Staff Writer, Author at Think Outside the Tax Box

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Why Can’t I Deduct PPP Payroll Expenses?

Question: Given the recent passing of the stimulus law (CAA 2021) permitting a business to deduct payroll expenses paid with Paycheck Protection Program (PPP) funds, how does an S corporation or Partnership basis negatively impact this? I’m hearing that even though the law allows the deduction, some businesses will have suspended losses due to PPP funds. Which is true? Can a business deduct losses from PPP payroll or not?

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What Is the Best Way Tax Advisors Can Charge for ERC Claims?

Question: How are you pricing Employee Retention Credit claims?

Answer: The Employee Retention Credit (ERC) has seemed more confusing than some of the other tax credits simply because it was mostly ignored by the tax community early in the pandemic. While small businesses happily pocketed PPP funds rather than claim the credit, the choice between the two benefits was clear.

As we now know, business owners can have both PPP loan forgiveness as well as access to the ERC tax credits. But many smaller firms and payroll processors felt overwhelmed by the demand, and with refunds taking months to process, some businesses are often looking for help on their own.

So many new players have entered the game selling access to these credits, up to $33,000 in cash per employee. Firms selling R&D studies and cost segregation are advertising – hard. Most are charging a percentage of the total credit amount.

You don’t want to miss out on this valuable service for your client to capture this free cash, yet many advisors are passing on this work due to the time, research, and education requirements for something that has such a short shelf life. Is it worth losing income to meet everyone’s needs?

Continue reading to check out the results of a short survey asking tax pros how they are charging for this type of work.

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Reduce Your Taxes by Making Your Spouse a Business Partner

Question: Can I save S/E tax and create passive income by having my spouse own my entity?

Answer: Potentially, but it depends on a number of factors.

If you’re a sole proprietor or single member LLC, you’ve probably felt the sting of self-employment taxes (S/E tax).
If you and your spouse work together and you’re not incorporated, the IRS generally considers you a 50/50 partnership and both spouses’ earnings are subject to S/E tax. This is true even if your spouse minimally participates in the activity.

That’s right, even without a partnership agreement, if you and your spouse both share in the profits and losses of an unincorporated business, the IRS considers that you have a partnership owned equally.

The IRS calculates self-employment taxes by apportioning 50 percent of the earnings to each spouse. It’s possible to pay way more than you need to if your profits are more than the threshold for Social Security.

One way around this is to make your non-participating (or passively involved) spouse your business partner. But if you live in a community property state, be sure to follow these guidelines to secure your savings.

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Owner Employee Wages – Do They Qualify For ERC?

Question: I read the recent IRS Notice, but I’m not sure I understand whether or not an employee/owner’s wages qualify for the ERC. Help!

Answer: On August 4, 2021, the IRS released Notice 2021-49 to answer exactly this question – albeit true-to-form in the confusing way only the IRS offers as an explanation.

The notice addresses full-time equivalents, how to stack the ERC with tip credits, the timing of adding back wages for tax purposes, and whether a majority owner’s wages qualify for ERC.

Is it possible the IRS is favoring orphans in this notice? It certainly appears that way. The original text of the CARES Act referenced the rules for Work Opportunity Credits. Specifically, the act indicates that relationships listed in Code Section 51 apply and, while not explicitly saying only payments made to the list of related parties were ineligible, most readers assumed wages to the owners were not disqualified.

Here’s what the guidance now says.

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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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Land Conservation Easements: Tax Avoidance or Evasion?

Question: I was going to look into a conservation easement (CE) for a client and noticed the IRS has focused heavily on compliance efforts for abusive syndicated transactions. Are there any legitimate conservation easement transactions, or is it best to stay away from this strategy until things calm down?

Answer: Sounds too good to be true, right? A $500,000 charitable tax deduction for a $100,000 land purchase in December. In your search for information, you may be scared off by the court cases and Department of Justice investigations of the promoters of syndication easements.

Syndication deals are partnerships that own land ideal for conservation and allow groups of investors to pool their money in the business, which typically will also include other activities beyond just the land ownership.

These deals have come under heavy scrutiny in the past few years as CEs became a listed transaction and more cases have wound their way through the court system. The IRS even announced a settlement program for syndicated conservation easements in mid-2020.

Click here to read the full answer.

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How To Report Officer’s Compensation For A Late S Election

Question: If I am making a late S election for a client, how do I handle the fact that the officer received no officer’s compensation throughout the year?

One of the biggest areas of audit for an S corporation return Form 1120S is officer’s compensation. The IRS collects and examines data from all returns filed and develops a computerized standard of insufficient compensation. Since this area can result in deficiencies for payroll taxes (Social Security and Medicare) for every dollar of distribution reclassified to wage, tax advisors would be wise to avoid risk factors that might raise the risk of audit on officer’s compensation.

