Category Archives: IRS

Education, IRS, Site News, Tips

K-2 & K-3 Requirement Issues For Small Businesses

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2/16/22 UPDATE: Looks like the IRS may be issuing relief after all!

Check out this article — IRS to delay some K-2 and K-3 reporting requirements for partnerships | Accounting Today

The source is #15 in the IRS FAQ on the topic:

This Journal of Accountancy article walks through the particular scenario where this relief — only for tax year 2021 — applies. They note that:

The relief announced Wednesday applies where:

  • In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates, or foreign trusts. 
  • In tax year 2021, the domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated, or may reasonably be expected to generate foreign-source income (see Regs. Sec. 1.861-9(g)(3)).
  • In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders, nor did the partners or shareholders request, the information on the form or its attachments regarding:
    • Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
    • Line 20c, Form 1065, Schedules K and K-1 (controlled foreign corporations, passive foreign investment companies, 1120-F, Sec. 250, Sec. 864(c)(8), Sec. 721(c) partnerships, and Sec. 7874) (line 17d for Form 1120-S).
  • The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.

To learn more, I recommend this excellent Compass Tax Free 10-Minute Webinar update from 2/17/22 on the new FAQ relief for partnerships and S corporations with Thomas Gorczynski, EA USTCP, and Kevin J. Todd, EA, CPA.

(Our original blog post is below, for context and reference.)

K-2 Mountain (courtesy of Wikimedia Commons)

Yes, that photo is of K-2, the second-highest mountain on Earth, where apparently one person dies on the mountain for every four that reach the summit. (Didn’t expect that to show up in my search for a common-usage-right image of an IRS K-2 form.)

The good news is that — as frustrating and arduous as this new IRS K-2 and K-3 reporting requirement is — no one is likely to die while attempting to complete it, and therefore I think we should just all keep this extremely challenging K-2 mountain in mind before we get too frustrated about additional complexities in tax preparation.

In all seriousness, here’s the story:
1) The IRS, in an attempt to deter fraud, for 2021 began requiring all pass-through entities to disclose foreign transactions as part of the tax returns and the K-1 package to shareholders and partners.
2) Initially, the new schedules were only to be used by entities with international transactions to report.
3) In mid-January, the IRS issued revised instructions for the schedules that may require domestic partnerships and S corporations without any foreign source income or assets to prepare Schedules K-2 and K-3.
4) If even one of the partners or shareholders plans to or is required to report foreign tax credits on Form 1116, Foreign Tax Credit, the Partnership or S-Corp must prepare Schedules K-2 and K-3.
5) As a result, the complex and comprehensive “reporting requirement applies to a much larger percentage of pass-through-entity (PTE) returns than perhaps the IRS intended”, as Forbes pointed out.

“This seems like an overly burdensome requirement to quietly clarify in the middle of filing season.” – Tom Gorczynski, EA

All is not lost. Yes, we’re talking about well-over 20 additional pages of tax forms — but it’s likely that you won’t have to fill them all out. An exception from filing Part II and Part III, Section 2, on Schedule K-3 may apply for a pass-through-entity that:

  • only has US-source income;
  • does not have income or deductions that the partners can source or allocate and apportion; and
  • only has limited partners owning less than 10% of the capital and profits of the partnership at all times during the tax year.

(Though the IRS clarified that a business with no foreign-source income must still file Part II (foreign tax credit limitation) and Part III (information for preparing Forms 1116 or 1118) on Schedules K-2 and K-3 if their partners have items of international tax relevance.)

From the NATP Blog: “For preparers who are handling the returns of both the partnership and the partner, the partner can choose alternatives to filing Form 1116 and triggering the Schedules K-2 and K-3 filing requirements if one of the following applies:

  • The partner neither paid nor accrued any foreign taxes and there was no foreign tax credit carryover for the tax year;
  • The foreign tax paid was under the $300 individual reporting threshold ($600 for married filing jointly) for Form 1116, or an election is made under Section 904(j) of the Tax Code to report the credit without the form;
  • Schedule A is used to report a deduction for foreign taxes (which also avoids the $10,000 SALT cap).

“Preparers who are not completing returns for the partner reporting foreign tax payments will need to ask the partners/shareholders directly for their information. If they fail to respond to the request, the preparer will at least have made a documented, good-faith effort to obtain the required information and should be eligible for the good-faith relief outlined in Notice 2021-39.”

