March 28, 2024
IRS Extension Time – How to file
There are three ways to request an extension. Each of these gives you the chance to make a payment with the extension request if you think you will owe tax. Once submitted, these all serve as your proof that you made a timely extension request, so be sure to keep a copy for your file in case you need to prove it later.
All of these options start online at the IRS website: irs.gov
1. File by Mail
Go to the below link, fill in Form 4868 with your name, address, social security number, enter the total amount of tax you think you will owe, enter any payments you’ve made either through withholding or payments directly to the IRS, subtract to get the balance due with the extension. Print the form and mail certified with any payment if needed at the post office no later than their normal business hours. Most post offices no longer have extended hours on April 15th. You have to be there before they close.
https://www.irs.gov/pub/irs-pdf/f4868.pdf
2. File through a Tax Software Vendor
Go to this link below and select one of the trusted partners listed on the IRS’s website. These are private software companies that sponsor the tax software that can be used by taxpayers directly. This service is free if your income is below $79,000. If your income is higher than this, then the provider will charge a fee. However, all of the providers allow any taxpayer, regardless of income, to setup an account with them and electronically file the extension request for free. You’re not obligated to finish your return with them, but make sure you print a copy of the form or the confirmation in case you need to prove you made a timely request.
https://www.irs.gov/filing/free-file-everyone-can-file-an-extension-for-free
3. File directly with the IRS
This is our recommendation. It allows your extension to be filed securely and electronically, and you’ll get an immediate confirmation that it was filed. You don’t have to set up an account, either with the IRS or through a third-party vendor. The only downside to this system is you HAVE to make a payment to use it. But there is no minimum. If you pay $5 or $10 to get the extension electronically filed, you will use that as a payment when you file your return. If you are due a refund, you’ll get it back. If you owe tax, it will reduce what you owe. Remember, if you underestimate the amount, you’ll have a late payment penalty. But you’ll avoid the expensive late filing penalty. To file using the IRS.Direct Pay system, go to this link:
https://directpay.irs.gov/directpay/payment?execution=e3s1
· Select EXTENSION for the reason
· It will auto fill 4868 (for 1040, 1040A, 1040EZ)
· It will autofill 2023 for the tax year
· Select Continue
· Select Continue to confirm
In the next section you’ll enter a year to “verify identity”. This should be the most recent year the IRS has a tax return on file for you, most likely 2022. Enter your filing status, name, and address EXACTLY as it was on that year’s return, even if any of these are now different. You’ll also enter your SSN and, date of birth. Continue to the next screens to enter your bank account information, payment amount, verify, and then submit. Print a copy before you submit so you have a record of what you entered, but you will get a confirmation number. Print that too. If you file a joint return, only one of the taxpayers needs to file, but if you think you MIGHT want to file separate returns, you’ll both need to ask for an extension.
It's not as hard as it may sound. Once you do a couple they are very straightforward. The only tricky part is making sure you’re matching the identity fields. If your last tax return had your middle initial, you’ll need to enter your middle initial. If it didn’t, then you won’t. Once you get through that match-up, the rest is just data entry.
We hope this helps. After you’ve completed your extension, if you want to call us after April 15th for an appointment, we are happy to talk with you and see if we are a good fit for what you need in a tax professional. We will take a few days after April 15th to catch our breath, then we’ll be on to Extension Season.
March 2, 2024
IRS ERC Voluntary Disclosure Program
The ERC program has been a prime area for fraudster who misled many employers into thinking they were eligible for refunds under a very general “impacted by Covid” interpretation of requirements. Many ERC refund companies sprung up almost overnight and aggressively marketed to employers that they were eligible for huge refunds, and for a 10% – 30% cut, these companies could get the employer the money they were entitled too. Unlike most Covid programs that ended quickly, this one had a long open period.
Up until the summer of 2023, these refunds were issued by the IRS without verification. During the summer of 2023 the IRS began slowly tracking the refunds, validating the claims. On September 14, 2023 they issued a moratorium on processing any further refunds, and discussion is now in Congress to officially terminate the program. For the 2020 year, the statute of limitations runs out April 15, 2024 and for the 2021 year the statute naturally will end the program on April 15, 2025. The IRS has warned repeatedly about these scams:
https://www.irs.gov/coronavirus/employee-retention-credit#beware
The IRS is now offering taxpayers one more chance to avoid audit assessments that will include substantial penalties and interest. In an audit assessment, the IRS will recover 100% of the erroneous refund, meaning the taxpayer has to also pay back the 10% - 30% fee that the ERC refund fraudsters kept, as well as being hit with interest and penalties for fraud.
