Small Business Taxes & ManagementTM--Copyright 2021, A/N Group, Inc.
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December 8, 2021
NewsThe Financial Crimes Enforcement Network (FinCEN) has issued a Notice of Proposed Rulemaking (NPRM) to implement the beneficial ownership information reporting provisions of the Corporate Transparency Act (CTA). The proposed rule is designed to protect the U.S. financial system from illicit use and impede malign actors from abusing legal entities, like shell companies, to conceal proceeds of corrupt and criminal acts. Such abuses undermine U.S. national security, economic fairness, and the integrity of the U.S. financial system. The proposed rule addresses, among other things, who must report beneficial ownership information, when they must report, and what information they must provide. Collecting this information and providing access to law enforcement, financial institutions, and other authorized users will diminish the ability of malign actors to hide, move, and enjoy the proceeds of illicit activities. The proposed rule identifies two types of reporting companies: domestic and foreign. A domestic reporting company would include a corporation, limited liability company, or any other entity created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe. A foreign reporting company would include a corporation, limited liability company, or other entity formed under the law of a foreign country and that is registered to do business in any state or tribal jurisdiction. Under the proposed rule and in keeping with the CTA, twenty-three types of entities would be exempt from the definition of reporting company.
Families who received advance payments will need to compare the advance Child Tax Credit payments that they received in 2021 with the amount of the Child Tax Credit that they can properly claim on their 2021 tax return. Taxpayers who received less than the amount for which they're eligible will claim a credit for the remaining amount of Child Tax Credit on their 2021 tax return. Taxpayers who received more than the amount for which they're eligible may need to repay some or all of the excess payment when they file. The IRS has reported that in January 2022, it will send Letter 6419 with the total amount of advance Child Tax Credit payments taxpayers received in 2021. Taxpayers should keep this and any other IRS letters about advance Child Tax Credit payments with their tax records.
Tip of the DayNumber of inputs . . . How risky is your business in the current economic environment? One factor is the number of inputs going into your product or service. Some products require only a few inputs. Custom make desks? Wood's the main item plus glue, stain, screws and/or nails and some fixtures. You can stockpile most of the items, but wood is critical and expensive to inventory. You'll watch the market, but you only have to follow one or two items. Some manufacturers can have 50 to 100 or even more inputs into their products. The lack of any one of them could shut down a plant. If that's your situation you'll have to monitor suppliers much more carefully.
December 7, 2021
NewsIR-2021-242 guidance for employers regarding the retroactive termination of the Employee Retention Credit. The Infrastructure Investment and Jobs Act, which was enacted on November 15, 2021, amended the law so that the Employee Retention Credit applies only to wages paid before October 1, 2021, unless the employer is a recovery startup business. Notice 2021-65 applies to employers that paid wages after September 30, 2021 and received an advance payment of the Employee Retention Credit for those wages or reduced employment tax deposits in anticipation of the credit for the fourth quarter of 2021 but are now ineligible for the credit due to the change in the law. The notice also provides guidance regarding how the rules apply to recovery startup businesses during the fourth quarter of 2021. Generally, employers that are not recovery startup businesses and received advance payments for fourth quarter wages of 2021 will avoid failure to pay penalties if they repay those amounts by the due date of their applicable employment tax returns.
Tip of the DayEmployee fraud . . . While internet scams get the headlines, employee fraud is a major concern. Small businesses can be particularly vulnerable because they don't have the internal controls to make fraud more difficult. There are more than a few stories about how an employee in a small company managed to embezzle $200,000, $400,000 or more. And those are the ones where the perpretrator was caught. There are probably many times that number where the business just incurs losses, is sold, or goes bankrupt without ever discovering the theft. Some studies suggest a better than 25% chance a small business has been defrauded to a significant amount by an employee. Your CPA has ideas on ways to discourage fraud and ways to protect your business.
December 6, 2021
NewsIn IR-2021-240 the IRS is reminding tax professionals and taxpayers that they can use digital signatures on a variety of common IRS forms and access a secure online platform to view and make changes to their account. To help reduce burden for the tax community, the IRS allows taxpayers to use electronic or digital signatures on certain paper forms they cannot file electronically. The IRS is balancing the e-signature option with critical security and protection needed against identity theft and fraud. The IRS will accept a wide range of electronic signatures. An electronic signature is a way to get approval on electronic documents. It can be in many forms and created by many technologies. Acceptable electronic signature methods include:
The IRS doesn't specify what technology a taxpayer must use to capture an electronic signature. The IRS will accept images of signatures (scanned or photographed) including common file types supported by Microsoft 365 such as .tiff, .jpg, .jpeg, .pdf, Microsoft Office suite or Zip. For more information, see IR-2021-240.
Tip of the DayNo buy-sell agreement? No restrictions on the sale of an interest? . . . Most business owners don't have a buy-sell agreement with their co-owners. That's even more true for younger owners. But a buy-sell isn't just in case one owner dies or becomes ill. The buy-sell or any restrictions on a sale can come into play when a partner just wants out, is selling his interest to raise cash, has to sell because of a divorce, etc. It's not unusual for a partner who thinks he's been slighted to sell his interest to a hostile party. Talk to your attorney to make sure you're protected.
December 3, 2021
NewsIn Joseph A Insinga (157 T.C. No. 8) the petitioner filed with the IRS Whistleblower Office ("WBO") a claim for an award, naming multiple target taxpayers. The WBO denied the claim, and the petitioner appealed that determination to the Tax Court pursuant to Section 7623(b)(4). The petitioner's claim as to two target taxpayers was still pending before the Tax Court when the petitioner died in 2021. Counsel for petitioner filed a motion to substitute the petitioner's estate for him in order to continue to prosecute his claim after his death. The Tax Court held that its jurisdiction over a petition filed pursuant to Sec. 7623(b)(4) is not extinguished by the death of the petitioner-whistleblower; the petitioner's claim survives his death; and his estate has standing to be substituted as petitioner.
You may be able to exclude your foreign earned income up to $108,700 (adjusted annually for inflation) per year if you can show you're a "qualified individual". To meet that definition you must either be a bona fide reisent of one or more foreign countries or by physically present abroad for a specified period. You must also show that your tax home is in a foreign country. The court may look at a number of factors to determine if you're a foreign resident. In Deborah C. Woods (T.C. Memo. 2021-103) the taxpayer showed that despite the ownership of a house in Texas where she spent a short amount of time during the year, she spent most of the year living and working in Afghanistan. In fact following time in the military and a short time working for a company in Texas, she spent most of 10 years working abroad. The Court examined and weighed the factors and found them to be in her favor. The Court allowed the foreign earned income exclusion.
Tip of the DayStarted a new business in 2021? . . . If you set it up as an S corporation, partnership, or sole proprietorship you may be able to deduct losses incurred during the year. But only if you're actually in business in 2021. Whether or not you were in business this year can depend on the facts and circumstances. But the IRS is likely to give you a hard time if you haven't had any sales. Nominal sales to a relative probably won't pass mustard, but you don't need to show big numbers either. You should look like you're ready to service customers. If you're unsure of what to do, talk to your accountant.
December 2, 2021
NewsNotice 2021-64 contains the 2021 Required Amendments List for pension plans. The Required Amendments List establishes the end of the remedial amendment period and the plan amendment deadline for changes in qualification requirements and Section 403(b) requirements set forth on the list for qualified individually designed plans and Section 403(b) individually designed plans, respectively.
The IRS continues to emphasize scams in general, tax scams in particular, and security issues. It recently posted three articles on its webpage. The first a taxpayer alert for the holidays, the second, scammers using fake charities, and the third adding and Identity Protection PINfor additional safety.
