Note: Congress is considering proposals that could expand the Work Opportunity Tax Credit for certain qualified groups. We will monitor this development and communicate updates as necessary.
As a business, tax planning can help create increased cash flow that allows management to expand, increase wages, bring in new inventory, and achieve other goals that require more financial flexibility. Business owners often go to tax credits involved with normal business operations but sometimes overlook human resource tax credits. One such tax credit is the Work Opportunity Tax Credit (WOTC).
This hiring-based tax credit was recently extended until Dec. 31, 2025, by the Consolidated Appropriations Act of 2021. Keep reading to learn how to use the WOTC.
What is the WOTC?
The WOTC is an employment-based tax credit the federal government offers to employers who hire from qualified groups and is based on wages paid to qualified employees.
While there is an extensive list of qualified groups a new employee may come from, they most often include groups that otherwise would be overlooked, including veterans, ex-felons, those graduating from rehabilitation programs, and individuals on certain state or federal government assistance programs. You can view the extended list here.
What credits can be taken?
The WOTC allows employers who hire from qualified groups to receive a tax credit for wages paid up to the specified maximum amounts, as shown below.
| Employee Category | Credit Amount | Maximum Wages |
| Qualified employees working 120+ hours a year | 25% of first-year wages | $6,000 maximum wages used in calculation of credit |
| Qualified employees working 400+ hours per year | 40% of first-year wages | $6,000 maximum wages used in calculation of credit |
| Temporary Assistance for Needy Families (TANF) recipients working 400+ hours per year | 40% of first-year wages
50% of second-year wages |
$6,000 maximum wages used in calculation of credit |
| Qualified veterans | 25% of first-year wages for employees working 120+ hours a year; 40% of first-year wages for employees working 400+ hours per year | $24,000 maximum wages used in calculation of credit |
| Rehires | 0% | Rehires are not eligible for the WOTC |
Claiming the WOTC
There are several steps businesses need to take to claim the WOTC. Both employer and applicant must complete Form 8850 before or on the date an employment offer is made. That form must then be filed with the appropriate state workforce agency within 28 days of the start of work.
The state workforce agency will confirm whether the employee is considered part of a qualified group for the WOTC. If so, the employee can then submit Form 5884 and Form 3800 with their income tax returns to take the appropriate credit amount.
For assistance understanding the WOTC and the nuances involved in calculating the appropriate credit amounts, reach out to our team of tax professionals.
When the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-02 (ASC 842) several years ago, the deadlines for private and public businesses seemed to be far into the future. FASB delayed the reporting requirements for private-sector companies because of COVID-19; however, that delay ended as of Dec. 15, 2021.
All businesses must use financial statements conforming to the new lease accounting standard for any fiscal year beginning after Dec. 15, 2021. If you’re not up to date on the new requirements and how they can impact your business, keep reading to familiarize yourself with ASC 842.
Lease Accounting Updates
Historically, organizations were required to divide their leases into operating leases and capital leases. Capital leases (finance leases) needed to be reflected on the organization’s statement of financial position (balance sheet) as capital assets with related lease debt liabilities. Operating leases, on the other hand, were recognized as expenses as lease costs were incurred but not on the statement of financial position.
Under ASC 842, all organizations must include all lease agreements with lease terms greater than 12 months on the statement of financial position, whether they are finance or operating leases. When reporting, accounting teams must include the following on the balance sheet:
How the shift affects remote work policies
The shift to remote work has changed how many companies conduct business. The new lease accounting standard poses several new questions. If you’re licensing any equipment, such as computers, include these contracts in your lease accounting review.
Also, keep in mind any leases that may need to be renegotiated or canceled if your business stays remote. Do you need less office equipment or space because half of your workforce is fully remote? Are company vehicles no longer in use as your organization has shifted to remote meetings? Are you subsidizing employees for internet or office space? These are all questions to ask when you begin transitioning your lease accounting methods.
Other impacts of the new lease accounting methods
If your business has already transitioned to the new lease accounting method, you may have noticed some financial statistics changes. Financial statements may show an increase in assets or liabilities when leases that previously were recognized off-balance-sheet are moved to the balance sheet. This impact will be greater in businesses with more significant lease activity (by total volume or value of leases).
Things to remember when transitioning
The process of transitioning your lease accounting method can take time if your contracts are not centralized. If your organization hasn’t started the transition, it may be helpful to assign a team to compile the necessary information. As you start, keep in mind these tasks to help make a smoother transition.
Make time to review the lease accounting standard updates and transition lease agreements over to the new process. Waiting until the balance sheets are created and published will leave your teams rushing, which can lead to mistakes and oversights.
For help understanding the changes or creating a new reporting system, reach out to our team of experts to set up a consultation.
The IRS recently released the 2022 mileage rates for businesses to use as guidance when reimbursing workers for applicable miles driven within the year. The rates tend to increase every year to account for rising fuel and vehicle and maintenance costs and insurance rate increases.
Businesses can use the standard mileage rate to calculate the deductible costs of operating qualified automobiles for business, charitable, medical, or moving purposes. Keep reading for the updated mileage rates, as well as some reminders for mileage reimbursements and deductions.
Standard mileage rates for cars, vans, pickups and panel trucks are as follows:
| Use Category | Mileage rate
(as of Jan. 1, 2022) |
Change from previous year |
| Business miles driven | $0.585 per mile | $0.025 increase from 2021 |
| Medical or moving miles driven* | $0.18 per mile | $0.02 increase from 2021 |
| Miles driven for charitable organizations | $0.14 per mile | Note: Only congress may adjust the mileage rate for service to a charitable organization by a Congress-passed statute. |
*Moving miles reimbursement for qualified active-duty members of the Armed Forces
Important reminders and considerations
When reimbursing employees for miles driven, keep in mind the following reminders and considerations:
To review your organization’s mileage reimbursement policy and any alternate methods for calculating appropriate reimbursement amounts, reach out to our team of knowledgeable professionals today.
Becoming a partner at a law firm is a goal many lawyers spend their careers striving to reach. Once you’re there, however, you must re-evaluate your personal financial and tax strategies as you shift from employee to owner. If you recently were promoted to partner and have reviewed your personal financial strategy, keep reading.
Personal financial considerations for new partners
Many of the personal financial decisions partners need to make depend on two things: the partnership agreement and whether you became an equity (owner) or non-equity partner. The partnership agreement will detail a lot of information about compensation and benefit structures, as well as equity structures and required capital contributions. Factors include:
Tax considerations for partners
Switching from an employee to an owner of a law firm also provides additional tax considerations. You’ll most likely see a change from a Form W-2 employee to a Form K-1 owner when it comes time to file your taxes. Keep the following in mind:
Once you’ve thoroughly reviewed your new partnership agreement, meeting with your tax planner and financial advisor can help you outline a new plan for managing your finances moving forward. Contact us today to get started!
After two years of no increases, the optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up in 2022 by 2.5 cents per mile. The IRS recently announced that the cents-per-mile rate for the business use of a car, van, pickup or panel truck will be 58.5 cents (up from 56 cents for 2021).
The increased tax deduction partly reflects the price of gasoline. On December 21, 2021, the national average price of a gallon of regular gas was $3.29, compared with $2.22 a year earlier, according to AAA Gas Prices.
Don’t want to keep track of actual expenses?
Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.
The cents-per-mile rate is beneficial if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.
Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles a great deal for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.
If you do use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.
How is the rate calculated?
The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear.
When can the cents-per-mile method not be used?
There are some cases when you can’t use the cents-per-mile rate. It partly depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.
As you can see, there are many factors to consider in deciding whether to use the standard mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2022 — or claiming 2021 expenses on your 2021 income tax return.
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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)
January 31
February 28
March 15
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The use of a company vehicle is a valuable fringe benefit for owners and employees of small businesses. This perk results in tax deductions for the employer as well as tax breaks for the owners and employees using the cars. (And of course, they get the nontax benefit of getting a company car.) Plus, current tax law and IRS rules make the benefit even better than it was in the past.
The rules in action
Let’s say you’re the owner-employee of a corporation that’s going to provide you with a company car. You need the car to visit customers, meet with vendors and check on suppliers. You expect to drive the car 8,500 miles a year for business. You also expect to use the car for about 7,000 miles of personal driving, including commuting, running errands and weekend trips. Therefore, your usage of the vehicle will be approximately 55% for business and 45% for personal purposes. You want a nice car to reflect positively on your business, so the corporation buys a new $55,000 luxury sedan.
Your cost for personal use of the vehicle is equal to the tax you pay on the fringe benefit value of your 45% personal mileage. By contrast, if you bought the car yourself to be able to drive the personal miles, you’d be out-of-pocket for the entire purchase cost of the car.
Your personal use will be treated as fringe benefit income. For tax purposes, your corporation will treat the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to your personal use. If the corporation finances the car, the interest it pays on the loan would be deductible as a business expense (unless the business is subject to the business interest expense deduction limitation under the tax code).
In contrast, if you bought the auto yourself, you wouldn’t be entitled to any deductions. Your outlays for the business-related portion of your driving would be unreimbursed employee business expenses that are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if you financed the car yourself, the interest payments would be nondeductible.
And finally, the purchase of the car by your corporation will have no effect on your credit rating.
Necessary paperwork
Providing an auto for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use will have to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.
Despite the necessary valuation and paperwork, a company-provided car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. We can help you stay in compliance with the rules and explain more about this prized perk.
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Has your company switched to a remote work or hybrid environment for employees? Government mandates and other health-related concerns at the beginning of the COVID-19 pandemic caused much of the workforce to transition from an office setting to a remote or hybrid work environment. As the pandemic stretched on and companies extended their remote work options, many employees started spreading out to find new locations to work from.
While many employers have researched return-to-work strategies, they’ve decided to allow employees to continue to work remotely either full-time or part-time based on their roles and responsibilities. The benefit is considerable for employees who wish for more flexibility or less time spent commuting to the office, but it may pose tax-withholding complications for companies.
Tax implications of remote workers
Most state and local sales-and-use taxes and payroll taxes are triggered by what’s considered a nexus event, which establishes a presence in a particular state. While a physical building or warehouse is the most widely known nexus, meeting a sales threshold for sales in that state or having an employee residing in the state can also trigger the tax withholding requirements for that state.
This means, if a remote worker moves to another state, it can complicate your organization’s tax situation immensely. For companies who are located near state borders, employees who previously commuted across state lines but are now working from home can change payroll and sales tax liabilities.
During COVID, many states granted exceptions for nexus events, while others loosened requirements. However, those requirements vary by state, sometimes overlap, and some are even coming to an end. This further complicates whether taxes should be withheld and filed in each state, and whether companies should collect and file sales-and-use taxes.
If you have remote workers, consider implementing a policy that includes (at minimum):
Remote workers who move without notifying their employer could open the company up to the consequences of misfiling tax payments.
Consequences of misfiling tax payments
Whether a remote worker moved without the company’s knowledge, or the company was unaware of the laws in place in the new state, the company remains liable for the payments and potential penalties. When payments are missed or misfiled, state and local jurisdictions may have fines and penalties in place.
For companies that have a worker in a new state where they previously did not have to file sales-and-use taxes, their system may be set up to waive sales-and-use taxes for that state or local jurisdiction. In that case, they may find themselves paying out of their revenue for these taxes that were not collected from their customers.
Solutions to manage taxes related to remote workers
Companies should consider several approaches to minimize the risk of misfiling sales-and-use taxes, as well as payroll and income taxes with a remote workforce.
Our team of accounting professionals can help you navigate the tax complexities associated with remote workers! Reach out to set up a consultation.
Don’t let the holiday rush keep you from considering some important steps to reduce your 2021 tax liability. You still have time to execute a few strategies.
Purchase assets
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.
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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.
Credit basics
The ERC was originally enacted in March of 2020 as part of the CARES Act. The goal was to encourage employers to retain employees during the pandemic. Later, Congress passed other laws to extend and modify the credit and make it apply to wages paid before January 1, 2022.