To add to the complexity, the availability of e-filing for the new Schedules K-2 and K-3 is:

  • March 20, 2022, for Form 1065
  • Mid-June 2022 for Form 1120-S
  • January 2023 for Form 8865

Therefore, for preparers who have to file Schedules K-2 or K-3, there are three options.
– One is to extend the returns, as e-filing is not available until after the current due date of both the S corporation and partnership returns.
– Another option is to paper-file the return, which will cause delays in processing.
– The third option (what we will likely do for those returns we cannot reasonably extend) is to prepare the K-2/K-3 forms and attach them to e-filed S-Corp and Partnership returns as a PDF. Generally the IRS is not great about referring to these attachments, and some tax software programs have problems delivering them; but at least it will show a good-faith attempt in the case of an audit.

Per Amber Gray-Fenner in Forbes, “These alternatives, while prudent, present some potentially serious unintended consequences:

  • The IRS may be inundated with PDF attachments that it is not prepared to process and review. PDF attachments are often separated from original returns never to be seen again—at least not until the taxpayer receives a notice looking for the “missing” information.
  • Many more PTE returns may be put on extension than would normally be the case.
  • Extended PTE returns mean extended 1040s, which is unsatisfactory to many taxpayers and tax professionals.”

In that same article, my colleague Fred Stein hopes “Occam’s Razor ‘kicks in and IRS realizes the unintended consequences this creates for many small businesses.’ If not, the additional work involved could cause PTE return preparation prices to increase by thirty to fifty percent.”

A summary from last week’s AICPA Town Hall:

We will be reaching out to all our S-Corp and Partnership clients to let them know about these new rules, and to ask that they obtain signed confirmation from each of their owners as to any personal requirement to file Form 1116 or another foreign-related tax form on the 1040 returns.

(For tax preparers who may not have any idea how to fill out these extremely long, complicated, new forms, Greg White is offering a live webinar on February 18th called “A Practical Approach to Quickly Filling Out Forms K-2 and K-3“.)

As you may have guessed, this unexpected new guidance will cause additional time, effort, and cost to all our small business S-Corps and Partnerships — almost none of whom actually have any foreign transaction exposure. After all the requests we’ve made of the IRS to reduce the tax preparation burden on small business owners and their CPAs, I wish I could say this is laughable.

In case that wasn’t enough for you, we’ve compiled a rich list of resources for your reading and watching enjoyment.

AICPA Resources:
• Navigating the new Schedules K-2 and K-3 (Sept. 2021 Tax Advisor)
• AICPA Comment Letter, K-2/K-3 (Sept. 2021)
• AICPA Podcast on Practitioner Insights, K-2/K-3 (Nov. 2021)
• IRS offers further K-2/K-3 relief, Journal of Accountancy (Feb. 2022)

NATP Resources:
• 2/10/22 National Association of Tax Professionals Blog Post – Tax preparers take note: another change for 2021 tax season with Schedules K-2 and K-3

Tax Speaker Resources:
• 2/4/22 Emergency Update Newsletter
• 2/9/22 Free 12-Minute Webinar – TaxSpeaker’s Solution to IRS’s New Form K-2 and K-3 for partnerships and S Corporations – YouTube

Compass Tax Resources:
• 2/10/22 Free 15-Minute Webinar – discussion on the new requirements for partnerships and S corporations with Thomas Gorczynski, EA USTCP, and Kevin J. Todd, EA, CPA
Compass Tax Resources:
• 2/17/22 Free 10-Minute Webinar – update on the new FAQ relief for partnerships and S corporations with Thomas Gorczynski, EA USTCP, and Kevin J. Todd, EA, CPA

IRS Resources:
• Changes to the 2021 Instructions for Schedules K-2 and K-3 (Form
8865) (Jan 18, 2022, IRS)
• Changes to the 2021 S Corporation Instructions for Schedules K-2 and K-3 (Form 1120-S) (Jan 18, 2022, IRS)
• Changes to the 2021 Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (Jan 18, 2022, IRS)
• Notice 2021-39 re: penalty relief for good faith compliance efforts
(June 2021, IRS)

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, IRS, Tips

IRS Service Issues – What Is Being Done? How Can You Help?