By avoiding what resembles unreasonably low compensation, we can help business owners by limiting the number of Forms 1120S without officer’s compensation. However, when making a late S election, what is the rule when officer’s truly have taken no compensation? You might be surprised to learn it isn’t filing a Form 1099. Read on to find out how to reduce the risk of audit, while accurately reporting your first Form 1120S.

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How to Qualify for More Interest Deductions You Didn’t Pay

How to Qualify for More Interest Deductions You Didn’t Pay

Question: Can I increase my business tax deductions with interest the Small Business Administration (SBA) paid during the COVID-19 pandemic?

Answer: In short, yes. But it depends on the type of loan, forgiveness options, and loan status. We here at Think Outside the Tax Box sure like the way you’re thinking!

One of the benefits created through the CARES Act included payments on existing SBA loans. In addition, new SBA loans created through the PPP and EIDL programs included deferred payments for the first six months of the loan.

Depending on your current situation, you may actually qualify for the interest deduction, even if the SBA paid it on your behalf!
To learn how to qualify, continue reading.

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How to Get More Tax Write-offs for Your Rental Property

Question: Do I need to have my LLC hold the title to my rental property to get the tax benefits?

Answer: If you’re like most investors, you probably purchased your rental property in your own name. While this doesn’t keep you from accessing all the special tax breaks available with owning real estate, it does expose you to some risky liabilities.

Insurance can cover a lot of predictable liabilities like slip and falls, theft, and vandalism, but there are many other things that can happen putting not only the property at risk but also your personal assets.

One way to protect against this risk is by using an LLC to hold your property. Most LLCs act like a corporation in providing limited liability protection against creditors for your personal assets and your other non-real estate business activities.

Like most things in law, changing the deed can lead to a whole set of problems. So be sure to think twice before changing your deed. There are two key problems this action can cause you as the property’s owner. Keep reading to learn how to overcome them.

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How to Deduct Even More Expenses as Self-Employed Health Expenses

Question: Can I still deduct self-employed health insurance if my spouse has insurance through their employment?

Answer: You may potentially qualify for the deduction even if your spouse has insurance through their employment.

Healthcare costs seem to be always on the rise, and if you’re self-employed if can be tough to find an affordable option for a single participant plan.

The good news is, the Self-Employed Health Insurance deduction provides an “above the line” write-off helping you not only save tax through a lower taxable income, but it also helps to slash your Adjusted Gross Income (AGI).

Lowering your AGI also helps mitigate the disadvantages of AGI based tax laws. For example, some itemized like medical expenses and charitable contributions can be hampered by the amount of your AGI. In other words, AGI determines how much of certain deductions and tax credits you can take.

There are three steps to qualifying for this deduction including some special provisions that let you sweeten the deal. Did you know you can even write off dental and long-term care insurance as self-employed medical expense? You can! Here’s how to get even more write-offs if you’re self-employed.

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How to Claim the Emergency Relief Credit Fast

Question: How are you pricing Employee Retention Credit claims?

Answer: The Employee Retention Credit (ERC) has seemed more confusing than some of the other tax credits simply because it was mostly ignored by the tax community early in the pandemic. While small businesses happily pocketed PPP funds rather than claim the credit, the choice between the two benefits was clear.

As we now know, business owners can have both PPP loan forgiveness as well as access to the ERC tax credits. But many smaller firms and payroll processors felt overwhelmed by the demand, and with refunds taking months to process, some businesses are often looking for help on their own.

So many new players have entered the game selling access to these credits, up to $33,000 in cash per employee. Firms selling R&D studies and cost segregation are advertising – hard. Most are charging a percentage of the total credit amount.

You don’t want to miss out on this valuable service for your client to capture this free cash, yet many advisors are passing on this work due to the time, research, and education requirements for something that has such a short shelf life. Is it worth losing income to meet everyone’s needs?

Continue reading to check out the results of a short survey asking tax pros how they are charging for this type of work.

Read More

How Late Is Too Late to Request a Late S Election?

Question: How Late Is Too Late to Request a Late S Election?

Answer: Late in 2020, the IRS issued a Private Letter Ruling related to a late S election request for relief. Generally, you must file a request to become an S corporation no later than the 15th day of the third month of the taxable year for which the election is to take effect. If you miss this deadline, or don’t file an election at all, the business is generally considered a C corporation or LLC.

If you’re like most business owners, however, you may not have known at the time you formed your business all the tax benefits available to you by holding your business as an S corporation. Whether you were unaware, or for some other reason, it may be well past the official IRS deadline to make this request for the current or recently ended tax year.

If you haven’t yet filed your tax returns at all, you may be qualified to use the relief available by following the proper procedures. You may also wonder, “How far back can I go in changing the way my business income is taxed?” To learn more about how far back and how long you can be “fashionably late,” continue reading.

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Go the Extra (Tax) Mile

Question: Can my business still take a deduction for my car if the title is in my name?

Answer: If you want to get all the business deductions you are entitled to for your car, it’s better to have the vehicle titled in your business’s name. Most taxpayers continue to use their vehicles for both personal use and business purposes, as a result, most car titles show just the individual’s name as the owner. This can present a big problem and potential lost deductions, especially due to the Tax Cuts and Jobs Act (TCJA).

