operating virtually, cloud access and real-time data has become more important than ever for making the best business decisions possible in uncertain times. With so much up in the air, you don’t want to be caught with a static accounting system that cannot keep up and provide the answers you need.
If you’re on the fence, we’ve put together the top 11 benefits of cloud-based accounting and the real-time data it provides.
1. Drill down on business performance – Real-time data through cloud-based accounting allows you to drill down on the key components of your business’s performance. You can get global or granular on factors such as location, project, customer, vendor, or department and see how each part is impacting your business in real-time. Additionally, you can use snapshots of your cash flow, revenue, expenses, and more to see how they compare year-over-year and how they are measuring up to your goals for this year.
2. Make better data-driven, real-time decisions – You’ve likely experience that last year’s or even last month’s data is irrelevant during these uncertain times. With real-time data, you can see clearly what’s holding you back now, or what’s working, and adjust accordingly. Without the real, hard data, these decisions can feel like a guessing game with a wait-and-see outcome, which is something most businesses cannot afford right now.
3. Make accurate predictions and forecasts – This accurate, up-to-date data allows you to feel more confident in the forecasting for the future your business. You have the facts in front of you to make more strategic predictions over the course of the year. Through the real-time data and historical facts, you can assess past performance, identify trends, and set goals and plans, making adjustments as needed along the way.
4. Automate processes – More and more, businesses are focused on automation, and there’s no better place to start than with your accounting. With cloud-based solutions, you can create automated workflows that handle much of the busy work for you like invoicing and paying vendors. This all funnels back into your real-time data so you can stay on top of your revenue and expenses.
5. Mitigate fraud and reduce errors – Mistakes and fraudulent activity can be more quickly and easily identified when you can see the transactions in real-time. The simplification of the software means less memorization of accounting practices, formulas, and Excel shortcuts – all of which can contribute to errors. And, the automatic reconciliation can help you detect fraud early. Being able to take timely action on errors and fraud can save your business big in the long run.
6. Simplify your reporting and EOY – Have you ever scrambled when a stakeholder asked for an up-to-date report on your business? Cloud-based accounting allows you to present an accurate, timely report in no time, simplifying the process for you and your stakeholders. Additionally, you avoid the end-of-year rush because you’ve been entering your information and tracking all year long, so tax bills aren’t as much of a surprise.
7. Simplify GST compliance – If you have general sales tax to track and monitor, you know it can be a challenge to assemble and file your GST returns. Cloud-based accounting tracks and applies GST automatically for you and allows you to pull a quick report when you’re ready to file.
8. Get access from anywhere – One of the best benefits of cloud-based accounting is that you can access your data from anywhere at any time. In the age of COVID-19 and working from home, this is especially beneficial for you and your team so everyone can stay on track and on task.
9. Collaborate with your accountant – Cloud-based accounting has simplified the transfer process of client information to accountant and saved both sides time and energy in equal measure. Gone are the days of having to download everything to a CD or flash drive and delivering it to your accountant. Now, you can collaborate together virtually and trust you’re both on the same page.
10. Simplify your technology – Cloud-based accounting eliminates hard downloads across multiple computers and saves your IT department (or you) the headache of making sure everyone is up-to-date across the company. Thanks to online hosting, IT doesn’t have to worry about updating the software either, so they can focus on other projects.
11. Get the tech support you need – Most cloud-based accounting platforms offer regular tech support to help you any hour of the day. You’ll also have access to forums of thousands of other users so you can discuss issues and share best practices. Keeping your program up and running and optimized contributes to better real-time data.
For assistance with choosing the right cloud-based accounting platform for your business, contact us today.
Economic downturns are an almost inevitable reality for nearly every business owner. Decisions made far away from your community, catastrophic and unpredictable weather events, and even global pandemics as we’ve seen this year can disrupt the health and viability of a business. During these challenging times, business owners have to make difficult decisions about the future of their business that not only affect them but also their employees, vendors, clients, and communities. It’s an enormous responsibility to bear, but you don’t have to go it alone.
