Dan Chodan, CPA, Author at Think Outside the Tax Box

AUTHOR SPOTLIGHT

Dan Chodan, CPA

Dan Chodan, CPA is a Partner at Trout CPA in Lancaster, Pennsylvania with over a decade of accounting and tax experience. He focuses on closely held business consulting and tax planning for clients nationwide. Dan leads the firm’s COVID relief response team working heavily on the Employee Retention Credit, Paycheck Protection Program, and other relief programs. He also leads Trout’s Consumer Services industry group and Auto Dealership practice group.

Learn more about Dan at TroutCPA.com.

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Your Inventory’s Inflation Can Be Your Tax Savings

The pandemic forced businesses to adapt in many ways. The economic recovery has highlighted supply chain issues exacerbated by strong demand and leading to overall inflation. Businesses are now continuing to adapt to higher prices. If you have inventory, you perhaps can realize tax benefits to help with this inflationary effect through the Last-In, First-Out inventory method (LIFO).

LIFO inventory methods are hardly a new tax concept, but taxpayers often may have ignored them due to complexity or periods of marginal inflation. This strategy deserves a second look during a year of high inflation. Read on to learn more about this tax savings strategy and the simplified calculation methods available.

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You Are Not Eligible for the Employee Retention Credit: Vague “Suspensions” Lead to Trouble

Far too many of these Employee Retention Credit (ERC) claims are nonsense. Now don’t get me wrong. I enjoy helping businesses claim the ERC. I have written in these pages about the unique ways a business may qualify and how to use startup eligibility even for existing employers. But let’s be honest: People are manipulating this program beyond belief. The refund dollars are too attractive and have created far too large an incentive for shops charging high commission fees (I have seen fees charged between 10 to 35 percent of the refund).

In the coming years, numerous aggressive ERC shops may contact you if they haven’t already. How do you know whether a claim is legitimate or nonsense? Here, we will review the most prevalent bad arguments to help you avoid trouble.

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OSHA and CDC Guidelines Are Not ERC Suspensions

The Employee Retention Credit is worth big bucks. Qualifying companies can get significant relief money – sometimes millions of dollars. So, it was no surprise to me when I heard some outlandish eligibility statements such as “the national emergency declaration counts” or even some “every business gets it” claims. There is a lot of desire to qualify out there and plenty of credit consultants looking to make money. But recently I have heard a different argument from multiple sources which has intrigued me. The argument is dressed up much better and almost looks legitimate.

Here is a summary of how the line of thinking goes: OSHA rules mandate compliance with CDC guidelines creating partial suspension eligibility for ERC. I call it the “OSHA argument.” That thinking has not set well with some – particularly as the argument results in qualification for every business for all of 2020 and 2021. Red states have had little or no restrictions in 2021 and even deep blue states generally lifted their restrictions in the spring of 2021. But conveniently, the OSHA argument would mean state and local orders do not need to be reviewed at all as a national order is in place. For a consultant charging a percentage of the ERC, they can sell this service now to everyone and avoid the headache of eligibility discussions. Let’s take a closer look at this argument and reasons why it does not work.

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Health Expenses ERC Relief

Health Expenses: A Commonly Ignored Portion of the ERC Leaves Relief Money on the Table

The Employee Retention Credit (ERC) is a huge benefit for businesses, but it is often incredibly difficult to maximize fully. Practitioners must perform a complex interplay of wages between PPP, grants, or other wage credits. They must know the voluminous rules of the ERC program itself, the other programs that may enter into the equation, and the related portions of the Tax Code. With so much to consider, a particularly powerful tool can easily be missed: the ERC health expenses.

Many are surprised when someone asks about health programs since they do not realize these benefits count as ERC qualified costs. Some ERC claims ignore health costs entirely or only capture the employee portions. Deductions for health costs are in the payroll data, but employer costs are typically not in pay records. By reviewing all the qualifying health expenses and available methods for allocating costs, you can really increase your ERC. Keep reading to learn more!