Recognizing that many taxpayers were caught up in this by scam promoters, the IRS is offering, for a limited time, a Voluntary Disclosure Program. If an employer signs up and agrees to provide any information the IRS needs to go after the fraudsters, the employer only has to pay back 80% of the refund. They will avoid penalties and interest assessments. This Voluntary Disclosure Program is a limited time program – it’s only open until March 22, 2024. After that, there will be no relief and on audit the business will pay significantly more in tax, penalties and interest.
For employers who filed refund claims through companies that were aggressively marketing the program, we expect there to be a high audit rate. Historically once the IRS identifies a fraudulent tax preparer filing bad returns, they will audit a large number of that companies’ clients. There is reason to expect the IRS will approach these audits in the same way.
It’s hard to say how they will approach the audit process, but the fact that they are offering taxpayers a “come clean” option tells us they are planning a massive audit process. Given the high incident of spam marketing, and the high dollar amount of refunds issued, it is reasonable to assume this will be a key focus for the IRS.
If you filed a refund claim through your CPA firm, and they clearly explained the qualification rules and determined you were eligible, you may still undergo the audit process, but chances are better that your refund was legitimate.
If you filed a refund claim through a third party who asserted that “everyone qualifies”, and took a percentage of the refund as their fee, and are no longer around to face the audit with you, you should consider participating in the voluntary disclosure program. You will get to keep 20% of the refund, and will need to cooperate with the IRS in any information they request about the company that filed the refund claim for you. The IRS is targeting the fraudster who perpetuated the fraud, not the taxpayers who got caught up in the scam.
This a limited time offer – the ERC-VDP is only open through March 22, 2024….here’s more information from the IRS on the program:
https://www.irs.gov/coronavirus/employee-retention-credit-voluntary-disclosure-program
If you have any questions, please give us a call.
FEBRUARY 23, 2024
Changes coming for QuickBooks Desktop users
Over the past few years, QuickBooks has transitioned the terms of their Desktop products in order to make the Desktop version more comparable to QuickBooks Online. Where you could once upon a time purchase a version for around $250 and upgrade every three years, the Desktop version is now being sold as an annual subscription.
One caveat to this new pricing platform is that if you do not have a current credit card on file upon renewal, your desktop file is made inactive, or read-only, until you have connected your account with updated payment information. While the annual subscription appears inconvenient at best, with the discontinuance of new subscriptions beginning July 31, 2024, it is now necessary to maintain your subscription if you want to continue to use your desktop software and receive the newest versions each year.
The same holds true for your payroll subscription. You will want to make sure you have current payment information on file before July 31, 2024 in order to continue to use QuickBooks Desktop payroll. If you are still using the Standard Payroll subscription, we strongly advise you to upgrade to Enhanced Payroll as Standard Payroll is no longer offered. If you are not using Enhanced Payroll by the July 31 deadline, it will also no longer be offered to new subscribers.
For more information on this topic, you can visit the Intuit article:
FEBRUARY 10, 2024
New BOI Reporting Requirement for Businesses
All businesses need to be aware of a new federal requirement to register with the Financial Crimes Enforcement Network of the U.S. Treasury Department, also known as FinCEN, that went into effect on January 1, 2024. The new rules require businesses to register with FinCEN, and to report personal information for all individuals who have a “Beneficial Ownership Interest”. This information will be retained by the federal government in a non-public database, and will be shared with agencies who are granted access to the information.
There are some noted exceptions for certain businesses that already have licensing or regulatory oversight, but most businesses will need to report their information by the prescribed deadlines. Any business formed under a Secretary of State, including limited liability companies (LLCs), partnerships and corporations, or who register a trade name, etc. will most likely need to file. If you are conducting business in any manner, you need to be informed.
You only need to watch the first 5 minutes of the 12 minute video on FinCEN’s website, from Brian Nelson, the Undersecretary of the Department of Treasury, to realize the rules are not as simple as they may sound. And the penalties can be severe: the new law provides for civil penalties of $500/day, AND criminal penalties of $10,000 and 2 years in prison for willful failures to comply.
