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.
|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
||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 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:
- The asset amount for the lease, calculated as of the date of adoption.
- An offsetting liability for each obligation.
- If the lease has a variable payment or option to renew.
- The amount, timing, and uncertainty of cash flow related to any leases.
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.
- Give yourself time to review every contract.
- Locate executed copies of all leases.
- Decide how to store these copies centrally.
- Create a system to review contracts regularly to make sure a change in terms hasn’t occurred whether the lease is required to be reported or not. Be sure to include non-lease components that may need to be separately assessed.
- Update policies and procedures with new lease accounting standards in mind and train employees on these updates.
- Communicate the changes to board members.
- Review covenant requirements on all loans to determine if the new reporting method will cause any violations. If they will, consider talking with your banker.
- Consult with an accounting professional as needed.
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:
(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:
- The Tax Cuts and Jobs Act (TCJA) does not allow employees to write off unreimbursed business mileage. Companies that fail to make up for this reimbursement could face legal consequences.
- Taxpayers using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or claiming a Section 179 deduction may not also use the business standard mileage rate for the same vehicle.
- Taxpayers have the option to calculate the actual costs of using their vehicle rather than accepting the standard mileage rates. Actual expense methods often provide different results than standard mileage. Talk with your CPA to determine the best method for you.
- While the IRS standard mileage rate helps hold businesses accountable, it does not account for fluctuations in vehicle-related expenses in different regions of the country.
- The Fixed and Variable Rate (FAVR) allowance is an alternate method for businesses whose employees use their vehicles for work. This method can help businesses avoid over-or underpaying an employee for the use of their vehicle for business purposes.
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.
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).
- Standard business mileage rate, per mile: 58.5 cents (up from 56 cents in 2021)
- Section 179 expensing:
- Limit: $1.08 million (up from $1.05 million in 2021)
- Phaseout: $2.7 million (up from $2.62 million)
- Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
- Married filing jointly: $340,100 (up from $329,800 in 2021)
- Single filers: $170,050 (up from $164,900)
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).
- Employee contributions to 401(k) plans: $20,500 (up from $19,500 in 2021)
- Catch-up contributions to 401(k) plans: $6,500 (unchanged)
- Employee contributions to SIMPLEs: $14,000 (up from $13,500)
- Catch-up contributions to SIMPLEs: $3,000 (unchanged)
- Combined employer/employee contributions to defined contribution plans: $61,000 (up from $58,000)
- Maximum compensation used to determine contributions: $305,000 (up from $290,000)
- Annual limit for defined benefit plans: $245,000 (up from $230,000)
- Compensation defining a highly compensated employee: $135,000 (up from $130,000)
- Compensation defining a “key” employee: $200,000 (up from $185,000)
Other employee benefits
- Qualified transportation fringe-benefits employee income exclusion: $280 per month (up from $270 per month)
- Health Savings Account contributions:
- Individual coverage: $3,650 (up from $3,600)
- Family coverage: $7,300 (up from $7,200)
- Catch-up contribution: $1,000 (unchanged)
- Health care Flexible Spending Account contributions: $2,850 (up from $2,750)
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)
- Pay the final installment of 2021 estimated tax.
- Farmers and fishermen: Pay estimated tax for 2021.
- File 2021 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
- Provide copies of 2021 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
- File 2021 Forms 1099-MISC, reporting nonemployee compensation payments in Box 7, with the IRS.
- File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2021. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
- File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2021. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
- File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2021 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
- File 2021 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)
- If a calendar-year partnership or S corporation, file or extend your 2021 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2021 contributions to pension and profit-sharing plans.
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):
- Workers to provide proof of work location within so many days of moving.
- An outline of how long employees can reside in each state without affecting payroll and sales-and-use taxes.
- How the costs of the employee moving will be analyzed and new tax payments processed on time.
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.
- Require remote workers to provide a report of what city and state they’re working in and for how long. This will allow your company to see any locations you may need to consider taxes for.
- Consider working in conjunction with an expert in sales-and-use and payroll taxes. Having a professional with a working knowledge of these unique tax situations can help guide your company to make further policy decisions and stay on time with required tax payments.
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 sheer amount of student loan debt individuals are graduating from higher education with has been increasingly covered in the news. While the government has been working to forgive student loan debt for certain people, there is something employers can do to help take the burden off employees and their tax liability. In addition to decreasing employee stress, it can also be used as an employee retention incentive.
The CARES Act and student loan repayment
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 and its extensions include a provision that allows employers to provide relief to employees with outstanding student loan debt. This program allows employers to pay up to $5,250 toward the student loan debt for eligible employees. All monies paid are to be excluded from income and payroll taxes for both the employee and employer portion.
This could be a significant principal decrease for employees with a national student loan average of more than $30,000.
What student loan debit is qualified?
Any amount an employer pays to a student loan held by an employee up to $5,250 is qualified for the income and payroll tax exclusion, if the payments are made before Dec. 31, 2025. This includes federal and private student loans and payments made directly to the employee or the loan servicer.
It’s not too late to provide this benefit and take advantage of the tax incentives for the 2021 tax year. For assistance creating an education assistance program and establishing benefits with appropriate tax documentation steps in place, contact our team of knowledgeable tax professionals today.
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:
- Began operating after February 15, 2020,
- Had average annual gross receipts of less than $1 million, and
- Didn’t meet the eligibility requirement, applicable to other employers, of having experienced a significant decline in gross receipts or having been subject to a full or partial suspension under a government order.
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.
- Employee Retention Credit: The infrastructure act ends the employee retention credit (ERC) early, repealing the fourth-quarter extension. Wages paid after September 30, 2021, are ineligible for the credit unless paid by an eligible recovery startup business.
- Crypto asset Reporting: The IIJA clearly defines the terms broker and digital assets to clarify capital gains or losses from cryptocurrency. It also provides new reporting requirements for crypt currency exchanges. The following information must be reported to the IRS and customers effective January 1, 2023:
- Name, address, and phone number of each customer,
- Gross proceeds from any sale of digital assets, and
- Capital gains or losses (short-term or long-term)
- Disaster relief: The IIJA modifies the automatic extension of specific deadlines for taxpayers impacted by federally declared disasters. It amends the definition of a disaster area as “an area in which a major disaster for which the President provides financial assistance under section 408 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5174) occurs.”
Other Tax Provisions
- Extension of highway-related taxes
- Extension and modification of superfund excise taxes
- Allowance of private activity bonds for qualified broadband projects and carbon dioxide capture facilities
What Else is Included?
Here’s a breakdown of what’s included:
- Roads and bridges: $110 billion to repair the nation’s highways, bridges, and roads and invest in other transportation programs.
- Public transit: $39 billion to expand and modernize transportation systems, improve access for people with disabilities, provide dollars to state and local governments to purchase zero-emission buses, and repair buses, rail cars, and train tracks.
- Passenger and freight rail: $66 billion to reduce Amtrak’s maintenance backlog and improve rail service routes, including the Northeast Corridor.
- Electric vehicles: $7.5 billion for electric vehicle charging stations, $5 billion to purchase electric buses, and $2.5 billion for ferries.
- Modernizing the electric grid: $65 billion to protect against power outages.
- Airports: $25 billion to improve runways, gates, taxiways, terminals, and air traffic control towers.
- Water and wastewater: $55 billion to spend on water and wastewater infrastructure, including replacing lead pipes and addressing water contamination.
- Broadband internet: $65 billion to bolster the country’s broadband infrastructure, including ensuring every American has access to high-speed internet. Additionally, one in four households is expected to become eligible for a $30 per month subsidy to pay for internet access.
- Great Lakes Restoration Initiative: $1 billion for the cleanup of rivers and lakes, including a special target of areas with heavy industrial pollution.
- Road safety: $11 billion for transportation safety programs.
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:
- If substantially all the business profits will be distributed to the owners, it may be preferable that the business be operated as a pass-through entity rather than as a C corporation, since the shareholders will be taxed on dividend distributions from the corporation (double taxation). In contrast, owners of a pass-through entity will only be taxed once, at the personal level, on business income. However, the impact of double taxation must be evaluated based on projected income levels for both the business and its owners.
- If the value of the business’s assets is likely to appreciate, it’s generally preferable to conduct it as a pass-through entity to avoid a corporate tax if the assets are sold or the business is liquidated. Although corporate level tax will be avoided if the corporation’s shares, rather than its assets, are sold, the buyer may insist on a lower price because the tax basis of appreciated business assets cannot be stepped up to reflect the purchase price. That can result in much lower post-purchase depreciation and amortization deductions for the buyer.
- If the entity is a pass-through entity, the owners’ bases in their interests in the entity are stepped-up by the entity income that’s allocated to them. That can result in less taxable gain for the owners when their interests in the entity are sold.
- If the business is expected to incur tax losses for a while, consideration should be given to structuring it as a pass-through entity so the owners can deduct the losses against their other income. Conversely, if the owners of the business have insufficient other income or the losses aren’t usable (for example, because they’re limited by the passive loss rules), it may be preferable for the business to be a C corporation, since it’ll be able to offset future income with the losses.
- If the owners of the business are subject to the alternative minimum tax (AMT), it may be preferable to organize as a C corporation, since corporations aren’t subject to the AMT. Affected individuals are subject to the AMT at 26% or 28% rates.
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.
With the increasing cost of employee health care benefits, your business may be interested in providing some of these benefits through an employer-sponsored Health Savings Account (HSA). For eligible individuals, an HSA offers a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the important tax benefits:
- Contributions that participants make to an HSA are deductible, within limits.
- Contributions that employers make aren’t taxed to participants.
- Earnings on the funds in an HSA aren’t taxed, so the money can accumulate tax free year after year.
- Distributions from HSAs to cover qualified medical expenses aren’t taxed.
- Employers don’t have to pay payroll taxes on HSA contributions made by employees through payroll deductions.
To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2021, a “high deductible health plan” is one with an annual deductible of at least $1,400 for self-only coverage, or at least $2,800 for family coverage. (These amounts will remain the same for 2022.) For self-only coverage, the 2021 limit on deductible contributions is $3,600 (increasing to $3,650 for 2022). For family coverage, the 2021 limit on deductible contributions is $7,200 (increasing to $7,300 for 2022). Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits for 2021 cannot exceed $7,000 for self-only coverage or $14,000 for family coverage (increasing to $7,050 and $14,100, respectively, for 2022).
An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2021 and 2022 of up to $1,000.
Contributions from an employer
If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan. It’s also excludable from an employee’s gross income up to the deduction limitation. Funds can be built up for years because there’s no “use-it-or-lose-it” provision. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.
HSA distributions can be made to pay for qualified medical expenses, which generally means expenses that would qualify for the medical expense itemized deduction. Among these expenses are doctors’ visits, prescriptions, chiropractic care and premiums for long-term care insurance.
If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65, or in the event of death or disability.
HSAs offer a flexible option for providing health care coverage and they may be an attractive benefit for your business. But the rules are somewhat complex. Contact us if you’d like to discuss offering HSAs to your employees.