Your CPA advisor is your best resource for tackling the challenges of an economic downturn. As an outside party, they can help you make smart business decisions that protect your vision and mission while remaining financially responsible. Your CPA can help you:
Optimize your books
Never underestimate the power of good bookkeeping. By keeping your books in order, your CPA can help you plan and project for the future at each stage of an economic downturn. This includes planning for temporary closures and tiered re-openings (and potentially a back-and-forth of both depending on the state of the country and market). When your books are clean and up to date, you can better project how events and decisions will impact your finances on a weekly, monthly, and quarterly basis. Your CPA can help you flex the numbers on fixed and variable expenses to account for increases in costs, decreases in income, and potential changes to payroll. Knowing your numbers intimately can help you make better-informed decisions.
Minimize your tax burden
During times of economic crisis, staying abreast of new and changing tax legislation will be essential to projecting tax burden and uncovering tax savings opportunities. Your CPA is the best person to handle this because they know your business and your industry inside and out and can help you uncover tax savings opportunities that are unique to your circumstances. They do all the research, and you reap the rewards. With a CPA’s assistance, you achieve deductions and credits you may not have realized were available and develop a plan to defer costs where allowed depending on your business, industry, and location. Taxes are not an area you should or need to face alone during an economic downturn. Your CPA has done the homework, so you don’t have to.
Rationalize your decision making
When markets are in flux and your business is facing unprecedented challenges, the decisions you make can make or break your business. But you don’t have to go it alone. Your accountant can help you make data-informed decisions whether that be how to pay vendors, when and how to apply lines of credit, and the best ways to use your capital. Negotiating contracts with vendors that meet your needs and theirs during a downturn will not only achieve cost savings but also preserve relationships – your CPA can help develop a plan that makes sense. Knowing when to engage lines of credit can help you make better moves that you can either afford to pay back later, or maybe prevent you from taking on credit you can’t handle – your CPA can guide you in this process. Knowing where to allocate capital will be key to maintaining operations, and you may need guidance on what expenses to cut and what to keep such as marketing and payroll – your CPA can help you project the ramifications. With your CPA by your side, you don’t have to operate in a silo of decision-making.
Maximize your sense of relief
Most of all, your CPA can provide perspective, alleviate business back-end burden, and help advise you on financially feasible and sound decisions when much of the world feels like it’s in chaos. You have a lot to focus on during a downturn including how to handle your customers and employees in a changing marketplace. Having someone who can help you stay fiscally viable as you work through tough times, and develop a plan for future success, provides a welcome peace of mind.
You don’t have to go through any economic downturn alone. Your CPA can help you shoulder the challenges and weather the storms so you can continue doing what you do best – running your business.
The Internal Revenue Service recently issued the 2020 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
As of January 1, 2020, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:
It is important to remember that a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.
Taxpayers always have the option of calculating the actual costs of using their vehicle, rather than using the standard mileage rates. For more information, please contact one of our professionals today.
Have you ever thought, I know we made more money than our statement shows, or I know we don’t owe that much in taxes; we never have any money! These moments of confusion are usually the result of either an assumption that your data is accurate, or a misunderstanding of how financial statements work.
Where did all the cash go?
You can always find the answer in your balance sheet. One of the first red flags that something is amiss is when your balance sheet tells a different story than your income statement. The key to unraveling the mystery is understanding the balance sheet, which shows your financial data at a fixed point in time. There are three pillars of a balance sheet.
A business owner’s primary goal is to increase profit month over month. So, when a CEO reviews a balance sheet, their eyes typically skim right to net value. A mistake on the balance sheet will never be in your favor. If the value is inflated, demise awaits. If the value is deflated, you miss opportunities. Novice bookkeepers tend to make the mistake of confusing assets and expenses. The ripple effect is showing less expense and more profit and failing to price future jobs with the true associated costs. Ensuring the right people with the correct understanding control your books is the first step to avoiding errors. Outsourcing accounting services is a great way to make sure the job is done right the first time.
Another tip is to approach your assets, liabilities, and equity in the same the way you look at your income statements. Keep a historical record or your balance sheet and compare the data month over month. A snapshot view is great for a quick assessment, but if you want to avoid discrepancies, you need to look at the whole story.