Tip of the DayLearning curve . . . There are several different types of learning curves, but the two most frequently encountered are the S curve and the exponential rise and fall to a limit. The idea behind the curves is similar. A worker's productivity starts low rises quickly and then pleateaus. How fast that happens depends heavily on the job. For example, Fred stacks pallets of raw material usinmg a forklift. All he has to learn is his way in the yard and plant. Sue assembles about half of a chain saw. It took Sue much longer to reach her plateau, but both Fred and Sue started out slow, gained productivity quickly and plateaued. Even an experienced professional will have some sort of a learning curve if they're moved to a different location, work for another employer with different procedures, etc.
December 1, 2021
NewsThe Infrastructure Investment and Jobs Act amends Section 3134 of the Code to limit the availability of the employee retention credit in the fourth quarter of 2021 to taxpayers that are recovery startup businesses, as defined in Section 3134(c)(5). Therefore, taxpayers that are not recovery startup businesses are not eligible for the employee retention credit for wages paid after September 30, 2021. Some taxpayers that are no longer eligible to claim the employee retention credit for wages paid after September 30, 2021 may have already reduced their employment tax deposits in anticipation of claiming the employee retention credit for the fourth quarter of 2021. These taxpayers should monitor guidance issued by the IRS to learn if they must take any action regarding these amounts. Some taxpayers may have already submitted Form 7200 to request an advance payment of the employee retention credit for the fourth quarter of 2021. If the Form 7200 hasn't been processed, the IRS will use the taxpayer's indication of whether it is a recovery startup business (Form 7200, Part 1, line H) as part of its determination regarding whether the Form 7200 claiming the employee retention credit in the fourth quarter of 2021 should be accepted or rejected. If an advance payment of the employee retention credit for the fourth quarter of 2021 was already sent to a taxpayer that is no longer eligible to claim the employee retention credit for the fourth quarter of 2021 because it is not a recovery startup business, the taxpayer will still include that advance payment on the appropriate line of its employment tax return (for example, Form 941, Part 1, line 13h) for the quarter. In this case, the taxpayer may have a balance due when it files that employment tax return. Taxpayers should continue to monitor guidance issued by the IRS to learn if they should take any additional action regarding these amounts.
Tip of the DayMultiple advisers . . . Even small businesses often have multiple advisers--an attorney, CPA, your banker, a personal financial advisor, an insurance agent, maybe more. Make sure that all concerned parties are on the same page. Most of the time, if there's any hint of tax or accounting concerns your lawyer will advise consulting your CPA--and vice versa. But others may not consider that. Setting up some insurance with your agent may require tax or regulatory filings, how the insurance is billed may affect the tax consequences. Your CPA is often one of the most knowledgeable about the broad implications of much of your business. And he'll defer to your attorney for legal implications. Talk to or email your CPA on a regular basis and keep him up to date on changes. That's particularly important in the current rapidly changing business environment.
November 30, 2021
NewsThe IRS is advising employers and taxpayers to corrections to the Box 10, Dependent care benefits section in the Form W-2 and the General Instructions for Forms W-2 and W-3 to ensure that employers who provide and employees who receive dependent care benefits obtain the correct maximum amount that can be excludable from an employee’s income. The American Rescue Plan Act of 2021 (ARP) permits employers to increase the maximum amount of dependent care benefits that can be excluded from an employee's income from $5,000 to $10,500 ($5,250 for Married filing separately). Form W-2, Box 10 under Instructions for Employee has been updated to remove the $5,000 limit. It’s been revised to state that any amount above your employer’s plan limit is also included in box 1. The General Instructions for Forms W-2 and W-3, Box 10—Dependent care benefits under Specific Instructions for Form W-2 has been updated to remove the $5,000 limit. It's been revised to advise of the increase to $10,500 or $5,250 for Married filing separately if the employer timely amends the plan. You can find updated information for preparing W-2s at General Instructions for Forms W-2 and W-3 (2021).
Tip of the DayDon't fall in love . . . Well, it's OK to fall in love with a person, your dog, cat, horse, etc. But don't fall in love with your investments, a product or supplier for your business, a customer, a building, etc. Love is important if you're going to be spending the rest of your live with a person, but it clouds your judgment when it comes to investments, a product line, supplier, etc. Often it means sticking it out long after the rational move would have been to sell the investment or look for a new supplier. In more than a few cases its brought the fall of a business. Sometimes it's hard to take love out of the picture (your father started your machining business supplying a certain customer who is now a slow pay soon to be a no pay). If that's the case step back and ask a colleague, an adviser, etc. to look at the issue objectively. Can't fire the customer? Get someone to do the dirty work.
November 29, 2021
NewsThe Small Business Administration (SBA) has provided additional guidance with respect to the deadlines for apply for a Economic Injury Disaster Loan (EIDL) under the COVID-19 program. The SBA reported EIDL loans will be accepted until the December 31, 2021 deadline. It will continue processing applications after the deadline. Targeted EIDL Advance applications will be accepted until December 31, 2021 and Supplemental Targeted Advance applications will not be accepted or processed after December 31, 2021. That includes reconsiderations. The SBA is encouraging small businesses to apply no later than December 10, 2021. For more information go to COVID-19 EIDL at the SBA webpage.
Tip of the DayWhat's in a name? . . . Most of the time, plenty. Picking the wrong name for a business or product can mean a struggle to build sales and, in some cases, can have negative implications. Picking a name that is too focused won't help if your company switches product lines or services. A name that doesn't convey what the company does or one that uses a made-up word may be slow to generate brand recognition. Changing a name can result in lost brand recognition and, if used to hide negative publicity, may not serve that purpose. If the name of the company is important, get a focus group (even an informal one if you're short on cash) to weigh in. By picking a diverse group of friends, business associates, etc. you may be able to avoid a name that has negative connotations in another country, religion, etc.
November 24, 2021
NewsThe IRS announced (Rev. Rul. 2021-24)that interest rates will remain the same for the calendar quarter beginning January 1, 2022. The rates will be:
The IRS has launched a new Spanish language version of the Child Tax Credit Update Portal (CTC-UP). The CTC-UP is designed to help families quickly and easily make changes to the monthly Child Tax Credit payments they are receiving from the IRS. The portal allows you to verify your eligibility as well as to make a number of changes to how the payments are delivered. To use the Spanish language versiion go to www.irs.gov/es/credits-deductions/child-tax-credit-update-portal.
The IRS has reported that starting earlier this week, there was a system issue that was causing the acknowledgements for some electronic returns to not generate properly in the Assurance Testing System (ATS) environment. The issue has been resolved and transmitters should be able to retrieve their acknowledgements.
Tip of the DayBonuses or raise? . . . They're usually not a direct substitute. In many situations you can't avoid paying regular raises to keep competitive with other employers. But bonuses are a way of compensating employees for a good year without becoming locked in to a higher wage structure which could negatively affect the business if there's a business reversal. Bonuses can vary with business conditions and can be eliminated in poor years.
November 23, 2021
NewsThe IRS has issued an advance copy of REG-109128-21, proposed regulations, which provide that "minimum essential coverage," as that term is used in health insurance-related tax laws, does not include Medicaid coverage that is limited to COVID-19 testing and diagnostic services provided under the Families First Coronavirus Response Act. The proposed regulations also provide an automatic extension of time for providers of minimum essential coverage to furnish individual statements regarding such coverage, and an alternative method for furnishing individual statements when the shared responsibility payment amount is zero. Lastly, the proposed regulations provide an automatic extension of time for "applicable large employers" to furnish statements relating to health insurance that the employer offers to its full-time employees.
The IRS doesn't give up easily. In Irvin Hannis Catlett, Jr. (T.C. Memo. 2021-102) petitioner had been convicted of various tax crimes and was incarcerated, but still faced civil tax penalties in addition to tax deficiencies. He died in prison while his Tax Court case was pending and family members were not interested in pursuing the case. The taxpayer had satisfied six of the badges of fraud. The IRS filed a motion to dismiss for failure to prosecute his case and the Tax Court held the IRS had satisfied its burden of production for fraud.