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
- They are already monitoring changes in the tax code that may affect clients.
- They manage deadlines for tax forms.
- They can use their wealth of existing knowledge to help your organization, including establishing best practices.
- They reduce money spent on an in-house tax expert and lower risks related to compliance of sales and use tax laws.
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.
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.
In light of the COVID-19 pandemic, the IRS expanded its electronic signatures program to include many more forms that historically needed a wet signature. The expansion is intended to make things easier for tax professionals and their clients, while in-person interactions may cause unnecessary risk.
The IRS has recently extended the ability to accept e-signatures on many documents through December 2021, simplifying the process for tax professionals.
What types of signatures are accepted?
The IRS has provided the following acceptable types of electronic signatures:
- Typed name in a signature block
- Scanned/digitized image of a handwritten signature attached to an electronic record
- Handwritten signature input on an electronic signature pad
- Handwritten signature, mark, command input on a display screen with a stylus device
- Signature created by third-party software (i.e., e-sign programs such as DocuSign)
While there are additional ways to provide an e-signature, taxpayers are advised to stick to the outlined methods to prevent the possibility of the forms being returned or delayed during processing.
What forms are included in the recent extension?
While some forms can be electronically filed, others must be sent by mail and manually processed by the IRS. The forms in this electronic signature program all require the latter – a hardcopy sent to the IRS for processing. This includes:
- Form 11-C Occupational Tax and Registration Return for Wagering
- Form 637 Application for Registration (For Certain Excise Tax Activities)
- Form 706 U.S. Estate (and Generation-Skipping Transfer) Tax Return
- Form 706-A U.S. Additional Estate Tax Return
- Form 706-GS(D-1) Notification of Distribution from a Generation-Skipping Trust
- Form 706-GS(D) Generation-Skipping Transfer Tax Return for Distributions
- Form 706-GS(T) Generation-Skipping Transfer Tax Return for Terminations
- Form 706-QDT U.S. Estate Tax Return for Qualified Domestic Trusts
- Form 706 Schedule R-1 Generation Skipping Transfer Tax
- Form 706-NA U.S. Estate (and Generation-Skipping Transfer) Tax Return
- Form 709 U.S. Gift (and Generation-Skipping Transfer) Tax Return
- Form 730 Monthly Tax Return for Wagers
- Form 1066 U.S. Income Tax Return for Real Estate Mortgage Investment Conduit
- Form 1120-C U.S. Income Tax Return for Cooperative Associations
- Form 1120-FSC U.S. Income Tax Return of a Foreign Sales Corporation
- Form 1120-H U.S. Income Tax Return for Homeowners Associations
- Form 1120-IC DISC Interest Charge Domestic International Sales – Corporation Return
- Form 1120-L U.S. Life Insurance Company Income Tax Return
- Form 1120-ND Return for Nuclear Decommissioning Funds and Certain Related Persons
- Form 1120-PC U.S. Property and Casualty Insurance Company Income Tax Return
- Form 1120-REIT U.S. Income Tax Return for Real Estate Investment Trusts
- Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies
- Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B)
- Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship
- Form 1128, Application to Adopt, Change or Retain a Tax Year
- Form 2678, Employer/Payer Appointment of Agent
- Form 3115, Application for Change in Accounting Method
- Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
- Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner
- Form 4421, Declaration – Executor’s Commissions and Attorney’s Fees
- Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes
- Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues
- Form 8038-G, Information Return for Tax-Exempt Governmental Bonds
- Form 8038-GC; Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales
- Form 8283, Noncash Charitable Contributions
- Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms
- Form 8802, Application for U.S. Residency Certification
- Form 8832, Entity Classification Election
- Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent
- Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement
- Elections made per Internal Revenue Code Section 83(b)
Our firm continues to monitor the ability to electronically sign and submit IRS forms. If you have any questions about tax filings, please reach out to our team of tax professionals for help.
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.
- Keep detailed records. Every expense should be tracked down to the penny. Don’t round or estimate when recording them. In addition, accurately categorize all your expenses.
- Consider upgrading from manual tracking. While spreadsheets can be an amazing tool, there’s a point where they can become a hindrance to your operations. Using time management or bookkeeping software to help track expenses, payroll, and other operations can be more efficient for your business.
- Adjust your forecasting process as your business grows. When your business starts to reach new heights, forecasts could involve more complex numbers (or a greater number of categories to review). If your business is experiencing growing pains, you may want to consider outsourcing to a trusted accountant or knowledgeable part-time CFO who can provide new insights and more efficiencies for you as a business leader.
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:
- Current expenses
- Current revenue
- Expected future liquid cash
- Potential future capital purchases
- Upcoming marketing and travel expenses
- Accounts receivable: both outstanding invoice amounts and the expected pay date
- Accounts payable: amount owed to others and when it must be paid by
- Long- and short-term debt payoff
- Future quarterly tax payments
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
- If a calendar-year C corporation that filed an automatic six-month extension:
- File a 2020 income tax return (Form 1120) and pay any tax, interest and penalties due.
- Make contributions for 2020 to certain employer-sponsored retirement plans.
Monday, November 1
- Report income tax withholding and FICA taxes for third quarter 2021 (Form 941) and pay any tax due. (See exception below under “November 10.”)
Wednesday, November 10
- Report income tax withholding and FICA taxes for third quarter 2021 (Form 941), if you deposited on time (and in full) all of the associated taxes due.
Wednesday, December 15
- If a calendar-year C corporation, pay the fourth installment of 2021 estimated income taxes.
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:
- Buildings and improvements,
- Furniture, fixtures and
- Intangibles (including customer lists, licenses, patents, copyrights and goodwill).
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.
- For a passenger auto placed in service in 2021 that cost more than $59,000, the Year 1 depreciation ceiling is $18,200 if you choose to deduct $8,000 of first-year bonus depreciation. The annual ceilings for later years are: Year 2, $16,400; Year 3, $9,800; and for all later years, $5,860 until the vehicle is fully depreciated.
- For a passenger auto placed in service in 2021 that cost more than $51,000, the Year 1 depreciation ceiling is $10,200 if you don’t choose to deduct $8,000 of first-year bonus depreciation. The annual ceilings for later years are: Year 2, $16,400; Year 3, $9,800; and for all later years, $5,860 until the vehicle is fully depreciated.
- These ceilings are proportionately reduced for any nonbusiness use. And if a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions.
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:
- The amount of the loss,
- The date the loss was discovered, and
- That a theft occurred under the law of the jurisdiction where the alleged loss occurred.
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:
- Retail Industry (March 2021),
- Construction Industry (April 2021),
- Nonqualified Deferred Compensation (June 2021), and
- Real Estate Property Foreclosure and Cancellation of Debt (August 2021).
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:
- A year after the date the marriage ends, or
- Six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement.
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.
- The ERC was expanded to include wages paid through December 31, 2021.
- “Recovery startup businesses” launched after February 15, 2020, have been added to the definition of eligible businesses.
- Clarifying the definition of a full-time employee, including whether wages paid to full-time equivalents are considered eligible.
- Determining if tips should be considered qualified wages.
- Outlining whether wages paid to majority owners and their spouses are considered qualified.
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:
- Determine if your business is eligible for the ERC moving forward and/or file an amended return.
- Understand which paid wages and expenses are eligible to be included in calculations.
- Assist in calculating the amount of credit your company is eligible to take.
- File amended or new returns in relation to your business.
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.
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.
||Payment Received Period (Payments Exceeding $10,000 in Aggregate Received)
||Deadline to Use Funds
||Reporting Time Period
||From April 10, 2020 to June 30, 2020
||June 30, 2021
||July 1 to Sept. 30, 2021
||From July 1, 2020 to Dec. 31, 2020
||Dec. 31, 2021
||Jan. 1 to March 31, 2022
||From Jan. 1, 2021 to June 30, 2021
||June 30, 2022
||July 1 to Sept. 30, 2022
||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:
- Reporting Entity Business Information
- Subsidiary Questionnaire
- Acquired/Divested Subsidiaries
- Interest Earned on PRF Payment(s)
- Tax and Single Audit Information
- Other Assistance Received
- Use of General and Targeted Distribution (including Skilled Nursing Facility and Nursing Home Infection Control Distribution) Payment(s)
- Unreimbursed Expenses Attributable to Coronavirus
- Los Revenues Attributable to Coronavirus (and additional revenue information depending upon the option selected to calculate lost revenues)
- Personnel, Patient, and Facility Metrics
- Survey Questions
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.
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.
- It’s available to owners of sole proprietorships, single member limited liability companies (LLCs), partnerships and S corporations. It may also be claimed by trusts and estates.
- The deduction is intended to reduce the tax rate on QBI to a rate that’s closer to the corporate tax rate.
- It’s taken “below the line.” That means it reduces your taxable income but not your adjusted gross income. But it’s available regardless of whether you itemize deductions or take the standard deduction.
- The deduction has two components: 20% of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate; and 20% of the taxpayer’s combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.
- QBI is the net amount of a taxpayer’s qualified items of income, gain, deduction and loss relating to any qualified trade or business. Items of income, gain, deduction and loss are qualified to the extent they’re effectively connected with the conduct of a trade or business in the U.S. and included in computing taxable income.
- QBI doesn’t necessarily equal the net profit or loss from a business, even if it’s a qualified trade or business. In addition to the profit or loss from Schedule C, QBI must be adjusted by certain other gain or deduction items related to the business.
- A qualified trade or business is any trade or business other than a specified service trade or business (SSTB). But an SSTB is treated as a qualified trade or business for taxpayers whose taxable income is under a threshold amount.
- SSTBs include health, law, accounting, actuarial science, certain performing arts, consulting, athletics, financial services, brokerage services, investment, trading, dealing securities and any trade or business where the principal asset is the reputation or skill of its employees or owners.
- There are limits based on W-2 wages. Inflation-adjusted threshold amounts also apply for purposes of applying the SSTB rules. For tax years beginning in 2021, the threshold amounts are $164,900 for singles and heads of household; $164,925 for married filing separately; and $329,800 for married filing jointly. The limits phase in over a $50,000 range ($100,000 for a joint return). This means that the deduction reduces ratably, so that by the time you reach the top of the range ($214,900 for singles and heads of household; $214,925 for married filing separately; and $429,800 for married filing jointly) the deduction is zero for income from an SSTB.
- For businesses conducted as a partnership or S corporation, the pass-through deduction is calculated at the partner or shareholder level.
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:
- Applicable employment taxes are the Medicare hospital taxes (1.45% of the wages) and the Railroad Retirement payroll tax that’s attributable to the Medicare hospital tax rate. For the first and second quarters of 2021, “applicable employment taxes” were defined as the employer’s share of Social Security or FICA tax (6.2% of the wages) and the Railroad Retirement Tax Act payroll tax that was attributable to the Social Security tax rate.
- Recovery startup businesses are qualified employers. These are generally defined as businesses that began operating after February 15, 2020, and that meet certain gross receipts requirements. These recovery startup businesses will be eligible for an increased maximum credit of $50,000 per quarter, even if they haven’t experienced a significant decline in gross receipts or been subject to a full or partial suspension under a government order.
