Question: I’m familiar with Qualified Improvement Property (QIP) and the technical correction made in 2020. What is everyone doing for returns when, if corrected, the client could benefit? Is it something you can amend the 2018 tax return for if you took a 179 expense instead of a bonus?
Taxes can be a maze of numbers and jargon that leave even the savviest individuals scratching their heads. But what if there was a secret method that tax professionals were using to make it all seem as easy as child’s play? Introducing the ELI5 approach!
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?
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.
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.
Why wait to deduct your depreciation over time? You can speed up your deductions with new increased depreciation rules making it possible to get your benefits up front. Here are four ways to deduct your business assets faster and save more tax now.
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.
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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
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.
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?
The House recently approved new tax legislation, some of which applies retroactively to 2023. Reliable reports suggest that the Senate likely won’t vote on their version of the bill until later this month or possibly in March due to a two-week recess starting on 02/12/2024 – if they even approve it at all. Should the legislation pass, that would mean that there has been only one filing season (2023) in the last five (2020-2024) where tax law changes and other issues have not affected the filing season. We know that these sorts of changes have huge implications for the timing of service you can offer your clients, as well as the price you may need to charge for your work.
Tax rules are generally designed with a purpose in mind. Most rules serve to define the tax base and tax rates. Many others serve a behavioral purpose to encourage or discourage certain activities. The focus of this article stems from tax rules that are a combination of favoring certain activity such as generation of capital gains, and a limitation on such gains for certain taxpayers, such as the so-called “hot assets” rule for partners under IRC Section 751, Unrealized Receivables and Inventory Items. While Section 751 has been in the tax law for decades, a new application of it was raised by both the IRS and California FTB. This article summarizes Rawat, TC Memo 2023-14, rev’d, No. 23-1142 (DC Cir., 2024), and FTB Legal Ruling 2022-02, and offers observations on their relevance to tax research and practice.
Astronomical expenses crop up more than ever in our economy. From medical bills, business startups, a long-cherished artistic project, it feels like things are harder to afford now than ever. But the internet has also helped create a revolutionary way to raise large amounts of money for some of these causes: crowdfunding. But what does that mean for when the Tax Man comes calling?
Somehow I got through the last thirty years without ever hearing of Dave Ramsey. Now when I go on YouTube, which I do way too often, there is usually a Dave Ramsey video or a video by one of his critics in my feed, sometimes several. I have also looked at a few of his books. I was once told that because I am an Aquarian I want everybody to get along. So I am going to try to reconcile Ramsey’s recommendations and the significant criticism of them.
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Tax rules are generally designed with a purpose in mind. Most rules serve to define the tax base and tax rates. Many others serve a behavioral purpose to encourage or discourage certain activities. The focus of this article stems from tax rules that are a combination of favoring certain activity such as generation of capital gains, and a limitation on such gains for certain taxpayers, such as the so-called “hot assets” rule for partners under IRC Section 751, Unrealized Receivables and Inventory Items. While Section 751 has been in the tax law for decades, a new application of it was raised by both the IRS and California FTB. This article summarizes Rawat, TC Memo 2023-14, rev’d, No. 23-1142 (DC Cir., 2024), and FTB Legal Ruling 2022-02, and offers observations on their relevance to tax research and practice.
Astronomical expenses crop up more than ever in our economy. From medical bills, business startups, a long-cherished artistic project, it feels like things are harder to afford now than ever. But the internet has also helped create a revolutionary way to raise large amounts of money for some of these causes: crowdfunding. But what does that mean for when the Tax Man comes calling?
Somehow I got through the last thirty years without ever hearing of Dave Ramsey. Now when I go on YouTube, which I do way too often, there is usually a Dave Ramsey video or a video by one of his critics in my feed, sometimes several. I have also looked at a few of his books. I was once told that because I am an Aquarian I want everybody to get along. So I am going to try to reconcile Ramsey’s recommendations and the significant criticism of them.
Considering hiring your kids to work in your business or renting property you own to your business to save money on taxes? Both of these strategies can work (and work well), but often those promoting them (the mainstream media, social media, etc.) hold forth heavily on the benefits of the strategies without considering the nuances and fine print that can end up costing money rather than saving it if you end up on the bad side of an audit. Keep reading for how to maximize tax savings on summer homes and summer jobs without getting burned.