The new federal law requires all businesses that were formed prior to January 1, 2024 to register with the FinCEN (the Financial Crimes Enforcement Network) no later than January 1, 2025. Any businesses forming AFTER January 1, 2024 must register within 90 days of formation. The FinCEN website includes a link to file the information electronically. In addition to the name, physical address (NOT a P.O. Box), and federal EIN of the business, the reporting also includes the personal information of anyone who has a “beneficial ownership interest”, or BOI.
A BOI may include someone who doesn’t have actual ownership, but has control in the decision making including a CEO, CFO or other officers, a trustee, or a family member who does not have ownership, but who helps control operational decisions. For a BOI, their name, date of birth, physical address, state identifying numbers will be reported, along with photo documentation that must be uploaded to the site (most commonly a driver’s license).
Once a business meets its initial filing obligation, it must also report any change in any of the information, such as a change of address for the business or any of the BOI’s, within 30 days of that change.
The determination of who has a “beneficial ownership interest” is subject to facts and circumstances, and also legal interpretation of the rules. This falls under the practice of law, and for this reason, the American Institute of Certified Public Accountants (the AICPA) has advised that our profession cannot provide this service. Our malpractice insurers have quickly followed this course as well.
Our role in all of this is to try to bring awareness of the new requirement to our clients and the business community, and to advise them to seek legal counsel on the matter if necessary. We will be overcommunicating this during the year in this effort.
There is a lot of information on the FinCEN website, including videos and access to the online filing portal:
What is also notable on their website is the fraud alert in the middle of this page: it appears that nefarious companies are already targeting businesses to reveal this sensitive information, and/or to charge fees to ensure compliance. Now, more than ever, you need to work with a trusted advisor. In the age of internet access to an entire world of service providers, now more than ever you need to know, and trust, who is advising you.
If you have any general questions, please don’t hesitate to call us. If you have specific questions regarding what your company should do to comply with these rules, please contact your attorney.
JANUARY 15, 2024
Commercial Activity Tax Changes
Major changes to Ohio’s Commercial Activity Tax will take place this year. For tax periods beginning on or after January 1, 2024 the following changes will be in effect:
The annual minimum tax is eliminated.
The annual exclusion amount is increased to $3 million.
Taxpayers with taxable revenue of $3 million or less per calendar year will no longer be subject to CAT.
Additionally, on January 1, 2025 the following changes will take place:
The annual exclusion amount is increased to $6,000,000.
Tax payers with taxable revenue of $6 million or less per calendar year will no longer be subject to CAT.
If your business has revenue of less than $3 million and you don’t expect to reach that threshold, you will need to cancel your CAT account at the time you file your 2023 4th quarter or annual CAT return with an effective date of December 31, 2023. If the CAT filing is something our office provides as a service to you, we will take care of canceling your account at that time. If this is not a service we provide to you, and you would like us to assist with canceling your account, please reach out to our office.
More information can be found at: https://tax.ohio.gov/business/ohio-business-taxes/commercial-activities/changes_to_ohios_commercial_activity_tax
JANUARY 5, 2024
Ohio Minimum Wage Increase
Ohio is one of several states increasing the minimum wage in 2024.
Ohio’s minimum wage is scheduled to increase Jan. 1, 2024, to $10.45 per hour for non-tipped employees and $5.25 per hour for tipped employees. The minimum wage will apply to employees of businesses with annual gross receipts of more than $385,000 per year. However, if the businesses’ receipts are less than $385,000 per year, they can follow the Federal minimum wage of $7.25 per hour.
The 2023 minimum wage was $10.10 per hour for non-tipped employees and $5.05 per hour for tipped employees. The 2023 Ohio minimum wage applies to employees of businesses with annual gross receipts of more than $372,000.
The federal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA). The federal minimum wage is $7.25 per hour effective July 24, 2009. Many states also have minimum wage laws. Some state laws provide greater employee protections; employers must comply with both.
Small business is subject to the rules of the FLSA so long as it generates at least $500,000 or more in annual sales, and if their employees operate business across and between states.
https://www.paycom.com/resources/blog/minimum-wage-rate-by-state/
https://com.ohio.gov/about-us/media-center/news/ohio-minimum-wage-to-increase-in-2024
Please call us if you have any questions. We would appreciate the opportunity to support your business accounting needs.
December 14, 2023
E-File Requirements for Information Returns
Effective with the 2023 filing year, the Internal Revenue Service is requiring that all businesses who file 10 or more W-2s and/or 1099s, file electronically. This change will eliminate the need for businesses to purchase the red copies of these forms, as they will only need to provide copies to the recipients and cities where tax was withheld.