- A “severely financially distressed” employer that has suffered a decline in quarterly gross receipts of 90% or more compared to the same quarter in 2019 can treat wages (up to $10,000) paid during those quarters as qualified wages. This allows an employer with over 500 employees under severe financial distress to treat those wages as qualified wages whether or not employees actually provide services.
- The statute of limitations for assessments relating to the ERTC won’t expire until five years after the date the original return claiming the credit is filed (or treated as filed).
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
- Employers report income tax withholding and FICA taxes for second quarter 2021 (Form 941) and pay any tax due.
- Employers file a 2020 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.
Tuesday, August 10
- Employers report income tax withholding and FICA taxes for second quarter 2021 (Form 941), if you deposited all associated taxes that were due in full and on time.
Wednesday, September 15
- Individuals pay the third installment of 2021 estimated taxes, if not paying income tax through withholding (Form 1040-ES).
- If a calendar-year corporation, pay the third installment of 2021 estimated income taxes.
- If a calendar-year S corporation or partnership that filed an automatic extension:
- File a 2020 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
- Make contributions for 2020 to certain employer-sponsored retirement plans.
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:
- Lower Operating Costs – Any change that will reduce costs without otherwise endangering operations will generally be positive. Many businesses are just too small to justify hiring a full-time, in-house CFO.
- Increased Efficiency – Inefficient operations harm your organization. A real advantage of outsourcing is that behind your outsourced financial planning expert stands an entire team of accountants, partners, consultants, and bookkeepers. When financial activities are outsourced and analyzed by an independent party specializing in that activity, efficiencies will result.
- More Flexibility – When a business owner wears too many hats, one is bound to fall off. Outsourcing CFO functions will allow your organization to become more flexible in dealing with its environment and core activities. Changes that make an organization more agile will make it better able to excel.
- Reduced Risk – Outsourcing a function may reduce the risk an organization faces. Outsourcing payroll, for example, is likely to reduce risk, as experts will now do the job.
- New Ideas – Outsourcing CFO duties will bring new ideas to the table. Small businesses need to recognize that outsourcing an expert will give them a clear advantage with complex financial activities.
- High Growth Potential – Many organizations are limited in taking on more activities because their current staff is spread too thin. Outsourcing financial activities can allow business owners and other staff to engage in better-targeted tasks.
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:
- Net income: Net income is what is left of your revenue after you’ve subtracted expenses and tax liability. Tracking changes in your net income and understanding when, why, and how it changes can help provide better forecasting for future business decisions.
- Days in Accounts Receivable: When an invoice is issued, how long until the payment comes in? Days in accounts receivable provide this average. If the number is trending far past the terms negotiated on the contract, it may be time to shift the collection efforts, so cash is coming in to help offset the initial costs of future work.
- Liquidity: Measuring liquidity tells an owner how likely they are to meet short-term obligations (anything under a year). Take current assets and divide them by the total of current liabilities to get this statistic.
- The average revenue per hour worked: Knowing how much revenue each employee or subcontractor generates can help an owner better cost out jobs and plan for jobs that make more money for the firm. In addition, it allows them to see where staffing is benefitting the company. If you have an employee who has a low average revenue per hour worked ratio, consider whether their assistance frees up other workers to handle more revenue-generating activities (i.e., business pitches instead of handling the books).
- Time and cost rate: When bidding out future jobs and planning for a steady stream of income for your business, knowing how long it will take certain projects and the average cost is imperative. It allows companies to predict their timeline better so that clients are not always delayed because a current job is running late and tying up workers.
- Bid development: Cashflow forecasting models need to know not only what upcoming projects there are (and the expected impact on the construction firm) but the jobs currently in the bidding pipeline. Estimating the profit, when the contract would begin and end, and the likelihood that the bid will be chosen can be an early indicator of cash flow bottlenecks. If the bid pipeline is looking lower, it’s time to start finding more business.
In addition to these more traditional KPIs, the following also impact profitability.
- Safety: Safety accidents can cause worker injury meaning staff shortages and higher employment costs.
- Quality assurance: Do certain employees, subcontractors, or types of projects usually lean toward cost overruns, errors that need correcting, missed site inspections, or low customer satisfaction? All of those concerns can eat away at the expected profit from a job.
- Worker performance: If workers are not efficient and effective with their time, they could be causing quality assurance issues or cost overruns from wasted time on the clock.
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
||Tax Code Reference
|Company social events and facilities for employees (e.g., holiday parties, team-building events)
||IRC Secs. 274(e)(4) and 274(n)(2)(A)
|Meals and entertainment included in employee or non-employee compensation
||IRC Secs. 274(e)(2) and (9)
|Reimbursed expenses under an accountable plan
||IRC Sec. 274(e)(3)
|Meals and entertainment made available to the public
||IRC Sec. 274(e)(7)
|Meals and entertainment sold to customers
||IRC Sec. 274(e)(8)
|Business travel meals
100% (1/1/2021 to 12/31/2022)*
|IRC Secs. 274(e)(3) and 274(e)(9)
|Client/customer business meals
100% (1/1/2021 to 12/31/2022)*
|Business meeting meals
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)
|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
|Personal, lavish, or extravagant meals/beverages in relation to the activity
||IRC Secs. 274(k)(1) and 274(k)(2)
|Entertainment without exception
||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.
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:
- Raising capital: This means selling a portion of your company to investors for an influx in cash.
- Maintaining a business line of credit: This loan allows you to draw funds when needed for expenses and pay them off on a payment plan, or when the revenue you were expecting comes in. Any money you use will incur interest charges as outlined in your loan agreement.
- Delaying payments: By negotiating the terms of payments for invoices in supplies, you can limit the amount of cash leaving your account at once. You can make payments in installments throughout the terms of the invoice or pay the balance of the invoice on the due date.
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:
- Is the asset designed to be removed?
- Would removing it cause damage to the real property?
- What would be the time and/or expense required to move the asset?
- Are there any circumstances that suggest the fixture is expected to be attached for a finite period?
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:
- Maintain or improve skills required for the employee’s then-current job, or
- Comply with certain express employer-imposed conditions for continued employment.
“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:
- Equipment, the construction of which begins before 2024, that uses solar energy to generate electricity for heating and cooling structures, for hot water, or heat used in industrial or commercial processes (except for swimming pools). If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in calendar year 2023; and, unless the property is placed in service before 2026, the credit rate is 10%.
- Equipment, the construction of which begins before 2024, using solar energy to illuminate a structure’s inside using fiber-optic distributed sunlight. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
- Certain fuel-cell property the construction of which begins before 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
- Certain small wind energy property the construction of which begins before 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
- Certain waste energy property, the construction of which begins before January 1, 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
- Certain offshore wind facilities with construction beginning before 2026. There’s no phase-out of this property.
The credit equals 10% of the basis of the following:
- Certain equipment used to produce, distribute, or use energy derived from a geothermal deposit.
- Certain cogeneration property with construction beginning before 2024.
- Certain microturbine property with construction beginning before 2024.
- Certain equipment, with construction beginning before 2024, that uses the ground or ground water to heat or cool a structure.
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.
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:
- Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay).
- In the minutes of your corporation’s board of directors, contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.) Cite any executive compensation or industry studies that back up your compensation amounts.
- Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by IRS.
- If the business is profitable, pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.
You can avoid problems and challenges by planning ahead. If you have questions or concerns about your situation, contact us.
The IRS has released additional guidance in Notice 2021-20 on the Employee Retention Tax Credit (ERC) with clarifications on the retroactive changes for expanded eligibility applicable to 2020. Employers who received a Paycheck Protection Program (PPP) loan have been waiting on guidance on claiming the credit in combination with forgiveness of their loan. The provisions outlined here apply to retroactive claims for 2020 as well as providing a plan for those yet to seek forgiveness.
Summary of ERC
As a reminder, eligibility to claim the 2020 ERC requires a business to have experienced a significant decline in revenues during 2020. Specifically, gross receipts for a calendar quarter during 2020 must have declined by 50% or more when compared to the same calendar quarter in 2019. Additionally, a company is eligible during any period where operations were suspended due to a government order.
- Employers with more than 100 FTEs can only claim the ERC on employees that are being paid qualified wages and not providing services.
- For 2020, the credit is available on 50% of qualified wages up to $10,000. The maximum credit amount per employee is $5,000.
- Health care costs are included when determining qualified wages.
- Wages paid as a result of the Families First Coronavirus Response Act (FFCRA) do not qualify.
Clarification on how to apply ERC with a PPP loan
The notice clarifies when and how PPP borrowers can claim the ERC on 2020 wages.
- Wages elected to be covered by the PPP forgiveness application but not granted.
- Wages in excess of the amount of their PPP loan – Example: An employer receives a $200,000 loan for wages but pays $230,000 in wages. Apply the $30,000 wages to ERC.
- The difference in wages and nonpayroll costs that are in excess of their PPP loan – Example: If a PPP loan equals $200,000 and the employer has $200,000 in forgivable wages and $70,000 in forgivable nonpayroll costs, reserve $70,000 in wages for ERC.
- Those that have already applied for forgiveness cannot amend their application to claim nonpayroll costs.
- For those yet to apply for forgiveness and eligible for the ERC, you will want to accumulate and submit nonpayroll costs to maximize eligible wages for the ERC.
The ERC requires specific documentation and support of facts and circumstances in order to qualify and receive the credit. For assistance with claiming the ERC, contact us.
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.
Review your tax strategy
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:
- Accelerating AMT refunds – The CARES Act has accelerated the alternative minimum tax following changes made by the Tax Cuts & Jobs Act. Corporations can claim all remaining credits in 2018 or 2019 thus allowing for filing of quick refunds.
- Using current losses for quick refunds – The CARES Act allows businesses to claim immediate refunds by using current losses against past income, for example.
- Submitting a retroactive refund for bonus depreciation – Businesses can now deduct qualified improvements dating back to Jan. 1, 2018, thanks to a fix made by the CARES Act. This could offer a quick refund.
- Claiming quick disaster loss refunds – Nearly every U.S. business is eligible for disaster-related refunds from losses in 2020 on an amended 2019 return for a quicker refund.
- Timing out your payroll tax deduction – While the CARES Act allows employers to defer paying their share of Social Security taxes, you should review the best strategy with your accountant. In some cases, it’s better to pay on time to take a loss. In others, it provides a liquidity benefit.
- Cash in on generous Section 179 deduction rules – For qualifying property placed in service in tax years beginning in 2020, the maximum Section 179 deduction is $1.04 million. The Section 179 deduction phase-out threshold amount is $2.59 million.
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.
Plan for the future
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:
- A sale or transfer of at least 20% of common stock or other ownership interests has occurred. This can be done in one or more transactions and can be to an affiliate or an existing owner of the entity.
- A sale or transfer of at least 50% of the PPP borrower’s assets measured by the fair market value in one or more transactions.
- A PPP borrower merges with or into another entity.
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:
- Equity sales where the transaction is of 50% or less of the borrower’s equity.