Tip of the DayOutsourced payroll? . . . Outsourcing payroll duties makes sense for a number of reasons. But on a $30,000 payroll the federal taxes (withheld and employer's FICA portion) can easily top $10,000 and could be considerably more. That's a great incentive for a unscrupulous payroll firm to deposit those taxes in its own account. It wouldn't take many payrolls to accumulate enough for a long vacation in another country. And you'd be responsible for the unpaid amount. If you're dealing with one of the big national firms, there isn't much need to worry. But there are small providers where you should be more cautious. There are a number of simple steps you can take to insure the money is being deposited with the IRS. First make sure any correspondence goes to you, not the payroll service. Second, make sure the payroll service is using EFTPS (Electronic Federal Tax Payroll System) and get a PIN number that will allow you to check up to make sure the deposits are made. The IRS has provided a web page with detailed steps you can take. Go to Small Business Self-Employed Outsourcing Payroll.
November 22, 2021
NewsWhile he forgiveness of a PPP (Paycheck Protection Program) is not income and expenses used to substantiate the loan can be deducted, there are some tax rules that can affect a number of taxpayer. The IRS has released three revenue procedures clarifying certain tax treatments. In Rev. Proc. 2021-48 the IRS held that the amount forgiven is includable in income for purposes of determining gross receipts in determining the use of the cash method of accounting and for tax-exempt organizations. The revenue procedure also provides guidance on the timing of the forgiveness for a number of purposes and when the PPP loan is not fully forgiven. Rev. Proc. 2021-49 provides guidance for partners and partnerships for determining allocations under Sec. 704 of deductions resulting from expenditures attributable to the use of forgiven PPP loans or certain grant proceeds or subsidized payments of certain interest and fees. The revenue procedure also provides guidance on basis adjustemtns for stock of a subsidiary under Sec. 1502. Rev. Proc. 2021-50 provides guidance to partnerships subject to the centralized partnership audit regime (BBA partnerships).
Tip of the DayProperty as good as cash . . . At least when it comes time to reporting amounts you pay employees. If, during the year, you pay your employees in goods, lodging, food, clothing, or services you must include the fair market value of the payments in their income. In addition, the value of the payments is subject to income tax withholding and social security, Medicare, and FUTA taxes. More than likely, the amounts are subject to state unemployment and income tax withholding also. (Noncash payments for household work, agricultural labor, and service not in the employer's trade or business are exempt from social security, Medicare, and FUTA taxes.) Check with your tax advisor. Some payments may be exempt because of a de minimis, working condition fringe benefit, or some other rule. For example, at Christmas time you pass out holiday turkeys. Or you give employees a discount on the purchase of company merchandise. (The discounts must meet certain rules.)
November 19, 2021
NewsThe IRS announced (IR-2021-228) the launch of an improved identity verification and sign-in process that enables more people to securely access and use IRS online tools and applications. Taxpayers using the new mobile-friendly verification procedure can gain entry to existing IRS online services such as the:
Additional IRS applications will transition to the new method over the next year. The IRS also integrated this new account-creation process into some applications used by tax professionals, including those used to request powers of attorney or tax information authorizations online using Tax Pro Account or to submit Forms 2848 and 8821 online.
Tip of the DayQualified charitable distributions . . . If you're at least age 70-1/2 you can make a distribution from a traditional IRA (limit $100,000 per year) directly to a charity. The distribution can count as your required minimum distribution. This type of distribution is not included in your income, but you can't take a charitable contribution deduction for the amount either. There are several pluses to taking a distribution and then making a charitable contribution. First, the distribution isn't income. That means it won't increase your adjusted gross income for the myriad of income thresholds that can result in lost deductions and/or credits or increased taxes. Second, with no deduction for mortgage interest and a $10,000 limit on taxes, there's a good chance at least part of any charitable contribution deduction would be wasted. There are some fine points to consider, so discuss the issue with your tax advisor.
November 18, 2021
NewsThe IRS announced (IR-2021-230) victims of Hurricane Ida throughout Mississippi now have additional time--until Jan. 3, 2022--to file various individual and business tax returns and make tax payments. Following the recent decision by the FEMA to add 63 counties to its Oct. 22 disaster declaration, the IRS is offering this expanded relief to these newly-designated localities, as well as the 19 counties listed in the original FEMA declaration. Previously, the IRS relief period for the 63 newly-designated counties had ended on Nov. 1. The current list of eligible localities is always available on the disaster relief page on IRS.gov. The updated relief, now covering the entire state of Mississippi, postpones various tax filing and payment deadlines that occurred starting on Aug. 28, 2021. As a result, affected individuals and businesses will have until Jan. 3, 2022, to file returns and pay any taxes that were originally due during this period. This means individuals who had a valid extension to file their 2020 return that ran out on Oct. 15, 2021, will now have until Jan. 3, 2022, to file. The IRS noted, however, that because tax payments related to these 2020 returns were due on May 17, 2021, those payments are not eligible for this relief.
The IRS announced (IR-2021-226) that, effective Nov. 15, 2021, tax professionals are able to order up to 30 Transcript Delivery System (TDS) transcripts per client through the Practitioner Priority Service line. This is an increase from the previous 10 transcripts per client limit. Through PPS, tax professionals can order a variety of transcripts. Practitioners can receive transcripts for up to five clients per call. There's no change to the number of clients. Transcripts available under this newly-expanded limit include the:
Transcripts not listed above continue to be limited to 10 per client and count toward the total of 30 transcripts per client.
The IRS has released Statistics of Income Estate Tax Data Tables. This link takes you to an IRS webpage where you can find links to various tables providing data on estate tax filings.
Tip of the DayDrop poor performing products . . . Not every product a reseller carries is sure to be a winner. Some are poor sellers, some have poor margins, and some can generate more ill will than they're worth. Thos in the last category may have a high defect or failure rate, be poor quality, or, in some cases be downright dangerous. Whatever the reason evaluate them to find out if they're worth keeping. In some cases you might have to stock them for various reasons, but one of the easiest ways to lose a customer is to sell him or her a product they'll have to return--even if you refund their money.
November 17, 2021
NewsThe IRS has issued Notice 2021-63 to make clear how the temporary 100 percent business deduction for food or beverages from restaurants applies to taxpayers properly applying the rules of Revenue Procedure 2019-48 for using per diem rates. Previously, the IRS issued Notice 2021-25 providing guidance under the Taxpayer Certainty and Disaster Relief Act of 2020, which added a temporary exception to the 50 percent limit on the amount that businesses may deduct for food or beverages. The temporary exception allows a 100 percent deduction for food or beverages from restaurants, as long as the expense is paid or incurred in 2021 or 2022. For a taxpayer properly applying the rules of Revenue Procedure 2019-48, Notice 2021-63 provides a special rule that allows the taxpayer to treat the full meal portion of a per diem rate or allowance as being attributable to food or beverages from a restaurant beginning Jan. 1, 2021, through Dec. 31, 2022.
The IRS has recently released an updated copy of Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns. This publication addresses the rules and requirements for participation in IRS e-file by Authorized IRS e-file Providers filing individual income tax returns and related forms and schedules. This edition of Publication 1345, replaces the previous edition revised February 2021.
Tip of the DayLook behind the numbers . . . Often the numbers speak the truth. Your sales are up 20% year over year as a result of a new product that's cheaper and better. Or you've introduced a new service boosting revenue and traffic. But before taking the numbers at face value, ask yourself if they make sense. Is it the new product that generated the sales or the fact that your competitor was shut down for three months because of a storm damage. If it's the former, you should take steps to take advantage of the new product. If it's the latter, you may still be able to take advantage of the situation, but in a much different way.