Understanding your financial statements
When a CEO lacks the financial knowledge to catch nuances in their statements, they are unable to take corrective action to change the results. Once you understand the language of your financial statements, you can interpret what they mean to your organization’s financial health. For example, knowing what you sell beyond the widget is a critical step to calculating your true assets. Likewise, a mature business owner knows that most likely reason for a discrepancy between a healthy P&L statement and a low cash account is lagging receivables. The numbers on the page are clues. When you learn to read the clues with the big picture in mind, you are better positioned to make sound business decisions. Failing to understand variances, overreacting to numbers on a page, and not catching insufficient and inaccurate data are clear indications that you are a good candidate for external help.
Financial statements can be misleading. As a business owner, noticing when something is amiss is a key element to managing your organization and driving growth. Do not let misleading financial information or a misunderstanding of financial statements be the downfall of your company. Ensure that you and your managers have the right financial management skills. We can assist you in developing accounting practices that will help make your company more profitable. Call us to learn more about our outsourced accounting services.
Outsourced accounting services are a cocktail experience – a carefully chosen mix of professionals, curated to leverage their expertise to grow your business. Each firm does things a little differently, but there are a few fundamentals across the board.
The most successful engagements begin with the right expectations and proper set up. Many businesses do not take the time to set their office up with right considerations. Here are a few ways to make sure your virtual accounting office is efficient and successful.
Regardless of your industry, size or stage of growth, outsourcing accounting services can be a tremendous advantage to your business. When the arrangement is a good fit, it allows business owners to operate more effectively. Starting off on the right foot, with the right expectations is critical to overall success. Our experienced CPAs and consultants can help you get started working with a virtual accounting office. Call us today.
Payroll fraud can put a huge dent in your bottom line – costing companies billions of dollars annually. Unfortunately, companies are often unaware that a corrupt employee is in their midst. According to data from the Association of Certified Fraud Examiner’s (ACFE) 2016 global fraud study, Report to the Nations on Occupational Fraud and Abuse, payroll fraud is an especially high risk for small organizations. In the United States, 131 cases of payroll fraud, representing 12.6% of all asset misappropriation schemes, were reported in 2016. While most fraud is uncovered within one fiscal year, payroll fraud tends to fly under the radar for an average of two years before detection and on average costs companies $90,000 per occurrence.
As business advisors, we stress the importance of internal controls to prevent fraud and theft and to ensure the accuracy of accounting data. However, many situations still exist in which organizations fail to establish adequate control systems to reduce transaction costs for many reasons. Whether it is a lack of information or a lack of personnel, the fact of the matter is that payroll fraud is usually perpetrated by a single or multiple insiders. The following strategies can help prevent and detect payroll fraud in your organization.
This is one of the most effective strategies, and if you do not already have one, we strongly recommend implementing processes that regularly check for schemes. Consider specialized software that combats ghost employee tactics by looking for red flags such as duplicate Social Security numbers, addresses or direct-deposit accounts. Another step is to be transparent with your audit plan. Making employees aware that you conduct such audits may be enough to deter them.
Compare payroll numbers against output. A spike in overtime hours during a slow month, for example, should prompt further investigation. We can help you analyze your data and identify any red flags.
This will prevent incompatible functions from being performed by the same individual, especially in the accounting department. Ask your payroll company if they allow multiple people to be in the authorization chain of command. Most payroll companies allow for multiple recipients of payroll reports; be sure you send final reports to an outside accountant and the owner. If one employee handles payroll, we recommend hiring an outside person to input the information into the accounting system, acting as the internal control.
Check documents such as timecards and any other payroll documentation. You should be on the lookout for employees who are claiming excess hours and overtime as well as any other items that seem suspect. If employees know you are regularly checking time cards, they will be less likely to test the waters.
These are often overlooked. Make sure you collect the right documentation when adding new employees. Equally important is following protocol for terminated employees. While failure to remove a terminated employee from payroll is not fraud, controls will help you avoid the embarrassment of paying an employee after termination.
If you have concerns about payroll fraud in your organization, please call one of our professionals today.
Have you ever stopped to think about whether outsourcing financial management functions of your business would benefit your organization?
You will probably be surprised how many activities they encompass and how vital they are to the success of your company. Your business thrives when these activities are in order. When faced with the options, a business owner quickly realizes that either they will need to manage their organization’s finances or hire someone else to do it.