- Equity or asset sales where the PPP borrower submits a forgiveness application that shows usage of all PPP loan proceeds and that an interest-bearing escrow account has been established with the PPP lender with funds equal to the balance of the outstanding PPP loan. After forgiveness has been processed, the escrow funds are to be used to pay any remaining loan balance plus interest.
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:
- Reasoning for why the above requirements cannot be met and details of the requested transaction
- A copy of the executed PPP note
- A letter of intent and the purchase or sale agreement that includes the PPP borrower, seller (if different than borrower), and buyer’s responsibilities
- Disclosure of buyer’s existing PPP loan, if any, including SBA loan number and an ownership list of 20% or more of purchasing entity
- Monthly 1502 reports until the PPP loan is satisfied
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.
Employers can now defer payroll tax withholding on employee compensation for the last four months of 2020 and then withhold the deferred amounts in the first four months of 2021, confirms a recent update from the IRS. President Trump’s memorandum on Aug. 8 gave employers the ability to defer payroll taxes for employees affected by the COVID-19 pandemic in an effort to provide financial relief.
The guidance directs that employers can defer the withholding, deposit, and payment of the employee portion of the old-age, survivors, and disability insurance (OASDI) tax under Sec. 3102(a) and Railroad Retirement Act Tier 1 under Sec. 3201 from employee wages from Sept. 1 to Dec. 31, 2020.
Employers must then withhold and pay the deferred taxes from wages and compensation during the period from Jan. 1, 2021, and April 30, 2021, with interest, penalties, and additions to tax to begin accruing starting May 1, 2021. Included in the notice is a line that indicates, if necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee,” such as if an employee leaves the company before the end of April 2021, but does not provide details on what that entails.
Employees with pretax wages or compensation during any biweekly pay period totally less than $4,000 qualify for the deferral. Amounts normally excluded from wages or compensation under Secs. 3121(a) or 3231(e) are not included in calculating the applicable wages. The determination of applicable wages should be made on a period-by-period basis.
Companies may choose whether or not to enact the payroll tax deferral. We are closely monitoring updates related this and other presidential executive orders and will communicate if more information becomes available. For questions or assistance with this payroll tax deferral, contact us.
On Aug. 24, the Small Business Administration (SBA) and Treasury issued the latest interim final rule update to the Paycheck Protection Program (PPP) that seeks to clarify guidance related to owner-employee compensation and non-payroll costs. This guidance has been long-awaited and clears up several questions borrowers have had about forgiveness. Here are the main points:
1. Owner-employees of C or S corporations are exempt from the PPP owner-employee compensation rule for loan forgiveness if they have a less than 5% stake in the business. The intent is to provide forgiveness for compensation of owner-employees who do not have a considerable or meaningful ability to influence decisions over loan allocations. This clarifies earlier guidance that capped the owner-employee compensation regardless of what stake they have in the business.
2. Loan forgiveness for non-payroll costs may not include amounts attributable to the business operation of a tenant or subtenant of the PPP borrower. The SBA provides a few examples of what this means:
- Borrowers renting an office building and subletting a portion to another business can only claim the difference between their rental cost and the sublet income.
- Borrowers with a mortgage on the building in which it operates who lease a portion of the building to another business can only claim a portion of the mortgage interest limited to the percent share of fair market value of the space not leased.
- Borrowers sharing rented space with another business must prorate rent and utility payments like they would for 2019 tax filings or, if new, expected 2020 tax filings.
- Borrowers working from home may only claim the share of covered expenses deductible on the 2019 tax filings or, if new, expected 2020 tax filings.
3. To achieve loan forgiveness on rent or lease payments to a related third–party, borrowers must ensure that (1) the amount of loan forgiveness requested does not exceed the amount of mortgage interest owed on the property attributable to the business’s rented space during the covered period, and (2) the lease and mortgage meet the Feb. 15, 2020, requirement for establishment. Earlier guidance had not addressed related third-party leases.
It’s important to note that mortgage interest payments to a related party are not eligible for forgiveness as PPP loans are not intended to cover payments to a business’s owner because of how the business is structured – they are intended to help businesses cover non-payroll costs owed to third parties.
For questions on any of these rules or assistance with your PPP loan forgiveness application, contact us today.
CFOs are playing more pivotal roles in modern corporations than ever before, and the impact of the COVID-19 pandemic is shedding light on how CFOs can impact short and long-term financial stability. While growth is frequently considered the ultimate goal for a business, economic downturns like the one created by the pandemic show us that CFOs with eyes on long-term financial stability, and not just on growth, will be able to better help their organizations weather the storms of an economic crisis.
A CFO’s strategy for long-term success should incorporate thorough cost management protocols, a comprehensive and holistic approach to increasing value, and stewardship and championship of the bigger picture. Here’s what that means.
How CFOs impact direct costs
As the financial head of the organization, the CFO naturally serves as the rightful guardian of a business’s expenses. It’s through these direct costs that CFOs can implement stronger internal controls and recover lost revenue for long-term benefit. A CFO can improve long-term viability by analyzing:
Cost of Goods Sold (COGS) – COGS are a key area for reduction as they represent the largest operating expense for the business. Depending on the industry, these costs can be complex, and the biggest expense can come in the form of purchased components and materials. CFOs can optimize this area with help from sourcing programs that consolidate costs by choosing more goal-aligned suppliers.
Indirect Taxes – Indirect taxes are an often-overlooked area of opportunity for many businesses. These taxes can be found in areas like R&D, procurement, labor, utilities, and manufacturing and can represent 25% of personnel expenses. Making indirect taxes a regular component of your tax strategy allows you to reduce costs in this area by 10-20% with quick realization rates. Bonus: “Look-back” provisions can help you save even more.
Real Estate – With real estate, take a holistic inventory of your business and consolidate where possible. The COVID-19 pandemic showed us how much can be done at home or in fewer locations. Consider whether you need all your locations, your facility management costs, and negotiating your contracts. Also, plan for a future workforce that may expect a more flexible work-from-home situation. Just because you‘re growing doesn’t mean you will actually need all that extra space.
Product Optimization – If you haven’t invested and implemented benchmarking and KPIs for your products, you need to now. Data and analytics are key to understanding how you can improve margins and grow profit. With product rationalization, you can drill down into what is really profitable and make decisions on what to cut and what to expand. Look at customer buying habits and your company overhead and determine what’s really worth keeping on the shelves.
Labor – The key to optimizing labor costs lies within efficiency. Do you have the right people in the right seats? Can current employees be retrained to fill open needs? Consider where you can use automation and outsourcing to save on salaries/benefits and overhead.
Working Capital – Assessing your working capital for cost efficiency involves taking a look at:
- Cash flow – Know that cash in the bank doesn’t equal good cash flow. Understanding cash flow is key to making short and long-term projections through times of prosperity and crisis.
- Supplier/vendor relationships – Reconsider and negotiate vendor/supplier terms where necessary while preserving valuable relationships.
- Accounts receivable – Your AR should have set policies for payment plans/terms, follow up procedures, and multiple available payment methods.
- Accounts payable – Assess your AP for opportunities to free up cash flow such as automating electronic payments and diligently checking for discrepancies.
How CFOs impact value
CFOs not only help to optimize costs, but they are also integral in increasing company value because of their instinct and insight into the finances, the business, and how everything relates. Value is the ultimate determinate for long-term success in a business as it is the final measurement taken into consideration at the time of succession or buy-out. And, as any good business valuation professional will tell you, the business is not worth what you think it’s worth. The consensus among international accounting organizations is that value is defined by your customers/stakeholders and created and sustained through the responsible management of your organization’s tangible and intangible assets, resources, and relationships.:
One can clearly see how the areas of impact for CFOs listed in the costs section above directly relates to value creation in a business and the management of financial resources. The CFO is the gatekeeper for value creation and thus long-term viability.
How CFOs champion the big picture
Because the CFO is intimately connected to the financial health of the organization, they are also the eyes of the market. They see the trends and shifts directly in the numbers and can advocate for the right kinds of measurements to make long-term decisions. CFOs should take an active role in their organization’s strategic planning process and use their knowledge to translate the ebbs and flows of the business into scalable growth.
Now more than ever, CFOs are at the forefront of business viability and growth. Their knowledge is invaluable in times of crisis and prosperity, and their voice and action are essential for long-term financial stability.
Our outsourced CFO services can help you establish and maintain a long-term financial strategy for your business. Contact us for more information.
The Small Business Administration (SBA) and Treasury released an updated Paycheck Protection Program (PPP) FAQ on Aug. 4 in an effort to address PPP loan forgiveness issues that have arisen as borrowers begin to complete their applications. The 23 FAQs address various aspects of PPP forgiveness including general loan forgiveness, payroll costs, non-payroll costs, and loan forgiveness reductions. Here is a brief overview of some of the most notable clarified guidance.
General loan forgiveness
- Sole proprietors, independent contractors, and self-employed individuals with no employees and no employee salaries included in average monthly payroll at the time of PPP loan application should use PPP Loan Forgiveness Application Form 3508EZ.
- Borrowers who submit their loan forgiveness application within 10 months of the completion of the covered period do not need to make payments until the forgiveness amount is remitted to the lender by the SBA.
- Borrowers who must repay a portion of the loan should know interest is accrued from the time of disbursement and the SBA remittance of the forgiveness amount. Borrowers whose full loan is forgiven do not need to pay the accrued interest.
Payroll costs forgiveness
- Owner-employee is defined as someone who is both an owner and an employee of a C corporation. This was not previously defined.
- Compensation limitation for owners is cumulative across all businesses if there are multiple.
- S corporation considerations
- Health insurance costs do not qualify as compensation for S corporation employees that own at least 2% of the business nor for family members of such employees.
- S corporation owner-employees with less than 2% ownership can count health insurance costs.
- Unemployment and state income taxes are eligible for forgiveness.
- Employer retirement contributions are eligible capped at 20.833% of 2019 contributions.
- C corporation considerations
- Forgiveness is allowed for employee shareholder compensation including state unemployment and income taxes and corporate contributions to employee health insurance.
- Employer retirement contributions are eligible capped at 20.833% of 2019 contributions.
- Employer contributions for retirement and group health benefits that were accelerated from periods outside of the covered period or alternative covered period are not eligible for forgiveness.
Non-payroll costs forgiveness
- Payments of transportation utility fees assessed by state and local governments are eligible for forgiveness.
- The alternative payroll covered period does not apply to non-payroll costs.
- Leases that existed prior to Feb. 15, 2020, but expired or renewed during the covered period are eligible for forgiveness.
- Interest payments on mortgage loans for real or personal property that existed prior to Feb. 15, 2020, but were refinanced during the covered period are eligible for forgiveness.
- Benefits are not to be included in the determination for a 25% reduction in employees’ hourly or salary wages.
- It is still unclear whether tips for restaurant employees are included, so restaurant owners may want to make up for lost tips to avoid the reduction.
- Borrowers should include employees who made more than $100,000 in 2019 when calculating FTE reduction exceptions.