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Even an Existing Business Can Claim the $100,000 of COVID Relief Money for Startups

Even an Existing Business Can Claim the $100,000 of COVID Relief Money for Startups

You might be a startup without even knowing it. If you are not a startup business today, you could be shortly. The incentive to start a business and hire employees is especially high now due to the Employee Retention Credit (ERC). With a special rule specifically for startups, the government will pay 70 percent of the first $10,000 of an employee’s wages in both the third and fourth quarters of 2021. This means it’s possible a business with as few as eight employees can claim the maximum $100,000 under the Recovery Startup Business rules (RSB).

Even an existing business may qualify as a startup to claim RSB ERC. There are steps a business can still take today to qualify. A new business activity, reorganization, change in ownership, related company, business purchase, or even a more detailed review of the average receipts calculations could trigger a qualification. Read on to learn more about this planning opportunity and the rules to do it well.

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COVID Relief hiding in plain sight

COVID Relief Money Is Still Hiding in Plain Sight: The Employee Retention Credit

Business COVID relief funds have been plentiful. We have seen it all from state and local grant programs to the Restaurant Revitalization Fund and Paycheck Protection Program (PPP). The dollars have flowed freely during the past two years although some programs were certainly simpler than others.

The Employee Retention Credit (ERC), unfortunately, has been the most complex and misunderstood relief program. It deserves serious consideration along with a second and third look. ERC has suffered from a branding problem, from repeated changes, and because the PPP overshadowed it. The CARES Act brought both programs to life in March 2020 , but small businesses quickly ignored the ERC in favor of the forgivable PPP loans. A taxpayer could only choose one of these programs until the December 2020 COVID relief law retroactively allowed them to coexist in the same business. But once again a second round of PPP loans overshadowed the ERC.

Perhaps now with the grants awarded and PPP funds issued, the ERC can finally get the attention it deserves. The benefits are tremendous at up to $5,000 per employee in 2020 and $28,000 per employee in 2021.

Opportunities abound for businesses and advisers to be on the hunt for ERC eligibility both obvious and obscure. Today, let’s review the program and cover some of the unusual ways to qualify.

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Avoiding Self-Employment Tax with a Limited Partner Interest

The best tax planning will often be found where both the form and substance of a transaction align in the client’s interest. One such planning activity focuses on reducing self-employment tax, and while the attempt is admirable, the substance of the transaction might be stronger than its form.

Generally, if you’re a partner in a partnership, your distributive share of income is subject to Self Employment Contributions Act (SECA) tax, also known as self-employment tax. This can be up to an additional 15.3 percent on your earnings, unless an exception applies.

Many tax pros attempt to mitigate this tax by simply making the spouse of the main business partner a limited partner in the entity. The thought is that an exclusion applies for SECA tax when there is a “limited partner’s” share of partnership income.

But be careful! When the underlying substance overrides the form of a transaction, the taxpayer generally will lose.

The IRS recently highlighted such a problem with form in its draft partnership tax instructions by saying “For purposes of self-employment tax, however, status as a limited partner is determined under Section 1402(a)(13); whether a partner is a limited partner under state limited partnership law is not determinative.”

Simply calling a partner “limited” is not enough. The limited partner exception from self-employment tax creates a significant benefit when applied, but rulings focused on the substance of the partner’s interest have narrowed this exception.

Let’s review how to properly qualify as a limited partner in light of the IRS’s recent emphasis in this area. In the process, we will also look at the specifics of how particular forms should still win the day by avoiding SE tax.

Keep reading for more.

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CURRENT EDITION

The Wild West of Employee Retention Credits (ERC): Outlaws, Deputies, and Cowboys

Gather ’round, pardners! The Employee Retention Credit (ERC) has been the latest gold rush in the tax frontier, drawing business owners, tax deputies, and even a few sly outlaws. But as the dust settles, the IRS—our law keeping sheriff—is on the hunt for any who might’ve bent the rules. In this frontier of finance, knowing who’s who can keep you out of trouble as the IRS rounds up dubious claims.

Selected Techniques to Monetize Tax Attributes

In the prior article “Tax Trends in M&A and What It Means for Your Clients,” we had discussed certain techniques to, e.g., maximize net operating loss (“NOL”) and interest expense deduction utilization in the context of M&A transactions. This article examines certain additional strategies to monetize expiring, latent, or otherwise disallowed tax attributes.

Do Those Tricks Really Work?