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On last week’s AICPA Town Hall they discussed the IRS service issues I posted about recently, as well as the advocacy efforts by the newly-formed Tax Professionals United for Taxpayer Relief Coalition — including the AICPA, NATP, and many other organizations. (Check out their recent media briefing here.)

They were effective in getting a bi-partisan group of nearly 200 members of Congress to send a letter to the US Treasury Secretary requesting the IRS implement the following:

  • Halt automated collections from now until at least 90 days after April 18, 2022;
  • Delay the collection process for filers until any active and pending penalty abatement requests have been processed;
  • Streamline the reasonable cause penalty abatement process for taxpayers impacted by the COVID-19 pandemic without the need for written correspondence;
  • Provide targeted tax penalty relief for taxpayers who paid at least 70 percent of the tax due for the 2020 and 2021 tax year; and
  • Expedite processing of amended returns and provide TAS and congressional caseworkers with timely responses.”

Shortly afterwards, the IRS announced they are suspending a small portion of automated notices — which they clarified on February 9 as “notices of unfiled returns and unpaid balances generally, including a final notice of an outstanding balance and intent to levy”.

The IRS identified the suspended letters and notices as:

  • CP80, notice of an unfiled tax return. The IRS sends this when it has credited payments or other credits to the taxpayer’s account but has not received a tax return for the tax period.
  • CP59, unfiled tax return, first notice. The IRS sends this when it has no record of a prior-year return’s having been filed. The Spanish-language version, CP759, is included.
  • CP516, unfiled tax return, second notice. This is a request for information on a delinquent return for which there is no record of filing. The Spanish-language version, CP616, is included.
  • CP518, final notice — return delinquency. The Spanish-language version, CP618, is included.
  • CP501, balance due, first notice. This letter is a reminder of an outstanding balance on the taxpayer’s accounts.
  • CP503, balance due, second notice.
  • CP504 balance due, third and final notice. This also is a notice of intent to levy.
  • 2802C, withholding compliance letter. This letter notifies taxpayers whom the IRS has identified as having underwithheld taxes from their wages, with instructions on correcting their withholding amount.
  • CP259, business return delinquency. The IRS has no record of a prior-year return’s having been filed. The Spanish-language version, CP959, is included.
  • CP518, final notice of a business return delinquency. The Spanish-language version, CP618, is included.

Per the Journal of Accountancy: “How long the letters and notices will be suspended or at what point the backlog can be considered sufficiently cleared to resume them remains unclear. The news release Feb. 9 said the IRS “will continue to assess the inventory of prior year returns to determine the appropriate time” to start sending them again. And there has been no mention of relieving taxpayers from their obligation to file returns or pay taxes that are the subject of the letters and notices, if those returns and taxes are indeed unfiled and unpaid.”

While this is a welcome step, it falls seriously short of what is needed.

In a recent Op Ed, former National Taxpayer Advocate Nina Olson outlined her suggestions to “fix the IRS”, and the AICPA Journal of Accountancy podcast elaborates on the following four recommendations:

  1. Discontinue automated compliance actions until the IRS is prepared to devote the necessary resources for a timely resolution
  2. Align requests for account holds with the time it takes the IRS to process any penalty abatement requests
  3. Offer a reasonable cause penalty waiver, similar to the procedures of first-time abatement administrative waiver
  4. Provide taxpayers with targeted relief from the underpayment and the late payment penalty for the 2020 and 2021 tax year

The podcast (highly-recommended short listen!) walks through these one-by-one and explains why each is crucial — in a very straightforward manner, providing examples of what kind of struggles real-life taxpayers and their advisors are going through.

A key takeaway: “What we’re trying to do with these recommendations is to lessen the need to reach out to the IRS. In theory, if we’re having to call the IRS less then the IRS will be able to get to people who have other types of problems and get those problems resolved.”

The Washington Post shared an article today highlighting the severity of the IRS backlog and what it means for this tax season.

In testimony before the House Ways and Means Committee on Tuesday, National Taxpayer Advocate Erin Collins noted that as of late December, the IRS had a backlog of 6 million unprocessed individual returns and 2.3 million unprocessed amended individual returns. In addition, more than 2 million Forms 941, Employer’s Quarterly Federal Tax Return, and its amended version remained unprocessed. Many of the latter included claims of the employer retention credit emergency pandemic relief provision.

