Category Archives: IRS

National Society Of Accountants For Co-ops Upcoming Webinars

March 6, 2022 Nancy McClelland Leave a comment

I often write and speak about my experiences as a co-op accountant, and how challenging it was to become an expert in the field with so few resources. Things have changed a lot since back then, with the National Society of Accountants for Co-ops (NSAC), National Cooperative Business Association (NCBA), and the Co-op Professionals Guild (CPG) all offering online education.

The NSAC line-up for the next few months is seriously powerhouse. For anyone in the field or looking to get into it, I strongly recommend a membership, which gets you into all of these webinars below at no extra charge. That said, if you only want to know the specifics of one topic or another, they are affordably priced at $56 each for non-members.

Note: I am not paid or given a discount to promote NSAC — I just think they’re great!

Education, IRS, Tips

Reasonable Compensation Stress Test & Resources

March 5, 2022 Nancy McClelland Leave a comment

This isn’t the first time I’ve posted about the useful resources offered by RCReports — but as it turns out, it’s been a while. Apparently I take it for granted that everyone knows about Reasonable Compensation requirements all too often, and then I regularly discover that it’s just not true.

Note: I am a loyal paid subscriber to RCReports, and receive no compensation or discounts for promoting their service or resources. I just think they’re great.

In any case, recently I was asked by a colleague to train her on the basics of Reasonable Compensation and walk through my process. I asked her to do these three pieces of homework first:

Read this article about stress-testing the RC amount – How to Stress Test a Reasonable Compensation Figure – RCReports
Watch this 2-hour RC Reports training session – Reasonable Compensation for S Corps on Vimeo
(tip for professionals – this class is sometimes offered on CPAacademy for free, with CPE credit included).
Watch this 1-hour RC Reports demo – RCReports Product Demo – RCReports

I know most non-accountants won’t bother with the 2-hour training session that walks through court cases and the history of Reasonable Compensation audits and challenges. And certainly folks who are not in the business of performing these calculations aren’t likely to bother with the 1-hour demo.

But anyone running their own corporation, and those considering electing S-corp status, will want to read about stress-testing. This is something you can do regardless of the calculation process, or how you got to the salary amount in the first place. A helpful excerpt (edited) from the article:

There are six main factors or tests (the IRS lists even more), but “applying just the first three will usually tell you whether a compensation is reasonable or not. In other words – three strikes and you’re out.”

1) Training and experience: Does $X/year seem like enough compensation for somebody who has this level of training and experience?
2) Duties and responsibilities: Does $X/year seem like enough compensation for someone with these duties and responsibilities?
3) Time and effort devoted to the business: Does $X/year seem like enough compensation for someone who worked this many hours/week?

But what if the company can’t afford to pay reasonable compensation? I hear that question a lot, as you might imagine. That’s a common situation, and a simple answer — you’re not required to pay yourself the entire amount of salary… it just means that you can’t issue distributions until it has been paid. “The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.” And no fair holding off on paying salary for years while building up retained earnings and then issuing a huge distribution in the first year you pay yourself salary. The IRS knows that trick as well. RCReports writes more about the issue in this article — check out Example 4 in particular for information about the look-back period.

There are different methods of determining Reasonable Compensation — yes, I’m referencing yet additional RCReports articles for details — the cost approach, market approach, and income approach. The Cost Approach generally works best for small businesses where the business owner provides multiple services for the business (wears many hats).

The key with all of these resources is to get shareholder-employees to take a closer look at their own salaries and make sure they are following IRS guidelines. Stress-testing is a great place to start, but for a more thorough approach to calculating Reasonable Compensation, I recommend contacting a CPA with background in this area who can walk you through an RC interview and help you support the amount you ultimately choose.

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.

Education, IRS, Site News, Tips

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

February 13, 2022 Nancy McClelland Leave a comment

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)

COVID-19 Financial Relief, IRS, Tips

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

February 12, 2022 Nancy McClelland Leave a comment

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:

Discontinue automated compliance actions until the IRS is prepared to devote the necessary resources for a timely resolution
Align requests for account holds with the time it takes the IRS to process any penalty abatement requests
Offer a reasonable cause penalty waiver, similar to the procedures of first-time abatement administrative waiver
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

COVID-19 Financial Relief, Education, Illinois, IRS, Site News, Tips

How To Download An IRS Account Transcript – UPDATED 2/6/2022

February 6, 2022 Nancy McClelland Leave a comment

Heads-up: this article is outdated and a new one serves to replace it; please check it out!