November 16, 2021
NewsWildfire victims in parts of California now have until January 3, 2022, to file various individual and business tax returns and make tax payments, the Internal Revenue Service announced today. Under relief provided in August, these extensions were generally due to run out on November 15. The IRS is providing this additional relief, based on the recent FEMA decision to end the incident period for this disaster declaration on October 25. By law, the IRS must provide disaster relief until at least 60 days after the end of the FEMA-designated incident period. Accordingly, the IRS is now providing more time to any area of California designated by FEMA for either individual or public assistance. Currently, this includes Lassen, Nevada, Placer, Plumas, Tehama and Trinity counties. Any jurisdiction added to the FEMA declaration will automatically receive the IRS relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov. This relief postpones various tax filing and payment deadlines that occurred starting on July 14, 2021. As a result, affected individuals and businesses will have until January 3, 2022, to file returns and pay any taxes that were originally due during this period. This means individuals who had a valid extension to file their 2020 return that ran out on October 15, 2021, will now have until January 3, 2022, to file. The IRS noted, however, that because tax payments related to these 2020 returns were due on May 17, 2021, those payments are not eligible for this relief. The January 3, 2022 deadline also applies to quarterly estimated income tax payments due on September 15, 2021, and the quarterly payroll and excise tax returns normally due on August 2 and November 1, 2021. Businesses with an original or extended due date also have the additional time including, among others, calendar-year partnerships and S corporations whose 2020 extensions ran out on September 15, 2021 and calendar-year corporations whose 2020 extensions ran out on October 15, 2021. It also applies to calendar-year tax-exempt organizations whose 2020 extensions run out on November 15, 2021. For additional information, go to California Wilfire Relief.
The IRS has launched a new online tool designed to help U.S. withholding agents comply with their reporting and withholding responsibilities with respect to IRS Form 1042-S (Foreign Person's U.S. Source Income Subject to Withholding). The tool performs a quality review of data before submission to the IRS. Use of the tool does not change a withholding agent's obligations to file Forms 1042-S with the IRS and furnish a copy of the Form 1042-S to the payee.
Tip of the DayRetain employees . . . On more than one occasion we've talked about how much cheaper it generally is to keep a customer than to secure a new one. That's also true of employees. And in the current job environment, especially so. Sometimes the reason employees leave is obvious--a stressful job, low pay, poor work environment, etc. Sometimes there's not much you can do to correct the situation. You can't change the fact that a stable hand will be dealing with horse manure. But there are often ways to improve retention. Make sure your pay scale is competitive and that includes fringes such as help with health insurance, at a minimum through a cafeteria plan, a deferred plan option, preferably with an employer match, flexible hours, occasional parties, help with child care, etc. Clearly this isn't a one size fits all. You have to tailor the solution to your situation. The first step may be finding out with the employees want.
November 15, 2021
NewsThe IRS has announced (a href="https://www.irs.gov/newsroom/irs-updates-faqs-for-2020-unemployment-compensation-exclusion">IR/2021-221) updates to the Frequently Asked Questions for 2020 Unemployment Compensation Exclusion. IR-2021-221 has links to the updated questions.
Tip of the DayCheck sales tax rules . . . If you're a business owner you, or someone on your staff, better have a working knowledge of the sales tax rules for the states you do business in. The rules vary widely, particularly with respect to services. Work done on real property may also have different sales tax implications. You want to make sure you're charging tax on the right items and paying tax on purchased items where appropriate. Goods for resale can be purchased tax free with an exemption certificate, but make sure employees aren't misusing it and purchasing items tax free on which the company should be paying tax. Unsure of the taxability of an item? Ask your tax adviser or get a ruling from the state.
November 12, 2021
NewsThe IRS takes employment tax returns and deposits seriously (the states do likewise on their employment tax filings). In Kidz University, Inc. (T.C. Memo. 2021-101) the failed to properly deposit employment taxes and failure to timely file Forms 941, Employer's Quarterly Federal Tax Return. The taxpayer sought collection alternatives of an installment agreement or an offer-in-compromise, as well as lien subordinatiion if a lien is processed so . . . it can sell the property. The taxpayer failed to file proof to the settlement officer that all returns had been filed nor proof all deposits were made for the latest quarter. A notice of determination sustaining the proposed levy was mailed to the taxpayer indicating that the taxpayer did not respond to the Appeals office nor was in current on making adequate federal tax deposits it did not qualify for any collection alternatives. The Court noted the actions taken by the two settlement officers involved and found no abuse of discretion.
Tip of the DayKeep your bank statements . . . At this time it's highly unlikely that you don't have online access to your bank statements each month. Don't just leave them on the bank's server. Download and archive them. That means not only storing them on your computer, but also making backup copies (hopefully automatically when you back up your computer). It's important for all your personal accounts and critical for your business accounts. And for business accounts, not only your regular checking accounts but any payroll, savings, credit card, and special accounts. Online access may only be available for two years. The bank keeps the records longer, but you may have to pay a service charge to retrieve them and there could be a delay.
November 11, 2021
NewsThe IRS has announced (Rev. Proc. 2021-45; IRB 2021-48) the 2022 inflation adjusted amounts for some 60 tax provisions. Here are some highlights:
Tip of the DayConditions in will . . . Certain conditions in a will are perfectly valid, others aren't. Placing a condition on inheriting such as a child marrying by a certain age generally aren't binding. Moreover, placing any restriction other than a clearly identifiable one such as the death of an heir, may require someone to rule whether the condition was met. You don't want to create a situation that has to be solved by expensive litigation. Get advice from an attorney specializing in wills and estates.
November 10, 2021
NewsThe IRS has updated frequently-asked-questions (FAQs) for the 2021 Child Tax Credit and Advance Child Tax Credit Payments to describe how taxpayers can now provide the IRS an estimate of your 2021 income using the Child Tax Credit Update Portal (CTC UP). These FAQs update the Advance Child Tax Credit Topic A FAQs by adding a new question, question 17 and Topic F FAQs by adding new questions, questions 2 through 6. These FAQs are being issued to provide general information to taxpayers and tax professionals as expeditiously as possible.
Congress created the Opportunity Zones incentive to spur investment in distressed communities. Taxpayers who invest in Qualified Opportunity Funds--which invest in zones--can get significant tax benefits. According to IRS, over 6,000 of these funds invested about $29 billion in Opportunity Zones through 2019. The incentive attracted investment in housing, renewable energy businesses, and other projects. IRS developed plans to ensure these funds comply with requirements. In a recent report, the General Accountability Office found that the IRS plans depend on data that isn't readily accessible--which could make it hard for IRS to find investors who aren't following the rules. We recommended addressing this risk. For the full report, go to Opportunity Zones: Census Tract Designations, Investment Activities, and IRS Challenges Ensuring Taxpayer Compliance.
Tip of the DayFree information? . . . Big companies can afford to spend big money on researching demographics for site selection but even the smallest company can get valuable information for free. While the availability can vary from town to town and state to state, many towns compile data on households, population, businesses, road traffic, etc. Small towns may not have as much information as larger ones, and if that's your situation, try the county. In many areas the county may not only have data but individuals who can help you get information and may be able to offer advice on locating and starting a business. If both of those fail, every state has a development office that can provide those services.
November 9, 2021
NewsRev. Proc. 2021-47 provides guidance on the income tax treatment and information reporting requirements for payments made to or on behalf of financially distressed individual homeowners by certain entities with funds allocated from the Homeowner Assistance Fund (HAF), which was established under section 3206 of the American Rescue Plan Act of 2021, in response to the COVID-19 pandemic. This revenue procedure provides that a payment made by a State or State entity to, or for the benefit of, a homeowner from funds allocated from HAF is a qualified disaster relief payment within the meaning of Sec. 139(b)(4), and such payments are not included in the homeowner’s gross income. In addition, the revenue procedure provides an optional safe harbor method for homeowners to compute their itemized deductions for mortgage interest and real property taxes when in the same taxable year the homeowner has received, or benefited from, a HAF payment from a State or State entity that may be used to pay a portion of a homeowner’s mortgage interest and/or real property taxes and the homeowner has also paid a portion of the mortgage interest and real property taxes with funds from the homeowner’s own sources.