The FAQ document also includes several examples for making calculations related to the above questions. Contact us for questions and assistance with your PPP loan forgiveness application.
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.
Your cash flow is the financial story of your business. It tells the story of your high points and low points, where the money comes in and goes out, and is the lifeline of your business in times of crisis. Proper cash flow management can mean the difference between survival and going under for small businesses especially in periods of market and economic downturn, such as the period of challenge faced currently by the ramifications of COVID-19.
Here are seven steps to managing your cash flow during a crisis.
1. Update your financial statements – The key to managing your cash flow is operating from current financial statements. As a first step, ask your CPA to provide you with an up-to-date look at your business’s financial picture and discuss the statement together. Your CPA can help you identify areas of opportunity and challenge to ensure you’re proactively optimizing your business’s financial situation no matter the circumstances of the marketplace.
2. Understand your fixed and variable expenses – Hand-in-hand with updated financial statements comes an understanding of your fixed and variable expenses. Sorting your expenses into these two buckets will help you to see where you have expenses you can cut temporarily or permanently to save cash, or where you can negotiate to improve your cash flow in times of need.
3. Know your credit options – Next, contact your banking professional to understand your credit options. In times of crisis, the likelihood of needing to dip into lines of credit increases, and you need to know what’s available to you, the terms, and have a plan for repaying it when the dust settles. This will help you project your cash flow as you begin to model scenarios through a period of challenge
4. Project your cash flow – Your first cash flow projection should be conducted using your current levels of income, expenses, and lines of credit so you can get a clear look at where you stand without change. Additionally, you will want to look back at least five years to see how your financial picture has fluctuated in the context of times of growth and downturn. Then, as you project outward into the future, break down your cash flow at micro increments, weekly or biweekly, to see where and when your cash reserves and credit lines may begin to run out. This can help you predict where you will need to make changes internally and when.
5. Increase income – Once you’ve projected your cash flow out, look at ways you can increase your income.
- Accounts receivable – You don’t have to be facing a period of crisis to start to clean up your accounts receivable (AR). Improving your AR timeline is essential to improving cash flow. Work with your customers to set up payment plans that make sense and adjust your AR policies where needed. Are you offering more time than necessary to pay-in-full? Are you following up with late payments? Are you offering multiple methods of payment? Now may be the time to start considering credit cards if you aren’t currently accepting them.
- Pivot your products/services – The COVID-19 pandemic is forcing many small businesses to pivot their offerings. Restaurants are offering delivery and takeaway, and grocery stores are offering personal shoppers as a couple of examples. As you look around, you’ll see small businesses across the country changing up the way they offer products and services to meet the needs of their customers. How can you pivot while staying true to your strengths?
- Offer gift cards/certificates – If you’re not already offering gift cards/certificates, this may be a good option to start if your services warrant it. Make it as easy as possible for customers to purchase these over the phone or online so you can start to realize some cash now.
6. Decrease expenses – Decreasing expenses is a natural place to start to try improving cash flow during a crisis, but it must be done carefully to maintain relationships with customers, vendors, and employees. Consider your fixed and variable expenses and what can be reduced or cut. Adjusting your utilities at the office if you’re working from home, implementing hiring freezes if you’re unsure about the future, and redistributing contract work to employees are just a few ways to decrease expenses. Additionally, consider:
- Negotiating contracts – Work with your suppliers to understand your options for delaying payments, keeping in mind that they have expenses to meet as well. Approach negotiating contracts carefully as you do not want to damage important relationships.
- Cutting payroll as a last resort – Before you implement lay-offs or furloughs, consider moving employees around the company to meet other needs, or offer work-from-home when possible. If you must make lay-offs or furloughs, ensure they meet the department of labor guidelines.
7. Rerun your cash flow model with different scenarios – Considering your options for increases in income and expenses, model your cash flow using various rates of change in those areas. Use realistic numbers to see how much of an improvement you can expect by making these adjustments over time.
Times of crisis can force small businesses to take a long hard look at their financial picture and address cash flow issues that may have been lingering long before the major event. By monitoring up-to-date financial statements and performing cash flow projections, you can become a better steward of your business’s finances in times of crisis and times of opportunity.
The Internal Revenue Service (IRS), Department of the
Treasury (DOT), Employee Benefits Security Administration (ESA), and Department
of Health and Human Services (DHS) recently issued a final ruling on the use of
employer-funded health accounts. Effective January 1, 2020, employers of all
sizes that do not offer a group coverage plan may use HRAs as a vehicle
to help employees pay for health insurance premiums. This ruling extends beyond
the current scope of health reimbursement arrangements (HRAs), which allows
businesses to offer employer-funded accounts for employees to apply to out-of-pocket
medical expenses and now allows employees to pay for insurance premiums.
The new ruling is expected to affect more than 800,000
employers and 11 million employees, making it a far-reaching update to the
current system. Under the guidance, employers may offer two new types of HRAs:
- Individual coverage HRAs (ICHRAs) – Employees
can use these funds to buy individual-market insurance as well as insurance on
the public exchanges formed under the Affordable Care Act (ACA), pay insurance
premiums and in some cases reimbursements. These can be offered when no group health
coverage is provided by the employer.
- Excepted-benefit HRAs (EBHRAs) – Employees
can use these funds to pay premiums for vision and dental coverage or similar
benefits. This is only permitted if you offer employees group health coverage.
- Small employers can now more effectively compete
with larger businesses when it comes to benefits offerings.
- The change allows businesses, small businesses,
in particular, flexibility in providing their workers with tax-preferred funds
to pay all or a portion of their cost of health coverage.
- Employers can segment their employees and offer
customized health benefits to individual groups. For instance, you could have one
group qualify for traditional group coverage while another group qualifies for
ICHRA but you may not offer them a choice between the two. For a full list of
employee classifications, visit https://www.irs.gov/pub/irs-utl/health_reimbursement_arrangements_faqs.pdf
- Employers must offer the HRA on the same terms
to all employees within a segment, but ICHRA benefit levels can be customized
- Employers can provide more substantial benefits
to older workers and workers with more dependents. ICHRAs can be used to
reimburse premiums for Medicare and Medigap when certain conditions are met.
- ICHRAs can also be compatible with HSAs when
- Employers should note that they are only allowed
to fund ICHRAs if they do not offer a group health plan. Conversely, EBHRAs may
only be offered if employers sponsor coverage under a group health plan.
- Participation in an ICHRA may make employees
ineligible for certain tax credits or subsidies when purchasing a policy from
the ACA exchange, even if they opt-out of the ICHRA.
- Employers are required to give employees at
least 90-days-notice before the beginning of the plan year and include
disclosure provision to help employees thoroughly understand their options.
- Although the new ruling offers more flexibility,
it does not permit employers to provide employees with a choice between ICHRAs
or a traditional group plan. However, when it comes to new employees, employers
can maintain their existing benefits for enrollees while offering new hires
only an ICHRA.
- The new rule does not cap contributions to
ICHRAs. Excepted-benefit HRAs are capped at $1,800 per year.
To assist employers, the DOL issued this Individual Coverage HRA Model Notice: https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB87/individual-coverage-model-notice.pdf .
This notice is not exhaustive. If you would like more
information on how your business might benefit from an ICHRA, give the
professionals in our office a call. We can go over your options and determine
if you satisfy the ACA’s affordability and minimum value requirements.
The Taxpayer First Act (the Act) of 2019 was signed into law on July 1, 2019. The bill, having gone through a few changes on its way to the president’s desk, passed with bipartisan support – a rare thing in Washington these days. The law aims to reform the Internal Revenue Service (IRS) by making it more taxpayer-friendly and has been praised by the American Institute of Certified Public Accountants (AICPA). The summary of the bill, its titles and subtitles signal a much-needed pivot to the way the IRS fits into the 21st-century economic narrative. Among the areas of impact, the main themes include customer service, enforcement procedures, cybersecurity and identity protection, management of information technology, and use of electronic systems. While the following table is not exhaustive, it does highlight the key points of reform.
IRS will adopt best practices of private sector customer service providers,
starting with a comprehensive training plan. They will officially benchmark
and track their endeavors and be responsible for measuring their success.
The IRS is required to
work behind the scenes and take their position front and center to assure
greater identity protection. By 2024, any taxpayer will be able to request a personal
identification number (PIN) to use when filing their tax return. The IRS is
also legally bound to notify taxpayers of suspected fraud and point them in
the right direction for next steps. Finally,
if a taxpayer’s return is adversely affected by identity theft, the IRS must provide
a single point of contact to track the case and resolve the issue.
taxpayers can skip the third-party service when paying their bill. The new
law allows the IRS to accept direct payment as long as the taxpayer agrees to
pay the processing fees. The IRS is also tasked with securing contracts with
The Act locks down
taxpayer information as it relates to contractors, such as outside attorneys,
when it is obtained by summons. Furthermore, by 2023, disclosures of tax
information for third party income verification must be fully automated and accomplished
disputes will get a second look under the Act. Taxpayers with a legitimate
claim now have legal access to an independent appeals process. The IRS is
also required to provide written notice of denial to the taxpayer and
Congress and turn over its case files to qualified individual and business taxpayers.
The IRS loves the word
“reasonable.” When it comes to audit inquiries, the ambiguity of the term has
now come to an end. The Act demands a 45-day notice requirement before
contact with a third party can be made.
| Internet Filing||
IRS has been tasked with creating a secure online user interface that allows
taxpayers to prepare and file Forms 1099 electronically. The platform, which
must be established by 2023, will also keep a historical record of submitted
Small business owners that
structure their bank deposits can rest a little easier. Legal deposits that
fall below the $10,000 threshold are no longer subject to the threat of IRS
Act prohibits consent-based disclosures from being used for purposes other
than their original intent.
The Taxpayer First Act is a welcome change. The Act helps protect business owners from IRS seizures and allows them to avoid the expenses and time-consuming process of having to go through the courts to reclaim their assets. Perhaps the most critical component of the new law is the attention to cybersecurity and customer service. Small business owners will still need to interact with the IRS, but if the law accomplishes its goal, the process will be easier and safer.
How will this law impact
my payroll compliance?
It is important to note that several of the Taxpayer First
Act provisions will directly influence your company’s payroll operations.
- The IRS has been tasked with creating a secure
online server for e-filing because the new law reduces the threshold for
mandatory e-filing. Currently, businesses only need to file online if they
employ 250 or more. The new law lowers the threshold to 100 in calendar-year
2021, and only 10 in calendar-year 2022 and on.
- The new law requires the IRS to verify
individuals as they open accounts to use the new e-Service features. Because of
the new information and identity protection measures outlined above, e-Services
are expected to take a little bit longer than they have in the past. Accounting
services personnel should factor this potential delay into their timelines.
- Although the IRS internet filing platform may
not be up and running until January 1, 2023, the interface will be familiar, similar
to the SSA’s Business Services Online.
- One of the law’s most significant changes
directly impacts nonprofits. Under the Act, all tax-exempt organizations
must e-file Form 990 and Form 8872. This provision, unlike many of the others,
goes into for tax years beginning after July 1, 2019. Organizations whose tax
year began July 1 will receive transition relief.