Last year we began requiring all clients to submit a copy of their IRS Account Transcript along with their Tax Organizer and other annual tax prep documentation.

The initial issue was that not everyone kept the Form 1444 notices regarding how much stimulus was received. Why would this matter? If a taxpayer did not receive the full amount, then they are entitled to recoup the difference on their annual tax return. (But don’t worry: if you received too much, you don’t have to pay it back — unless it was obtained fraudulently.) Not only does this issue remain for 2021, but the problem is exacerbated, because now we also have child tax credit payments to track — some folks received advances while others decided to opt out (and unlike stimulus payments, any excess child tax credit payments may have to be repaid).

In addition, we’ve also noticed quarterly estimated taxes are often reported incorrectly by clients — especially with additional complexities due to recent state legislation to get around federal limits on deducting state taxes.

We’ve come to the conclusion that the best solution to these concerns is to continue to ask clients to download their annual Account Transcript and provide it to us via secure upload. It’s free, reasonably easy, and reliable.

Instructions for obtaining the Account Transcript for folks who have already registered for an IRS online account follow — if you did this last year, you don’t need to follow all the steps in last year’s post about how to create an account. Just sign in to the system and you should be golden.

(Yes, the IRS will ask you to create a new ID.me account “as soon as possible” and you won’t be able to log in with your existing IRS username and password starting in summer 2022. But for now, no need to create a new account in the new system — the old one works just fine.)

Go to the IRS’s Get Transcript home page and click the “Get Transcript Online” button.
Log into the system.
You’ll need to select the reason you need a transcript.

In this case, you would select “Other”.

4. Leave the Customer File Number blank and click “Go”.

5. The screen will display all four types of transcript options and the available years.

6. Select “2021” under “Account Transcript” (the box in the lower-left).

Make sure you are selecting the right kind of transcript — in this case you want an Account Transcript.
(Click here for information on what each of the types of transcripts are.)

And like magic, a pdf pops up in a new tab of your browser with a letter from the IRS — and if you scroll down to the bottom, there’s section detailing all the transactions you need.

At this point, print the file to pdf and save somewhere safe, along with the rest of your tax season documents.

What about state information?

To get a list of the estimated tax payments you’ve made to the state of Illinois, go to https://mytax.illinois.gov/?link=1040EPy and enter your SSN, Name, and the year (in this case 2021).

If you also made payments from a corporation or partnership, you’ll need to log into your MyTaxIllinois business account to get those.

Done! Let the tax return preparing begin!

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. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

IRS, Site News, Software, Tips

Tax Season Begins Jan 24 — IRS Says to Expect Frustration

January 16, 2022 Nancy McClelland Leave a comment

In an already unprecedented year, the IRS is taking an unprecedented approach toward managing taxpayer expectations, and with good reason: with tax season officially beginning this coming January 24th, the IRS is dealing with a severe lack of staffing — facing workforce headcounts at 1970s levels — and a backlog of tax returns from the past two years. They say to expect frustration this tax season.

The IRS has been dealing with budget shortages for many years now, and Covid forced their mailrooms to close down for months at a time, creating a massive backlog from which they have not yet recovered. Add to that the unbelievable number of new demands placed upon the agency: three rounds of stimulus payments, Employee Retention Credits for both 2020 and 2021, and demands for guidance in an unbelievable number of groundbreaking areas of code… it is certainly understandable that they would not be able to meet taxpayer needs.

So what can taxpayers do to avoid additional problems? Filing electronically with direct deposit, and avoiding a paper tax return — at almost any cost — is more important than ever this year. Additionally, those who received an Economic Impact Payment or an advance Child Tax Credit last year should be especially careful to order an IRS transcript ahead-of-time to confirm these amounts before filing a return. (We are requiring all clients to submit both federal and state transcripts this year, in their own interest.)