The Financial Crimes Enforcement Network (FinCEN) is updating and replacing its October 1, 2020 Advisory on Ransomware and the Use of the Financial System to Facilitate Ransom Payments. This updated advisory is in response to the increase of ransomware attacks in recent months against critical U.S. infrastructure.
Tip of the DaySupply chain problems to continue? . . . The answer depends on the product, but many of the problems won't be solved quickly. While COVID remains a factor, it appears to be rotating into different countries. The latest problem is an energy shortage in China. But once the goods are on a boat unloading that boat remains an issue. Truck drivers are desparately needed, but that problem won't be solved for some time. A concentration of companies and manufacturing facilities can spell real trouble if one company or plant has a crisis. The problem can be compounded if that isue occurs overseas. A shortage of even one component can doom a product. The best you can do is monitor your suppliers so you can react quickly. But expect problems to continue for some time.
November 8, 2021
NewsRecords are critical. For both income and expenses. Failing to keep good records risks the IRS disallowing deductions. But failing to keep records on the ncome side can also be problematic. That allows the IRS to reconstruct your income and the burden is on you to prove the IRS wrong. In Alexander Bernard Wathen (T.C. Memo. 2021-100) the taxpayer did not keep a set of books and records. As a result, the IRS reoncstructed his income using the bank deposits method. Based on the bank statements, the Court found the taxpayer had unreported income. On the deductions side the taxpayer also lost because of poor records. That was particularly true weith respect to travel and entertainment expenses.
Tip of the DayOut of stock? . . . You may consider an out of stock situation not much more than a few lost sales. But in some cases it could be worse. It could result in your customer or prospect going to another supplier. Not everyone is aware of the some of the shortages. You can explain that there's a plastics shortage, but many people will find that hard to believe. A contractor may be in an even worse position. Not being able to secure certain parts may mean the whole job is lost. There's no stock answer here, but you should be prepared and have options.
November 5, 2021
NewsThe IRS has announced (Notice 2021-61) the new amounts taxpayers and employers can contribute to IRAs and qualified plans. For 2022 the limit on contributions to 401(k) plans has increased to $20,500, up from $19,500 for 2021 and 2020. These limits also apply to 403(b), most 457 plans and Other changes for 2022 include and the federal government's Thrift Savings Plan. The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver's Credit all increased for 2022. Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or the taxpayer's spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2022:
The income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $68,000 for married couples filing jointly, up from $66,000; $51,000 for heads of household, up from $49,500; and $34,000 for singles and married individuals filing separately, up from $33,000. The amount individuals can contribute to their SIMPLE retirement accounts is increased to $14,000, up from $13,500. The catch-up contributiions limit remains at $6,500 except for 401(k) and 408(p) plans where it's unchanged at $3,000. The income limit for SIMPLE plans is increased from $13,500 to $14,000. The limitation for defined contribution plans rises from $58,000 to $61,000.
Tip of the DayPassive or nonpassive? . . . To curb the use of tax shelters the 1986 tax law required taxpayers to materially participate in the business to deduct losses against ordinary income. The material participation requirement is rigorous. You can't meet it by simply showing up and spending a few hours working on your cattle ranch or charter boat. But Congress carved out an exception for rental real estate, mainly because many individuals of all income classes have rental properties. In order to deduct loss against other income you need only actively participate. And that requirement is usually easy to meet. Keep in mind that the exception only applies to rental real estate. It doesn't apply to short-term rentals, the rental of personal property, leasing raw land, etc.
November 4, 2021
NewsThe IRS has announced (CT-2021-05) victims of the remnants of Hurricane Ida that began September 1, 2021 now have until January 3, 2022, to file various individual and business tax returns and make tax payments. Following the recent disaster declaration issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in certain areas will receive tax relief. Individuals and households affected by remnants of Hurricane Ida that reside or have a business in Fairfield County, New London County, Mashantucket Pequot Tribal Nation, and Mohegan Tribal Nation qualify for tax relief. The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after September 1, 2021, and before January 3, 2022, are postponed through January 3, 2022. This means that individuals who had a valid extension to file their 2020 returns, due to run out on October 15, will now have until January 3, 2022 to file. The IRS noted, however, that because tax payments related to these 2020 returns were due on May 17, 2021, those payments are not eligible for this relief. Businesses with extensions also have the additional time including, among others, calendar-year partnerships and S corporations whose 2020 extensions ran out on September 15, 2021 and calendar-year corporations whose 2020 extensions ran out on October 15, 2021. The January 3, 2022, deadline applies to the quarterly estimated tax payment, normally due on September 15 and to the quarterly payroll and excise tax returns normally due on January 3, 2022. It also applies to tax-exempt organizations, operating on a calendar-year basis, that had a valid extension due to run out on January 3, 2022. Also, penalties on deposits due on or after September 1, 2021, and before September 16, 2021, will be abated as long as the tax deposits were made by September 16, 2021.
The IRS posted detailed reporting directions for certain passthrough entities and taxpayers reporting of partnership interests held in connection with the performance of services, often referred to as "carried interests", in the form of frequently asked questions (FAQs). The FAQs contain sample worksheets that certain passthrough entities and taxpayers may be required to use in reporting “carried interests,” partnership interests held in connection with the performance of services for tax returns, filed after Dec. 31, 2021 in which a passthrough entity applies the final regulations. In addition, the FAQs contain additional instructions for certain passthrough entities and taxpayers who though not required to file the sample worksheets must provide similar information and must disclose whether the information was determined under the proposed regulations or another method for tax returns filed after Dec. 31, 2021 for a taxable year beginning before Jan. 19, 2021. A 2017 tax law change recharacterized certain net long-term capital gains of a partnership that holds one or more applicable partnership interest (APIs) as short-term capital gains. The provision generally requires that a capital asset be held for more than three years for capital gains allocated with respect to any API to be treated as a long-term capital gain. The purpose of the FAQs is to provide guidance relating to both Passthrough Entity filing and reporting requirements and Owner Taxpayer filing requirements in accordance with Department of the Treasury regulations revised in TD 9945. This updated reporting guidance will also be added to the next revision of Publication 541-Partnerships, which will be released in 2022.
Tip of the DayNot every solution need be high tech . . . There's no question that computers have made most work easier. But there are times when a low tech solution is easier and faster. If you're doing some computations only once and they're not that complicated, grab the calculator and a pencil rather than opening a spreadsheet. You can use a computer to schedule multiple processes in a small job, but you can almost assuredly do it quicker with paper and pencil or a whiteboard. On the other hand, if you'll have to do the computations more than a few times, the computer is the answer.
November 3, 2021
NewsIf you're going to court, make sure you have a case. The majority of small cases in Tax Court are pro se, that is. the petitioner is representing himself and does not have a lawyer. While the Court is more lenient in enforcing the procedures, a petitioner still has to meet the basic requirements. In Amr M. Mohsen (T.C. Memo. 2021-99) the Court held it did not have jurisdiction because a claim for refund for that year was not before the Court. Even if the Court had jurisdiction, the taxpayer would not have been entitled to a refund because he had failed to meet the threshold requirements for claiming a refund. The taxpayer contended the remittance of $43,000 in the earlier year was in the nature of a cash bond instead of a claim for refund of an overpayment of tax which has a limitation period. But the Court found there was no indication the check was intended to be a bond and it was attached to a Form 4868, an extension form. The Court found the IRS settlement officer did not abuse his discretion with respect to the collection action.