- Finally, it is worth mentioning that the law
institutes a new position within the IRS, Chief of Appeals. This person
will oversee the Independent Office of Appeals and report to the IRS
Commissioner. The Chief and their office will embody independent review by seeking
to resolve tax disputes outside the courtroom.
If you have questions about the law in its entirety or want
to know how this legislation will impact your company’s payroll operation
compliance, give the professionals in our office a call today.
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.
- Remote accountants work in sync with technology to help you do
more with less.
- Virtual accounting is a hybrid of traditional accounting and great
software; in fact, virtual accounting is typically considered a software as a
service (SaaS) option.
- Remote bookkeepers use customized software, cloud-based tech, and
a human touch to provide optimal solutions.
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.
- Virtual means virtual! If you want to go remote, you will need to establish procedures for sending items (scanning, email, etc.) to the virtual office. Snail mail is not efficient! Likely, your CPA will have an implementation plan, but if you aren’t positioned to use the cloud, virtual services will be a learning curve. Make sure you have a conversation with your provider to determine appropriate technology integrations.
- Streamline invoices. Set up a “generic” email for the accounting department so multiple people have access. All invoices should be sent to this email, which can then be routed to a billing platform, like Bill.com.
- Internal controls. Establishing a system for the virtual approval of invoices and payments will ensure the flow of information is accurate, on-time, and properly classified. Virtual accountants typically have at least two sets of eyes on each step and multiple levels of staff working on one account.
- Uniform procedures. Make it simple to issue invoices and payments and require the company to follow the procedures with no exceptions!
- Align communications. Designate an in-house contact person for your virtual team. Without someone in the office physically, assigning a point person will ensure minimal interruption of service.
- Easy, not absent. Owners must review financials on a regular basis and set up monthly or quarterly meetings with their remote accountants to make sure that everyone is on the same page. Owners have a tendency to turn away from their financials when they think it is all taken care of. This lapse violates the first rule of ownership – always have one finger on the pulse of your bottom line!
- Accessible Accounts. To be efficient, your virtual office is going to need partial access to bank accounts, credit cards, payroll and routine vendor accounts. Access to view these accounts online should not come as a surprise. After all, how else can your virtual accountant keep track of your income and expenses and reconcile the books each month without it? It is crucial that you take the time to set account permissions correctly. Full access to authorize transactions is not necessary. Providing access to these accounts will allow you to have a much more efficient (and less costly) accounting team!
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.
The Internal Revenue Service recently unveiled a draft version of Form W-4, Employee’s Withholding Allowance Certificate. The revised form is in response to changes made by the Tax Cuts and Jobs Act and aims to provide simplicity, accuracy and privacy for employees while minimizing burden for employers and payroll processors. It is open for review and feedback until July 1, 2019.
We want to remind our clients that this is only a draft and the new form will not be used until 2020. However, we are closely following this and will continue to provide updates. Below is a high-level summary of what we know so far.
What’s being proposed? The new form will account for:
- Multiple sources of income within your
- Claiming dependents, specifically factoring in
the $2,000 child tax credit for each kid under 17 or the $500 credit for other
- Providing additional details of income that
didn’t have taxes withheld upfront such as interest, dividends and retirement
- The number of deductions you anticipate to
claim, thus reducing your withholding and allowing you to take more money home.
The final draft is expected to be released mid-to-late July.
We will continue to monitor changes to Form W-4 and keep you abreast. In the
meantime, we encourage taxpayers to make sure they have the right amount of tax
taken out of their paychecks and thus avoid a larger tax bill next year.
Taxpayers with major life changes, including marriage or a new child, should
especially check their withholding amounts.
Determining how much to withhold depends on your unique
financial situation. The professionals at Hamilton Tharp can help, call us
today for a paycheck checkup.
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.
- Adequately separate duties.
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.
- Routinely check documentation.
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.
- Controls for new and terminated employees.
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
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.
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
What is an outsourced CFO?
An Outsourced CFO is a valuable partner that can:
- provide budget guidance,
- prepare and analyze financial statements,
- forecast cash flow,
- provide strategic financial planning and advisement,
- evaluate current bookkeeping systems, and
- act as a negotiator.
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.
- Transaction processing – accounts receivable, customer billing, credit and collections,
accounts payable, general accounting, payroll, tax accounting, cost accounting,
fixed asset accounting, benefits administration, and internal and external
- Control and risk management – budgeting, cash flow
management, insurance risk management, forecasting, tax planning, performance
reporting, treasury management, and internal and external audit
- Decision support – business performance analyses (ratio analysis, cost analysis,
pricing analysis), business planning support, and finance function
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
Operating Costs – Any change that will reduce costs without otherwise endangering
operations will generally be positive. Many businesses are just too small to
justify hiring a full-time, in-house CFO.
Efficiency – Inefficient operations harm your organization. A real advantage of outsourcing is that behind
your outsourced financial planning expert stands an entire team of accountants,
partners, consultants, and bookkeepers. When financial activities are
outsourced and analyzed by an independent party specializing in that activity,
efficiencies will result.
Flexibility – When a business owner wears too many hats, one is bound to fall
off. Outsourcing CFO functions will
allow your organization to become more flexible in its ability to deal with its
environment and core activities. Changes
that make an organization more agile will make it better able to excel.
Risk – Outsourcing a function may reduce the risk an organization
faces. Outsourcing payroll, for example,
is likely to reduce risk, as experts will now do the job.
Ideas – Outsourcing CFO duties will bring new ideas to the table. Small
businesses need to recognize that outsourcing an expert will give them a clear
advantage with complex financial activities.
Growth Potential – Many organizations are limited in their ability to take on more
activities because their current staff is spread too thin. Outsourcing financial activities can allow
business owners and other staff to engage in better-targeted tasks.
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:
suppliers without following a standardized procedure
payments due to workarounds in the ERP system
- Missing the risky
behaviors that expose your business to disbursement fraud
- Taking liberties
with late vendor payments
- Not separating
the duties of new supplier approval from invoice payment
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:
- Automated invoice and payment processes. Too often, small businesses use error-prone manual
processes to approve requisitions, scan supplier invoices, and issue payments.
Adopting automated systems will reduce the number and mistakes and increase the
effectiveness of process controls.
- AP Workflow.
Unless you have an AP workflow in place, your ERP system will only act as a
gatekeeper. Without an intentional
workflow, manual loopholes make it possible to outsmart the very systems you
have in place to prevent these mistakes. Setting up a workflow – a series of
checks and balances – will help you avoid these errors before they begin. For example,
- Duplicate Payments. One challenging area for some of our clients are payments to vendors
via check and by credit card. To avoid duplicate payments, we often suggest
requiring PO numbers for payments made by credit card.
- Three-Way Matching. It is always a good idea to confirm that the supplier invoice amount
aligns with the goods or services you have purchased. Failure to do this can
leave your organization susceptible to paying for things you did not order,
receive or approve. To prevent this, consider adopting a three-way matching
approach to your checks and balances. These steps triple check your process for
oversights or mistakes. The three documents you will review are the vendor
invoice, purchase order and receiving document (packing slip or report).
- Airtight Master Files. Take vendor management seriously before an internal audit. Establishing and maintaining a clean
vendor master file will safeguard you against potential fraud. Keeping records and
contracts up-to-date will help you identify red flags and make it easier for
your procurement personnel to do their jobs.
- Proactive Behaviors. Your organization will benefit from a proactive approach, but three
main areas will outshine in the Accounts Payable department.
discounting produces a risk-free, annualized return on investments, simply by
leveraging payments terms to your advantage. In simplified terms, the
purchasing organization offers to pay their suppliers early in exchange for a
discount. This synergistic approach is dependent on transparent and up-to-date
disbursement systems and works best in organizations that have an efficient AP
- On average, fraud
takes 18 months to uncover.In
addition to internal and external audits, businesses need to commit to regular,
rigorous fraud monitoring. Being proactive in this area means establishing
controls that look for red flags such as employee-vendor matches, invoice
anomalies, or prohibited entities in your master list. Aggressive monitoring
should not invoke a culture of distrust; it should instill a core value around
- A great byproduct
to careful monitoring is an instinct toward recovery audits. When a department
initiates recovery audits as part of their quarterly review process, they catch
incidents like overpayments and pricing compliance before they require
- A Thriving Team. If members of your accounting team have made a habit of extending
payment cycles or accepting discounts without calculating the costs or neglect to
take advantage of maximum savings through volume rebates, it might be time to
reassess your staffing structure. Reactive accounting will not support your
growth; it will curb your progress. Be sure your AP team knows their value, is adequately
staffed, sufficiently trained, and has the right skillsets for tasks at hand.
Personnel in this department need to have an analytical mind and the tools to
get the job done.
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.
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.
Today’s workforce is a gig economy. According to a study by intuit, by 2020 40% of American workers will be independent contractors.
Independent contracts can save businesses from the cost of benefits, office space, taxes and many other perks given to employees. Becoming an independent contractor can be very attractive to the individual performing those services as well because of the flexibility over their schedule and the choice in the work they will perform.
Today’s gig economy doesn’t come without implications. Many businesses still employ people and will continue to do so. It’s important to understand the effect of classifying individuals as employees or independent contractors. Many business owners fail to recognize the effect of classifying an individual as an employee or independent contractor. If you have misclassified the individual, you could expose yourself to significant tax liabilities.
As described by the IRS, an employee is anyone who performs services for you where you can control what will be done and how it will be done. Classifying workers as employees requires that a company withhold applicable Federal, state and local income taxes, pay Social Security, Medicare taxes, state unemployment insurance tax and pay any workers compensation fees. Employee status also requires filing a number of returns during the year with various taxing authorities and providing W-2’s to all employees by January 31. Not to mention, employees may also have rights to benefits such as vacation, holidays, health insurance or retirement plans.
Over the years, we have come to learn that there are a number of common myths that you should avoid in classifying your workers. The more frequent inappropriate decisions to classify an employee as an independent contractor include:
- The worker wanted to be treated as an independent contractor;
- The organization had a signed contract with a service provider;
- The worker does assignments sporadically, inconsistently or is on-call to the organization, and
- The worker is virtual or remote
The IRS notes that simply because a worker does assignments for many companies does not necessarily suggest independent contractor status. The determination of whether a worker is an employee or an independent contractor rests primarily upon the extent that the employer has to direct and control the individual with regard to what and how an activity is to be accomplished. Generally, the employer controls how an employee performs a service. On the other hand, independent contractors determine for themselves how a given assignment is to be completed.
To aid business owners, the IRS has developed tests to be used as guiding points to indicate the extent and direction of control present in any employer/employee/independent contractor situation. The degree of importance of each factor varies depending on the occupation and the facts of the particular situation.
IRS Control Test
1. Behavioral Control
Employee status is determined when the business can direct and control the work performed by the worker. Consider:
- Is the individual required to comply with instructions about when, where and how work is to be performed? Receiving detailed instructions may indicate a worker is an employee. Less detailed instructions reflect less control which may indicate the worker is more likely to be an independent contractor.