Many payroll software companies offer an option to file the W-2s electronically free of charge. When it comes to filing 1099s electronically through your accounting software, there may be a charge. This is the case when using QuickBooks Enhanced Payroll. QuickBooks Enhanced will electronically file W2s without a charge, however there is a per-vendor charge for filing 1099s.
As an alternative, the IRS created a new, free online portal to help businesses file Form 1099 series information returns electronically. Known as the Information Returns Intake System (IRIS), this free electronic filing service is secure, accurate and requires no special software. Though available to a business of any size, IRIS may be especially helpful to any small business that currently mails paper copies of their 1099 forms to the IRS. You can find more information on creating an IRIS account at the following website.
https://www.irs.gov/filing/e-file-forms-1099-with-iris
It can take up to 45 days for processing, therefore, you should apply online as soon as possible.
FebRuary 10, 2023
Rate Change Alert
Lancaster City Income Tax Rate Increased
We are quickly up to speed for Tax Season 2023 and thanks to all of our clients who seem to be getting their information in earlier this year….that really helps!
We are making a public service announcement in this Tax Byte, reminding everyone, or perhaps making them aware for the first time, that the City of Lancaster had an Income Tax Rate change effective January 1, 2023 increasing it from 2.2% to 2.3%.
Here’s a link to the City’s website that discusses this:
https://www.ci.lancaster.oh.us/191/Income-Tax
If you have Lancaster City Tax withheld from your pay, OR you’re responsible for any payroll for employees working inside Lancaster, double check your system software and paystubs to make sure the right rate is in your system.
If you make any city estimated tax payment you should factor this rate change in as well.
As always, contact us if you have any questions.
october 25, 2022
ERTC Refund Claim – Part II
We continue having conversations with clients about the Employer Retention Credit, especially since our last Tax Byte where we warned of the aggressive sales tactics being used by what the American Institute of CPAs (AICPA) has termed “credit mills”. This is in no way meant to discourage those companies who legitimately qualify for the program from applying. There are bright line tests that we discussed last time. We filed many of these refund claims for our clients who qualified, and did it BEFORE we filed the income tax returns for 2021 so that there was no need to amend these returns. We are still able to assist others who qualify for the program, the process is just more complicated now because the payroll AND the income tax returns will need to be amended. Still, it can be worthwhile.
Our caution is from those companies making the assertion that because all businesses were impacted by government Covid restrictions, all businesses qualify. Stop for a minute and ask yourself: Is this what I think Congress intended when they made the rule? Does this sound too good to be true? And then ask these questions to the company making the pitch:
• What did your company do before the ERTC program?
• What will your business plan be after 2024, when the claim period expires?
• Does your company sign the amended IRS Form 941 returns as a paid preparer?
• Does the IRS review/pre audit the refund claim before sending out the refund check?
• How long does the IRS have to audit these amended returns?
• Does the filing of these returns extend the IRS’s time to audit these returns?
• What can happen if the IRS examines these refund claims?
• Will you be there during the audit period to represent us before the IRS, in case of audit?
• What professional standards is your company subject to?
Again, there are legitimate opportunities that do not take “uncertain tax positions” and this is not just Snyder & Company sending the warning. The AICPA has been watching this arena and has taken a strong position for companies using uncertain tax positions when preparing their financial statements “in accordance with generally accepted accounting standards” also known as GAAP. They are requiring the refunds be held on the balance sheet until after the audit period has expired. Here’s a link to the IRS bulletin from last week…..it’s obvious they are watching this closely as well:
Please call us if you have any questions – and ask us all the questions above. We’re happy to help you take advantage of this opportunity if your situation falls within the guidance of the IRS and our professional standards. AND we’re not allowed to charge a contingent fee, it’s considered a violation of our professional ethics…..just be careful.
october 19, 2022
ERTC Refund Claim – Caution Advised
The ERTC program was addressed and modified in some way by all of the major Covid relief packages. Originally, employers had to choose between applying for PPP Loans or using the ERTC program, they couldn’t use both. Then it was opened up to allow both programs, but the wages paid to qualify for PPP forgiveness couldn’t also be used for the ERTC program, and that rule still stands.
The rules for determining eligibility and calculating the credit are complicated. It is still an open program because eligible employers have three years to file amended payroll tax returns to claim the credit. The third quarter of 2021 was the final quarter of potential eligibility for most employer – amended returns for this quarter can be filed by October 31, 2024.