An eligible employer could claim the refundable credit against its share of Medicare taxes (1.45% rate) equal to 70% of the qualified wages paid to each employee (up to a limit of $10,000 of qualified wages per employee per calendar quarter) in the third and fourth calendar quarters of 2021.
For the third and fourth quarters of 2021, a recovery startup business is an employer eligible to claim the ERC. Under previous law, a recovery startup business was defined as a business that:
However, recovery startup businesses are subject to a maximum total credit of $50,000 per quarter for a maximum credit of $100,000 for 2021.
Retroactive termination
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.
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The long-awaited $1 trillion Infrastructure Investment and Jobs Act (IIJA) received the U.S. House of Representatives’ approval Friday, November 5, 2021, to provide funding for improvements to highways, bridges, and other road safety measures. The bill also offers plans to reconnect communities previously divided by highway building and expand national broadband networks.
According to White House projections, investments outlined in the infrastructure act will add approximately 2 million jobs per year over the next decade.
A portion of the original bill was held back, and there were not as many tax provisions as originally expected, which could mean additional changes may be coming in a fiscal year 2022 budget reconciliation.
What’s in the $1T Infrastructure Act?
There are several key tax provisions found in the IIJA.
Other Tax Provisions
What Else is Included?
Here’s a breakdown of what’s included:
Where does the Build Back Better plan stand?
The BBB is set to be the largest social policy bill brought to a vote in recent years, bringing funding to address issues such as climate change, health, education, and paid family and medical leave.
House leaders hope to pass the Build Back Better plan later when they return November 15 after a weeklong recess.
The Build Back Better plan and IIJA have many intricate details. We’ll continue to provide more information as it becomes available.
If you need help understanding how the changes will impact your individual or business tax strategy, please reach out to our team of experts. We’ll help you navigate these changes and make any necessary adjustments to your plan.
Are you planning to launch a business or thinking about changing your business entity? If so, you need to determine which entity will work best for you — a C corporation or a pass-through entity such as a sole-proprietorship, partnership, limited liability company (LLC) or S corporation. There are many factors to consider and proposed federal tax law changes being considered by Congress may affect your decision.
The corporate federal income tax is currently imposed at a flat 21% rate, while the current individual federal income tax rates begin at 10% and go up to 37%. The difference in rates can be mitigated by the qualified business income (QBI) deduction that’s available to eligible pass-through entity owners that are individuals, estates and trusts.
Note that noncorporate taxpayers with modified adjusted gross income above certain levels are subject to an additional 3.8% tax on net investment income.
Organizing a business as a C corporation instead of as a pass-through entity can reduce the current federal income tax on the business’s income. The corporation can still pay reasonable compensation to the shareholders and pay interest on loans from the shareholders. That income will be taxed at higher individual rates, but the overall rate on the corporation’s income can be lower than if the business was operated as a pass-through entity.
Other considerations
Other tax-related factors should also be considered. For example:
These are only some of the many factors involved in operating a business as a certain type of legal entity. For details about how to proceed in your situation, consult with us.
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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:
Eligibility rules
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.
Taking distributions
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.
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The COVID-19 pandemic caused many families to rethink their child care situation. Nannies became a popular choice for many, as they decreased the risk of sending children to child care centers and provided the benefit of helping those same children through online schooling while their parents worked. As the pandemic has ebbed and flowed, nannies have remained a popular option. Many families, however, were unprepared with how to transition to a household employer.
As a household employer, you’re responsible for paying your employee’s Social Security and Medicare taxes (i.e., the nanny), even if that person works part-time or on a seasonable basis. If you miss the payments or misfile the forms, you could be subject to fines or, worse, tax evasion.
Do you need to pay taxes?
As long as you pay the nanny directly, whether through cash, check, money transfer, etc., you’re considered the employer. If the payments exceed $2,300 for the year (as of 2021), the nanny cannot be considered a contractor, and you can’t use a Form 1099 to report wages.
As a household employer, you must pay Medicare and Social Security taxes (also known as Federal Insurance Contributions Act, or FICA) that are split evenly between your household funds and those the nanny/household employee receives. However, those younger than 18 are exempt from FICA. You may also potentially claim an exemption if the employee is your child and younger than 21 or a parent or spouse who is providing the care.
Household employers should also remember they are not required to withhold federal income taxes unless they and their employee agree to it. Even still, some states will not allow them to withhold state income taxes. Reach out to a knowledgeable tax professional to determine your state’s withholding rules.
Important forms, filings for household employers
Once you confirm you’re considered a household employer, understanding which forms you must file is important. Keep these forms in mind:
Tax credits, deductions
Families with children younger than 13 in child care may be eligible for tax credits and deductions. For starters, if an employer offers a Dependent Care FSA, they can contribute up to $10,500 in 2021 before deducting taxes from their pay. Those funds must be used to cover eligible dependent care expenses.
Any funds not paid for by the FSA may be eligible for the Child and Dependent Care Tax Credit. Qualifying taxpayers are eligible to take a credit for a portion of the cost of care for a qualifying dependent that enables the taxpayer to work or actively look for work, up to $2,100. Click here for more information on the Child and Dependent Care Tax Credit.
Outsourcing payments to mitigate risk
Several options are available for household employers who are new to employing care staff or may not have the time to handle all tax payments and filings properly. Outsourcing a part or all of the process can be done through:
For more information on the nanny tax and how it could affect your household, reach out to our team of tax professionals today.
Tax compliance is an essential aspect of any business, with sales and use tax making up a large portion of overall tax requirements. However, sales and use tax can get complicated very quickly as each state and local tax has its own rules and nuances.
With increased connectivity and remote capabilities, it has become easier than ever for a business to conduct interstate commerce. When a business’ operations expand across state lines, this opens the company to potential tax filing requirements in other cities and states.
Keep reading to understand why sales and use tax compliance is important, how to determine if you have a presence in another state, and solutions for increasing your company’s compliance.
Why is sales and use tax compliance important
There is a heavy administrative burden to sales and use tax compliance. Consider every type of transaction to ensure you use the proper tax categories when calculating sales and use tax liabilities. In addition, you must meet deadlines when filing forms and paying taxes. Your company can be subject to additional filings, penalties, and interest on any underpaid amounts that could total an extra 40% paid on the tax liability.
The costs associated with noncompliance can eat into your profits and affect your ability to pay additional obligations. All of the filings and tax calculations can get even more convoluted if your company has a presence, or nexus, in another state or locality. These days, a nexus is even easier to achieve than in the past.
How to determine if you owe taxes in another state
You may find your business has tax responsibilities in other states without even realizing it. Businesses that have a nexus because of a presence in the state or local region are subject to certain sales and use taxes for that region. This can be established through a remote worker or affiliates living in the state or region, or because of a physical or economic presence in the state.
Keeping track of where your workers live and who your business partners are is important to determine tax liabilities.
Solutions for managing sales and use tax compliance
Keeping abreast of the changing sales and use tax landscape can be time-consuming. While it may seem like hiring an individual internally to manage this process is a better plan, outsourcing the process to a knowledgeable tax professional can be cost-effective.
Firms handling sales and use tax filings for other organizations can take advantage of several benefits
Reach out today if your company would like to chat with our knowledgeable tax professionals to help your organization, whether through an audit of existing processes or by outsourcing your tax handling altogether.
Employers offer 401(k) plans for many reasons, including to attract and retain talent. These plans help an employee accumulate a retirement nest egg on a tax-advantaged basis. If you’re thinking about participating in a plan at work, here are some of the features.
Under a 401(k) plan, you have the option of setting aside a certain amount of your wages in a qualified retirement plan. By electing to set cash aside in a 401(k) plan, you’ll reduce your gross income, and defer tax on the amount until the cash (adjusted by earnings) is distributed to you. It will either be distributed from the plan or from an IRA or other plan that you roll your proceeds into after leaving your job.
Tax advantages
Your wages or other compensation will be reduced by the amount of pre-tax contributions that you make — saving you current income taxes. But the amounts will still be subject to Social Security and Medicare taxes. If your employer’s plan allows, you may instead make all, or some, contributions on an after-tax basis (these are Roth 401(k) contributions). With Roth 401(k) contributions, the amounts will be subject to current income taxation, but if you leave these funds in the plan for a required time, distributions (including earnings) will be tax-free.
Your elective contributions — either pre-tax or after-tax — are subject to annual IRS limits. For 2021, the maximum amount permitted is $19,500. When you reach age 50, if your employer’s plan allows, you can make additional “catch-up” contributions. For 2021, that additional amount is $6,500. So if you’re 50 or older, the total that you can contribute to all 401(k) plans in 2021 is $26,000. Total employer contributions, including your elective deferrals (but not catch-up contributions), can’t exceed 100% of compensation or, for 2021, $58,000, whichever is less.
Typically, you’ll be permitted to invest the amount of your contributions (and any employer matching or other contributions) among available investment options that your employer has selected. Periodically review your plan investment performance to determine that each investment remains appropriate for your retirement planning goals and your risk specifications.
Getting money out
Another important aspect of these plans is the limitation on distributions while you’re working. First, amounts in the plan attributable to elective contributions aren’t available to you before one of the following events: retirement (or other separation from service), disability, reaching age 59½, hardship, or plan termination. And eligibility rules for a hardship withdrawal are very stringent. A hardship distribution must be necessary to satisfy an immediate and heavy financial need.
As an alternative to taking a hardship or other plan withdrawal while employed, your employer’s 401(k) plan may allow you to receive a plan loan, which you pay back to your account, with interest. Any distribution that you do take can be rolled into another employer’s plan (if that plan permits) or to an IRA. This allows you to continue deferral of tax on the amount rolled over. Taxable distributions are generally subject to 20% federal tax withholding, if not rolled over.
Employers may opt to match contributions up to a certain amount. If your employer matches contributions, you should make sure to contribute enough to receive the full match. Otherwise, you’ll miss out on free money!
These are just the basics of 401(k) plans for employees. For more information, contact your employer. Of course, we can answer any tax questions you may have.
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The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $147,000 for 2022 (up from $142,800 for 2021). Wages and self-employment income above this threshold aren’t subject to Social Security tax.
Background information
The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers — one for Old Age, Survivors and Disability Insurance, which is commonly known as the Social Security tax, and the other for Hospital Insurance, which is commonly known as the Medicare tax.
There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2022, the FICA tax rate for employers is 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2021).
2022 updates
For 2022, an employee will pay:
For 2022, the self-employment tax imposed on self-employed people is:
More than one employer
What happens if an employee works for your business and has a second job? That employee would have taxes withheld from two different employers. Can the employee ask you to stop withholding Social Security tax once he or she reaches the wage base threshold? Unfortunately, no. Each employer must withhold Social Security taxes from the individual’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employee will get a credit on his or her tax return for any excess withheld.
We can help
Contact us if you have questions about payroll tax filing or payments. We can help ensure you stay in compliance.
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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.
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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.)
Background information
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.
Less recordkeeping
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.
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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:
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:
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.
What to include in forecasting
When creating your forecasts, you should include certain elements to ensure sure you’re getting the most accurate outlook possible. This includes:
While it’s important to create a budget and stick to it, forecasting is an equally important business function that can help direct the future of your company. Forecasts will allow you to foresee upcoming roadblocks or cash flow concerns so you can plan for and adjust around them.
Our firm is available to help you with regular forecasting data, setting up a system for you to create forecasts, audit your current system, and provide outsourced CFO services. Reach out to us to discuss how we can help you today!
Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have a business in federally declared disaster areas.
Friday, October 15
Monday, November 1
Wednesday, November 10
Wednesday, December 15
Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.
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Low interest rates and other factors have caused global merger and acquisition (M&A) activity to reach new highs in 2021, according to Refinitiv, a provider of financial data. It reports that 2021 is set to be the biggest in M&A history, with the United States accounting for $2.14 trillion worth of transactions already this year. If you’re considering buying or selling a business — or you’re in the process of an M&A transaction — it’s important that both parties report it to the IRS and state agencies in the same way. Otherwise, you may increase your chances of being audited.