Financial planning, financial risk assessment, record-keeping, and financial reporting are time-consuming cogs in the wheel of a functional business and are best managed by someone who has the right qualifications. But the fact of the matter is, CFOs cost money, and most small businesses do not have forty hours of work for a qualified individual. Rightly dividing resources within an organization is a critical matter, which is why outsourcing CFO services makes a lot of sense.
What is an outsourced CFO?
An Outsourced CFO is a valuable partner that can:
Beyond these critical finance utilities, an Outsourced CFO can deliver expert “back office” support to organizations so they can focus on growing their business. The finance function can be broken up into three main activities, each with a series of sub-functions.
Is it time to consider outsourcing?
Determining whether to outsource requires a focused and deliberate approach. Below are six advantages that will help you decide whether outsourcing financial management would benefit your organization:
Before determining whether to outsource financial management functions, there are many factors to consider including the size of your business, industry, number of employees, volume of transactions, and skill sets.
As a business owner, accepting the “virtual” reality of outsourcing means adjusting your expectations. In this environment, you will not be your CFOs only client, but you will have access to exceptional quality. If you are involved in the authorization process and can extend trust beyond your four walls, then you will truly benefit from this arrangement. However, if you are hung up on signing checks and are not able to hand over responsibilities, you will hinder the process and negate the experience.
Outsourcing services from your organization may enable you to operate more effectively. With our requisite knowledge of different types of organizational structures, we can help you create innovative changes in your organization. If you would like to learn more, please call our office to speak with one of our professionals and learn how you can enhance the success of your business.
Learn more about our outsourced CFO services by clicking here.
There are many reasons why revenue can slip through the cracks of an organization. Common culprits include outdated technology, lack of training, employee turnover and complacency. Accounts Payable tends to be the land of the lost – overlooked and underappreciated. Ignoring best practices in this department leads to lost revenue and exposes your operation to significant financial risk. Accounts Payable is critical to capital optimization; it is time to bring this core strategy into the light.
Taking a strategic approach to Accounts Payable requires a business owner first to identify which practices are holding up their business. Common mistakes include:
A well-functioning Accounts Payable department is an opportunity to optimize payables and free up the working capital needed to fuel growth. Strengthening your accounts payable department processes and procedures is a big task. Addressing the following areas first will help build momentum:
Poor Accounts Payable practices occur in both emerging and mature businesses. If you need assistance strengthening your Accounts Payable department process and procedures or would like to talk about creating a strategy around capital optimization, the professionals in our office can help! Give us a call today to get started.
Tax audit. These two simple words are enough to strike fear and loathing into the hearts of many business owners. But, in reality, the Internal Revenue Service (IRS) won’t arbitrarily make your company the subject of an audit investigation. In fact, according to IRS.gov, out of the 196 million returns filed in 2016, only 1.1 million (0.5%) came under examination in 2017. You are more likely to be summoned for jury duty (1 in 10) this year.
Unless you’re operating below the board or completely ignoring best practices, you have little to fear. However, even the most prudent sometimes miss a step. From managing the filing cabinet to the people who hold the keys, ensuring your business doesn’t catch unnecessary attention from the government comes down to good habits. Here are a few ways you can minimize the likelihood that you’ll be audited or ensure a more positive experience should you be audited.
If the IRS contacts you about an audit, CPAs advise that you don’t panic. Remember, you are not going on trial, you’re simply being asked to verify some of the claims you made on your tax return. It’s best to remain calm and cooperative when dealing with the IRS.
It’s also a good idea to contact your local CPA for advice and assistance in case you are audited. He or she can help you understand the process and work with you to try to achieve the best resolution.
Surprising but true, small and mid-sized businesses are more susceptible to and crippled by fraud when compared to larger organizations that have more resources to invest in anti-fraud initiatives. The Association of Certified Fraud Examiners recently published its 10th annual report to the nations. The largest global study on occupational fraud, the publication highlights 2,690 real cases of occupational fraud and includes data collected from 125 countries. The 80-page report explores the costs, schemes, victims, and perpetrators of fraud. According to the 2018 report, organizations with fewer than 100 employees experienced the greatest percentage of fraud cases and suffered the largest median loss.