It is important to review the rules since they have changed recently. You may have deducted expenses on past tax returns as an unreimbursed employee vehicle expense. But under tax reform, the miscellaneous itemized deductions were repealed until 2026, and this is an important rule change. Read on to learn how to still benefit after tax reform and why it can help you go the extra tax mile to title the car in your business’s name.

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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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Extra Taxes on S Corporation Distribution?

Question: 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?

Answer: Without planning, yes, the taxpayer has to pay tax on this excess distribution amount. There is a completely legal way to either avoid or substantially reduce this tax, though. Read on to learn how.

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Closing the Tax Gap – An Enticing Alternative to Raising Taxes

The tax hikes on wealthy Americans included in President Biden’s economic recovery plan last spring have been a battleground for bipartisan debate for most of 2021. Now, the Senate Republicans have pushed aside the administration’s proposal to increase funding for the Internal Revenue Service, for the moment. We will take a closer look at the proposed IRS funding, the reasons it is necessary, and how the same wealthy Americans could end up the most impacted by the proposal.

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Can I Double Dip? Qualifying for Both PPP Forgiveness and COVID-related Tax Credits

Question: Is it possible to qualify for both PPP forgiveness and COVID-related tax credits?

Answer: The short answer, of course, includes, “it depends.” We were fortunate that the Consolidated Appropriations Act passed in December 2020 made it so that businesses that received PPP loans may now be eligible for the Employee Retention tax credits retroactively.

The tax credits are great – a dollar for dollar reduction of tax, and for 2020 the value is up to $5,000 per employee!
It is a credit against the employer’s share of the Social Security tax, but it is refundable, so if the amount of the credit is more than the tax, you’ll get free cash from the IRS.

In addition, we’ve discussed previously in Think Outside the Tax Box about paid leave tax credits and even how to get them if you are a small business. These credits are also applicable even if you received PPP forgiveness provided you otherwise qualify.
Here’s where it gets complicated. You can stack the benefits, but you can’t double dip. While no one likes a double dipper at the snack bowl (especially during COVID) there are ways to get the benefit from forgiven PPP funds and tax credits allowing you to have your chips and “dip” them too.

Keep reading to learn how to legally take these benefits.

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Can I “Nominee” Income From a Schedule C to Another Return?

I have a few physician clients who earn their income via Form 1099 and are perfect candidates for an S corporation. However, the hospital won’t issue the Form 1099 in the name/EIN of an S corporation. Is this an issue? Can I still report the income on the Form 1120S and report the Form 1099 on a Schedule C with a negative adjustment for the same amount and attach an explanation annually? Or is there any other way?

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CURRENT EDITION

Electric Vehicles Credits - Worth It

Are Electric Vehicle Credits Really Worth It? Spoiler Alert: It Depends!

It happens all the time. A client comes in with the receipt for their new hybrid or electric vehicle and is expecting a huge tax credit to offset some of the purchase expense. It’s a fact that hybrid and electric vehicles cost more (some estimates say an average of $19K more) than their internal combustion engine (ICE) based counterparts. And, despite the fact that hybrids and fully electric vehicles continue to gain market share, it has continued to be difficult to quantify exactly how much fuel and maintenance cost savings offset the larger price tag. Often, the time span for offsetting the difference in purchase price is much longer than many taxpayers want to keep their cars. Taxpayers often hope tax credits will help them to recoup the difference in purchase price more quickly than fuel and maintenance cost savings. Do they? Are electric vehicle tax credits really worth it? Well—it depends.

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.

Crypto and the Wash Loss Rule

Wash Up for Tax Savings – Cryptocurrency and the Wash Loss Rule

When recognizing capital gains during a tax year, it can often make financial sense to sell assets that have lost value to offset profits in other investments or regular income. In this situation, you swap stocks, bonds, or mutual funds by buying a similar asset, selling the old asset and taking a loss.

This strategy is called tax-loss harvesting, and it can be applied under certain circumstances which will lower your taxes. Yet while the tax deduction might seem appealing, you might have a hard time locking in that loss forever, and you may be inclined to repurchase the same investment in case the value rebounds.

This strategy may appear brilliant on paper; however, the IRS doesn’t allow such manipulation just to reduce taxes.

The Wash Loss Rule prevents traders from realizing a tax loss on a position that the taxpayer reacquires within 30 days after (or before) selling a security.

But a little known loophole may allow you to complete a wash sale and claim your deduction without recognizing the loss forever as long as it is crypto.

Cryptocurrency continues to be an area where the rules don’t always seem to make sense. Most experienced investors are already familiar with the “Wash Loss Rule,” while many newer investors have recently learned about it the hard way.

To learn this valuable strategy for offsetting your capital gains while remaining in the investment gain for expected future growth, continue reading to learn more.

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    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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    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?

    Read More

    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?

    Read More

    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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