If a sale involves business assets (as opposed to stock or ownership interests), the buyer and the seller must generally report to the IRS the purchase price allocations that both use. This is done by attaching IRS Form 8594, “Asset Acquisition Statement,” to each of their respective federal income tax returns for the tax year that includes the transaction.
Here’s what must be reported
If you buy business assets in an M&A transaction, you must allocate the total purchase price to the specific assets that are acquired. The amount allocated to each asset then becomes its initial tax basis. For depreciable and amortizable assets, the initial tax basis of each asset determines the depreciation and amortization deductions for that asset after the acquisition. Depreciable and amortizable assets include:
In addition to reporting the items above, you must also disclose on Form 8594 whether the parties entered into a noncompete agreement, management contract or similar agreement, as well as the monetary consideration paid under it.
What the IRS might examine
The IRS may inspect the forms that are filed to see if the buyer and the seller use different allocations. If the tax agency finds that different allocations are used, auditors may dig deeper and the examination could expand beyond the transaction. So, it’s best to ensure that both parties use the same allocations. Consider including this requirement in your asset purchase agreement at the time of the sale.
The tax implications of buying or selling a business are complex. Price allocations are important because they affect future tax benefits. Both the buyer and the seller need to report them to the IRS in an identical way to avoid unwanted attention. To lock in the best results after an acquisition, consult with us before finalizing any transaction.
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If you use an automobile in your trade or business, you may wonder how depreciation tax deductions are determined. The rules are complicated, and special limitations that apply to vehicles classified as passenger autos (which include many pickups and SUVs) can result in it taking longer than expected to fully depreciate a vehicle.
Cents-per-mile vs. actual expenses
First, note that separate depreciation calculations for a passenger auto only come into play if you choose to use the actual expense method to calculate deductions. If, instead, you use the standard mileage rate (56 cents per business mile driven for 2021), a depreciation allowance is built into the rate.
If you use the actual expense method to determine your allowable deductions for a passenger auto, you must make a separate depreciation calculation for each year until the vehicle is fully depreciated. According to the general rule, you calculate depreciation over a six-year span as follows: Year 1, 20% of the cost; Year 2, 32%; Year 3, 19.2%; Years 4 and 5, 11.52%; and Year 6, 5.76%. If a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions instead of the percentages listed above.
For a passenger auto that costs more than the applicable amount for the year the vehicle is placed in service, you’re limited to specified annual depreciation ceilings. These are indexed for inflation and may change annually.
Heavy SUVs, pickups, and vans
Much more favorable depreciation rules apply to heavy SUVs, pickups, and vans used over 50% for business, because they’re treated as transportation equipment for depreciation purposes. This means a vehicle with a gross vehicle weight rating (GVWR) above 6,000 pounds. Quite a few SUVs and pickups pass this test. You can usually find the GVWR on a label on the inside edge of the driver-side door.
After-tax cost is what counts
What’s the impact of these depreciation limits on your business vehicle decisions? They change the after-tax cost of passenger autos used for business. That is, the true cost of a business asset is reduced by the tax savings from related depreciation deductions. To the extent depreciation deductions are reduced, and thereby deferred to future years, the value of the related tax savings is also reduced due to time-value-of-money considerations, and the true cost of the asset is therefore that much higher.
The rules are different if you lease an expensive passenger auto used for business. Contact us if you have questions or want more information.
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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.
Plan ahead
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.
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A business may be able to claim a federal income tax deduction for a theft loss. But does embezzlement count as theft? In most cases it does but you’ll have to substantiate the loss. A recent U.S. Tax Court decision illustrates how that’s sometimes difficult to do.
Basic rules for theft losses
The tax code allows a deduction for losses sustained during the taxable year and not compensated by insurance or other means. The term “theft” is broadly defined to include larceny, embezzlement and robbery. In general, a loss is regarded as arising from theft only if there’s a criminal element to the appropriation of a taxpayer’s property.
In order to claim a theft loss deduction, a taxpayer must prove:
Facts of the recent court case
Years ago, the taxpayer cofounded an S corporation with another shareholder. At the time of the alleged embezzlement, the other original shareholder was no longer a shareholder, and she wasn’t supposed to be compensated by the business. However, according to court records, she continued to manage the S corporation’s books and records.
The taxpayer suffered an illness that prevented him from working for most of the year in question. During this time, the former shareholder paid herself $166,494. Later, the taxpayer filed a civil suit in a California court alleging that the woman had misappropriated funds from the business.
On an amended tax return, the corporation reported a $166,494 theft loss due to the embezzlement. The IRS denied the deduction. After looking at the embezzlement definition under California state law, the Tax Court agreed with the IRS.
The Tax Court stated that the taxpayer didn’t offer evidence that the former shareholder “acted with the intent to defraud,” and the taxpayer didn’t show that the corporation “experienced a theft meeting the elements of embezzlement under California law.”
The IRS and the court also denied the taxpayer’s alternate argument that the corporation should be allowed to claim a compensation deduction for the amount of money the former shareholder paid herself. The court stated that the taxpayer didn’t provide evidence that the woman was entitled to be paid compensation from the corporation and therefore, the corporation wasn’t entitled to a compensation deduction. (TC Memo 2021-66)
How to proceed if you’re victimized
If your business is victimized by theft, embezzlement or internal fraud, you may be able to claim a tax deduction for the loss. Keep in mind that a deductible loss can only be claimed for the year in which the loss is discovered, and that you must meet other tax-law requirements. Keep records to substantiate the claimed theft loss, including when you discovered the loss. If you receive an insurance payment or other reimbursement for the loss, that amount must be subtracted when computing the deductible loss for tax purposes. Contact us with any questions you may have about theft and casualty loss deductions.
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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.
Unique issues
IRS auditors need to examine different types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand various industries or issues, the accounting methods commonly used, how income is received, and areas where taxpayers might not be in compliance.
By using a specific ATG, an auditor may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the business is located.
Updates and revisions
Some guides were written several years ago and others are relatively new. There is not a guide for every industry. Here are some of the guide titles that have been revised or added this year:
Although ATGs were created to help IRS examiners uncover common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. For a complete list of ATGs, visit the IRS website here: https://www.checkpointmarketing.net/newsletter/linkShimRadar.cfm?key=89521691G3971J9396851&l=72457
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If you’re a business owner and you’re getting a divorce, tax issues can complicate matters. Your business ownership interest is one of your biggest personal assets and in many cases, your marital property will include all or part of it.
Tax-free property transfers
You can generally divide most assets, including cash and business ownership interests, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under this tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).
Let’s say that under the terms of your divorce agreement, you give your house to your spouse in exchange for keeping 100% of the stock in your business. That asset swap would be tax-free. And the existing basis and holding periods for the home and the stock would carry over to the person who receives them.
Tax-free transfers can occur before a divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they’re made “incident to divorce.” This means transfers that occur within:
More tax issues
Later on, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — when the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold (unless an exception applies).
What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex will continue to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex-spouse ultimately sells the shares, he or she will owe any capital gains taxes. You will owe nothing.
Note that the person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. That’s why you should always take taxes into account when negotiating your divorce agreement.
In addition, the beneficial tax-free transfer rule is now extended to ordinary-income assets, not just to capital-gains assets. For example, if you transfer business receivables or inventory to your ex-spouse in a divorce, these types of ordinary-income assets can also be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.
Plan ahead to avoid surprises
Like many major life events, divorce can have major tax implications. For example, you may receive an unexpected tax bill if you don’t carefully handle the splitting up of qualified retirement plan accounts (such as a 401(k) plan) and IRAs. And if you own a business, the stakes are higher. We can help you minimize the adverse tax consequences of settling your divorce.
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Note: We are closely monitoring H.R. 3684, known as the Infrastructure Investment and Jobs Act. The Senate has approved the infrastructure bill and now goes to the House of Representatives for consideration as of the publication. The infrastructure bill would terminate the employee retention credit early, making wages paid after September 30, 2021, ineligible for the credit.
The Employee Retention Credit (ERC) was introduced in 2020 to help businesses that have been affected by the COVID-19 pandemic. Since its release, it has been expanded and modified to help more businesses. Despite all of this, many businesses that are eligible for the credit haven’t filed for it. Did the pandemic impact your business? Don’t assume your business is ineligible. Keep reading to learn more.
What is the Employee Retention Credit?
The ERC allows businesses to claim a refundable credit for qualified employee wages and related expenses if there was a significant disruption to business because of the pandemic. That disruption is measured in a quarterly reduction of gross revenues – 50% reduction in 2020 vs. 2019; and only 20% reduction in 2021 vs. 2019. In addition, there is a “safe harbor” test that allows you to look back a quarter. For example, if your 4th quarter 2020 revenues were down 20% compared to the 4th quarter 2019, you are eligible for the first quarter of 2021, regardless of the first quarter test outcome.
The second disruption is a government shutdown – complete or temporary. For example, a restaurant limited to 75% seating capacity by the governor’s mandate has experienced a partial shutdown.
If you experienced EITHER one of these disruptions, you might be eligible for the employee retention credit.
Eligibility for 2020 includes businesses with 100 or fewer full-time equivalent employees in 2019, in which all wages qualify whether the business was open or (partially) closed because of governmental orders. For businesses with more than 100 employees, only wages paid to employees when they weren’t providing services because the pandemic are eligible.
For 2021 the full-time equivalent threshold increased to 500 employees in 2019.
For 2020 the credit is 50% of the first $10,000 of eligible employees’ earnings for the year – up to $5,000 per employee for the year.
For 2021 the credit is 70% of the first $10,000 of eligible employee earnings per QUARTER – up to $28,000 per employee for the year.
What new guidance was released?
The IRS released Notice 2021-49 on August 4, 2021, which provided additional ERC guidance.
Keep in mind, the ERC is a complex tax credit with ever-changing guidelines and requires interpretation. Reach out to our professional tax team, who are familiar with the credit and most up-to-date guidelines.
What if I missed filing for the ERC?
While some of the newer guidelines are retroactive, others only apply to wages paid more recently. In most cases, employers can file a correction to their quarterly tax documents to receive appropriate credit for qualified wages paid. Keep in mind that wages included in Payroll Protection Plan (PPP) forgiveness are not qualified (no double-dipping).
We have noted a longer processing time for amended returns. This means you’ll see benefits of the credit faster by filing for it with your quarterly returns; however, it could take 90 to 120 days for amended returns.
How can my business receive help?
If you’re like many businesses and need help understanding the ERC and the recent changes, reach out to our team of qualified professionals for help! We can help you:
We look forward to helping you!
What if you decide to, or are asked to, guarantee a loan to your corporation? Before agreeing to act as a guarantor, endorser or indemnitor of a debt obligation of your closely held corporation, be aware of the possible tax consequences. If your corporation defaults on the loan and you’re required to pay principal or interest under the guarantee agreement, you don’t want to be blindsided. Business vs. nonbusiness
If you’re compelled to make good on the obligation, the payment of principal or interest in discharge of the obligation generally results in a bad debt deduction. This may be either a business or a nonbusiness bad debt deduction. If it’s a business bad debt, it’s deductible against ordinary income. A business bad debt can be either totally or partly worthless. If it’s a nonbusiness bad debt, it’s deductible as a short-term capital loss, which is subject to certain limitations on deductions of capital losses. A nonbusiness bad debt is deductible only if it’s totally worthless.
In order to be treated as a business bad debt, the guarantee must be closely related to your trade or business. If the reason for guaranteeing the corporation loan is to protect your job, the guarantee is considered closely related to your trade or business as an employee. But employment must be the dominant motive. If your annual salary exceeds your investment in the corporation, this tends to show that the dominant motive for the guarantee was to protect your job. On the other hand, if your investment in the corporation substantially exceeds your annual salary, that’s evidence that the guarantee was primarily to protect your investment rather than your job.