Also, keep in mind that by law, the IRS cannot issue a refund involving the Earned Income Tax Credit or Additional Child Tax Credit before mid-February, though eligible people may file their returns beginning on January 24. The law provides this additional time to help the IRS stop fraudulent refunds from being issued.

Due to the Emancipation Day holiday falling on Friday, April 15th, the filing deadline to submit 2021 tax returns or an extension to file is Monday, April 18, 2022. Taxpayers requesting an extension will have until Monday, Oct. 17, 2022, to file (but not an extension to pay; make sure to pay an estimate of tax with your extension).

The IRS did note that if you are still awaiting processing of your 2020 tax return, this should not prevent you from filing a 2021 return — but as a CPA, I’d recommend against that approach, opting instead to file an extension with a payment of any estimated tax due; otherwise, changes from 2020 could affect 2021 and require an amended return.

The American Institute of CPA’s VP of Tax, Ed Karl, has repeatedly shared in AICPA Town Halls and articles that the IRS Commissioner himself testified that during busy season the IRS gets 1500 calls per second — this translates into their only being able to answer 2% of calls. “No, that is not a typo.” The AICPA strongly supports penalty relief measures that are fair, reasonable and practical, and would mitigate the negative effect of the coronavirus on taxpayers and require less contact with the IRS. Such an approach would alleviate the daily struggles that taxpayers, their advisers and the IRS face. Specifically, the AICPA urges Treasury and the IRS to:

Stop compliance actions until the IRS is prepared to devote the necessary resources for a proper and timely resolution of erroneous notices, missing refunds and other matters. At a minimum, stop automatic collections at least for 90 days after the filing deadline.
Align requests for account holds with the time it takes the IRS to process any penalty abatement requests.
Provide taxpayers with targeted relief from underpayment of estimated tax penalty and the late payment penalty.
Offer a COVID-19 reasonable cause relief, similar to the procedures of first-time abatement and generally facilitate the easier adoption of reasonable cause relief.

Those are some solid suggestions for short-term relief — long-term suggestions and more can be found in this excellent AICPA summary. On Friday, the AICPA joined a coalition seeking relief from IRS service challenges, pointing out that “though the pandemic has created unforeseen and prolonged problems for the IRS, taxpayers, and tax professionals, the IRS has not taken reasonable actions to reduce burdens that appear likely to continue into the upcoming tax filing season”.

In the meantime, here are several important dates from Tax Practice Advisor that taxpayers should keep in mind for this year’s filing season:

January 14: IRS Free File opens. Taxpayers can begin filing returns through IRS Free File partners; tax returns will be transmitted to the IRS starting January 24. Many tax software companies also are accepting tax filings in advance.
January 18: Due date for tax year 2021 fourth-quarter estimated tax payments.
January 24: IRS begins 2022 tax season. Individual 2021 tax returns begin being accepted and processing begins.
January 28: Earned Income Tax Credit Awareness Day to raise awareness of valuable tax credits available to many people – including the option to use prior-year income to qualify.
April 18: Due date to file 2021 tax return or request extension and pay tax owed.
April 19: Due date to file 2021 tax return or request extension and pay tax owed for those who live in MA or ME due to Patriots’ Day holiday.
October 17: Due date to file for those requesting an extension on their 2021 tax returns.

Best of luck — and please remember to be kind and patient with your tax preparer and agency representatives. We’re all human beings struggling with an imperfect system during a difficult time.

Illinois, IRS, Tips

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

December 23, 2021 Nancy McClelland Leave a comment

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!

COVID-19 Financial Relief, Education, IRS

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

September 25, 2021 Nancy McClelland Leave a comment

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!

COVID-19 Financial Relief, IRS

IRS Backlog Leads To AICPA Campaign For Penalty Relief

September 23, 2021 Nancy McClelland Leave a comment

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.

COVID-19 Financial Relief, Education, IRS, Tips

IRS Finally Issues Guidance On Employee Retention Credit (ERC)

August 12, 2021 Nancy McClelland Leave a comment

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.

The Dancing Accountant