The other factor contributing to this abuse is that the IRS’s refund process system is automatic, and is NOT subject to much, if any, review of the initial refund. The refund checks are issued now and the IRS has up to 5 years AFTER the refund is issued to audit the claim. If they find it was issued in error, they will take back the refund, along with penalties and interest. All of these factors have led to the “credit mills” promoting aggressive positions, claiming that virtually all companies are eligible for the credit.
Consider this risk factor too – a percentage of the refund is paid to the company preparing the refund claim (we’re seeing some requesting up to 30%). If the IRS takes back the refund on audit, these fees most certainly will NOT be repaid by the company. Many of these credit mills do not sign the refund claim as paid preparers, in direct violation to the IRS rules, and many of these companies may not be around when the IRS auditors show up years later.
Yes, there is a large gray area in this program, the AICPA has advocated for clarity on the rules from the onset. There are two bright line tests for eligibility: a business had to be subject to a government imposed full or partial shutdown, OR there had to be a specific decrease in gross revenue between specific quarters. Essential services that were allowed to remain open, OR were able to be moved to remote work, did NOT qualify for ERTC under the first rule, but could still qualify under the second.
The devil is in the details – the aggressive positions claim that essentially the CDC’s restrictions on ALL business qualifies as a “significant impact”, had “supply chain disruptions” etc and therefore all businesses qualify, regardless of revenue impact. What constitutes a “government order” is a key area of argument.
We as a firm, and the AICPA as a profession, do not agree with this aggressive tax position and advise businesses to proceed with caution. Here’s a link to an AICPA podcast discussing some of these issues:
Please call us if you have any questions. This has the potential to be a big mess for many years – do your due diligence and ask a lot of questions of these companies claiming these refunds on your behalf.
october 3, 2022
IRS Tax Refund Error Alert!
Recently we have had two clients erroneously receive large refunds from the IRS (one was over $50,000). They wisely reached out to us to see what was up. In both cases, the IRS refunded 100% of their employment taxes, one was from the first quarter of 2020 and the other from the first quarter of 2021.
In both cases, they had properly and timely made their employer tax deposits, AND had timely mailed their employer 941 returns for the quarters. Both have been filing quarterly payroll returns for years, and are still in business.
Our best conclusion: the IRS apparently did not process the 941 returns, and rather than make an inquiry about a missing return as they have typically done in the past, they just refunded all the taxes paid. Good grief!
As I said, we are a small fish in a big ocean. If we have two clients with this issue, especially over two different quarters, we have to wonder how pervasive the problem is. Of course we helped them send the money back, along with another copy of the quarterly payroll tax return. Eventually, we think, their error would have been discovered and the IRS would want their money back, along with interest. We are pretty sure penalties would have been abated, but by law interest can’t be abated. Regardless, it was best to send back the original checks.
We know from our experience, and from news releases, that the IRS has had significant difficulty through the pandemic in trying to keep up with the chaos. We know they struggled to process mail during the pandemic, we’ve written about that in previous Tax Bytes. We know that over the summer there was concern over the IRS’s decision to destroy over 30 million unprocessed 2020 information returns (mostly 1099 forms). Their system was too old to process the backlog and supposedly it would have no detrimental consequences to the taxpayer – here's a link to an article from the Journal of Accountancy:
What a challenge for everyone. Only time will tell whether or not the hiring of the new 88,000 IRS agents will help them catchup. Our advice remains the same, regardless of the IRS’s ability to properly process returns: stay in compliance, follow the rules, and be grateful for the opportunity to have a business in the greatest country in the world. It may not be perfect, but we have opportunities many others in the world only dream of.
And for our clients: contact us if you get an unexpected tax refund check. It’s easier to send it back as soon as possible.
September 21, 2022
Ohio SALT Cap Workaround - Part 2
Our Tax Byte on September 9th gave the basic details of the strategy, and here’s an example to show how it works:
Assume these facts:
ABC, LLC has 2 shareholders, Joe (30%) and Sally (70%). For 2022, they expect to have gross sales of $2,000,000 and net income after all deductions of $500,000. ABC, LLC files as an S Corporation. Joe itemizes his deductions on his return because of his mortgage interest, charitable contributions, and his real estate taxes. Sally uses the standard deduction because she does not have enough to itemize her deductions. They are both Ohio residents. For simplicity sake, we’ll say that Joe’s Ohio tax bill on his share of the business income is $3,000 and Sally’s is $8,500. Jim’s marginal federal tax rate is 24% and Sally’s is 32%.