Except in the case of job guarantees, it may be difficult to show the guarantee was closely related to your trade or business. You’d have to show that the guarantee was related to your business as a promoter, or that the guarantee was related to some other trade or business separately carried on by you.
If the reason for guaranteeing your corporation’s loan isn’t closely related to your trade or business and you’re required to pay off the loan, you can take a nonbusiness bad debt deduction if you show that your reason for the guarantee was to protect your investment, or you entered the guarantee transaction with a profit motive.
In addition to satisfying the above requirements, a business or nonbusiness bad debt is deductible only if:
- You have a legal duty to make the guaranty payment, although there’s no requirement that a legal action be brought against you;
- The guaranty agreement was entered into before the debt becomes worthless; and
- You received reasonable consideration (not necessarily cash or property) for entering into the guaranty agreement.
Any payment you make on a loan you guaranteed is deductible as a bad debt in the year you make it, unless the agreement (or local law) provides for a right of subrogation against the corporation. If you have this right, or some other right to demand payment from the corporation, you can’t take a bad debt deduction until the rights become partly or totally worthless.
These are only a few of the possible tax consequences of guaranteeing a loan to your closely held corporation. Contact us to learn all the implications in your situation.
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If your business receives large amounts of cash or cash equivalents, you may be required to report these transactions to the IRS.
What are the requirements?
Each person who, in the course of operating a trade or business, receives more than $10,000 in cash in one transaction (or two or more related transactions), must file Form 8300. What is considered a “related transaction?” Any transactions conducted in a 24-hour period. Transactions can also be considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.
To complete a Form 8300, you’ll need personal information about the person making the cash payment, including a Social Security or taxpayer identification number.
Why does the government require reporting?
Although many cash transactions are legitimate, the IRS explains that “information reported on (Form 8300) can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”
You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS.
What’s considered “cash” and “cash equivalents?”
For Form 8300 reporting purposes, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders.
Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.
Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.
Can the forms be filed electronically?
Businesses required to file reports of large cash transactions on Form 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic acknowledgment of receipt when they file.
The IRS also reminds businesses that they can “batch file” their reports, which is especially helpful to those required to file many forms.
How can we set up an electronic account?
To file Form 8300 electronically, a business must set up an account with FinCEN’s Bank Secrecy Act E-Filing System. For more information, visit: https://bsaefiling.fincen.treas.gov/AboutBsa.html. Interested businesses can also call the BSA E-Filing Help Desk at 866-346-9478 (Monday through Friday from 8 am to 6 pm EST). Contact us with any questions or for assistance.
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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.
Tax implications
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.
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The California Governor signed Assembly Bill 150 on July 16, 2021. The AB150 budget trailer bill creates an elective pass-through entity tax, revises and expands the small business hiring credit (also known as the Main Street Small Business Tax Credit), creates a homeless hiring tax credit, extends the taxable years for which the credits for rehabilitating certified historic structures and for donating fresh fruit or vegetables to a food bank may be claimed, and increases the amount of California Competes Tax Credits that may be allocated during fiscal year 2021-22.
California joins several other states, such as New York and New Jersey, that have created a PTE tax, providing individual pass-through entity owners a workaround of the federal $10,000 limit on state and local taxes deductions.
Elective Pass-Through Entity Tax
The PTE tax is effective for electing qualifying entities for tax years beginning on or after January 1, 2021, through December 31, 2025. Qualifying entities are partnerships or S corporations with owners that are exclusively corporations, individuals, fiduciaries, estates, and trusts. AB150 allows a qualified entity doing business in California and that is required to file an S corporation return, a limited liability company return, or a partnership return to elect annually to pay an elective tax according to or measured by its qualified net income, computed at the rate of 9.3% for the taxable year for which the election is made. The “qualified net income” of a qualified entity means the sum of the pro rata share or distributive share of income subject to tax under the personal income tax law for the taxable year of each qualified taxpayer. “Qualified entity” means an entity that meets both of the following requirements for the taxable year: (1) the entity is taxed as a partnership or an S corporation; and (2) the entity’s partners, shareholders or members in that taxable year are exclusively corporations or taxpayers, as defined in Cal. Rev. & Tax. Cd. § 17004 , excluding partnerships, i.e., individuals, fiduciaries, estates, or trusts, but a quailed entity does not include a publicly traded partnership or an entity that is permitted or required to be in a combined reporting group.
The PTE tax requires an annual election on an original, timely filed return, which is irrevocable for that year and is binding on all owners of the PTE. Partnership or S corporations eligible to be considered as an electing qualifying entity should consider whether making the election and paying the elective tax on or before the original due date of these 2021 tax returns would help maximize the qualified taxpayer’s federal deduction for state and local taxes. Consider whether highly compensated California employees may benefit by restructuring their wages as pass-through entity income and electing California PTE tax.
Main Street Small Business Tax Credit
AB150 expands and revises the Main Street Small Business Tax Credit, which is a credit against California’s personal and corporate income taxes (for taxable years beginning in 2020) or sales and use taxes (for reporting periods commencing on January 1, 2021, and until April 30, 2026, as specified) for qualified small business employers (employers that, as of December 31, 2019, employed 100 or fewer employees and experienced a 50% decrease in gross receipts as compared to a base period) that received a tentative credit reservation from the California Department of Tax and Fee Administration (CDTFA), which could allocate, on a first-come, first-served basis, up to cumulatively $100 million in credits but not more than $100,000 to any qualified small business employer. A150 authorizes a credit against the personal and corporate income taxes for each taxable year beginning on or after January 1, 2021, and before January 1, 2022, to a qualified small business employer (a taxpayer that as of December 31, 2020, employed a total of 500 or fewer qualified employees and has a decrease of 20% or more in gross receipts as compared to a base period) that receives a tentative credit reservation, in an amount equal to $1,000 for each net increase in qualified employees, not to exceed $150,000 for any qualified small business employer.
Homeless Hiring Credit
A150 allows a credit under the personal income and corporation tax laws for each taxable year beginning on or after January 1, 2022, and before January 1, 2027, to a qualified taxpayer that employs an eligible individual during the taxable year, in an amount between $2,500 and $10,000 per eligible individual, not to exceed $30,000 per taxpayer per taxable year, depending on the amount of hours worked by the eligible individual, and subject to specified conditions and limitations. A “qualified taxpayer” is an eligible employer that pays California wages subject to withholding under the unemployment insurance code to an eligible individual; an “eligible employer” is a taxpayer that pays wages subject to withholding under the unemployment insurance code, pays at least 120% of the minimum wage, and provides to the FTB, upon request, a copy of the certification for each eligible individual for each taxable year the credit is claimed for that eligible individual; and an “eligible individual” is a person who: (1) is homeless on the date of hire or anytime during the 180-day period before the date of hire, or someone who is receiving supportive services from a homeless services provider; and (2) has been issued a certification that has not expired. The total aggregate amount of the credit that may be allocated by credit reservations per calendar year to all qualified taxpayers is limited to $30 million. A continuum of care, as defined, or a community-based service provider that is connected to a specified local information system, is required to issue certifications to eligible individuals and eligible employers, so that they may be eligible for the credit.
Credit for Rehabilitating Historic Structures
A150 extends by one year the taxable years for which the credit under the personal income and corporation tax laws for rehabilitating certified historic structures may be claimed (from taxable years ending before January 1, 2026, to taxable years ending before January 1, 2027).
New Donated Fresh Fruits or Vegetable Credit
A150 extends by five years the taxable years for which the credit under the personal income and corporation tax laws for donating fresh fruits and vegetables to a food bank may be claimed (from taxable years ending before January 1, 2022, to taxable years ending before January 1, 2027).
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.
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Did your company receive funds from the Human Health Services (HHS) Cares Act stimulus? If so, you may be required to submit supporting documentation for how the funds were used.
The Human Health Services department calculated relief payments based on 2019 Fee for Services (FFS) Medicare payments and direct deposited them into hospital and medical provider accounts. Any payments of more than $10,000 require additional reporting by the deadline specified in the chart below, per the Terms and Conditions of the payments.
| Period | Payment Received Period (Payments Exceeding $10,000 in Aggregate Received) | Deadline to Use Funds | Reporting Time Period |
| 1 | From April 10, 2020 to June 30, 2020 | June 30, 2021 | July 1 to Sept. 30, 2021 |
| 2 | From July 1, 2020 to Dec. 31, 2020 | Dec. 31, 2021 | Jan. 1 to March 31, 2022 |
| 3 | From Jan. 1, 2021 to June 30, 2021 | June 30, 2022 | July 1 to Sept. 30, 2022 |
| 4 | From July 1, 2021 to Dec. 31, 2021 | Dec. 31, 2022 | Jan. 1 to March 31, 2023 |
Source: hhs.gov
These funds provided by the stimulus payments must be used for eligible expenses and lost revenues to allow hospitals and medical practices to prevent, prepare for, and respond to COVID-19. To provide the necessary reports, Health and Human Services has launched a Provider Relief Fund (PRF) reporting portal.
Before getting started, you may want to gather the following types of information:
You can learn more about the system and reporting requirements here. Our team of professionals is also available to help you sort through the necessary reporting requirements.
Despite the COVID-19 pandemic, government officials are seeing a large increase in the number of new businesses being launched. From June 2020 through June 2021, the U.S. Census Bureau reports that business applications are up 18.6%. The Bureau measures this by the number of businesses applying for an Employer Identification Number.
Entrepreneurs often don’t know that many of the expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your federal tax bill.
How to treat expenses for tax purposes
If you’re starting or planning to launch a new business, keep these three rules in mind:
Eligible expenses
In general, start-up expenses are those you make to:
To qualify for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.
To be eligible as an “organization expense,” an expense must be related to establishing a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.
Plan now
If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the election described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.
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Are you eligible to take the deduction for qualified business income (QBI)? Here are 10 facts about this valuable tax break, referred to as the pass-through deduction, QBI deduction or Section 199A deduction.
As you can see, this substantial deduction is complex, especially if your taxable income exceeds the thresholds discussed above. Other rules apply. Contact us if you have questions about your situation.
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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.
Background
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.
Modifications
Beginning in the third quarter of 2021, the following modifications apply to the ERTC:
Contact us if you have any questions related to your business claiming the ERTC.
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Earlier this year, the American Rescue Plan (ARP) was announced, including some temporary updates to the child tax credits available for many parents. Under the ARP, eligible parents of dependent children can take a tax deduction of up to $3,600 per child, depending on the child’s age and household income.
Part of this tax deduction is currently planned to be distributed to parents in the form of monthly payments from the IRS. For every child under the age of 6, parents will receive $300 per month starting on July 15 and ending on December 15. For children age 6 to 17, parents will receive $250 per month. Any remaining amount on the child tax credits will be eligible to be taken during the regular tax filing season.
The child tax credit update portal
The IRS has released a website where parents, including eligible non-filer parents, may make their designations concerning the child tax credits and scheduled deposits. This includes updating bank account information for direct deposits, even if previous economic stimulus payments were sent via check.
For parents that want to forego the advance payments and take their child tax credit in one lump sum during their tax filings, you may opt-out using this portal. The deadline to opt-out for the first payment was June 28. If you opt-out after that deadline, you will still receive the first payment if you qualify. In addition to personal preference, filers may want to opt-out of these payments because:
Now would be a good time to discuss with a tax professional any benefits or drawbacks to accepting the monthly advance payments to the child tax credit.
Note: Parents who are married couples filing jointly must BOTH opt-out of receiving the payments, or you may still receive a partial payment.
Who will receive monthly payments?
Payments will be received by eligible parties starting around July 15, 2021. You can check your eligibility using this tool created by the IRS. Currently, the IRS is using 2019 and 2020 tax filings to decide who may be eligible. If you are a non-filer and have registered for the Economic Impact Payments online previously, you should not need to register for the child tax credit advance payments at this time. If you have not previously registered, you may do so at the Non-filer Sign Up Tool here.