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Are you seeking clarity on whether employee owners can claim the Employee Retention Credit (ERC) tax credit for yourself? Or perhaps you want to know whether qualifying for the Recovery Startup Business bonus is really that easy. You’re in luck! On August 4, 2021, the IRS released Notice 2021-49 to answer our questions related to the definition of wages, majority owner wages treatment, timing of the deduction disallowance, and recovery startup businesses. The ERC has been a phenomenal tax credit getting much needed cash to qualifying businesses using qualifying wages paid between June 30, 2021, and January 1, 2022. It hasn’t been uncommon to see small businesses recovering $50,000 to $200,000 in cash refunds just by claiming the credits for wages paid during 2020. The recovery startup business element of the CARES Act incentivizes new businesses to hire employees by offering up to a possible $100,000 in refundable credits using wages paid in the third and fourth quarters of 2021. This means if you hire seven employees (who are unrelated to you) in your new business, which began after February 15, 2020, and their average earnings are $10,000 for the quarter or more, you can receive up to $100,000 in credits. Naturally, we’ve received a lot of questions related to this lucrative credit and so has the Treasury Department. If you’re wondering how the IRS weighs in on how to maximize these tax credits, keep reading because we have six clear ways to qualify for even more money!
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2020 saw a huge increase in taxpayers working from home. A good internet connection can allow taxpayers in many industries to work almost anywhere. Whether it is because the typical workspace has closed or there’s a need to be home to care for a family member, the shift to working from home can come with substantial tax savings. Claiming the home office deduction allows the taxpayer to take a typically non-deductible expense and make it deductible, reducing the amount of income subject to tax. The most important item to note is the Tax Cuts and Jobs Act of 2017 (TCJA) suspended this deduction for employees until 2025. However, this deduction is still available to taxpayers who are self-employed or independent contractors. (Some states may still allow a deduction for an employee). While it’s not as easy as claiming the expenses and calling it a day, home office deductions provide fantastic ways to get a tax deduction for amounts you ordinarily would spend but are not eligible as write-offs. Keep reading to learn the details and how to deduct things like your homeowner’s association dues, security systems, and other home improvements.
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One of the most common non-tax questions clients ask tax professionals is “How long should I keep this?” “This” could mean bank records, copies of tax returns, or virtually any other piece of business information. This reasonably comprehensive overview focuses on keeping business records for tax compliance, specifically, what to keep and how long to keep it in case a taxing authority ever decides to examine (audit) a business return. Records management is an entire field unto itself! Hiring an in-house records manager is beyond the needs or the budget of most small businesses, but it’s important to understand that proper records management is serious business.
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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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Your optimal choice of entity depends on many factors, including which tax breaks and loopholes are available for that entity type. The C corporation leaps to the top of entity choices if your C corporation stock will qualify as small business stock (QSBS). The tax law gives two huge tax breaks to QSBS: 1. Up to $10 million of gain exclusion upon sale or the stock’s liquidation; or 2. Tax-deferred rollover of gains if the taxpayer purchases additional QSBS. But beware: There are two issues that are ambiguous under the law that could cause you to not qualify for either of these tax benefits. Read on to learn more!
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The COVID-19 pandemic has altered many aspects of our society, perhaps permanently. One of these is the need to physically go to the office to get work done. Like all businesses, partnerships are no exception. While the Tax Cuts and Jobs Act of 2017 (TCJA) suspended this deduction for employees of the partnership until 2025 . However, partners may still take advantage of this often-overlooked tax benefit. The key is in how to report it. Read on to learn how!
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It’s every tax professional’s favorite answer to the question “How is your business organized?” “I have an LLC.” It’s the non-answer answer. Unfortunately for many clients and practitioners, clients often decide to form an LLC for no reason other than “they said I should” and more often cannot provide a good answer when the practitioner asks, “Who is ‘they?” Ideally, small business clients should consult both an attorney and a tax professional when deciding to form a business entity under state law. Because while state law governs entity formation and many aspects of entity administrative compliance, federal and state tax law determines which tax returns you need to file and which tax laws apply to the entity. It is just good business to make a mindful, proactive choice when choosing a type of business entity. Making a conscientious choice means asking the right questions. And when choosing a business entity, asking the right questions means asking questions about matters other than simply tax considerations.
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