Without implementing the SALT Cap strategy, neither Joe nor Sally get a tax deduction for these state taxes they pay on the business. They pay federal taxes on their share of the $500,000 profit.
They decide to implement the SALT Cap strategy in 2022 so they can save some taxes. Here’s what they need to do:
• By December 31, 2022 ABC, LLC sends a tax estimate check for $25,000 to Ohio ($500,000 * 5%)
• When ABC, LLC files its 2022 Form 1120S it will deduct this payment as state taxes and show taxable income of $475,000, allocating 30% to Jim and 70% to Sally. It will also show on an Ohio K-1 schedule a $7,500 payment for Jim as an Ohio estimated tax payment (30% of the $25,500) and $17,500 for Sally (70% of the $25,000). ABC, LLC will also file a new Ohio tax form, the IT-4738, to report the taxes paid on behalf of its shareholders (this form is being developed by the State of Ohio).
• At their respective marginal tax rates, Jim saves $1,800 in federal taxes and Sally saves $5,600. Their itemized or standard deduction does not change. Combined they saved $7,400 in federal taxes.
Now, there’s one more step – because this Ohio tax is paid by ABC, LLC on behalf of Jim & Sally, they claim the $7,500 and $17,500 as an Ohio estimated tax payment on their respective personal Ohio returns. Based on our assumption above, they would get the following refunds:
• Jim: $7,500 estimate less $3,000 Ohio tax on business = $4,500 refund
• Sally: $17,500 estimate less $8,500 Ohio tax on business = $9,000 refund
Net result:
• $25,000 paid to Ohio in December as a tax estimate
• $13,500 of this refunded back to Jim & Sally when they file their individual returns
• $ 7,400 saved in combined federal taxes
Remember too that Jim & Sally owe the state taxes on the business income with or without the strategy. The difference was they saved $7,400 in FEDERAL taxes.
An interesting part of this strategy for Ohio businesses is that, because of the $250,000 Business Income Deduction, it’s possible Jim and Sally could get the entire $25,000 Ohio tax estimate back when they file their returns, and still save the $7,400 in federal taxes. It depends on other variables, but we expect this could happen frequently given our current Ohio tax rules.
Also, note that this is not an option for school district and city taxes – it only applies to OHIO taxes.
Finally, if implemented, this strategy applies to all shareholders, it’s not possible for one to opt in and another to opt out. And the election is only good for one year – you can decide each year whether you want to go this route.
So, you ask, why wouldn’t I want to do this? If the potential tax savings isn’t large enough to cover the additional accounting fees and bookkeeping costs, or if the business has a loss for the year, then it’s probably not worth it. And there is a timing difference between when the business pays the check to Ohio and the owners get it back on their personal returns.
This example shows the current rules for 2022. For 2023 there are some key differences: The business only pays 3% tax on the estimated profits, and will have to pay the estimates quarterly. We are still waiting for guidance on these details.
September 9, 2022
Ohio SALT Cap Workaround - Part 1
You can Google “Ohio SALT Cap workaround” if you’d like to get more information, but I wanted to attempt a more layman’s version. After reading this, Google away.
In summary, here’s the scoop:
• “SALT” in this story refers to State And Local Taxes, this includes the state income, city income, and school district income taxes, as well as real estate taxes that you pay every year.
• In 2018, the federal tax rules changed and taxpayers of all shapes, sizes, locations, could take a federal deduction for a maximum of $10,000 for these taxes, regardless of how much they actually paid in taxes.
• This limitation became not-so-fondly referred to as the “SALT Cap”.
• High income/property tax states like California, New York, and others took great exception to this SALT Cap, and offered a number of ideas to effectively “workaround” this Cap. They felt disproportionately impacted by this Cap because of their high local tax structure. The $10,000 cap didn’t begin to cover their tax liabilities, and like most tax take-aways, it didn’t rest well with the natives.
• In that same time period, Ohio began significantly reducing the taxes on small businesses through the $250,000 Small Business Income deduction and the 3% maximum tax rate on small business income, which lessened the negative impact of the SALT Cap on Ohio business owners.
• After much wrangling, the IRS has signed off on a strategy that will effectively still allow business owners a deduction for the State Income taxes they pay (Note: this does NOT allow a deduction strategy for city, school or real estate taxes.)
