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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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 Bucket List (Part 2): Living Large in Retirement While Minimizing Your Taxes

In Part 1 of this series, we took a deeper dive into IRMAA planning and minimizing tax on your Social Security benefits. You play a large role in shaping your retirement years in terms of lifestyle and financial health. Think of taking advantage of the many techniques to lower your tax during your retirement years as another aspect of self-care. By treating your financial health and well-being as carefully as you treat your mental and physical well-being, you can ensure that you have resources to attain your financial goals and support yourself in the style for which you’ve planned. In my practice, I see a wide range of client behavior surrounding retirement – from no planning to thoughtful, long-range planning. Looking ahead, whether you’re working with your tax professional and financial team or whether you’re planning on your own, pays off enormously.
Please read on for some additional tips and techniques for tax savings involving charitable giving, Roth IRA conversions, and minimizing capital gains taxes – and two more examples.

Don’t Overpay: Determining the Fair Market Value of Cryptocurrency Airdrops

To the non-crypto enthusiast, the term “airdrop” may conjure an image of a pallet of relief supplies parachuting in from above. In the cryptocurrency world, the term has a very different meaning, but conjures the same mental image.

In the simplest terms, a crypto airdrop is a token that appears in your wallet without being purchased, although in some cases additional actions may be necessary to facilitate the transfer of the asset.

An airdrop can take several different forms, the most basic of which is an unsolicited token that simply shows up in your wallet. This is typically done as a marketing campaign, to try to expand the user base of a new project. Generally, only a nominal amount of the token is distributed.

Many times, this type of airdrop is done maliciously as part of a phishing or dusting attack. The vast majority of these airdrops are unwanted; they function as cryptocurrency’s version of “junk mail.”

Other airdrops are used to reward users of a particular protocol for their past behavior. Typically, this will take the form of a governance token or some other newly minted token.

Occasionally, the new token will automatically be deposited in the recipient’s wallet, but most of the time the user will need to connect their wallet to a website and actively claim the reward.

You may also be required to pay a gas fee to enable the transfer. Many airdrops of this type contain tokens of substantial value, so proper determination of when receipt takes place and what the fair market value (FMV) is can have considerable impact to tax.

While the two previous examples are the most common form of airdrops, they are not limited to the above. In practice, any unsolicited token received is generally considered an airdrop. This can also apply to non-fungible token (NFT) and game-based environments.

Small differences in the facts and circumstances of the airdrop may have outsized impacts on taxability and your planning opportunities. Keep reading to learn more.

Just Good Business – Develop or Review Your Employee Handbook

An employee handbook is usually designed to cover everything a new hire needs to know to get started at their job. Depending on the size of the company “everything a new hire needs to know” can be either a vast amount of information or a much smaller amount. Many small, closely held businesses may not have an employee handbook because they don’t feel they are large enough to warrant it or they (mistakenly) believe that necessary information is getting communicated effectively and consistently to all staff members. Often having an employee handbook isn’t something most businesses think about until it’s too late (for example, when an employee files a lawsuit for discrimination or a worker’s compensation claim). Even businesses that have an employee handbook may not give it much thought once it has been developed. But developing and maintaining a useful employee handbook is just good business. Why? The employee handbook explains a company’s culture and values and is a valuable reference tool for employees looking for information on company policies. It can save management time (and money) and can help to prevent or mitigate legal issues for the company.

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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

    Taxpayers have been whipsawed by confusing rules for the $10,000 limit on deducting state and local taxes (SALT), the most politically charged piece of the Tax Cuts and Jobs Act (TCJA) of 2017. The cap has caused nearly 11 million individuals to lose an annual deduction worth $323 billion. But many owners of private businesses known as passthroughs can avert that financial pain. If you own your company and thus report your business income on your personal federal income tax return, here’s what you need to know.

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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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