Some penalties are virtually automatic. If the IRS remembers to assess them (and it usually does) there's a good chance it will stand up in court. You can be assessed a penalty for filing a frivolous return. That's not simply forgetting a W-2 or taking an excessive deduction (but it can be in some circumstances). In Christian D. Silver (T.C. Memo. 2021-98) the taxpayer worked for a number of employers during the tax year and received 11 W-2s amounting to $28,155 and one Form 1099 for $5,000. The taxpayer filed 11 Froms 4852, Subsititute for Form W-2 Wage and Tax Statement and one corrected 1099-MISC claiming $0.00 wages and income. The IRS satisfied its minimal factual burden the taxpayer received the income by introducing a Wage and Income Transcript. The taxpayer argued that the income is not taxable. The Court noted the taxpayer filed documents asserting common tax protestor arguements which have been rejected by the courts. The Court also noted that the taxpayer has filed two other petitions with similar arguments. The Tax Court sustained the IRS's deficiency of $3,640 but did not impose a frivolous return penalty, noting the taxpayer had not been warned of the penalty in the earlier cases nor in the current one.
Tip of the DayBuy now, pay later . . . A number of big box stores have had these deals or variations for years, but they're gaining wider popularity. Do they make sense for a consumer? Maybe, if you can make the payments on time. If you miss a payment you could end up with a penalty or a very high interest rate. Some deals are structured such that if you pay by the deadline (often a year later on large purchases) there's no interest. But if you're late you'll owe interest on the full amount for a year. And that interest rate is often 25 percent or more. The other drawback is a low monthly payment or a deferred payment can encourage excess spending. Keep close track of how much your buying and how much you owe--both in total and on a monthly basis.
November 2, 2021
NewsThe IRS announced (IR-2021-212) it recently sent approximately 430,000 refunds totaling more than $510 million to taxpayers who paid taxes on unemployment compensation excluded from income for tax year 2020. The IRS efforts to correct unemployment compensation overpayments will help most of the affected taxpayers avoid filing an amended tax return. So far, the IRS has identified over 16 million taxpayers who may be eligible for the adjustment. Some will receive refunds, while others will have the overpayment applied to taxes due or other debts. The American Rescue Plan Act (ARPA) of 2021, enacted in March, excluded the first $10,200 in unemployment compensation per taxpayer paid in 2020. The $10,200 is the amount excluded when calculating one's adjusted gross income (AGI); it is not the amount of refund. The exclusion applied to individuals and married couples whose modified adjusted gross income was less than $150,000.
The Financial Crimes Enforcement Network (FinCEN) announced the renewal of its Geographic Targeting Orders (GTOs) that require U.S. title insurance companies to identify the natural persons behind shell companies used in all-cash purchases of residential real estate. The purchase amount threshold remains $300,000 for each covered metropolitan area. The terms of this Order are effective beginning November 1, 2021, and ending on April 29, 2022. The GTOs cover certain counties within the following major U.S. metropolitan areas: Boston; Chicago; Dallas-Fort Worth; Honolulu; Las Vegas; Los Angeles; Miami; New York City; San Antonio; San Diego; San Francisco; and Seattle.
Tip of the DayMoving out? . . . And converting your old home to a rental property? If you can afford to, in the current rental environment it may make sense. You can depreciate the house and improvements, but not the land. Your basis for depreciation is the lower of your cost or the fair market value at the time you begin to rent it. In the current market, the lower amount is almost assuredly your cost. Your cost includes not only your purchase price but improvements over the years. After you arrive at the total, you need to subtract out the value of the land. You can use the local assessment or one from an appraiser.
November 1, 2021
NewsThe IRS announced (IR-2021-211) on Monday, November 1, it will launch a new feature allowing any family receiving monthly Child Tax Credit payments to update their income using the Child Tax Credit Update Portal (CTC UP), found exclusively on IRS.gov. To help families plan ahead, the IRS also announced today that in late November it will launch a new Spanish-language version of the CTC UP. The IRS urges families to enter any significant income changes by midnight on November 1 in order for them to be reflected in their November payment, scheduled for November 15. If a family is unable to make the changes on November 1, enter them by November 29 so they are reflected in the December payment. Once the update is made, the IRS will adjust the remaining payment amounts to ensure people receive the total advance payment for the year. For married couples, if one spouse makes the income update, it will apply to both spouses and could impact both spouses' future monthly advance payments of the Child Tax Credit. The new income feature can help families make sure they are getting the right amount of advance Child Tax Credit payments during 2021. For that reason, it will be especially useful to any family who wants to raise or lower their monthly payments because their 2021 income has risen or fallen substantially, compared to 2020.
Tip of the DayDrop asking rent? . . . The commercial rental market is in flux. Unless the market around you is decreasing, dropping the asking rent for space you want to lease out can be risky. You could alienate current tenants. But empty space is costly. You're paying taxes and maintenance without any income. Unless there's a significantly bump up in the rent, a meaningful drop in the rent can be costly over a five-year lease. A smarter approach can be to give a months' free rent every year for five years while keeping the base rent the same (or some other variation). There are some other options that can create a lower effective rent while keeping the asking rent the same, such as paying for alterations. You want to offer just enough in concessions to get the space rented quickly.
October 29, 2021
NewsYou may be able to settle your tax debt for less than the full amount if the IRS accepts your offer-in-compromise. But it's far from automatic. In Jerry R. Abraham and Debra J. Abraham (T.C. Memo. 2021-97) taxpayers submitted an offer-in-compromise of $50,000 to settle their tax debts. The offer was based on doubt as to collectibility, based on special circumstances. The settlement officer (SO) performed a financial analysis of the taxpayers' income and expenses and assets to determine their reasonable collection potential. The SO found their collection potential, based on the net value of their assets including cash in the bank, IRAs, and equity in their home far exceeded their offer. The Court noted that even if the SO's financial analysis tontained the errors the taxpayers suggested, their reasonable collection potential would be nearly six times their offer. The Court also noted the taxpayers failed to show any special circumstances, i.e. either that they would suffer economic hardship or equity considerations. The Court found no abuse of discretion by the SO in rejecting the taxpayers' offer-in-compromise.
Tip of the DayRent personal property? . . . If you do it as a business, it's reportable on Schedule C, 1120S, etc. like a normal business. But if it's an incidental activity such as renting out a tractor you might own for use on your property, it's reported as an adjustment to income in Part I of Schedule 3 of Form 1040. Expenses related to the rental are reported in Part II of Schedule 3. If the personal property is rented incidential to a real property rental, such as renting a house that's partially furnished, that's not a separate activity.
October 28, 2021
NewsThe IRS has announced (IR-2021-210) that victims of Hurricane Ida in parts of Mississippi now have additional time--until January 3, 2022--to file various individual and business tax returns and make tax payments. Following last week's disaster declaration by the Federal Emergency Management Agency (FEMA), the IRS is offering this expanded relief to those parts of the state newly designated for either individual or public assistance. Previously, the IRS had provided special relief to the entire state of Mississippi, generally postponing various tax-filing and tax-payment deadlines until November 1, 2021. Currently, the expanded relief applies to Amite, Claiborne, Copiah, Covington, Franklin, Georgia, Hancock, Harrison, Jackson, Jefferson, Jefferson Davis, Lawrence, Lincoln, Pearl River, Pike, Simpson, Walthall, Wayne and Wilkinson counties. Any jurisdiction added to the October 22 FEMA declaration will automatically receive the expanded IRS relief. The deadline remains November 1 for affected taxpayers in other parts of Mississippi. The current list of eligible localities is always available on the disaster relief page on IRS.gov.