But all this isn’t enough — they need to hear actual stories from real taxpayers about what you’ve gone through. If you had a challenge with the IRS in the past couple years, and especially if you have an ongoing issue, please contact your Senators and Representatives to tell your personal story. This generally moves them to action, and what we need now is continued and increased pressure on the IRS to make short-term immediate changes that will affect the here-and-now of this tax season.

RESOURCES:
Find your rep: https://www.house.gov/representatives/find-your-representative
Members of Congress Twitter handles: https://twitter.com/i/lists/34179516/members
IRS Social Media: @IRS

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Illinois, IRS, Tips

2021 Year-End Priority: Pass-Through Entities Should Pay State Taxes By 12/31

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Slide from December 23, 2021 AICPA Town Hall

In a December 17th IAAI tax update webinar, the Illinois Department of Revenue (IDOR) walked through instructions for claiming a new “SALT” tax benefit signed into law in September, and in today’s AICPA Town Hall, the importance of making these payments before year-end was underscored. This new law is a workaround for individual taxpayers who are otherwise unable to benefit from a full deduction on state tax payments on pass-through income from their businesses.

As a result, we (along with probably thousands of other CPA firms) have made a list of our own pass-through clients (aka S-Corps and Partnerships) who might benefit from this increased deduction, and we’re scrambling to calculate estimates and reach out to them to recommend these payments be made by 12/31.

So, what the heck is SALT? And why have the deduction rules changed?

SALT stands for “state and local taxes”, and they are generally deducted by individual taxpayers on their annual 1040 tax return. Before 2018, taxpayers could deduct these taxes by itemizing them on Schedule A.

However, the Tax Cuts & Jobs Act limited this to $10,000. This cap was likely to be removed with the Build Back Better Act, but it appears that legislation will not be passed before year-end after all.

Many states, including Illinois, have passed legislation allowing these taxes to be paid at the business level, on behalf of the shareholders and partners. Since these companies “pass-through” their income to owners, they are known as Pass-Through Entities (PTEs). The PTE does not have a cap on this type of tax, so it reduces both federal and state income and also allows the full deduction.

My colleague, James Hamilton, wrote up a clear explanation with an example, which I recommend reading if you’d like to get into the details.

Why are we all scrambling to do this before year-end?

Usually, estimated state tax payments are paid by the individual and are due 4/15, 6/15, 9/15 and 1/15, with any balance remaining payable by the following 4/15. The IL state law was not passed until after estimated tax deadlines for the first three quarters were already paid. And a December 20 article in Journal of Accountancy, as well as the aforementioned AICPA Town Hall from earlier today, suggest that the IRS guidance requires the business pay the tax by year-end, not by 1/15.

From The Journal of Accountancy: Crucially, a specified income tax payment is one the PTE “makes … during a taxable year” in computing its taxable income “for the taxable year in which the payment is made” (Notice 2020-75, Section 3.02(2)). Even though Sec. 164(a) provides that the SALT deduction is for the tax year in which taxes are “paid or accrued,” the more restrictive, literal application of the notice to taxes paid is the safer course, advocates say.

To get the largest tax benefit from the new law, businesses would want to pay in the entire state tax liability for the year by 12/31, even if the owners have already paid quarterly estimated taxes. In other words, take the company’s full taxable income for the year (which you won’t know before 12/31, but this is where estimates come in) times 4.95% (IL flat tax rate for individuals). The resulting overpayment would be refunded to the taxpayer upon filing their personal tax return.

Not all businesses will have the cash to do this, but to the extent it can be paid, it is certainly a smart tax-reduction move.

Okay, then how do we make the payments?