You can also find more about the temporary increase for the child tax credit and the upcoming advance payments here.
Be sure to speak with your tax professional to determine the best course of action moving forward with these advance tax credit payments. Our team of experts is available to assist you.
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.
Other expenses
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.
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Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Monday, August 2
Tuesday, August 10
Wednesday, September 15
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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.
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In 2020, there was record-breaking new business growth in the United States. The sheer number of new businesses was 24 percent higher than the prior year, with new employee identification number (EIN) applications breaking records in Quarter 3. This all took place despite the pandemic that has swept around the world. In the 1930s, an Austrian economist described this phenomenon of new business growth in times of uncertainty as “creative destruction.” In short, this creative destruction happens as people come up with new ways to overcome challenges – like the inability to shop in person due to lockdowns or health concerns.
However exciting or successful your new business may be at marketing and sales, it’s hard to know what you don’t know about the finance functions and find the time to manage the books and your other priorities. Brushing important accounting and record-keeping tasks to the side can hurt your bottom line and create stress when tax payments are due. So how do you tackle this problem? Keep reading to find out.
Your business will thrive when the finance functions are in working order. Business owners quickly realize they will either need to carve out the necessary time to manage their organization’s finances or hire someone else to do it.
Hiring a CFO is one option. However, most new businesses do not have forty hours of work for a qualified individual. This is when outsourcing CFO services can be a practical solution.
The benefits of working with an outsourced CFO:
Outsourcing services from your organization can help you operate more effectively. With our requisite knowledge of different organizational structures, we can help you create innovative changes in your organization. If you would like to learn more, please call our office to speak with one of our professionals and learn how our outsourced CFO services can help enhance the success of your business.
Most industries came to a halt last year when the pandemic shut down businesses around the world. When manufacturers adjusted operations, taking necessary precautions to protect employees, it created a ripple effect of shortages in other areas, including lumbar, tile, and other supplies used to build houses. Amidst all the uncertainty, it may seem easier to ignore performance metrics. In this climate, however, they are more important than ever before.
Tracking key performance indicators (KPIs) can help business owners keep their operations running smoothly. KPIs are essentially prioritized metrics that owners and managers need regular access to make decisions. When determining which KPIs are important to track, know that it varies by industry. Keep reading to discover some key metrics to help leaders in the construction industry understand your firm’s performance.
Here are a few KPIs to consider:
In addition to these more traditional KPIs, the following also impact profitability.
While there are many other KPIs that construction firms can choose from, we find that these are often the top indicators of financial health and areas of opportunity. If you would like a second look at your KPIs or help establish some, give our team of professionals a call today.
The last few years have afforded quite a few changes in how the IRS allows businesses to handle meal and entertainment costs in relation to their taxes. The 2018 Tax Cuts and Jobs Act (TCJA) eliminated deductions for most business-related entertainment expenses. Since the pandemic, the IRS has temporarily changed the tax-deductible amount allowed for some business meals to encourage increased sales at restaurants. With the easing of restrictions, businesses may be considering company picnics for employee appreciation or starting up business lunches with clients again.
With all of these changes, putting a system in place to accurately track business food and entertainment expenses becomes essential. Best practices should include requesting detailed receipts and separately tracking which costs fall under the 50 percent deduction, 100 percent deduction, or not deductible categories.
In addition to keeping excellent records, below are some additional things to keep in mind about the business meal and entertainment deduction rules, including a helpful chart highlighting the deduction category particular meal and entertainment expenses fall under.
Meal and entertainment expense changes
Under the TCJA, the IRS no longer allows businesses to deduct most entertainment expenses even if they were a cost of doing business. Food and beverage related to entertainment venues are only covered with detailed receipts separately stating the cost of the meal.
Another change from the TCJA is that spouse or guest meals are not covered from travel unless the business employs the person. So, if your spouse accompanies you on a work trip, their meals are not deductible for the business.
The Consolidated Appropriations Act of 2021 (CAA) has temporarily increased the deduction for business meals provided by restaurants to 100 percent for tax years 2021 and 2022. Not all meals are created equal, however. The 100 percent deduction is only available for meals provided by restaurants, which the IRS defines as: “A business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” Prepackaged food from a grocery, specialty, or convenience store is not eligible for the 100% deduction and would be limited to a 50% deduction.
Also, note that the expenses must be considered ordinary (common and accepted for your business) or necessary (helpful and appropriate) and cannot be considered lavish or extravagant. An employee of the business or the taxpayer must be present during the meal, as well.
A quick guide to business meal deductions
| Expense Category | Deductible Amount | Tax Code Reference |
| Company social events and facilities for employees (e.g., holiday parties, team-building events) | 100% | IRC Secs. 274(e)(4) and 274(n)(2)(A) |
| Meals and entertainment included in employee or non-employee compensation | 100% | IRC Secs. 274(e)(2) and (9) |
| Reimbursed expenses under an accountable plan | 100% | IRC Sec. 274(e)(3) |
| Meals and entertainment made available to the public | 100% | IRC Sec. 274(e)(7) |
| Meals and entertainment sold to customers | 100% | IRC Sec. 274(e)(8) |
| Business travel meals | 50%
100% (1/1/2021 to 12/31/2022)* |
IRC Secs. 274(e)(3) and 274(e)(9)
|
| Client/customer business meals | 50%
100% (1/1/2021 to 12/31/2022)* |
Notice 2018-76 |
| Business meeting meals | 50%
100% (1/1/2021 to 12/31/2022)* |
IRC Secs 274(e)(5), 274(k)(1), and 274(e)(6) |
| De minimis food and beverages provided in the workplace (e.g., bottled water, coffee, snacks) | 50%
|
IRC Sec 274(e)(1) |
| Meals provided for the convenience of the employer | 50% (through 12/31/2025)
0% (on or after 1/1/2026) |
IRC Sec. 274(n) and 274(o) |
| Employer-operated eating facilities | 50% (through 12/31/2025)
0% (on or after 1/1/2026) |
IRC Sec. 274(n) and 274(o) |
| Meals/beverages associated with entertainment activities when not separated stated on the receipt | 0% | Notice 2018-76 |
| Personal, lavish, or extravagant meals/beverages in relation to the activity | 0% | IRC Secs. 274(k)(1) and 274(k)(2) |
| Entertainment without exception | 0% | IRC Secs. 274(a)(1) and 274(e) |
*Meals are only deductible in the 2021 and 2022 tax years if provided by a restaurant, as defined by the IRS in the above article.
If you need help establishing a system to better track expenses or seek clarification on whether certain expenses are tax-deductible, give our team of CPAs a call today.
Cryptocurrency, a type of virtual currency that utilizes cryptography to validate and secure transactions digitally recorded on a distributed ledger, such as a blockchain, has been on the rise over the past several years. ‘ Approximately 14 percent of Americans own at least one share of virtual currency. Therefore, it’s essential to understand the tax implications associated with receiving, buying, and selling these currencies, mainly because the IRS is starting to crack down on reporting for capital gains and losses associated with them.
Keep reading to learn more about the tax implications associated with cryptocurrency and what the IRS is doing to sharpen its focus on crypto transactions.
What you need to know about virtual currency tax reporting:
Much like when you hold investment accounts, cryptocurrency owners must recognize gains and losses when filing their taxes. While gains are typically subject to capital gains taxes, losses can sometimes be used to counteract those gains.
Here are some important details:
What about using virtual currency as a form of payment?
Whether you’re using virtual currency to pay someone or receiving virtual currency as payment for something, there can be tax implications. When reporting virtual currency received, use the fair market value on the day you received payment. Here are a few popular reasons virtual currency can be exchanged between two parties:
While it may seem tedious to track every single purchase, exchange, trade, or receipt of virtual currencies, there are online platforms available that analyze the transactions and report to you when you have gains or losses to recognize.
What the IRS is doing with cryptocurrency reporting:
The IRS is partnering with TaxBit to help verify cryptocurrency tax calculations during an audit. This tax automation company is automating the cryptocurrency transaction analysis process for the IRS to understand how much money was made or lost from transactions. When the IRS is auditing a tax filing with cryptocurrency, they’ll request the report from TaxBit, who will then provide it to the IRS and the taxpayer.
In addition to these reports, which some taxpayers may see beginning next year, the IRS has also added a question to Form 1040 asking if the taxpayer has sold, exchanged, sent, received, or otherwise acquired any financial interest in virtual currency. With the IRS requiring taxpayers to treat virtual currency as property for Federal income tax purposes, it shows they recognize virtual currencies aren’t going away any time soon.
The Treasury is currently exploring the possibility of requiring reporting on any virtual currency transfers over $10,000. We’re monitoring this and will keep you posted as more information comes to light.
For help reporting virtual currencies on your tax filings, reach out to our team of tax professionals today. Establishing a system to track purchases, sales, and transfers before the end of the year will help ease the burden of preparing for tax season.
If your business is organized as a sole proprietorship or as a wholly owned limited liability company (LLC), you’re subject to both income tax and self-employment tax. There may be a way to cut your tax bill by conducting business as an S corporation.
Fundamentals of self-employment tax
The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for Social Security up to a certain maximum ($142,800 for 2021) and at a 2.9% rate for Medicare. No maximum tax limit applies to the Medicare tax. An additional 0.9% Medicare tax is imposed on income exceeding $250,000 for married couples ($125,000 for married persons filing separately) and $200,000 in all other cases.
What if you conduct your business as a partnership in which you’re a general partner? In that case, in addition to income tax, you’re subject to the self-employment tax on your distributive share of the partnership’s income. On the other hand, if you conduct your business as an S corporation, you’ll be subject to income tax, but not self-employment tax, on your share of the S corporation’s income.
An S corporation isn’t subject to tax at the corporate level. Instead, the corporation’s items of income, gain, loss and deduction are passed through to the shareholders. However, the income passed through to the shareholder isn’t treated as self-employment income. Thus, by using an S corporation, you may be able to avoid self-employment income tax.
Keep your salary “reasonable”
Be aware that the IRS requires that the S corporation pay you reasonable compensation for your services to the business. The compensation is treated as wages subject to employment tax (split evenly between the corporation and the employee), which is equivalent to the self-employment tax. If the S corporation doesn’t pay you reasonable compensation for your services, the IRS may treat a portion of the S corporation’s distributions to you as wages and impose Social Security taxes on the amount it considers wages.
There’s no simple formula regarding what’s considered reasonable compensation. Presumably, reasonable compensation is the amount that unrelated employers would pay for comparable services under similar circumstances. There are many factors that should be taken into account in making this determination.
Converting from a C corporation
There may be complications if you convert a C corporation to an S corporation. A “built-in gains tax” may apply when you dispose of appreciated assets held by the C corporation at the time of the conversion. However, there may be ways to minimize its impact.
Many factors to consider
Contact us if you’d like to discuss the factors involved in conducting your business as an S corporation, and how much the business should pay you as compensation.
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As a business owner, increasing sales can be a great mood lifter. But what happens if you get a large order and have no way to pay for the supplies? Sales don’t always equal immediate cash in hand, which can put a strain on your business accounts and your ability to deliver on time.
Below, we’ll share what the difference between revenue (sales) and cash flow is, and how it can affect your business.
More revenue, more problems
While the thought of increased revenue causing more problems for a business owner can seem counterintuitive, there are challenges that increased sales can bring forth. But first, let’s talk about what revenue is.
Revenue is the total income generated by business’s sales before expenses are deducted. This is also known as cash inflow. Most often, this is income from your primary operations. Your business may also have non-operating income, which is generated from interest bearing accounts and investments.
When you have sales come in on credit, or terms, it can be weeks or months before you receive the full payment for the order. Additionally, credit card processors can take up to three days to deposit monies from sales, depending on your merchant services provider. Meanwhile, your business still must cover any expenses like building materials, new inventory, or payroll.
That’s where managing your cash flow comes in.
The ins and outs of cash flow
Cash flow is simply how money moves in and out of a business or bank account. Just like you have to budget your paychecks, bills, and expenses in your personal accounts, you have to manage the cash flow for your business.
