I was recently researching the tax treatment of loan origination fees for a client, and found almost all the search terms I was using returned only information on personal mortgage loans, not business loans.  With a decent amount of searching, I came across a few nice articles that clearly spell out the tax treatment versus the financial accounting (GAAP) treatment of these fees, so I am sharing them here in hopes that when you go searching for the same info (as a business owner or accountant), you’ll find them all here together, in this nice little spot.

To clarify, there are different types of loan fees at closing — so, find this part out first — as that’s the key to how they’re treated.

First up, The Balance (a personal finance site that has a pretty decent “Small Business” section) discusses Deducting Interest Expenses on Your Business Taxes:

For mortgages on business property, you may end up prepaying interest from the settlement date to the closing date, as part of your closing costs.

The IRS says that when you prepay interest, you must allocate the interest over the tax years to which the interest applies. You may deduct in each year only the interest that applies to that year.

You may not deduct interest that must be capitalized, that is, interest that is added to the principal balance of a loan or mortgage. This interest expenses must be depreciated along with the other costs of the business asset.

• For sole proprietors and single-member LLCs, show these expenses in the “Expenses” section of Schedule C on Line 16. Note that interest expenses are divided between mortgage interest and all other interest expenses.

• For partnerships and multiple-member LLCs, show these expenses in the “Other Deductions” section of Form 1065

• For corporations, show these expenses in the “Other Deductions” section of Form 1120.

Meaden & Moore’s blog does a really nice job of explaining — through an example that culminates in a journal entry — the accounting treatment (Generally Accepted Accounting Principles, or GAAP) of not only how to amortize these fees over the life of the loan, but why (the matching principle).

These costs should be recorded as an asset and the related periodic expense should be charged to amortization expense. If these costs were expensed in full at the time of payment, expense for that period would be artificially higher than normal and potentially misleading. Utilizing the matching principle will allow a Company to align this expense with the term of the loan.

However, I only found one article that discussed what I was really looking for: the comparison of tax vs. GAAP rules for period expensing or capitalization/amortization of loan origination fees.

Loan Origination: Getting Tax and Financial Accounting to Mesh, by CFO.com’s Accounting & Tax department, offers an excellent general explanation of why tax and GAAP (financial statement accounting) systems differ.

We have seen that, with respect to many items of income and expense, tax accounting differs, diametrically, from financial accounting. This divergence, of course, is not surprising in light of the fact that the fundamental goals of each system also diverge.

Financial accounting has as its underpinning the doctrine of conservatism such that, wherever possible, net income is understated through the mechanism of accelerating expenses and deferring income. The fundamental objective of the tax accounting system, as we are all aware, is revenue collection such that the system strives to enhance net (or taxable) income and, to this end, income items are accelerated while expenses, wherever possible, are deferred. With each system, however, ”matching” (of revenues with the expenses incurred to produce such revenues) is also advertised as a central tenet. But frequently, this particular objective is sacrificed on the altar of the larger objectives — conservatism and revenue enhancement.

In the case of the bank in the particular example they use, the fees were deductible as a period expense for tax purposes (as opposed to being amortized, which is the requirement for GAAP) because the bank’s loan marketing activities were a core activity of its day-to-day business.

That case stands, broadly, for the proposition that expenses must be capitalized if they provide benefits that extend beyond the year in which such expenses are incurred.

Which means that in most situations, for both financial statement and tax purposes, these fees need to be written off over the period of the loan — but there are exceptions for tax purposes if the activities are central to daily operations.

Beginning in 2017, a new law requires the IRS to hold refunds on tax returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) until mid-February. Under the change required by Congress in the Protecting Americans from Tax Hikes (PATH) Act, the IRS must hold the entire refund — even the portion not associated with the EITC and ACTC — until at least Feb. 15. This change helps ensure that taxpayers get the refund they are owed by giving the agency more time to help detect and prevent fraud.

Source: IRS Urges Taxpayers to Check Their Withholding; New Factors Increase Importance of Mid-Year Check Up

For filing season 2017, which will cover the 2016 tax year, employers and other payers will be required to get the IRS its copies of tax payment documents at the same time the agency issues statements to taxpayers — January 31st.