The step-by-step instructions I painstakingly wrote up earlier this year for making business replacement income tax estimated and extension payments are now out of date, because IDOR revamped their MyTaxIllinois website in September (grrrrr). So here are the basic instructions (a blog post with screenshots is coming soon, but this will have to do for now):

— Log into the business’s My Tax IL account
— On the ‘Summary’ tab, look for the ‘Business Income Tax’ section
— Click on the link for ‘View more account options’

There are two ways to do it from here; the first is:
— In the ‘Account Options’ section, click the link for ‘Make An Estimated Payment’
— Select the period you want to pay, which is 12/31/2021
— Click the first ‘Add Payment’ hyperlink in the Payment Schedule table for each payment you would like to schedule.
— If your payment information is saved in MyTax Illinois, then in the ‘Choose’ tab you can select the dropdown under ‘Payment Channel’
— Otherwise, select ‘New’ and enter your company bank info.
— In either case, on the right where it says ‘Payment’, you can change the payment’s debit date and enter the amount.
— Click Submit, and re-enter your password for security purposes

Alternatively:
— In the ‘Periods and Submissions’ section, click the link for ‘View Account Periods’
— Click the 12/31/2021 link so that your payment is applied to tax year 2021
— In the upper right corner of this page, click the ‘Make A Payment’ link
— Select the ‘Bank Account Debit’ link
— Click the IL-1120-ST Payment link (ST denotes a “Small Business” payment)
— Enter the amount you want to pay in the Amount and Confirm Amount fields
— Click Submit, and re-enter your password for security purposes

Best of luck, and… Happy New Year!

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, Education, IRS

How To Apply for PPP Forgiveness (Loans $150K Or Less; No Employees) Using Biz2Credit

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Screenshot from Biz2Credit forgiveness process.

Note: this is an update to an existing blog post — the instructions below are specific to the Biz2Credit PPP lending platform. If you received your loan through another platform, please see my original post.

For over a year we waited for legislation from Congress as well as guidance from both the SBA and IRS as to the interplay between the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP). It appears the last of that guidance was issued on August 10, 2021 — so, at this point, as long as you have worked out the interplay between PPP and the Employee Retention Credit (ERC), then you should go ahead and apply. Which means that if you are a sole proprietor and have no employees, you are ready to apply — since ERC is only an issue if you have W-2 employees or are a W-2 employee of your own company.

For PPP draws in 2021, our firm participated in a joint program by AICPA and Biz2Credit called the “CPA Loan Portal”. We’ve prepared the following step-by-step instructions for clients of ours who were funded through this system — however, I believe the instructions are the same for small business owners who applied directly with Biz2Credit. (Let us know in the comments if this is the case or if you had to tweak the approach at all.)

First, a couple general comments for borrowers of $150k or less who are self-employed with no employees:

  • For self-employed with no employees, it’s an “owner compensation replacement” approach, which means you will have 2.5 months’ worth of your prior-year net profit (or gross profit, for those who applied for PPP funding under the last-minute changes to the rules) automatically forgiven. Your forgiveness amount should exactly equal your loan amount, presuming the original loan was calculated properly.
  • According to Biz2Credit on their July 1 webinar (from their PPP Forgiveness Required Documents Customer Guidebook), no documentation is required for sole proprietors with loans of $150k or less:

How-To Instructions for PPP Forgiveness – AICPA Biz2Credit Application – Self-Employed with No Employees

First things first, decide whether you’d like to fill out the forgiveness application yourself or whether you’d like your CPA firm to do it for you for a small fee. Once you’ve informed them that you’d like to DIY, they will need to “assign” the forgiveness application to you, which will trigger an email that looks something like this:

Once you log in to your account using the credentials you created when you signed the PPP draw application just before getting funded, you’ll be walked through a series of screens.

Click the “Apply for Loan Forgiveness” button.

Most of the information will be automatically filled in based on the initial loan application information. There is no need to enter information in any of the fields marked “(Optional)”. Click the “Confirm” button.

A pop-up should suggest you use the 3508-S application, the simplest one – click the Continue button to go to the Basic PPP Loan Information screen.

Covered Period Start Date should default to the disbursement date as the start date. The duration of the covered period can be anywhere from 8-to-24 weeks; if the applicant is self-employed with no employees, we suggest a 10-week period. The end-date will auto-fill.

Most of the information will fill in automatically, but you will have to note the number of employees at the time of the forgiveness application – for self-employed with no employees, the answer is 1.

For a self-employed person with no employees, the Amount of Loan Spent on Payroll Costs should be the full amount of the PPP loan.

Click the green “Next” button on the lower-right corner to continue.

A pop-up will come up – read and click “Accept & Continue” if you agree.