As stated above, cash inflow is your revenue and your non-operating income. Cash outflow, then, is comprised of anything your business has to pay for (i.e., rent, inventory, supplies, payroll, refunds, and merchant chargebacks).
Creating a forecast for expected expenses and payments, plus when they’re expected to take place, can help you see where any shortages could be expected throughout the month. Keep in mind, the forecast can be affected by delayed sales payments and unexpected expenses.
To create a buffer and give yourself some breathing room in your cash flow, consider:
Managing your cash flow is an essential part of business ownership and can keep your company moving forward while minimizing growing pains. Our team can help you review your cash flow system and identify areas of strength or for improvement; or we can assist you in setting up your cash flow system from scratch. Give us a call to get started today.
If you are in possession of business or investment property, or looking to exchange real property for others, you might want to get acquainted with “like-kind exchanges,” also known as a 1031 exchange. As with all tax code, changes are consistently made to clarify previous unclear areas or adjust the language based on new policy. In 2020, there were some larger changes noted to section 1031 of the tax code, which deals with like-kind exchanges of real property.
Here are some of the bigger changes.
1. Defining “Real Property.” In the past, the definition of real property held more ambiguity, and there was little deference to the state and local definitions. The new language allows real property to be defined by local and state guidelines in addition to the list included in the final regulations, and property that passes a facts and circumstances test. The final regulations include categories such as “land and improvements to land, unsevered natural products of land, and water and airspace superjacent to land.” Note that property previously excluded prior to the 2017 TCJA is still excluded.
2. Inherently Permanent. The “purpose or use test” that was previously required to determine whether the property contributed to unrelated income is no longer applicable. Instead, the final rules state that if the tangible property is both permanently affixed and will remain affixed to the real property indefinitely, it’s considered inherently permanent and a part of the real property. Note, this does not automatically include installed appliances, sheds, carports, Wi-Fi systems, and trade fixtures. In addition, if interconnected assets serve an inherently permanent structure together, they are now analyzed as one distinct asset. (e.g., a gas line powering a heating unit would qualify as part of the heating unit. However, if the gas line solely powered a stove or oven, it would not qualify).
3. Facts and Circumstances Test. For fixtures and assets not automatically included by the Inherently Permanent rule, use the facts and circumstances test to determine if it’s eligible to be considered a part of the real property. For each fixture, ask:
While there is still some room for improvement, the facts and circumstances test are a vast improvement, as the previous rule may have led to costly and inefficient cost segregation studies.
4. Incidental Property. In the past, non-real property that could be transferred as part of an exchange could potentially violate the escrow rules allowing for a Qualified Intermediary to facilitate an exchange not made in real-time (a third-party exchange). The new regulations now allow some leeway, defining that if the fixtures or non-real property is deemed as typical for the type of property transfer, or if the aggravate value does not exceed 15 percent of the fair market value of the real property, it is considered incidental and will not be in violation of the escrow rules. Keep in mind, the real property is still considered a separate transaction and not included in the gains deferment of the exchanged real property.
5. Qualified Intermediaries. The new regulations maintain the transaction must be structured as an exchange and that the seller cannot receive funds from the sale before taking ownership of the new property. Qualified intermediaries can hold the properties or funds in an escrow within the time limit, so that the transaction looks like an exchange.
Most of the time, the sale of any investment property, which is property not considered your primary residence, can result in capital gains tax. Using a 1031 like-kind exchange can help defer that tax until later and possibly result in a lower tax liability down the road.
On April 28, 2021, President Biden introduced a new economic plan that would impact 1031 exchanges. The Biden proposal would abolish 1031 exchanges on real-estate profits of more than $500,000. As we move further into 2021, we will continue to monitor the impact.
If you would like to discuss tax strategies in business or investment properties, give us a call. Our team can help you understand if the decision you are making falls in line with applicable tax laws and if it’s the best strategy for your real property investments.
Many businesses provide education fringe benefits so their employees can improve their skills and gain additional knowledge. An employee can receive, on a tax-free basis, up to $5,250 each year from his or her employer for educational assistance under a “qualified educational assistance program.”
For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, including those normally taken by an individual pursuing a program leading to a business, medical, law or other advanced academic or professional degree.
Additional requirements
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.
Job-related education
If you pay more than $5,250 for educational benefits for an employee during the year, he or she must generally pay tax on the amount over $5,250. Your business should include the amount in income in the employee’s wages. However, in addition to, or instead of applying, the $5,250 exclusion, an employer can satisfy an employee’s educational expenses, on a nontaxable basis, if the educational assistance is job-related. To qualify as job-related, the educational assistance must:
“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for qualification in his or her employment or other trade or business.
Educational assistance meeting the above “job-related” rules is excludable from an employee’s income as a working condition fringe benefit.
Student loans
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.
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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).
Eligible property
The business energy credit equals 30% of the basis of the following:
The credit equals 10% of the basis of the following:
Pluses and minuses
However, there are several restrictions. For example, the credit isn’t available for property acquired with certain non-recourse financing. Additionally, if the credit is allowable for property, the “basis” is reduced by 50% of the allowable credit.
On the other hand, a favorable aspect is that, for the same property, the credit can sometimes be used in combination with other benefits — for example, federal income tax expensing, state tax credits or utility rebates.
There are business considerations unrelated to the tax and non-tax benefits that may influence your decision to use alternative energy. And even if you choose to use it, you might do so without owning the equipment, which would mean forgoing the business energy credit.
As you can see, there are many issues to consider. We can help you address these alternative energy considerations.
© 2021
The IRS and Treasury Department provided new information regarding the tax credits available through the American Rescue Plan (ARP). The ARP was created to help small businesses through the pandemic. This new guidance provides information on how eligible businesses can claim the credit for providing paid time off to employees receiving or recovering from the vaccine. Below, we’ve outlined which employers are eligible for the credits and when and how the credits can be taken.
Who is eligible?
Any business with fewer than 500 employees is eligible to take the tax credit. This includes tax-exempt organizations and governmental employers who are not the federal government or not outlined in section 501(c)(1) of the Internal Revenue Code. Self-employed individuals are eligible for similar credits.
What are the paid leave qualifications?
In order to qualify for the tax credit, employers/employees must meet the following guidelines:
For more information on the credits, including how they’re calculated, view the IRS Fact Sheet or reach out to our team of professionals.
Owners of incorporated businesses know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Thus, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.
However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.
Determining reasonable compensation
There’s no easy way to determine what’s reasonable. In an audit, the IRS examines the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.
There are some steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:
You can avoid problems and challenges by planning ahead. If you have questions or concerns about your situation, contact us.
Are you thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved in providing a traditional pension plan? Two options to consider are a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).
SEPs are intended as an alternative to “qualified” retirement plans, particularly for small businesses. The relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions, are features that are appealing.
Uncomplicated paperwork
If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.
When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $58,000 for 2021. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.
There are other requirements you’ll have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans.
The detailed records that traditional plans must maintain to comply with the complex nondiscrimination regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.
SIMPLE Plans
Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (SIMPLE). Under these plans, a “SIMPLE IRA” is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a “simple” 401(k) plan, with similar features to a SIMPLE plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.
For 2021, SIMPLE deferrals are up to $13,500 plus an additional $3,000 catch-up contributions for employees age 50 and older.
Contact us for more information or to discuss any other aspect of your retirement planning.
© 2021
As a business owner, you should be aware that you can save family income and payroll taxes by putting your child on the payroll.
Here are some considerations.
You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.
For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $12,550 standard deduction for 2021 to shelter his earnings.
Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10% rate, instead of being taxed at your higher rate.
Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year.
However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,100 for 2021 (and includes more than $350 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.
Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.
If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent isn’t considered employment for FICA tax purposes.
A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.
Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.
Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $58,000 for 2021).
Contact us if you have any questions about these rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too.
© 2021
A measure to extend the Paycheck Protection Program (PPP) application deadline from March 31, 2021, to May 31, 2021, has passed the U.S. House of Representatives and the Senate. It now heads to President Biden’s desk for signature which he is expected to do promptly.
Small businesses will have until May 31, 2021, to continue submitting first and second-draw PPP loan applications to the Small Business Administration (SBA). The SBA was also granted an additional 30 days past May 31 to finish processing applications. The measure does not include any funding increases for the program.
Contact us for assistance with your PPP loan or forgiveness applications.
Are you thinking about launching a business with some partners and wondering what type of entity to form? An S corporation may be the most suitable form of business for your new venture. Here’s an explanation of the reasons why.
The biggest advantage of an S corporation over a partnership is that as S corporation shareholders, you won’t be personally liable for corporate debts. In order to receive this protection, it’s important that the corporation be adequately financed, that the existence of the corporation as a separate entity be maintained and that various formalities required by your state be observed (for example, filing articles of incorporation, adopting by-laws, electing a board of directors and holding organizational meetings).
If you expect that the business will incur losses in its early years, an S corporation is preferable to a C corporation from a tax standpoint. Shareholders in a C corporation generally get no tax benefit from such losses. In contrast, as S corporation shareholders, each of you can deduct your percentage share of these losses on your personal tax returns to the extent of your basis in the stock and in any loans you make to the entity. Losses that can’t be deducted because they exceed your basis are carried forward and can be deducted by you when there’s sufficient basis.
Once the S corporation begins to earn profits, the income will be taxed directly to you whether or not it’s distributed. It will be reported on your individual tax return and be aggregated with income from other sources. To the extent the income is passed through to you as qualified business income, you’ll be eligible to take the 20% pass-through deduction, subject to various limitations. Your share of the S corporation’s income won’t be subject to self-employment tax, but your wages will be subject to Social Security taxes.
Are you planning to provide fringe benefits such as health and life insurance? If so, you should be aware that the costs of providing such benefits to a more than 2% shareholder are deductible by the entity but are taxable to the recipient.
Also be aware that the S corporation could inadvertently lose its S status if you or your partners transfers stock to an ineligible shareholder such as another corporation, a partnership or a nonresident alien. If the S election were terminated, the corporation would become a taxable entity. You would not be able to deduct any losses and earnings could be subject to double taxation — once at the corporate level and again when distributed to you. In order to protect you against this risk, it’s a good idea for each of you to sign an agreement promising not to make any transfers that would jeopardize the S election.
Consult with us before finalizing your choice of entity. We can answer any questions you have and assist in launching your new venture.
© 2021
President Biden signed the $1.9 trillion American Rescue Plan Act (ARPA) on March 11. While the new law is best known for the provisions providing relief to individuals, there are also several tax breaks and financial benefits for businesses.
Here are some of the tax highlights of the ARPA.
The Employee Retention Credit (ERC). This valuable tax credit is extended from June 30 until December 31, 2021. The ARPA continues the ERC rate of credit at 70% for this extended period of time. It also continues to allow for up to $10,000 in qualified wages for any calendar quarter. Taking into account the Consolidated Appropriations Act extension and the ARPA extension, this means an employer can potentially have up to $40,000 in qualified wages per employee through 2021.
Employer-Provided Dependent Care Assistance. In general, an eligible employee’s gross income doesn’t include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program (DCAP).
Previously, the amount that could be excluded from an employee’s gross income under a DCAP during a tax year wasn’t more than $5,000 ($2,500 for married individuals filing separately), subject to certain limitations. However, any contribution made by an employer to a DCAP can’t exceed the employee’s earned income or, if married, the lesser of employee’s or spouse’s earned income.
Under the ARPA, for 2021 only, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 (from $2,500 to $5,250 for married individuals filing separately).
This provision is effective for tax years beginning after December 31, 2020.
Paid Sick and Family Leave Credits. Changes under the ARPA apply to amounts paid with respect to calendar quarters beginning after March 31, 2021. Among other changes, the law extends the paid sick time and paid family leave credits under the Families First Coronavirus Response Act from March 31, 2021, through September 30, 2021. It also provides that paid sick and paid family leave credits may each be increased by the employer’s share of Social Security tax (6.2%) and employer’s share of Medicare tax (1.45%) on qualified leave wages.