- Individuals who are trained to perform a job in a particular method are usually considered employees. Training includes that provided by an experienced worker, requiring the worker to attend meetings or by corresponding with the worker in other methods. Independent contractors bring their skills to your enterprise.
- Evaluating the details of how the work is done points to an employee while evaluating only the end result can point to either an independent contractor or an employee.
2. Financial Control
If the business can direct or control the financial and business aspects of the worker’s job, it may suggest employee status. Consider:
- When a worker has a significant investment in his or her own work facilities, this suggests an independent contractor status.
- An employer generally pays expenses which means it has a right to regulate and direct business activities thereby suggesting employee status.
- Independent contractors realize a profit or incur a loss. The risk of loss may be the result of investments in equipment or due to other expenses.
- Generally, you will not see employees market their services to the public on a regular basis.
- Paying your service provider by the hour, week or month suggests an employee status while paying an agreed-upon lump sum for a job suggests independent contractor status. In some situations, employers may also implement a straight commission basis of compensation without adversely affecting a worker’s status as an independent contractor.
The type of relationship is dependent upon how the worker and business perceive their interaction with one another. Consider:
- Is there a written contract which describes the relationship the parties intend to create? Keep in mind, a contract stating the worker is an employee or an independent contractor is not enough to determine the worker’s status.
- Businesses often provide employees with benefits such as insurance, a pension plan, vacation pay or sick pay. These benefits are rarely offered to independent contractors.
- An employer-employee relationship is evident if the expectation is set that the relationship will continue indefinitely instead of just for a specific project or defined period of time.
- Are the services provided considered a key activity of the business? If the worker is a key component of the regular business of the company, it suggests employee status.
In addition, the Voluntary Classification Settlement Program (VCSP) offers certain eligible businesses the option to reclassify their workers as employees with partial relief from federal employment taxes.
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:
- Taxpayers can get free tax return transcripts by using the Get Transcript tool on IRS.gov, or use their smartphone with the IRS2Go mobile phone app. They can also call 800-908-9946 to order them by phone.
- To establish the extent of the damage, taxpayers should take photographs or videos as soon after the disaster as possible.
- Taxpayers can contact the title company, escrow company, or bank that handled the purchase of their home to get copies of appropriate documents.
- Home owners should review their insurance policy as the policy usually lists the value of a building to establish a base figure for replacement.
- Taxpayers who made improvements to their home should contact the contractors who did the work to see if records are available. If possible, the home owner should get statements from the contractors to verify the work and cost. They can also get written accounts from friends and relatives who saw the house before and after any improvements.
- For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, the taxpayer can contact the attorney who handled the trust.
- When no other records are available, taxpayers can check the county assessor’s office for old records that might address the value of the property.
- There are several resources that can help someone determine the current fair-market value of most cars on the road. These resources are all available online and at most libraries:
- Kelley’s Blue Book
- National Automobile Dealers Association
- Taxpayers can look on their mobile phone for pictures that show the damaged property before the disaster.
- Taxpayers can support the valuation of property with photographs, videos, canceled checks, receipts, or other evidence.
- If they bought items using a credit card or debit card, they should contact their credit card company or bank for past statements.
- If a taxpayer doesn’t have photographs or videos of their property, a simple method to help them remember what items they lost is to sketch pictures of each room that was impacted.
We wanted to make you aware of a valuable new tax credit made possible by the Tax Cuts and Jobs Act (TCJA). The credit is available to employers that provide paid family and medical leave to their employees. The amount of the credit is generally 12.5% of wages paid to an employee on leave. However, you must pay at least 50% of the wages normally paid to the employee while he or she is out on qualifying leave. The credit is increased by 0.25% (but not above 25%) for each percentage point the rate of pay is more than 50% of normal wages. So, if the leave payment rate is the same as the employee’s normal rate, a maximum credit of 25% will apply.
You must satisfy several requirements to take advantage of the credit. These include the following:
- You must have a written policy in place that provides at least two weeks of annual paid family and medical leave to qualifying full-time employees. (This is prorated for qualifying part-time employees.) Also, your policy must provide that qualifying employees on leave will be compensated at least 50% of their normal wages.
- The credit only covers wages paid to qualifying employees. These are individuals who have been employed for one year or more and didn’t have prior-year compensation exceeding a threshold amount. For 2018, this amount is $72,000. This means that employees who were paid more than $72,000 in 2017 aren’t qualifying employees in 2018.
- Wages must be paid for qualifying family and medical leave. This generally includes leave for the birth, adoption, or fostering of a child; care for a spouse, child, or parent with a serious health condition; an employee’s serious health condition; and qualifying needs of a spouse, child, or parent who is a covered veteran or member of the Armed Forces. Vacation leave, personal leave, and medical or sick leave (other than specifically defined as qualifying leave) don’t qualify for the credit.
The maximum length of paid family and medical leave that can qualify for the credit is 12 weeks per employee, per tax year. Also, the total credit attributable to one employee can’t exceed the employee’s normal hourly rate for each hour (or fraction of an hour) of actual work performed multiplied by the number of hours (or fraction of an hour) family and medical leave is taken. The wages for an employee who isn’t paid an hourly wage rate are prorated to an hourly wage rate to determine the credit limit.
Assuming all of these requirements are met, the new employer credit for paid family and medical leave is a win-win situation. However, it’s only available for two years (unless extended by Congress). It’s important that you act now by reviewing your current leave policy and instituting a new policy if necessary. We can help you with that. Please contact us if you have questions or want more information on the new credit.
With hurricane season in progress, we would like to remind individuals and businesses to safeguard their records against natural disasters with four simple steps.
- Create a Backup Set of Records Electronically
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.
One of the most difficult things for a family to deal with after a loved one’s death is sorting through the endless paperwork needed to get the estate in order. Of course, this can be avoided by creating a “family file” containing all of your important documents needed in the event of your death. This file can make an already difficult process easier on your loved ones. Additionally, it is important that your documents are in order to ensure prompt payout on any life insurance policies on which your family may be depending.
The first step in assembling this file is to determine its contents. Generally, you will want copies of all of your financial and legal documents. Your financial adviser should be able to assist you in identifying files and developing a list specific to your situation, but the following paragraphs provide some general insight.
The most important document to keep a copy of is your will. Making sure that your loved ones know where this document is kept can be vital to ensuring that your final wishes are carried out. Your will should be kept at an attorney’s office or in a safety deposit box at a bank. Be sure that your family is aware of its location. You may also want to keep a letter of instruction in your home. This letter is not legally binding but oftentimes contains instructions for your funeral arrangements and the names and contact information for people listed in your will.
Documents establishing ownership of your financial assets, properties and any business interests should be kept in one location. Oftentimes family members are not aware of – or cannot remember – all of your assets. This could lead to them remaining unclaimed after your death. You also should ensure that any log-in information for online access to the accounts is kept on file, as well as information related to any safety deposit boxes you have. This information can help your family contact the bank in the event of your death. You might also want to keep a copy of your tax return with this information as it can help identify your assets in case any are missing.
In addition, you will want to keep copies of any life insurance policies you have, as well as documentation for your retirement accounts such as a pension or 401(k). This information should include the policy name, number and an agent to contact. If you have life insurance through your employer, make sure that it is included. Employer-provided policies are often overlooked.
Finally, you should keep your healthcare documentation in a file known to your family. For example, if you have a durable power of attorney – a document that lets your family make healthcare decisions on your behalf if you are incapacitated – this, too, should be in that file. You should also be sure to update this document as healthcare and privacy laws may render your documentation obsolete.
The professionals in our firm can help you identify the documentation you need to help your family in the event of a death. Call us today.
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:
- Does this year’s gross revenue outpace last year’s?
- Are expenses being monitored?
- Do we have a good cash flow?
- How do our investment gains (or losses) compare with our benchmarks?
- Where do the trends point?
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 tax reform legislation that Congress signed into law on December 22, 2017, was the largest change to the tax system in over 3 decades. The new tax code contains many provisions that will affect individual, estate, and corporate taxpayers. One of those changes, the elimination of a business-related deduction used for entertainment, amusement or recreation expenses, will make it costlier for business owners to entertain clients.
Previously, if an entertainment or meal expense was related to or associated with the active conduct of a trade or business, it was deductible up to 50 percent. Under the new tax code, these expenses are now considered the cost of doing business. In the chart below, we have highlighted the major changes.
||2017 Old Rules
||2018 New Rules
|Qualified client meal expenses
|Qualified employee meal expenses
|Meals provided for employer convenience
|Client entertainment expenses
Qualified charitable events
50% deductible at face value
|No deduction for entertainment expenses
|Office holiday parties
The elimination of this deduction will impact business owners who are accustomed to treating clients to golf outings or providing clients with tickets to sporting events or concerts. Businesses will have to re-evaluate their entertainment expenses related to their trade or business, as these items are no longer 50 percent deductible.
In consideration of the elimination of this deduction, we recommend creating separate accounts for meals and entertainment expenses. Educating employees to separate their expenses will be vital as business meals will remain 50 percent deductible until 2025.
Entertainment expenses are notoriously targeted by auditors. Considering the law change, we anticipate these expenses to be a heightened area of concern during an audit. The professionals in our office can help ensure you are in compliance, call us today.
The Internal Revenue Service, state tax agencies and the tax industry urges all employers to educate their payroll personnel about a Form W-2 phishing scam that made victims of hundreds of organizations and thousands of employees last year.
The Form W-2 scam has emerged as one of the most dangerous phishing emails in the tax community. During the last two tax seasons, cybercriminals tricked payroll personnel or people with access to payroll information into disclosing sensitive information for entire workforces. The scam affected all types of employers, from small and large businesses to public schools and universities, hospitals, tribal governments and charities.
Reports to firstname.lastname@example.org from victims and nonvictims about this scam jumped to approximately 900 in 2017, compared to slightly over 100 in 2016. Last year, more than 200 employers were victimized, which translated into hundreds of thousands of employees who had their identities compromised.
The IRS and its partners in the Security Summit effort hope to limit the success of this scam in 2018 by alerting employers immediately. The IRS can take steps to protect employees, but only if the agency is notified immediately by employers about the theft. Last year, the IRS created a new process by which employers should report these scams.
How the scam works
- Cybercriminals do their homework, identifying chief operating officers, school executives or others in positions of authority.
- Using a technique known as business email compromise (BEC) or business email spoofing (BES), fraudsters posing as executives send emails to payroll personnel requesting copies of Forms W-2 for all employees.
- The Form W-2 contains the employee’s name, address, Social Security number, income and withholdings. Criminals use that information to file fraudulent tax returns, or they post it for sale on the Dark Net.
- The initial email may be a friendly, “hi, are you working today” exchange before the fraudster asks for all Form W-2 information. In several reported cases, after the fraudsters acquired the workforce information, they immediately followed that up with a request for a wire transfer.
Best Practices for Employers
To prevent falling victim of the Form W-2 Scam, employers can:
- Train payroll or finance personnel employees to recognize and report security threats.