You should get a screen confirming the form was completed and letting you know they have sent an email with a link to Docusign the application. Do not click the “Continue” button until you sign the application. Open your email program in a separate tab to find the email from Biz2Credit Contract Support via Docusign, with the subject, “Biz2Credit : PPP Loan Forgiveness Application Form 3508S”. Keep in mind that it may be in the “Promotions” or “Updates” tab, or in Spam.

Click the orange “Review Document” button in the email.

The Docusign document should open in a separate tab – you may need to allow it to access your location.

Checkmark the agreement and click “Continue”.

Click the “Start” button and follow the guidelines to initial twice and then sign the form. Click the “Finish” button when you are done. Save a copy for your own records.

Go back to the Biz2Credit tab and click “Continue” (if you accidentally closed the tab, please go to the Biz2Credit site and log in again). It is essential that you click the “Continue” button to submit the application.

Click “Ok” on the pop-up. This will take you back to the dashboard – at the bottom, instead of the “Apply for Loan Forgiveness” button, you should see two links: View Submission and View Documents. There is no need to click on these at this point, but seeing them is reassurance that your application has in fact been submitted.

(If you did not download the form after Docusigning, then you can do it at this point, by clicking “View Documents”. It will then take you to a screen with a long list of possible documents – the top link (“E-signed 3508”) allows you to download a pdf of the e-signed document for your records.)

You will receive two more emails from Biz2Credit: 1) an email via Docusign allowing you to view or download the completed document (which at this point you’ve already done); and, 2) a confirmation that your loan forgiveness application is being sent to the SBA.

Now sit tight and await a confirmation email from Biz2Credit once the SBA has forgiven the loan – please make sure to forward this to your CPA firm… and congratulations!

Note: Even though no documentation for loans under $150k is required, occasionally there will be a follow-up email from Biz2Credit requesting certain items. Please forward to your CPA firm if this occurs and they will advise (and they’ll inform your Biz2Credit lending rep that this step should not be required).

For self-employed folks with no employees, the PPP Forgiveness process is very straightforward. Please let us know in the comments if you come across challenges, so others can learn from your experiences — especially for those who applied directly with Biz2Credit instead of through your CPA. Best of luck to you all!

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, IRS

IRS Backlog Leads To AICPA Campaign For Penalty Relief

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According to a report by the Treasury Inspector General for Tax Administration, the Covid pandemic caused a backlog of almost 8 million paper-filed business tax returns at the end of 2020. The IRS continues to have difficulty hiring enough staff to continue processing tax-year 2020 returns — the agency had only met 63% of its recruitment goal for processing operations as of July, NBC reports.

In today’s AICPA Town Hall — a special edition focused on tax issues — Melanie Lauridsen, Senior Manager of Tax Policy & Advocacy, drove home the point of how the inability of the IRS to fully process this backlog, answer the phones, or handle incoming snail mail in a timely manner is affecting taxpayers and their preparers. A case in point was the answer-rate of the phone lines — they are overwhelmed with substantially more calls than in the past, and only able to answer 2-8% of calls.

This has motivated the AICPA to introduce penalty relief recommendations to Congressional leaders. Underpayment and late penalty relief for 2020, as well as holding off on compliance adjustments and issuing account holds until all snail mail is processed and payments by check can be applied to accounts, would significantly reduce the number of calls to the IRS to resolve these issues (many of which are only a matter of correspondence crossing in the mail). By reducing the number of calls, we would be helping the IRS increase the rate at which they can answer existing calls.

In the meantime, you can check on the IRS status of operations in specific areas via this link — IRS Operations During COVID-19: Mission-critical functions continue | Internal Revenue Service — if you need to contact the IRS, try right at 7 am or shortly before 7 pm; and if after repeated attempts you have no luck, try contacting your local Taxpayer Advocate:
Local Taxpayer Advocate | Internal Revenue Service (irs.gov)

If you’re having challenges and want to help raise awareness to the situation at the IRS and promote penalty relief as one part of the solution, you can go to social media and:
• Share stories of pandemic-related hardships
• Tag members of Congress, media and gov’t officials on social media posts
• Include hashtag #COVIDPenaltyRelief in all social media posts
• Tag AICPA on your posts:
– Twitter: @AICPA
– Facebook: @AICPA
– LinkedIn: @AICPA
– Instagram: @theaicpa
• Find your rep: https://www.house.gov/representatives/find-your-representative
Members of Congress Twitter handles: https://twitter.com/i/lists/34179516/members
IRS Social Media: @IRS
• Share story or template post:
The pandemic has caused a lot of personal and economic suffering in our country. Taxpayers need relief from tax penalties now – we ask the @IRS to grant penalty relief. #COVIDPenaltyRelief @AICPA @[mediaoutlet] @[member of Congress