Grants to restaurants. Under the ARPA, eligible restaurants, food trucks, and similar businesses that provide food and drinks may receive restaurant revitalization grants from the Small Business Administration. For tax purposes, amounts received as restaurant revitalization grants aren’t included in the gross income of the person who receives the money.
Much more
These are only some of the provisions in the ARPA. There are many others that may be beneficial to your business. Contact us for more information about your situation.
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The American Rescue Plan Act (ARPA) has been signed into law by President Biden and makes significant updates to several tax provisions to alleviate some of the pandemic’s financial burdens for individual taxpayers and businesses. Updates include expansions and extensions of various tax credits such as the employee retention credit (ERC), COBRA continuation coverage, Affordable Care Act (ACA) subsidies, and more. The bill also includes $1.46 billion for the IRS to manage the additional responsibilities on top of the annual tax filing season. Here are the critical tax updates.
Significant updates were made for individual taxpayers to deal with the financial ramifications of the pandemic.
COBRA continuation coverage credit expanded – Health care premiums will be subsidized at 100% for those who are eligible for COBRA from the date of enactment to Sep. 21, 2021.
ACA marketplace subsidies expanded – Health insurance premium cost savings for all marketplace exchange users are included in the bill.
Applicable extra subsidies can be claimed immediately or on the 2021 tax return. A special enrollment period is available until May 15, 2021, for most states.
Child tax credit increased – The child tax credit can now be claimed in advance of filing your return and increases to $3,000 per child (now including 17-year-olds) and $3,600 for children under six years of age. It phases out for married-filing-joint taxpayers with incomes over $150,000, $112,500 for heads of household, and $75,000 for all others. The credit will be paid monthly in cash up to $300 per month by the IRS from July through December.
Earned income credit expanded – The bill introduces rules for individual taxpayers with no children for 2021:
Student loan forgiveness – Any student loan forgiveness passed between Dec. 31, 2020, and Jan. 1, 2026, would be tax-free rather than the forgiven debt treated as taxable income.
Business tax provisions were also extended and expanded to help businesses with the financial challenges of the pandemic.
ERC extended – The ERC is extended through Dec. 31, 2021, and expands the eligibility to new startups established after Feb. 15, 2020 (capped at $50,000 per calendar quarter), and companies with a 90% revenue decline compared to the same calendar quarter of the previous year.
Child and dependent care credit expanded – The credit is refundable for 2021. It increases the employer-provided dependent care assistance exclusion to $10,500. The maximum allowable expenses increase to $8,000 (from $3,000) for one dependent and $16,000 (from $6,000) for two or more and allow the credit to cover 50% of expenses.
Family and sick leave credit extended – The Families First Coronavirus Response Act (FFCRA) credits are extended to Sept. 30, 2021, and include:
Executive compensation deduction expanded – The executive compensation deduction for publicly traded employers expands to include the 8 highest compensated employees other than the CEO and CFO by 2027. Currently, a deduction is available on the first $1 million paid to the CEO, CFO, and next three highest compensated officers.
For questions and assistance with any of the programs related to ARPA, contact us.
The American Rescue Plan Act (ARPA) of 2021 passed Congress and President Biden signed the bill into law on March 12, 2021. The ARPA approves $1.9 trillion in spending for individuals, businesses, governments, and certain industries impacted by the COVID-19 pandemic. The third Act in a year, the ARPA approves additional economic impact payments for individuals; the extension of federal unemployment benefits; additional funds for Paycheck Protection Program (PPP) Loans, and Economic Injury Disaster Loans (EIDL) for hard-hit small businesses; and grants for food and beverage establishments. Here are the key individual and business provisions in the bill.
The bill extends and slightly alters two key benefits many individuals have been relying upon through the pandemic.
Unemployment – Federal benefits of $300 per week (in addition to state benefits) are extended through Sep. 6, 2021. The first $10,200 in federal unemployment benefits is tax-free for households making less than $150,000 per year in 2020. Taxpayers who received unemployment income may need to update 2020 tax returns if already filed.
Economic impact (stimulus) payments (EIPs) – The IRS will issue another round of EIPs at $1,400 per individual, $2,800 per married filing joint (MFJ), plus $1,400 per dependent. Income phase-out limits reduce from previous EIPs to $80,000 for individuals and $150,000 for MFJ. Full-time students under the age of 24 are now eligible for economic impact payments (EIP), unlike previous rounds. Your 2019 or 2020 adjusted gross income (AGI) is the basis for EIPs, so taxpayers will want to consider when to file their 2020 tax return to ensure a maximum EIP benefit.
The bill includes additional funding for small business relief programs, including the PPP, EIDLs, and industry-specific relief.
PPP – The Act allocates an additional 7.25 billion in additional funds, and the eligibility expands to include:
The deadline is still Mar. 31, 2021, to apply, so don’t delay.
EIDL advance payments – The Act allocates $15 billion for EIDL advance payments, and eligibility requirements state:
Restaurants, bars, and other eligible food and beverage providers – The Act allocates $28.6 billion for grants, and $5 billion is set aside for applicants with 2019 gross receipts of $500,000 or less.
Shuttered venue operators – The program is extended from the Consolidated Appropriations Act (CAA) with $1.25 billion allocated.
Community navigator pilot programs – $175 million is allocated for programs that increase awareness of and participation in COVID-19 relief programs for socially and economically disadvantaged business owners.
For assistance with any of these provisions, please 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.
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.
The notice clarifies when and how PPP borrowers can claim the ERC on 2020 wages.
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.
Form 1040, Schedule C taxpayers received an updated interim final rule (IFR) on the Paycheck Protection Program (PPP) from the Small Business Association (SBA). The IFR clarifies guidance released on Feb. 22 that made changes to how self-employed and sole proprietors could calculate their maximum loan amount to help expand the program for these groups. Approximately 2.6 million sole proprietors have applied for PPP loans, and it is estimated there are about 25 million sole proprietors across the country.
The biggest adjustment made by the IFR is that these borrowers may calculate their maximum loan amount using their gross income. Previously, the calculation was done by using payroll costs plus net profits. This excluded many sole proprietors who had little or negative net profit.
For sole proprietors with no employees the calculation is as follows:
First-draw and second-draw owner compensation is capped at $20,833; however, for accommodations and food services, second-draw owner compensation is capped at $29,167
For sole proprietors with employees, the calculation is as follows: Use either line 31 net profit or calculate the following using gross receipts:
The same owner compensation limits apply as for those with no employees.
Limited liability companies with only one member do qualify for these updated calculations, but single member S-corporations do not.
The calculation is only for loans submitted after the rule’s effective date of Mar. 3, 2021, meaning loans submitted between Jan. 1 and Mar. 2, 2021, would not be eligible for this new calculation. You can access the new forms here:
Additionally, the IFR states that first-draw PPP loans with $150,000 or less in gross income on a Schedule C will be eligible for the economic necessity safe harbor, but loans above will not and could receive additional SBA review.
The current PPP application period expires Mar. 31, 2021, and lenders are experiencing delays in implementing these new calculations. It is anticipated they will begin accepting applications the week of Mar. 8. We are continuously monitoring the situation for additional clarifications and updates.
The nation’s smallest businesses are getting revamped Paycheck Protection Program (PPP) rules and a special filing period announced in recent changes from the Biden-Harris administration. Small businesses with fewer than 20 employees make up 98% of the small businesses in the U.S. but have not received much assistance from the PPP so far and have accounted for a significant portion of business closures during the pandemic. These new rules seek to remedy that. Here’s what you should know.
Dedicated filing period – Small businesses with fewer than 20 employees will get a dedicated filing period starting Wednesday, Feb. 24 and running through Tuesday, March 9 to allow lenders to focus on loans for these businesses. This includes individuals who receive 1099s or are considered self-employed who file a Schedule C.
New calculations for ‘no-payroll’ business owners – Specifics have not yet been released, but self-employed, independent contractors, and sole proprietors can expect a new calculation method to account for the missing payroll component of their PPP loans. Additionally, $1 billion is being set aside for this group for those located in low and moderate-income areas.
More opportunities for underserved communities – Former felons (with nonfraud convictions) and non-citizen small business owners with Individual Taxpayer Identification Numbers (ITINs), green card holders, and those with visas will be eligible to apply for relief. Further guidance is expected.
Greater access for business owners with delinquent student loan debt – Business owners with delinquent or defaulted federal debt over the last seven years will now be able to apply for a PPP loan.
Address PPP processing delays – Anti-fraud violation checks have been a significant hold up for PPP processing, and the White House expects to continue to work with the Small Business Administration (SBA) to address this issue while maintaining program integrity.
Further guidance is expected in many of these areas, and we will continue to update you as it becomes available. Contact us for assistance with your PPP loan application or forgiveness application.
Merger and acquisition activity in many industries slowed during 2020 due to COVID-19. But analysts expect it to improve in 2021 as the country comes out of the pandemic. If you are considering buying or selling another business, it’s important to understand the tax implications.
Under current tax law, a transaction can basically be structured in two ways:
1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.
The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.
The current law’s reduced individual federal tax rates have also made ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also is taxed at lower rates on a buyer’s personal tax return. However, current individual rate cuts are scheduled to expire at the end of 2025, and, depending on actions taken in Washington, they could be eliminated earlier.
Keep in mind that President Biden has proposed increasing the tax rate on corporations to 28%. He has also proposed increasing the top individual income tax rate from 37% to 39.6%. With Democrats in control of the White House and Congress, business and individual tax changes are likely in the next year or two.
2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.
Preferences of buyers
For several reasons, buyers usually prefer to buy assets rather than ownership interests. In general, a buyer’s primary goal is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after a transaction closes.
A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.
Preferences of sellers
In general, sellers prefer stock sales for tax and nontax reasons. One of their objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling assets
With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).
Obtain professional advice
Be aware that other issues, such as employee benefits, can also cause tax issues in M&A transactions. Buying or selling a business may be the largest transaction you’ll ever make, so it’s important to seek professional assistance. After a transaction is complete, it may be too late to get the best tax results. Contact us about how to proceed.
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Last spring, the CARES Act created the ERC for businesses that were affected by the COVID-19 pandemic. However, the CARES Act disallowed the credit for businesses that received a Paycheck Protection Program (PPP) loan. Fast forward to December 2020, when Congress declared that businesses that had obtained PPP loans could also qualify for the ERC. In addition, Congress extended the availability of the ERC into the first two quarters of 2021, with a few new favorable provisions. The credit is refundable, which means that qualified businesses are able to get cash to the extent that the credit exceeds the payroll tax liabilities. The chart below outlines the terms of the ERC for both the original and extended filing periods:
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As I previously noted, a business cannot “double dip,” or utilize the same wages to obtain PPP loan forgiveness while still benefiting from the ERC. However, the ERC was not available to PPP recipients prior to December 27, 2020. Accordingly, those businesses that applied for loan forgiveness would have included all eligible payroll costs paid or incurred during the covered period pursuant to the instructions in the loan forgiveness applications. Certainly, those businesses shouldn’t be penalized for already receiving forgiveness prior to this change in the law; however, this wouldn’t be the first time we’ve seen something like that with the evolution of the PPP.
On January 15, the American Institute of Certified Public Accountants (AICPA) sought clarification on this matter. In a letter to the IRS, the AICPA “recommends that the IRS and Treasury provide guidance stating that the filing of a PPP loan forgiveness application does not constitute an election to forgo the ERC with respect to the amount of wages reported on the application exceeding the amount of wages necessary for loan forgiveness.” It is clear — additional guidance is imminent.
As we await clarification from the IRS, businesses who have already received forgiveness on their PPP loans should first evaluate their eligibility for the ERC. After concluding their eligibility, businesses should begin gathering payroll reports, government shutdown orders and financial statements to calculate and claim their credits.
