Category Archives: IRS

Deducting Loan Origination Fees on Business Taxes

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.

IRS Urges Mid-Year Withholding Check-Up: Refunds Will Be Delayed For Some

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

Request W-9 Forms from Contractors & Freelancers NOW — Don’t Wait Until January

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

IRS “Tax Design Challenge” Begins Soon

Attention designers: The IRS wants your help.  The “Tax Design Challenge” is a three-week competition invites the public to design an online experience that better organizes and presents a person’s tax information.  Submissions will be accepted starting April 17 through May 10, 2016. Participants must first register on the website www.taxdesignchallenge.com.  Prizes for: Overall Design—$10,000 (1st), and $5,000 (2nd); Best Taxpayer Usefulness—$2,000 (1st), and $1,000 (2nd), and; Best Financial Capability—$2,000 (1st), and $1,000 (2nd).

Source: “Tax Design Challenge” Begins Soon

Health Insurance Reimbursement Guidance for 2% Shareholders of S-Corps Still in Transitional Relief

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.

Is A Member’s Share Of LLC Income Subject to Self-Employment Tax?

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

Tax-time Resources for Clients

Information on tax return due dates, some answers to the most-commonly-asked questions from clients during tax season, and some additional resources I’d recommend; enjoy!

The IRS will begin accepting individual tax returns on January 19. Of course, most taxpayers won’t receive their information returns (Forms W-2, 1099, 1098, 1095, etc.) until the first week of February, so at our firm (which specializes in small businesses and more complex individual returns) we typically wait to file until February 6th.

Corporate tax returns (both C- and S-Corps) are due by March 15, and partnership tax returns are due April 18th.  (Spoiler alert: stay tuned for an upcoming post on due date changes for next year that will line these up better with individual tax due dates and extensions.)

Individual tax returns are due April 18 (Saturday, April 16, 2016 is Emancipation Day in the District of Columbia, and the holiday is observed on Friday, April 15… this pushes the tax deadline to Monday, April 18, since the IRS deadlines never land on weekends).

Some important tax-time resources for IRS and Illinois taxpayers:

Where’s My IRS Refund — https://www.irs.gov/Refunds
Where’s My IDOR Refund — https://mytax.illinois.gov –> Click on Individuals –> Click on “Where’s My Refund?”

Look Up IDOR Estimated/Extension Tax Payments — https://mytax.illinois.gov –> Click on Individuals –> Click on “Look up my estimated/extension payments”

Order an IRS tax return transcript online — https://www.irs.gov/Individuals/Get-Transcript
Order a copy of a prior tax return — https://www.irs.gov/pub/irs-pdf/f4506.pdf

Make An Online Payment to the IRS — https://www.irs.gov/uac/EFTPS-The-Electronic-Federal-Tax-Payment-System
Make An Online Payment to IDOR — https://mytax.illinois.gov –> Click on Individuals –> Click on “Make an IL-1040, IL-1040-ES, or IL-505-I payment”

Where’s My IRS Amended Return — https://www.irs.gov/Filing/Individuals/Amended-Returns-(Form-1040-X)/Wheres-My-Amended-Return-1

2016 Standard Mileage Rates — https://www.irs.gov/uac/Newsroom/2016-Standard-Mileage-Rates-for-Business-Medical-and-Moving-Announced

The Affordable Care Act and your tax return — https://www.irs.gov/Affordable-Care-Act/Individuals-and-Families/Health-Care-Law-and-Your-Tax-Return

IRS FAQ — https://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers

Contact the IRS by phone — https://www.irs.gov/uac/Telephone-Assistance
Contact your local IRS Office (long lines; don’t recommend it) — https://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1

Due Dates for Forms 1095-B and 1095-C Extended — why do we care?

A new requirement for the 2015 tax year is that health insurance companies now need to issue Form 1095-B to those insured, confirming that they have minimum essential health insurance coverage.  Similarly, large employers providing insurance must issue Form 1095-C to their employees stating the coverage and their share of its cost.  The forms are due to be postmarked by the end of January 2016.

But it turns out that many of these folks weren’t ready for this unexpected deadline.  (Sarcasm: this deadline has been in the plan for years — ever since the ACA passed.)  So the IRS, with Notice 2016-04, issued an extension until March 31st.  Quick summary here.

So why do we care?  We’re not health insurance companies or large employers.  Well, the issue is that on individual returns, tax preparers need to indicate whether the taxpayer had minimum essential coverage or not, as well as calculate whether the taxpayer qualifies for any premium assistance credit.  Without these forms, we won’t necessarily have that information — unless the taxpayer is getting health insurance directly through the Marketplace: their Form 1095-A is still slated to arrive by the end of January, as was originally the deadline for the other forms.

As a result of these extensions, individuals might not receive a Form 1095-B or Form 1095-C by the time they file their 2015 tax returns. The IRS is allowing us to depend on other information from insurance providers and employers that would give us the same answer, so as not to file extensions for all these taxpayers.  But this could be hard to come by… if these companies weren’t ready to send out these forms, they may not have anything else that has similar information on which we can rely.  Expect this to be a tax season challenge.

Questions?  The IRS has a great chart on how these forms matter to taxpayers on their returns, what they should expect to receive, and what they should do when they receive it: https://www.irs.gov/Affordable-Care-Act/Individuals-and-Families/Health-Care-Law-and-Your-Tax-Return

As a side note, the IRS isn’t requiring these companies to file the IRS copies of the same forms until June 30th, so I think it’s safe to bet we won’t see a matching program in place this season, and with the IRS so woefully understaffed, audits of coverage and credits will be far down the line, if they happen at all for this filing year.

2016 Tax Season Opens January 19

Accountants everywhere, rejoice!  For the first time in years, tax season will open on time!

From the National Assocation of Tax Practitioners:

The IRS states in IR-2015-139 that despite the recent passing of the tax extenders legislation, the IRS will begin accepting individual electronic returns as scheduled on January 19. The IRS will also begin processing paper tax returns at the same time. The IRS states there is no advantage to filing paper returns in early January instead of waiting for e-file to begin.

Although the IRS begins accepting returns on January 19, many tax software companies will begin accepting tax returns earlier in January and submitting them to the IRS when processing systems open.

Take note: the due date for the 2015 Form 1040 is April 18, 2016, due to Washington, D.C.’s observance of Emancipation Day.

I prepare tax returns in the order I receive completed packets, which usually means waiting until the second week of February, at which point most folks will have received their 1099s and W-2s, and businesses will have closed out and reconciled their books.  But it’s nice to know that simple returns can be filed early, and that our software company will already have weeded out any filing issues by the time we begin e-filing.

Source: 2016 Tax Season Opens Jan. 19 for Nation’s Taxpayers