Thank you in advance for helping raise awareness to a situation that is causing serious hardship for many thousands of Americans.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, Education, IRS, Tips

IRS Finally Issues Guidance On Employee Retention Credit (ERC)

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It finally happened… the IRS released long-awaited guidance on the Employee Retention Credit (ERC):
• August 4 – Notice 2021-49 and accompanying IR-2021-165
• August 10 – Rev. Proc. 2021-33

Some major questions were answered:
• Whether wages of more than 50% shareholders and their spouses are considered qualified wages for the purpose of the credit.
(Mostly “no”, unless you’re an orphan with no living siblings or kids. Much frustration abounds — more on this later.)
• Whether cash tips are included in qualified wages.
(Yes. Good news!)
• Whether full-time employees or full-time equivalent employees should be used to calculate the number of employees to determine whether a business is a small or large eligible employer.
(Head-count, not FTEs. Good news again!)
• Timing of the wage deduction disallowance.
(Must be on 2020 tax return, so amend if already filed.)
• Does gross receipts for ERC include PPP, SVOG, RRF?
(Mostly “no”, as long as you treat them consistently. More good news!)

They also released rules on changes made to the ERC by the American Rescue Plan Act (ARPA) regarding:
• Recovery Start-up Business
• Severely Financially Distressed Employer

There were other significant updates to the ERC as well, including clarifications as to:
• If an employer may claim both the ERC and the Internal Revenue Code Section 45B “Tip Tax Credit” that applies to food and beverage workers.
(YES! You can double-dip. Truly shocking, and good news.)
• Instructions on amending filed income tax returns returns after receiving the ERC.

Thankfully, the AICPA shared numerous resources on these in this week’s Town Hall — I strongly recommend viewing the AICPA TV session called “Employee Retention Credit: Your Questions Answered”. In this video, Kristin Esposito and April Walker review the IRS notice and explain guidance on the common questions listed above.

Additionally, AICPA released two Tax Adviser Articles:
• Guidance on claiming ERC
• New safe harbor for ERC gross receipts calculation

They are also putting together a panel of practitioners for a September Town Hall, to discuss how each is dealing with client returns based on this new guidance.

In addition to all the AICPA goodies, our go-to legal resource, Alan Gassman and Brandon Ketron recorded a “PPP and ERC Update” video on August 7th that explores (and vents) Notice 2021-49 (it was recorded prior to Rev. Proc 2021-33, so there’s no reference to the fact that PPP, SVOG, and RRF receipts are not included in gross income for ERC qualification purposes).

Which is a good segue to circle back to the frustration derived from the IRS’s “letter of the law” guidance. The basic idea is that if owners have any living relatives (regardless of association with the business), their wages do not qualify for ERC — but those of an orphan with no siblings or offspring would. Unsurprisingly, this didn’t go over well in the accounting and legal communities:

NCCPAP blasts IRS guidance on Employee Retention Credit | Accounting Today

Newly Issued Employee Retention Credit Guidance Punishes Owner Employees If They Have Living Family Members | Forbes

Practitioners call for fixes to the Employee Retention Credit | Accounting Today

IRS Issues Additional Guidance for Claiming the Employee Retention Tax Credit | Gould & Ratner LLP – JDSupra

I suspect the IRS is attempting to force Congress’s hand by taking the sloppily-written legislation at face value and therefore releasing a ridiculous literal interpretation they know could not have been intended. But without sufficient administrative authority to read their own preferences into it, the IRS has now put Congress in a position to have to release new legislation to explicitly spell out their original intent. Will this happen anytime soon? Do we hold off on filing client 941-X returns in the meantime? Or is Congress too busy to right this wrong?