Borrowers of PPP loans who have yet to apply for loan forgiveness have an alternative path; those businesses looking to leverage the ERC now have an additional element to consider in their evolving journey to loan forgiveness. This change in guidance further emphasizes the importance of an intentional strategy to maximize the benefits of both programs, but also leaves questions unanswered for borrowers who have already received forgiveness on their PPP loans.
The coronavirus pandemic has forced many businesses and entire industries to move their operations remotely in the interest of employee and customer safety, and this has caused these businesses to change the way they think about their operations. During this time, businesses have had to quickly adapt and implement new technology and processes in order to meet customer and employee demands that did not exist previously. These disruptions can be a source of headache or opportunity for businesses who choose to embrace the virtual business model.
One process that is in the limelight more than ever is virtual outsourced accounting. Virtual outsourced accounting simply means working with an accounting firm that provides services virtually through cloud-based platforms. While many businesses have already made the move the cloud-based accounting platforms, some have resisted or have kept operations in-house due to the lack of incentive to change. However, the pandemic has created an incentive and highlights many of the reasons why a business would want to consider a virtual outsourced accounting option.
Safety – First and foremost is the safety of yourself and your employees. Virtual outsourced accounting allows you to conduct these financial operations remotely keeping you and your employees safe. When we return to our workplaces and safety is less of an issue, you continue to receive the other benefits of virtual accounting.
Security – Virtual accounting allows for heavy encryption of your sensitive and confidential data and frequent backups of information across multiple locations, keeping your records safe in the event of any number of physical or digital threats. Physical filing cabinets or local servers are at increased risk of physical or digital hacking because they often do not have the heavy encryption necessary for protection, nor the multiple back-ups in case of a data breach or natural disaster.
Consistency – Businesses are likely in this for the long-haul with many industries not anticipating a return to workplaces for several more months. When you outsource your accounting to a firm with virtual capabilities, you never have to worry about lost time due to illness or employee turnover. Accounting firms have adapted their workplaces to virtual as well, providing as uninterrupted service as possible.
Knowledge – Outsourcing your accounting provides you with greater access to a deeper bench of highly-skilled and knowledgeable accounting teams to help you bust through roadblocks or troubleshoot issues you are likely facing during the pandemic. When you’re encountering especially difficult and unforeseen challenges, a knowledgeable third-party adviser can help you stay on top of regulatory changes, financing opportunities, and provide guidance on forecasting and budgeting during unpredictable times.
Flexibility – As the pandemic increasingly throws new challenges at businesses, having access to virtual outsourced accountants allows you the flexibility to bring in help where and when you need it. Outsourced accounting teams can serve as a fill-in for your in-house accounting staff where needed due to illness, long-term leave, furloughs/layoffs, or employee turnover.
Remote Access – Working with a virtual accounting team that operates in the cloud allows you greater flexibility to perform tasks and access your numbers. Because data is updated in real time between you and your accountant, you can get a more accurate picture of your business’s financials – crucial during a turbulent time like the pandemic.
Cost Savings – Outsourcing your accounting to a firm that conducts operations virtually provides you with significant cost savings including salary/compensation, employee benefits, and overhead that you would experience by hiring and in-house employee. Furthermore, you never have to worry about turnover costs such as recruiting, hiring, and training a new staff member.
If you haven’t considered virtual accounting, now is the time. You do not have to face these pandemic challenges alone, and your financial processes shouldn’t be stifled due to inadequate operations that fail to consider the virtual world to which we’ve been forced to adapt. Contact us for more information on virtual accounting.
The Small Business Administration (SBA) announced that the Paycheck Protection Program (PPP) reopened the week of January 11. If you’re fortunate to get a PPP loan to help during the COVID-19 crisis (or you received one last year), you may wonder about the tax consequences.
In March of 2020, the CARES Act became law. It authorized the SBA to make loans to qualified businesses under certain circumstances. The law established the PPP, which provided up to 24 weeks of cash-flow assistance through 100% federally guaranteed loans to eligible recipients. Taxpayers could apply to have the loans forgiven to the extent their proceeds were used to maintain payroll during the COVID-19 pandemic and to cover certain other expenses.
At the end of 2020, the Consolidated Appropriations Act (CAA) was enacted to provide additional relief related to COVID-19. This law includes funding for more PPP loans, including a “second draw” for businesses that received a loan last year. It also allows businesses to claim a tax deduction for the ordinary and necessary expenses paid from the proceeds of PPP loans.
The CAA permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts to take a PPP second draw loan of up to $2 million.
To qualify for a second draw loan, a taxpayer must have taken out an original PPP Loan. In addition, prior PPP borrowers must now meet the following conditions to be eligible:
To be eligible for full PPP loan forgiveness, a business must generally spend at least 60% of the loan proceeds on qualifying payroll costs (including certain health care plan costs) and the remaining 40% on other qualifying expenses. These include mortgage interest, rent, utilities, eligible operations expenditures, supplier costs, worker personal protective equipment and other eligible expenses to help comply with COVID-19 health and safety guidelines or equivalent state and local guidelines.
Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors and small agricultural co-operatives.
The CARES Act didn’t address whether expenses paid with the proceeds of PPP loans could be deducted on tax returns. Last year, the IRS took the position that these expenses weren’t deductible. However, the CAA provides that expenses paid from the proceeds of PPP loans are deductible.
Generally, when a lender reduces or cancels debt, it results in cancellation of debt (COD) income to the debtor. However, the forgiveness of PPP debt is excluded from gross income. Your tax attributes (net operating losses, credits, capital and passive activity loss carryovers, and basis) wouldn’t generally be reduced on account of this exclusion.
This only covers the basics of applying for PPP loans, as well as the tax implications. Contact us if you have questions or if you need assistance in the PPP loan application or forgiveness process.
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The Internal Revenue Service recently issued the 2021 optional standard mileage rates. These rates, which adjust every year to account for inflation of fuel costs, vehicle cost and maintenance, and insurance rate increases, will once again affect the way a company reimburses their mobile workers. Specifically, the IRS mileage rate is a guideline that businesses use to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes. Beyond announcing the rate change, we have a few reminders and tips surrounding this reimbursement allowance.
As of January 1, 2021, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:
Have you considered…
Remember,
The IRS rate was intended to function as a reimbursement cap. Today, the rate holds businesses accountable, but it doesn’t account for fluctuations in vehicle prices across city, county, and state lines. For companies whose employees use their vehicles for work, there is an alternative to the standard mileage rate. The Fixed and Variable Rate (FAVR) allowance preserves reimbursement equity and helps businesses avoid over- or underpayment to employees. To find out more about this IRS recommended reimbursement methodology or if you have any questions about the IRS Standard Mileage Rate, please contact one of our professionals today.
The employee retention tax credit (ERTC) is intended to provide liquidity to employers during the pandemic and was greatly expanded in the Consolidated Appropriations Act of 2021 thanks to Sections 206 and 207 of the Taxpayer Certainty and Disaster Relief Act portion, opening the doors to more businesses to be able to qualify for and receive this credit who are facing significant hardship as a result of the coronavirus pandemic. Many changes from the original credit were enacted including an expansion in the amount of credit and business eligibility, and how it plays with the Paycheck Protection Program (PPP).
Here’s what you need to know about this credit, how it works, and how to apply. Note that when a provision is designated as effective Jan. 1, 2021, it does not apply to any retroactive credit claims.
The following businesses and organizations engaged in a trade or business are eligible to qualify for the ERTC:
An eligible organization can qualify for the ERTC if:
The gross receipts test is Effective Jan. 1, 2021, this is an increase from the previous law and expands the threshold for eligible businesses.
Effective Jan. 1, 2021, businesses with 500 employees or less are eligible to claim the credit even if an employee is working during the first two quarters of 2021 (an increase in the threshold from 100 employees in the original law). For affiliated companies sharing more than 50% common ownership, the 500 count is aggregated.
The passage of the bill at the end of December extended the availability of the ERTC through the first two quarters of 2021, allowing for more relief as the pandemic continues on. Qualified wages paid after March 12, 2020, and before July 1, 2021, are eligible for the credit.
Additionally, the new law will allow for an advanced credit for companies with 500 or fewer employees, allowing these companies to monetize the credit before wages are paid. The amount is based on 70% of the average quarterly payroll for the same quarter in 2019, and if there is excess advance payment, companies will need to repay the credit to the government.
Effective Jan. 2021, 70% of qualified wages are eligible for the ERTC including the cost to continue providing health benefits (such as if an employee is on furlough). This is an increase from the 50% provided in the previous stimulus bill. The qualified wage limit was increased to $10,000 per quarter per employee for the first 2 quarters of 2020. Previously was $10,000 per employee for the entirety of 2020.
Also, effective Jan. 1, 2021, the credit maxes out at an aggregate $14,000 per employee, or $7,000 for the first two quarters of 2021, and is available even if the employer received the maximum credit for wages paid to the same employee in 2020. This is an increase from the $5,000 max in the previous bill.
Additionally, the credit is now available for certain pay raises including hazardous duty pay increases (previously not allowed and is retroactive).
First and foremost, companies with PPP loans can now also claim the ERTC, and the change is retroactive to the effective date of the original law (March 12, 2020). Key to note is that the ERTC cannot be applied toward wages covered by the PPP.
If, for example, your business received a PPP loan in 2020 and paid qualified wages in excess of the PPP loan amount, you could qualify and apply for the ERTC through an amended employment tax return (Forms 941X). This also applies to affiliate companies related to a PPP borrower. Furthermore, if your PPP payroll costs are not forgiven, those same payroll costs can be applied toward ERTC qualified wages. Your accountant can help you calculate and designate these costs.
Claiming the ERTC, with or without a PPP loan, requires careful calculation and documentation. Contact us for assistance with this credit.
The U.S. Small Business Administration (SBA) and Treasury have announced that lenders with $1 billion or less in assets will be able to open applications for the next round of Paycheck Protection Program (PPP) funding starting Friday, Jan. 15 at 9 a.m. ET. Both first and second-draw loans will be able to apply at that time. For large lenders, the application opens on Tuesday, Jan. 19 for first and second-draw loans.
Community financial institutions (CFIs) began accepting applications for underserved small businesses on Jan. 11 for first-draw loans and Jan. 13 for second-draw loans. More than 9,100 applications were submitted so far totaling over $1.4 billion of the $284.5 billion available in this round of funding.
As a reminder, the second round of PPP funding expanded certain provisions of the original program including:
You can read more about the provisions of the second round of PPP funding in our blog. Contact us for assistance with a first or second-draw PPP loan and your forgiveness application.
Three new interim final rules (IFRs) for the Paycheck Protection Program (PPP) have been released from the Small Business Administration (SBA) and Treasury in response to the changes and second round of funding enacted by the relief portion of the Consolidated Appropriations Act signed at the end of December.
Here’s the breakdown on the first two IFRs.
First-time borrowers of PPP forgivable loans received consolidated rules in the IFR “Business Loan Program Temporary Changes; Paycheck Protection Program as Amended” as well as an outline of changes made by the Act. Here’s what this rule clarified:
Additionally, specific funds were set aside for minority, underserved, veteran, and women-owned businesses. When the PPP portal reopens on Monday, Jan. 11, lenders for underserved communities will have exclusive access for two days for first-draw loans and will be able to offer second-draw loans on Wednesday, Jan. 13. The portal will be open to all borrowers following these exclusive access days.
In the IFR “Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans,” much-awaited guidance was released for those looking to apply for a second PPP loan. Here’s what it said:
Eligible borrowers must
In an IFR released on Jan. 19, the SBA and Treasury made a few notable changes and clarifications to the PPP that apply regardless of which type of forgiveness application a business uses. Here are the key points:
Additionally, the three forgiveness applications have been updated to account for changes in these IFRS. Here are the links:
New PPP application forms have been released for first or second-draw loans. We will continue to update you as further guidance becomes available. Contact us for assistance with your application for a first or second-draw loan or forgiveness.