Unfortunately, most small to mid-sized companies are ill-prepared to detect, prevent, and react to instances of fraud in their businesses. In this article, we will provide information that business owners can use to identify gaps in their fraud prevention processes and provide recommendations on ways to better protect your business from internal fraud.
The Association of Certified Fraud Examiners identifies and defines three primary categories of occupational fraud that are most the common:
(1) Financial Statement Fraud – a scheme in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports.
(2) Asset Misappropriation – a scheme in which an employee steals or misuses the employing organization’s resources.
(3) Corruption – a scheme in which an employee abuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit.
The following strategies can help deter and detect payroll fraud from occurring in your organization.
As business advisors, we stress the importance of internal controls to deter and prevent fraud and to ensure the accuracy of accounting data. Small to mid-sized businesses often fail to establish adequate internal control systems for a number of reasons. The most common reasons are often a lack of resources or putting too much trust in employees and vendors.
One of the most effective strategies in deterring fraud is having a system in place that regularly checks for schemes. As a business owner, you have enough on your plate. Consider automating your internal controls by leveraging software that can detect red flags such as duplicate social security numbers, addresses or direct-deposit accounts.
Other recommendations for deterring fraud include increasing overall transparency and generating awareness that you will be conducting fraud audits. When you communicate the importance of internal fraud-prevention initiatives, transactions and systems will be better monitored, and any suspected scams can be quickly identified and investigated.
Finally, avoid delegating accounting and bookkeeping functions to one person. Concentrating these duties to one person makes it too easy for fraud to go unnoticed. Separating functions is the best way to increase accountability. We suggest having at least two people handle these functions or outsourcing a virtual CFO.
According to the ACFE’s 2018 report, understanding and recognizing behavioral red flags can help organizations detect fraud. The ACFE has identified six red flags that have consistently been displayed by fraud perpetrators in every one of its studies since 2008. They include living beyond means, financial difficulties, unusually close association with vendors or customers, control issues and unwillingness to share duties, divorce or family problems, and a “wheeler-dealer” attitude.
While also remind business owners that a fraud perpetrator may not exhibit any behavioral red flags. In these circumstances, be on the lookout for concealment methods. According to the ACFE’s 2018 report, the top three concealment methods used by fraudsters include creating fraudulent physical documents, altering physical documents, and creating fraudulent transitions in the accounting system.
Generally, developing strong controls and maintaining a close watch over your accounts can help you both prevent and catch fraud. If you discover fraud, do not confront the presumed perpetrator directly. Contact your organization’s attorney. While one may believe to have caught an individual “red-handed,” this version may not pass muster in court. Once an attorney assures it is a valid case, notify your insurance carrier.
The ACFE’s 2018 report identifies the most common actions organizations take to penalize fraud perpetrators. They include termination, settlement agreements, required resignation, and probation or suspension.
The professionals in our office can assess your fraud risk and provide you with a comprehensive and personalized plan to mitigate that risk. Contact one of our professionals today for more information.
The Internal Revenue Service recently issued the 2019 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
As of January 1, 2019, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:
It is important to remember that a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.
Taxpayers always have the option of calculating the actual costs of using their vehicle, rather than using the standard mileage rates. For more information, please contact one of our professionals today.
Listen to Lana Pflaum, CPA (around minute 6) provide insight on this very important topic. Hamilton Tharp, LLP is proud to have been asked to be a part of this discussion. Congratulations Lana!
Taxpayers who are victims of a disaster might need to reconstruct records to prove their loss. Doing this may be essential for tax purposes, getting federal assistance, or insurance reimbursement.
According to the Internal Revenue Service, there are 12 things taxpayers can do to help reconstruct their records after a disaster:
With hurricane season in progress, we would like to remind individuals and businesses to safeguard their records against natural disasters with four simple steps.
Taxpayers should keep a set of backup records in a safe place. The backup should be stored away from the original set.
Keeping a backup set of records –– including, for example, bank statements, tax returns, insurance policies, etc. –– is easier now that many financial institutions provide statements and documents electronically, and much financial information is available on the Internet. Even if the original records are provided only on paper, they can be scanned into an electronic format. With documents in electronic form, taxpayers can save them to the cloud, download them to a backup storage device, like an external hard drive or USB flash drive, or burn them to a CD or DVD.