This is really big news.  Usually we spend a lot of time in January working with our clients to get W-9 info (SSN/TIN, address) in time to send their 1099-MISC forms to freelancers and independent contractors by January 31st… but it’s quite common that January comes and goes and we’re still chasing after vendors for this info.  It’s never been that big a deal, because the forms weren’t due to the IRS until a month later (two months, in case of e-filing).  So if the vendor didn’t get us their info until late February, we could still file on-time with the IRS.

That’s all changing.  In 2017, the deadline to provide W-2s & 1099s to the IRS is the same date as for taxpayers — January 31.  This means we’re going to have a real challenge getting this information in time… even more so than in the past.

The new budget law also prohibits the IRS from issuing any refunds prior to Feb. 15 of any upcoming tax years.  The refund delay is an added way to help the IRS combat tax fraud by beefing up its efforts to authenticate taxpayer filings. The thinking is that the extra days will provide the IRS with time to process the simultaneously sent W-2 and 1099 forms from employers/payers before issuing refund to taxpayers.

We’ll be getting in touch with all our clients this year and encouraging them more than ever to obtain the W-9 information from vendors during the year, rather than waiting until the following January.  This is good practice for a few reasons:

1. Often vendors mistakenly think when they receive their check that it’s somehow “under the table”.  By requiring them to fill out a W-9 before they receive their payment, they understand that it is taxable income and aren’t surprised later on.
2. Some vendors simply try to avoid giving you their information after year-end, thinking that if they’ve changed their address, neither you nor the IRS can find them.  By requiring them to fill out a W-9 before they get their check, you’re helping to keep them and your client honest and out of trouble.
3. Sometimes clients don’t realize that a vendor qualifies as a 1099 contractor.  By reviewing their books throughout the year, we can give them a heads-up sooner rather than later.

Make it a practice to provide W-9s to your non-incorporated vendors who provide services before they receive their first check, even if you think a) they might be incorporated (remember, an LLC is NOT a corporation), or b) they won’t break the $600 limit.  There’s no harm in having it on file, and it might save you a lot of trouble down the line.

Source: W-2, 1099 forms delivery deadline is here In 2017, IRS and taxpayers will be on same Jan. 31 schedule – Don’t Mess With Taxes

I received this important little gem in today’s newsletter from the National Association of Tax Professionals —

Guidance Not Yet Provided for 2% Shareholders

Employers are potentially subject to an excise tax for reimbursing or paying for individual health insurance policies, known as the $100 per day per employee penalty ($36,500 per year). According to Notice 2015-17, for two-percent shareholders (as defined in §1372(b)), transitional relief lasts through December 31, 2015, or until further guidance has been provided.

Since further guidance has not yet been provided, the health insurance reimbursement of two-percent shareholders can continue to be reported as such on the April Form 941 provided it meets the criteria set forth in Notice 2008-1.

My absolute favorite writer on the topic of taxes, Tony Nitti, has written the clearest and most informative article on the topic of LLC member income and its related tax issues that I’ve seen yet.  I’ve excerpted this one question and its answer as a summary, but if you prepare LLC returns or you are a member of an LLC, do yourself a favor and read the whole article.  It’s concise, explanatory, entertaining, and a treasure trove of info.

Q: So what does this mean? Is the distributive share of all LLC members now subject to self-employment tax?

A: I wouldn’t go that far. This ILM was specific to the taxpayer, but there are certainly lessons to be learned. If the LLC’s members provide significant services to the LLC, and it is those services that give rise to the majority of the LLC’s income, it is clear that the IRS is going to be prepared to argue that the LLC members are not limited partners for purposes of the exception from self-employment income found at IRC Section 1402(a)(13). You may want to have a strong defense ready to go, or else be prepared to have a hard conversation with your LLC member clients in the next few days explaining why income that has not been subject to self-employment income in the past is subject to self-employment tax on their most recent tax return.

Source: IRS: Partners’ Share Of LLC Income Is Subject to Self-Employment Tax – Forbes