The Federal Trade Commission (FTC) has reported there's a fake IRS email that keeps popping into people's inboxes. It says that you can get a third Economic Impact Payment (EIP) if you click a link that lets you "access the form for your additional information" and "get help" with the application. But the link is a trick. If you click it, a scammer might steal your money and your personal information to commit identity theft. It’s yet another version of the classic government impersonator scam. Best approach? Ignore emails and phone calls unless you've previously initiated contact with the IRS, Social Security, or some other federal agency. And don't give out any personal information until you know who you're talking to.
Tip of the DayWillful ignorance . . . There's a line between being unaware of some illegal activity and knowing that something is going on, but ignoring it on purpose. For example, you hire a firm to do tree work. You check the company's license before work begins. There's an accident and lawsuits fly. You've been accused of hiring an unlicensed contractor because the company's license was revoked two weeks before the work began. That's different than not inquiring about a contractor's license, and selecting the company because they put in a bid substantially below competitors. Willful ignorance can depend on your level of intelligence, what steps you took to insure the right result, etc. A classic example is a tax return where you get a big refund. The preparer reports your salary of $120,000, but not your husband's $80,000 salary. Taxes can be a complex field, but you're supposed to review the return and you should spot such an obvious error.
October 27, 2021
NewsOffshore accounts can be dangerous. They have to be reported and all the income has to be included on your tax returns. In George S. Harrington (T.C. Memo. 2021-95) the taxpayer, while working in Canada was involved in a lumber exporting business. Related to this activity the taxpayer set up an offshore bank account with a European bank. The records of that bank were obtained by the IRS as a result of an agreement and the taxpayer's name appeared. The taxpayer had not reported having a foreign bank accounts and did not report the income from those accounts. The taxpayer was deemed the owner of the accounts. The IRS compiled the information on the accounts and determined there was some $791,000 in unreported income. The IRS assessed tax deficiencies and determined a fraud penalty. The Court examined the badges of fraud finding the taxpayer underreported his income, kept inadequate records, gave implausible or inconsistent explanations, concealed income or assets, failed to cooperate with the IRS until some years after the bank had entered into an agreement with the IRS, lacked credibility in his testimony, and filed false documents (i.e., his original tax returns). The Court sustained the deficiencies and the fraud penalty in part.
Tip of the DayAttorney client privilege has its limits . . . The attorney-client privilege protects confidential communications between client and an attorney made for the purpose of obtaining or providing legal assistance. Information conveyed to a lawyer by a client solely for the purpose of retransmission to a third-party is generally not protected by the attorney-client privilege, and the result is no different when the third-party is the IRS and the means of retransmittal is a tax return. The issue hinges on whether the information was conveyed by the client to the attorney in confidence for the purpose of obtaining legal advice and not merely for the purpose of retransmittal to a third party. The attorney-client privilege can also be lost if you reveal the information to a third party. Best advice? If you want the information to remain privileged, talk to your attorney and make sure you understand the nuances of the law.
October 26, 2021
NewsThe executor's job is to distribute the assets, but there has to be enough to pay the estate's debts. In Estate of Kwang Lee, Deceased, Anthony J. Frese, Executor (T.C. Memo. 2021-92) the IRS denied the estate's offer-in-compromise. The executor distributed assets leaving the estate with insufficient funds to pay the estate tax. The IRS Settlement Officer determined that the estate's resonable collection potential included the collection potential from the executor. The Court noted that the estate did not show the executor relied on the advice of the estate's tax advisor regarding distributions.
Tip of the DayBonuses or raise? . . . They're usually not a direct substitute. In many situations you can't avoid paying regular raises to keep competitive with other employers. But bonuses are a way of compensating employees for a good year without becoming locked in to a higher wage structure which could negatively affect the business if there's a business reversal. Bonuses can vary with business conditions and can be eliminated in poor years.
October 25, 2021
NewsIn order to assist in COVID-related labor shortages, the IRS is reminding (IR-2021-208) employers that they generally will not jeopardize the tax status of their pension plans if they rehire retirees or permit distributions of retirement benefits to current employees who have reached age 59-1/2 or the plan's normal retirement age. With the COVID-19 pandemic, many employers, including governmental employers (such as public school districts), are looking for ways to encourage retirees to return to the workforce to fill open positions and experienced employees to stay on the job. The IRS is providing help to these employers in two new frequently asked questions (FAQs), designed to offer technical guidance to public and private employers who sponsor pension plans for their employees. The FAQs highlight existing ways that employers can meet their employment objectives and still comply with the plan qualification rules. Under the FAQs, an employer can generally choose to address unforeseen hiring needs by rehiring former employees, even if those employees have already retired and begun receiving pension benefit payments. Also, if permitted under plan terms, those employees may continue receiving the benefits after they are rehired. Moreover, an employer can generally choose to make retirement distributions available to existing employees who have reached age 59 ½ or the plan's normal retirement age. This may assist in the retention of employees eligible for retirement. Further details can be found in the two new FAQs now posted on IRS.gov.
The IRS has added the county of Dauphin to the list of those in Pennsylvania where victims of remnants of Hurricane Ida that began on August 31, 2021 will be granted tax relief. As a result individuals and households affected by Hurricane that reside or have a business in the counties of Bedford, Bucks, Chester, Dauphin, Delaware, Fulton, Huntingdon, Luzerne, Montgomery, Northampton, Philadelphia, Schuylkill qualify for tax relief. The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after August 31, 2021, and before January 3, 2022, are postponed through January 3, 2022. For more information, go to IRS Announces Tax Relief for Pennsylvania Victims of Hurricane Ida.
Tip of the DayWhat's your basis? . . . There are two things that determine your gain or loss on a stock--the selling price and your cost basis. Before balancing your portfolio you should have a good idea of your profit or loss. If you bought the stock last year or you keep good records, you probably know your basis. But if you held the stock for some time, you may not. If the stock was purchased after 2011, your broker will definitely have the basis, and chances are he'll have it for earlier purchases.
October 22, 2021
NewsThe IRS is reminding (IR-2021-207) federal tax return preparers they must renew their Preparer Tax Identification Numbers (PTINs) now for 2022. All current PTINs will expire December 31, 2021. Anyone who prepares or assists in preparing a federal tax return for compensation must have a valid PTIN from the IRS before preparing returns. The PTIN needs to be included as the identifying number on any return filed with the IRS. All Enrolled Agents must also have a valid PTIN. The fee to renew or obtain a PTIN is $35.95 for 2022. The PTIN fee is non-refundable, and the exact amount must be paid to complete the PTIN process.
Notice 2021-56 sets forth current standards that a limited liability company (LLC) must satisfy to receive a determination letter recognizing it as tax-exempt under Section 501(a) of the Internal Revenue Code and described in Section 501(c)(3). This notice also requests public comments on these standards as well as specific issues relating to tax-exempt status for LLCs. This notice does not affect the status of organizations currently recognized as described in Section 501(c)(3).
Tip of the DayRefundable vs. nonrefundable credits . . . The law offers many tax credits for individuals. Some are refundable, some not, some partially. A nonrefundable credit is one in which where the credit is only available to offset your tax liability. For example, Fred and Sue have a credit from buying a plug-in electric vehicle. The credit amount is $7,500, but their tax liability before the credit is only $5,000. The credit will offset all their tax. The excess, $2,500 can be carried forward. Some credits, such as the Earned Income Credit, are fully refundable. That is, the credit is first used to offset a taxpayer's liability. The government will send you a check for any excess amount.
October 21, 2021
NewsThe Treasury Department has released a Fact Sheet, Tax Compliance Proposals Will Improve Tax Fairness supporting the need for bank reporting of income inflows and outflows into bank accounts. The proposed reporting threshold has been raised from $600 to $10,000. The IRS is aware that taxpayers who accrue income in hard-to-trace ways exhibit much lower rates of compliance, as there is no third-party source that reports income to tax authorities. Instead, these taxpayers take advantage of the fact that certain income streams are hidden from the IRS, with no information that the IRS can use to detect noncompliance. Treasury estimates that the cost of tax evasion among the top 1 percent of taxpayers exceeds $160 billion a year.