Another step a taxpayer can take to prepare for disaster is to photograph or videotape the contents of his or her home, especially items of higher value. It may be a good idea to compile a room-by-room list of belongings.
A photographic record can help an individual prove the market value of items for insurance and casualty loss claims. Photos should be stored with a friend or family member who lives outside the area.
Emergency plans should be reviewed annually. Personal and business situations change over time as do preparedness needs. When employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.
Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.
We are Ready to Help
Don’t wait until disaster strikes. If you have questions about safeguarding your records, speak to one of our team members today. We can help individuals and businesses prepare for disaster-related issues.
As a business owner, it is important to be able to read and understand the accounting terms found in your financial statements. Once you understand the basics of the financial statements and can interpret them, you can focus on what these statements mean to your organizations overall financial health.
Understanding your Financial Statements
A statement of financial position, also known as a balance sheet, simply shows the assets and liabilities of the organization at any given point in time. Thinking of it as a summary of what the organization owns versus owes is a great way to put this financial report into plain English.
When delivering the information found in your financial statement, use broad categories to keep the conversation at a high level. This will prevent information overload and help keep the emphasis on the bigger picture. Providing a recap of the organization’s goals and objectives will help connect the dots between the numbers and their efforts.
Investing in training is another opportunity that will help teach members of your organization about the various accounting practices and how they can be helpful in determining the organization overall financial health.
Understanding Your Cash Flow
A statement of cash flow is used to show where cash came from and how it was spent. It will tell you the revenue and expenses for the organization.
Rather than question the budget line by line, we recommend looking at the bigger picture by focusing on the following:
Asking these questions will help you gauge the health of the organization. Depending on the situation, you may want to consider digging deeper. If, for instance, expenses are significantly higher than budgeted originally, you may want to seek an explanation. And if you find that financial trends are showing stagnation or contraction, we recommend you seek an answer as to why.
Our professionals are well-versed in accounting and are eager to assist you in determining your organization’s financial well-being. Please call us today.
The Internal Revenue Service recently issued the 2017 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
As of January 1, 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:
The mileage rate for service to a charitable organization is not alterable by the IRS. Instead, it must be changed by statute passed by Congress.
It is important to remember that a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. For more information, please contact one of our professionals today.
After much anticipation, the Department of Labor recently released a new rule which will change how employers compensate employees. Effective December 1, 2016, workers who earn above the previous threshold but below the new one will qualify to receive time-and-a-half for each hour they work surpassing 40 hours a week. An estimated 4.2 million salaried workers will become eligible for overtime pay under the new rule.
The new rule will:
Job titles do not determine exempt status. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements set by Department of Labor regulations. If you are unfamiliar with the criteria please refer to our exemption checklist which explains the job requirements to meet the overtime exemption.
The exemptions do not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy. The exemptions also do not apply to police, fire fighters, paramedics and other first responders.
Many businesses will be affected and must comply with the new rule. As a business owner, you have a variety of options to comply:
Below are four steps you can implement which will help integrate the changes successfully into your workflow.
The first step is to review your payroll and identify exempt employees whose salaries are below the new proposed thresholds for executive, professional and administrative white collar exemptions. It will also be important to identify employees who are currently classified as exempt from the overtime protections of the Fair Labor Standards Act because they must meet the duties test for their exemption to be recognized.
Once you have reviewed your payroll and identified the employees who are exempt it will be essential to carefully consider which positions to transition to nonexempt status. Employers have two options: they can either increase the salary level to maintain an employee’s exempt status or transition the position to nonexempt status. When transitioning positions to a nonexempt status, ask yourself the following questions:
Anticipate more time to track for employees transitioning from exempt to nonexempt status. To ensure complete compliance with the Fair Labor Standards Act and state laws, consider investing in a time and attendance software. It will help track hours worked. Establishing a formal policy will also help track and record time. The policy should define:
The final step is to communicate and educate staff of any policy changes. Don’t forget to include employees who are already nonexempt; they will also need a refresher. Communications and training programs must be timely. Consider having supervisors regularly administer audits to ensure employees are following protocol.
Employers have several months to prepare for the new rule. Our firm’s professionals can help you develop a strategy to ensure your business is in compliance. Call us today.