- Create a policy to limit the number of employees who have authority to handle Form W-2 requests.
- Require additional verification procedures to validate actual requests before emailing sensitive data such as employee Form W-2s.
If the business or organization victimized by these attacks notifies the IRS, the IRS can take steps to help prevent employees from being victims of tax-related identity theft.
How to notify the IRS if you are a victim
The IRS established a special email notification address specifically for employers to report Form W-2 data thefts. Here’s how Form W-2 scam victims can notify the IRS:
- Email email@example.com to notify the IRS of a Form W-2 data loss and provide contact information, as listed below.
- In the subject line, type “W2 Data Loss” so that the email can be routed properly. Do not attach any employee personally identifiable information data.
Include the following:
- Business name
- Business employer identification number (EIN) associated with the data loss
- Contact name
- Contact phone number
- Summary of how the data loss occurred
- Volume of employees impacted
Businesses and organizations that fall victim to the scam and/or organizations that only receive a suspect email but do not fall victim to the scam should send the full email headers to firstname.lastname@example.org and use “W2 Scam” in the subject line.
Be aware that cybercriminals’ scams are constantly evolving. Employers should be alert to any unusual requests for employee data.
Equifax, one of the United States’ three major consumer credit reporting agencies, recently reported a breach that compromised the personal information of approximately 143 million Americans. The nature of this breach is particularly alarming because many consumers may not even know they are customers of the company. Equifax receives information from multiple sources including banks, lenders, credit card companies and retailers. Names, social security numbers, birth dates, addresses and driver’s licenses were among the information stolen from Equifax’s databases.
Credit card numbers for about 209,000 people were exposed, as was “personal identifying information” on roughly 182,000 customers involved in credit report disputes.
How to determine if you were one of the 143 million Americans affected
- Visit www.equifaxsecurity2017.com to find out if your information was exposed. Click on the “Potential Impact” tab. You will be asked to enter your last name and last six digits of your Social Security number.
- Whether or not your information was exposed, U.S. consumers can get a year of free credit monitoring. You have until November 20, 2017 to enroll.
- Keep in mind, if you sign up for Equifax’s offer of free identity theft protection and credit file monitoring, you may be limiting your rights to sue and be forced to take disputes to arbitration.
Additional steps you can take
- Review your transactions regularly. Monitor your credit card statements and credit report for any accounts or charges you don’t recognize. You can order a free report from each of the three credit bureaus once a year.
- Consider placing a credit freeze, making it difficult for someone to open a new account in your name.
- File your taxes early, before a scammer can.
- Respond right away to letters from the IRS. Remember the IRS will never call.
We are closely monitoring this issue and will keep you informed of any new developments.
One only needs to skim the daily news to realize that hackers are getting better and cybersecurity is more important than ever. The most recent cyberattack was a strain of ransomware that spread itself across all workstations in a network, causing a global epidemic. Luckily, a programmer developed an internal “kill switch,” which disabled the malware from spreading any further. Regardless of whether your system was impacted by this outbreak or not, there are many lessons to be learned. Principally, the need to reinforce fundamental security practices to prepare for the future.
Taking these recent outbreaks into consideration, it is evident that organizations need to make cybersecurity risk management a top priority. To help leaders in the accounting profession reach this goal, the American Institute of CPAs (AICPA) has unveiled a cybersecurity risk management reporting framework that will help companies and auditors communicate cyber risk readiness to stakeholders. The framework is long overdue; until now a common language for companies to communicate about their cybersecurity risk management was non-existent. The AICPA’s new framework includes three main resources:
- Description criteria used by management to explain the organization’s cybersecurity risk management program.
- Control criteria used by CPAs providing advisory or attestation services to evaluate and report on the effectiveness of the controls within a client’s program.
- Attest Guide, Reporting on an Entity’s Cybersecurity Risk Management Program and Controls, will be used to assist CPAs engaged to examine and report on an entity’s cybersecurity risk management program.
Cyber threats are constantly evolving, and unfortunately, your cash and customer information are desirable targets. Providing assurance to your team and stakeholders requires intentionality and a plan. Having strong cybersecurity measures in place will help safeguard sensitive information and the AICPA’s new reporting framework will help you better communicate your preparedness to key stakeholders. If you need any guidance in this area, please reach out to one of our tax advisors.
The Internal Revenue Service (IRS) has released the annual contribution limitations for health savings accounts (HSAs) and the minimum deductible amounts and maximum out-of-pocket expense amounts for high-deductible health plans. These limitations are updated annually to reflect cost-of-living adjustments. Business owners should inform employees of the HSA contribution limits increase for 2017.
Employers commonly offer employees HSA contributions as part of their healthcare benefit packages. HSAs are a popular option because of its dual purpose. Employees can utilize HSAs to save for the future or pay for qualified medical expenses tax free.
Under Sec. 223 of Rev. Proc. 2016-28, individuals who participate in a health plan with a high deductible are permitted a deduction for contributions to HSAs set up to help pay their medical expenses. To be eligible to contribute to an HSA you must participate in a high deductible health plan.
The following chart summarizes the contribution and out-of-pocket limits for HSAs and high-deductible health plans for 2017. There was only one minor change between 2016 and 2017.
|HSA contribution limit
Family: No Change
|HSA catch up contribution (age 55+)
|HDHP minimum deductible
|HDHP maximum out of pocket
Employers should remind employees who are contributing to or using their HSA:
- They have until April 15, 2018 to make contributions for the 2017 tax year.
- Unqualified medical expenses are subject to a 20% tax penalty
- Withdrawing from your HSA for nonqualified purposes are subject to income tax
There are other options available that employers can offer which take advantage of tax-free medical spending and reimbursement. The professionals in our office can clarify any questions you may have on HSAs. Call on us 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:
- raise the salary threshold at which white-collar workers are exempt from overtime pay from $23,660 to $47,476;
- strengthen overtime protection for salaried workers already entitled to overtime;
- automatically update the salary threshold every three years, based on wage growth over time;
- provide greater clarity for workers and employers.
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:
- Pay time-and-a-half for overtime work;
- Raise worker’s salaries above the new threshold;
- Limit workers’ hours to 40 per week;
- A combination of the above.
Below are four steps you can implement which will help integrate the changes successfully into your workflow.
- Review payroll and identify employees who are exempt.
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.
- Consider which positions to transition to non-exempt status.
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:
- What will be the basis for pay: hourly or salaried?
- Does this meet the minimum wage requirements?
- Will overtime be permitted? Is it necessary?
- Invest in automation to streamline timekeeping practices.
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:
- What is considered time worked?
- How is overtime approved?
- Who approves overtime?
- What are the consequences for failing to follow the policy?
- Communicate changes internally.
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.
The Internal Revenue Service (IRS) has released the annual contribution limitations for health savings accounts (HSAs) and the minimum deductible amounts and maximum out-of-pocket expense amounts for high-deductible health plans. These limitations are updated annually to reflect cost-of-living adjustments. Business owners should inform employees of the HSA contribution limits increase for 2017.
Employers commonly offer employees HSA contributions as part of their healthcare benefit packages. HSAs are a popular option because of its dual purpose. Employees can utilize HSAs to save for the future or pay for qualified medical expenses tax free.
Under Sec. 223 of Rev. Proc. 2016-28, individuals who participate in a health plan with a high deductible are permitted a deduction for contributions to HSAs set up to help pay their medical expenses. To be eligible to contribute to an HSA you must participate in a high deductible health plan.
The following chart summarizes the contribution and out-of-pocket limits for HSAs and high-deductible health plans for 2017. There was only one minor change between 2016 and 2017.
|HSA contribution limit
Family: No Change
|HSA catch up contribution (age 55+)
|HDHP minimum deductible
|HDHP maximum out of pocket
Employers should remind employees who are contributing to or using their HSA:
- They have until April 15, 2018 to make contributions for the 2017 tax year.
- Unqualified medical expenses are subject to a 20% tax penalty
- Withdrawing from your HSA for nonqualified purposes are subject to income tax
There are other options available that employers can offer which take advantage of tax-free medical spending and reimbursement. The professionals in our office can clarify any questions you may have on HSAs. Call on us today.
Effective Monday, July 11, 2016
Employees who perform at least two hours of work (within the geographic boundaries of the City of San Diego) in one or more calendar weeks of the year must be paid at least $10.50 per hour and must accrue one hour of paid sick time for every 30 hours worked within the City of San Diego.
As passed, the Ordinance provides that while employers can cap use of sick pay to 40 hours within a benefit year, sick pay must continue to accrue indefinitely. Additionally, the Ordinance currently does not allow for a front-loading or deposit method of providing sick pay. Both of these issues present challenges for employers as they attempt to align their current paid time off and sick pay policies with new San Diego requirements.
Fortunately, the San Diego City Council is attempting to address these challenges and, on July 11, 2016, approved an Implementing Ordinance at a first reading that will provide much needed clarification and flexibility for employers with San Diego employees. If the implementing Ordinance becomes effective, it provides the following key changes:
- It allows employers to comply with the sick pay law by depositing or “front-loading” San Diego employees with 40 hours of sick pay at the beginning of each benefit year. Employers who don’t wish to front load the time, especially for part-time employees, may choose to comply with the law through the accrual method.
- Employers who use the accrual method may cap accrual of sick pay at 80 hours. This means that employers would be able to continue to limit an employee’s use of sick pay to 40 hours each year and also cap accrual of paid sick time at 80 hours.
- Employers who provide an employee with an amount of paid leave, including paid time off, paid vacation or paid personal days, of at least 40 hours each year, and who allow such time to be used for the same purposes and under the same conditions as the Ordinance, do not need to provide additional sick pay to employees. Similarly, employers who provide greater paid time off through a contract, collective bargaining agreement, employee benefit plan, or other agreement will be deemed in compliance even if they use a different method of calculating, paying or using sick pay.
- Employers have additional time to meet the Ordinance’s notice and posting requirements. The Ordinance requires employers to post a notice in the workplace informing employees of, among other things, the minimum wage and their rights to sick pay accrual. Under the proposed Implementing Ordinance, the City’s Enforcement Office will have this notice poster available for employers by September 1, 2016. Additionally, under the proposed Implementing Ordinance, employers must issue a notice to each employee, by October 1, 2016 or the time of hire, whichever is later, that provides information on how the employer complies with the Ordinance. This notice must be provided to both exempt and non-exempt employees and may be provided through electronic communication. Under the proposed Implementing Ordinance, the City’s Enforcement Office will have a template notice available to employers by September 1, 2016
Finally, the proposed Implementing Ordinance establishes strong anti-retaliation provisions, provides increased damages and civil penalties and outlines enforcement procedures. The Ordinance is now effective, which means immediate compliance steps need to be taken, including ensuring all covered San Diego employees receive a minimum wage of $10.50 per hour as of July 11, 2016. However, since the law is in flux on key sick pay issues such as caps and accrual rates and favorable employer changes are anticipated, it would be smart for covered employers to consult with legal counsel to craft a customized compliance solution.