The IRS is encouraging employers to use the speed and convenience of filing employment tax returns electronically. E-filing is the most accurate method to file returns and saves taxpayers time by performing calculations and auto-populating forms and schedules with a step-by-step process. The IRS acknowledges receipt of e-filed returns within 24 hours, giving taxpayers reassurance that their return was not misplaced or lost in the mail. Electronically filed returns reduce processing time and have fewer errors, which reduces a taxpayer's chance of receiving an IRS notice. For more information, go to IRS Reminds Employers to e-file Payroll Tax Returns Timely.
Tip of the DayGetting rid of clients . . . Some clients aren't worth keeping. The customer that haggles over an already low price, the one that pays his invoice consistently late (without good cause), the client that doesn't take your advice and then blames you for not not advising him, and, possibly the worst, the one who likes to sue. Think for a couple of minutes and you'll come up with your own such as the one who's always late for appointments, or doesn't show up at all. You may not be outright losing money on them, but they're certainly not as profitable as your other clients. And, if you have trouble staffing your business, they could be more of a hassel than they're worth. Start with the most obnoxious one first. Not a move to be made quickly. Consider how much trouble it will be to replace him and all the consequences of losing them.
October 20, 2021
NewsThe Treasury Inspector General for Tax Administration (TIGTA) has issued its annual Department of the Treasury Agency Financial Report with its perspective on the most serious management and performance challenges confronting the IRS. The report notes that high-income nonfilers contribute to the majority of the nonfiler Tax Gap, with some 685,000 taxpayers with AGI of $200,000 or more owing a combined total of $38.5 billion. The growth of peer-to-peer payment applications will increase the compliance challenge. The report also focuses on modernizing IRS operations, improving customer service, identity theft, reducing fraudulent claims and improper payments, and increasing international tax compliance. For the full report, go to www.treasury.gov/tigta/management/management_fy2022.pdf.
The IRS announced (IR-2021-204) that the IRS's large business division has begun accepting all taxpayer requests to meet with IRS employees using secure videoconferencing. This step extends the practice used during the pandemic to accommodate taxpayers who sought more than meeting with an IRS employee over telephone calls.
Tip of the DaySpecific bequests in a will . . . Estates have a nasty way of creating rifts among the closest relatives. And often it's not the size of the bequest, but one or more items. Fred may not care that he got the larger share of the inheritance, he's upset he didn't get the lake property where he spent summers and proposed to his wife. Because of the way the will was written the property had to be sold and the proceeds divided. Often the best approach is to talk to the heirs and find out what they want and either put that as a specific bequest in the will or gift the property before you pass.
October 19, 2021
NewsThe IRS has outlined the information that taxpayers will be required to include for a research credit claim for refund to be considered valid. Existing Treasury Regulations require that for a refund claim to be valid, it must set forth sufficient facts to apprise IRS of the basis of the claim. The Chief Counsel memorandum will be used to improve tax administration with clearer instructions for eligible taxpayers to claim the credit while reducing the number of disputes over such claims. Effective tax administration entails ensuring taxpayers understand what is required to support the claim for the research and experimentation (R&E) credit. Each year, the IRS receives thousands of R&E claims for credits in the hundreds of millions of dollars from corporations, businesses, and individual taxpayers. Claims for research credit under IRC Section 41 are currently examined in a substantial number of cases and consume significant resources for both the IRS and taxpayers. For more information and additional links, go to Required Information for a Valid Research Credit Claim for Refund.
It's difficult to turn an entity that started with a profit motive into a tax-exempt organization under Sec. 501(c)(3). The standard for tax-emempt status under that section of the law requires that an organization be operated exclusively for an exempt purpose. In New World Infrastructure Organization (T.C. Memo. 2021-91) the shareholders had a venture to design and construct equipment for the construction field. The rationale for the exempt application was the equipment could reduce the cost of infrastructure projects, thus aiding governments. An entity will fail the operational test for tax exempt status if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. The Court also noted that the entity did not establish any bylaws that would be the governing instrument that would establish its purpose. The Court denied the taxpayer's tax exempt application.
Tip of the DayMore than one house? . . . Could be a main home and a vacation home or two "main" homes. Some remote workers are working from their vacation or second home most of the time and only occasionally use their main home. That can be a problem for tax purposes. The state can argue you've changed your domicile to your vacation home. That's an issue if the vacation home is in a different state. The outcome will depend on the facts. Talk to your tax adviser. He may suggest keeping a log of your days in each state.
October 18, 2021
NewsThe IRS has added the counties of Fulton, Huntingdon, Luzerne and Schuylkill to the list of those in Pennsylvania where victims of remnants of Hurricane Ida that began on August 31, 2021 will be granted tax relief. As a result individuals and households affected by Hurricane that reside or have a business in the counties of Bedford, Bucks, Chester, Delaware, Fulton, Huntingdon, Luzerne, Montgomery, Northampton, Philadelphia, Schuylkill qualify for tax relief. The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after August 31, 2021, and before January 3, 2022, are postponed through January 3, 2022. For more information, go to IRS Announces Tax Relief for Pennsylvania Victims of Hurricane Ida.
The IRS is updating its process for certain frequently asked questions (FAQs) on newly enacted tax legislation. The IRS is updating this process to address concerns regarding transparency and the potential impact on taxpayers when these FAQs are updated or revised. At the same time, the IRS is also addressing concerns regarding the potential application of penalties to taxpayers who rely on FAQs by providing clarity to taxpayers as to their ability to rely on FAQs for penalty protection. For more information, go to IRS Updates Process for Frequently Asked Questions.
Tip of the DayCheck your checkbook . . . When you're gathering information for your personal return, you'll probably shortchange yourself if you don't go through your checkbook, credit card statements, etc. Just bundling together your 1099s, your mortgage interest statement and property tax bills often isn't enough. You may have charitable contributions, medical expenses, investment expenses etc. paid by check or credit card. It's even more critical if you have a sole proprietorship. You may have made purchases using your credit card or personal account rather than on the business account. Take a home office deduction? You'll want to pick up repairs, house insurance, security system fees, etc.
October 15, 2021
NewsIf you paid for a benefit with pretax money, you can't deduct the expense. For example, you elect to allow your employer to reduce your pretax income and he pays your health insurance premium. But here the situation took a twist. In Charles H. Leyh (157 T.C. No. 7) incident to a separation agreement pending divorce, the taxpayer agreed to pay his then spouse's health insurance premiums through a "cafeteria plan" provided by his employer. The taxpayer excluded from his gross income an amount equal to the health insurance premiums pursuant to Secs. 106 and 125 and also claimed an alimony deduction pursuant to Secs. 62 and 215 for the portion of the premiums covering his then spouse. The IRS issued a notice of deficiency disallowing the alimony deduction in an amount equal to the premiums paid to provide health insurance coverage for the taxpayer's then spouse. The parties submitted this case for decision without trial under Rule 122. The Tax Court held that the taxpayer may deduct, as alimony, an amount equal to the premiums paid to provide health insurance coverage for his then spouse. The Tax Court noted that if a taxpayer pays alimony as defined in Section 71(b), then the taxpayer may deduct such payments from gross income if the amounts are includible in the gross income of the recipient under Section 71. For divorce proceedings before the Tax Cuts and Jobs Act of 2017 a taxpayer can deduct the payments as alimony because his or her spouse has to include the amounts in income.
Tip of the DayDon't abandon the office yet . . . Many companies have survived the pandemic despite not being able to use an office. And, for many, downsizing, even significantly, may be possible. But completely eliminating a formal office may not be a good idea, or even possible. You'll always need a place for company records (not everything can be stored in the cloud), for meeting clients or other outsiders, and for formal office meetings.
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