On the website for Axium Wealth, Charles Dombek tells us that: “Most CPAs are historians that tell their clients how much they make, how much they owe, when and where to file their taxes, and oftentimes how to write large checks at the last minute when you least expect.” When it comes to Axium, though: “We help clients recover dollars they unnecessarily pay in State and Federal income taxes.” Axium also helps clients diversify capital into off-market passive real estate and alternative investments. Before Axium, there was The Optimal-Financial Group LLC. Of course many of the readers of Think Outside The Tax Box are CPAs, or EAs or others who both help their clients be compliant and advise on ways to minimize their liability. When I was practicing I would call the things I might suggest my “bag of tricks.”

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  • Avoiding Passive Loss Limitations Through Short-term and Alternative Rentals

    Short-term rentals like AirBnb are becoming increasingly popular with taxpayers who invest in real estate. For many taxpayers, the appeal of these properties is the flexibility and cash flow potential. However, there may be an overlooked third tax benefit. In many situations these short-term rentals may not qualify as a rental activity to the IRS, and that may offer a big tax break. While many rental activities generate losses, this can leave taxpayers facing the frustrations of not always getting to deduct those losses right away due to the passive activity limitations.

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    How Business Owners Can Boost Income by Avoiding the $10,000 SALT Cap

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    GOFUNDME & KICKSTARTER: TAXABLE? DEDUCTIBLE?

    Millions of taxpayers in the United States are using crowdfunding websites like GoFundMe and Kickstarter to raise money for important needs, such as paying medical bills, paying legal fees, or funding a new business venture. Both the IRS and the courts have been surprisingly silent on the tax consequences of crowdfunding platforms. The good news is that established tax law provides a clear road map for answering most tax questions created by raising money from a crowdfunding website. By knowing these rules, taxpayers can use crowdfunding to raise cash and minimize their overall tax exposure.

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    My Client Stuck with a Mistaken C Corporation Election?

    My client formed three limited liability companies (LLCs) to hold his rental properties. Without consulting me, he filed Form 8832, Entity Classification Election, to elect C corporation treatment, effective January 1, 2020, for these LLCs. I want the LLCs to be disregarded entities, which is the most tax-efficient structure for his situation. What is the best way to undo these elections?

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    Quick Guide to Claiming Work-From-Home COVID-19 Expenses to Reduce Your Tax Bill

    This information is particularly important if you are the owner/shareholder of your own corporation – C or S corp. You can set up payroll and designate tax-free reimbursements for you to be working at home – as well other tax-free money for you and for your employees. (We will discuss employees momentarily. Yes, it’s essential.) If being an employee is your main source of income – watch out! The short answer to employees claiming an office in home deduction this year is... There is no deduction!

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    Five Tax Reduction Strategies for the Casual Cryptocurrency Owner

    With so many people looking for more ways to make money outside their 9 to 5 jobs, many are turning to money making methods using technology including trading in cryptocurrency. For tax purposes, the IRS considers cryptocurrencies property, not as currency. Just like other property types, stocks, investments, or real estate, when you sell, swap, or otherwise dispose of your cryptocurrency for more or less than you acquired it for, you incur a tax reporting obligation. As an example, there would be a $1,000 capital gain if 0.1 bitcoin is bought for $2,000 in June of 2020 and then sold for $3,000 two months later. This profit must be reported on the tax return and a certain amount of tax is due on the gain, depending on the tax bracket of the taxpayer. In this example, the gain would be short term requiring the profit to be taxed at the filer’s ordinary tax rate. These rates range anywhere from 0-37%.

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    Extra Taxes on S Corporation Distribution?

    My client plans to take about $15,000 in distributions in excess of his basis from his S corporation construction business. I know this generates tax for him. He’s in the 32 percent tax bracket and single. Does he also have to pay the 3.8 percent net investment income tax and the 0.9 percent additional Medicare tax on this amount? Is there a way for him to avoid taxes on this amount?

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    Reduce Taxable Income Up to $25,000 with Passive Rental Losses

    You have likely heard that owning rental real estate provides great tax benefits. This is true for a multitude of reasons, but there’s one benefit that is arguably the best of the bunch: The Small Taxpayer Allowance for Deducting Passive Rental Losses. Based on average household income levels, more than three-quarters of taxpayers can potentially qualify for this fantastic tax benefit that offers taxable income reduction of up to $25,000.

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