We’ll be mulling these questions over in the next few weeks, with the intention of making a game-time call with enough time to get our September 15th extended business tax returns filed.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, Education, IRS, Tips

FREE Employee Retention Credit (ERC) Small Business Workshop

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Employee Retention Credit (ERC) Small Business Workshop | NFIB

The National Federation of Independent Business is hosting a free webinar with special guest, Matt Evans, CPA, SMA, CFM. Join them as he reviews the benefits of the ERC program, a refundable tax credit that could be worth up to $33,000 per employee for qualified wages an eligible employer pays to employees after March 12, 2020, and before December 31, 2021.

In this FREE webinar, Matt will explain how to:

• Determine ERC eligibility;
• Calculate the amount of ERC;
• Access and apply for the ERC; and
• Utilize both the PPP and ERC programs.

NFIB hosts Beth Milito and Holly Wade will conclude the webinar with LIVE Q&A to answer your PPP, ERC, FFCRA, and EIDL questions. You can submit your questions ahead of the webinar using the registration form so they can make sure to answer them.

Can’t make this webinar? Don’t worry! Register now and they’ll email you an on-demand version.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, Education, IRS, Tips

Advance Child Tax Credit: Recommendation To Opt-Out

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I’m hearing from a lot of clients and colleagues about the new advance payment of the increased child tax credit that began today, and it seems there’s a lot of confusion out there, so I wanted to take a moment to explain how it works.

The child tax credit has been around for a long time, but as part of the American Rescue Plan Act that was enacted in March 2021, the child tax credit was expanded — the amount has increased for certain taxpayers; it is fully refundable (meaning you get it back even if you don’t owe the IRS); and it may be partially-received in monthly advance payments. The new law also raised the age of qualifying children to 17 (from 16).

The thing is, the amount folks are starting to receive right now is just an advance payment of half of what the IRS thinks your credit will be based on last year’s tax return. The entire credit itself will be calculated and show up on your annual tax return for 2021, and any advance payments will be subtracted from it.

So: let’s say that you qualified for a big credit based on last year’s tax return, but then you made more money this year than last year (which is the case for many small business owners) — then you’d have to pay the difference back on your tax return. As a result, we’re actually recommending to most folks that they just opt-out entirely to be safe. Don’t worry — you will get the entire amount that’s coming to you on the next tax return; you just won’t have to worry about paying back an accidental overpayment.

These tax changes are temporary and only apply to the 2021 tax year. The credit is normally part of your income tax return and would reduce your tax liability. The choice to have the child tax credit advanced will affect your refund or amount due when you file your return. To avoid any unpleasant surprises, I strongly recommend you opt out, or at least contact your tax preparer to run the numbers.

Our colleagues over at Wegner CPAs put together a 5-minute video explaining when you might want to opt out versus receiving the advance payments — it’s worth a watch! She does a great job explaining the situations when you might want to remain enrolled in the program, and other scenarios when you should definitely opt out.

If that wasn’t enough for you, please read on for more details about what it means to qualify and how much you might receive.

Qualifications and how much to expect

The child tax credit and advance payments are based on several factors, including the age of your children and your income.

  • The credit for children ages five and younger is up to $3,600 –– with up to $300 received in monthly payments.
  • The credit for children ages six to 17 is up to $3,000 –– with up to $250 received in monthly payments.

To qualify for the child tax credit monthly payments, you (and your spouse if you file a joint tax return) must have:

  • Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS your information using the non-filer tool;
  • A main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year;
  • A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number;
  • Income less than certain limits.

You can take full advantage of the credit if your income (specifically, your modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. The credit begins to phase out above those thresholds.

Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but may also choose to receive monthly payments.

Taxpayers generally won’t need to do anything to receive any advance payments as the IRS will use the information it has on file to start issuing the payments.

IRS’s child tax credit update portal

Using the IRS’s child tax credit and update portal, taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children. Parents may also use the online portal to check on the status of payments or elect out of the advance payments. (To reiterate: that’s what we’re recommending to most of our clients. In general, we’d rather our clients be happily surprised at tax-time rather than frustrated that they have to return a portion of what they received.) The IRS also has a non-filer portal to use for certain situations where the taxpayers haven’t filed a tax return, similar to the one that existed for the stimulus payments.

Lastly, if you haven’t filed a tax return for 2020 yet — do not fret! The credit will show up on your 2021 tax return for the full amount; you are not missing out on getting your fair share.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.