So here’s how it works:
Businesses formed as S-Corporations and Partnerships are referred to as “pass-through entities” (PTE’s for short). By design, PTE’s do not pay federal or state income taxes directly, but rather they “pass through” that income to their shareholders, who in turn pay the federal and state tax on the business income. There are many benefits to this, which is why PTE’s are the preferred tax structure for most small businesses……that’s a conversation for another Tax Byte.
In this case, the SALT Cap Workaround creates a process where the business can take an deduction on its federal return for state income taxes, which then passes on that deduction to its shareholders. This allows the shareholders to get a federal tax deduction for the state income taxes on the business income. It is an overt election that has to be made each year. Making it once doesn’t cover next year, and there are reasons why it may not be something to do each year.
For states like Florida, Tennessee, Texas and the six other states who don’t have income taxes, it’s a non-issue. There is no benefit for those states to enact this provision. For the rest of us, it can be a meaningful way to save federal taxes.
Here’s basically how it works:
• The business pays a required estimated state tax payments during the year. For 2022 in Ohio it’s 5% of the projected business income.
• The business deducts these payments as state income taxes on its federal return when it passes out the net income to the owner.
• The owner files their federal return with that payment taken as a business tax deduction. In doing so, the owner saves federal taxes based on their income tax rate.
• The business also reports the amount paid as a “state income taxes paid on behalf of the owner” on the K-1 it gives them at the end of the year.
• When the owner files their state tax returns they apply this payment as an estimated tax payment.
• In Ohio, because of our Small Business Income Deduction and 3% maximum tax rate, Ohio business owners will get most, and possibly all, of this tax payment back as a refund from personal taxes.
That’s enough for now…..I’ll do a follow up Tax Byte to walk through an example and provide a little more detail.
September 1, 2022
Tax Planning Season Begins
As we look towards the end of 2022, here are a couple of things we think you should consider:
Federal Mileage Rate:
• The federal mileage reimbursement rate increased to 62.5 cents for business miles after July 1, 2022. For business mileage January through June the rate is 58.5 cents/mile. For most vehicles this is a generous rate. Using this standard mileage rate over time can increase the deduction of the vehicle, and simplifies record keeping. A taxpayer doesn’t have to keep actual receipts for gas and insurance. The only record needed to substantiate the standard deduction is a log book tracking business and personal miles for the year.
• This is the rate that self-employed taxpayers can deduct for auto expenses, and also is the maximum an employer can use to reimburse employees tax free for mileage driven for his or her job.
• The key for any mileage deduction is documentation, documentation, documentation. For reasons expanded next, it is very important to keep a log (paper or electronic), during the year, of the total miles driven and the business purpose for those being used as a tax deduction. Judges can, and do, deny the entire mileage deduction if a proper log book wasn’t maintained throughout the year. Many of our clients use an app on their phone that uses GPS locators and can provide us with a spreadsheet at the end of the year that we use to quantify the deduction. This system works well with the IRS.
• For employers: Note that you are not required to use this rate for reimbursing employees, you can use either a higher, or a lower, rate. There are no tax consequences if you use a lower rate. A business owner can reimburse at a higher rate, the amount in excess of this rate has to be included in the employee’s taxable compensation.
We are reminding you of these rules because…..
IRS Audits are coming:
We assume you have heard about the new IRS funding that was included in the Inflation Reduction Act. Over half of the funding is allocated to enforcement and with IRS audit rates steadily declining over the last decade, we anticipate an uptick in IRS enforcement. The Administration is being clear that the new enforcement funding will be focused on increasing the number and scope of audits to make sure everyone is paying his/her fair share. There has been some press coverage about these new audits only impacting upper income taxpayers, but I wouldn’t suggest resting on your laurels and presuming it won’t apply to you.
It is a good time to look over your record keeping habits and make sure they’re in good order. Keep your receipts to support your deductions, credit cards, loan information, bank statements for five years, as the statute of limitation for the IRS to audit a return is 3 years, assuming a return was filed. If the return is never filed, then this statute never starts and you should keep your tax records indefinitely.
As a refresher: the IRS requires all business expenses taken as a tax deduction to meet the “ordinary, necessary, and reasonable” standard, and there has to be a business purpose to the deduction. That said, things like the current labor market may qualify more expenses in that arena than in the past. Employee fringe benefits are more important than they have been in the past.