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IRS, Tips

Top Five Tax Benefits Your Preparer Might Be Forgetting

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I used to find it annoying when a client would forward me an article about a tax deduction or credit, to make sure I would take it on their tax return. But even though I take approximately 70 credit hours of continuing education each year (almost twice the requirement for Illinois CPAs), every once-in-a-while a new tax law falls between the cracks, or I might not realize a given client is suddenly eligible for an old one. So, while 99% of these shares are “old news”, it’s worth avoiding the eye roll and taking a look just in case. Out with the ego, in with the knowledge.

To that end, when you do share something with your tax preparer, I beg you to phrase it in respectful language that recognizes they are experts in their field. Examples: “I’m sure you already know about this but just wanted to play it safe,” or “I read about this new tax law and am constantly amazed at how much y’all have to keep up with; any chance this applies to my situation?”

There are five tax benefits I’ve noticed — in my interactions with colleagues at conferences, in webinar chat, or in our online communities — that seem to keep flying under the radar. Most likely the tax preparer is expecting the bookkeeper or taxpayer to bring it up if one of these situations exists, but they may not know it’s significant, and may forget to note it in the books or tax organizer. So, to make sure we’re all on the same page, here are a few choice tax benefits that are often overlooked.

  • Credit for Small Employer Retirement Plan Startup Costs
  • Employer Credit for Paid Family and Medical Leave
  • Restaurant Meals Enhanced Deduction (2021 & 2022 only)
  • Self-Employed Health Insurance
  • Health Insurance Premium Tax Credit

Credit for Small Employer Retirement Plan Startup Costs —
SECURE 2.0 gets most of the airtime these days, but back in late 2019, the original version of this law passed, making it easier for small business owners to set up “safe harbor” retirement plans that are less expensive and easier to administer, and made them accessible to a wider range of employees. Although many of these benefits were modified and expanded upon with SECURE 2.0, the new rules didn’t take effect until 2023. But that shouldn’t stop you (or your preparer) from taking a look at the benefits in place in 2022. For starters, Form 8881, Credit for Small Employer Pension Plan Startup Costs provides for a maximum tax credit of up to $500 per year for startup costs, and another $500 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment. This benefit is a win-win for employers and employees, especially when the employee additionally qualifies for the retirement savers’ credit.

Employer Credit for Paid Family and Medical Leave —
Effective starting 2018, the Section 45S Employer Credit for Paid Family and Medical Leave is designed to cover up to 25% of the cost to employers of providing paid family and medical leave to their staff. The FMLA credit is claimed on Form 8994, Employer Credit for Paid Family and Medical Leave. To qualify, employers must have a written policy providing all eligible employees access to at least two weeks of paid family and medical leave annually, paid at 50% or more of normal wages (yes, short-term disability policies often count).

Policies must also include leave that covers one or more of the following:
– Birth of a child
– Adoption or fostering of a child
– Care for a spouse or family member with a serious health condition
– Employee’s own serious health condition
– Spouses and family member of certain active military members

Employers can claim the credit for up to 12 weeks of paid leave benefits. It’s available through 2025 and the IRS has an FAQ on it that’s chock-full of details.

Restaurant Meal 100% Deduction —
For 2021 and 2022 only, businesses can deduct the full cost of business-related food and beverages purchased from a restaurant; the limit is usually 50% of the meal, so this can be quite a savings. For our own clients, we’re simply exporting the entire “Meals” category from their financial software and reviewing all payees, sorting out the ones that are not restaurants… yet another benefit for small business owners who heed our cry to “please add payees to all transactions”.

Per the IRS, to qualify for the enhanced deduction:
– The business owner or an employee of the business must be present when food or beverages are provided.
– Meals must be from restaurants, which includes businesses that prepare and sell food or beverages to retail customers for immediate on-premises or off-premises consumption.
– Payment or billing for the food and beverages occurs after December 31, 2020, and before January 1, 2023.
– The expense cannot be lavish or extravagant.
– Grocery stores, convenience stores and other businesses that mostly sell pre-packaged goods not for immediate consumption, do not qualify as restaurants. ­

Self-Employed Health Insurance Deduction —
Now, this may sound obvious, since almost everyone knows that self-employed people are generally allowed to deduct their health insurance premiums for themselves, their spouses, and their dependents (and in some cases, non-dependent children). Yet we often see this benefit overlooked on tax returns, especially when S-Corp shareholders pay for their insurance through work. There are special and complex rules regarding how this health insurance deduction is claimed, which I suspect is why it is often missed (or sometimes duplicated). It’s important to understand that this is not a business deduction; neither do you have to itemize to take it. The deduction is claimed as a reduction of taxable income, and applies only to income taxes, not to self-employment taxes. It also needs to be subtracted from Section 199A Qualified Business Income before calculating the QBI Deduction, and there are complex issues when it interacts with the Premium Tax Credit (see below), so keep an eye out for these potential issues when claiming this important tax benefit.

Premium Tax Credit —
This one is often overlooked on tax returns in more than one direction… often the client forgets to provide Form 1095-A (Marketplace Health Insurance) to their preparer, which shows the advance premium tax credit, and therefore any increase or decrease in the credit based on the current year’s income is missed. How does this happen? Well, the credit is based on the prior tax year’s income, but “reconciled” on the tax return against the current tax year’s income — therefore, if the taxpayer had a good year, they may lose most or all of their credit. By contrast, in more difficult times, they may find out on the return that they’re entitled to more of a credit than they received. Not everyone enrolled on the Marketplace is eligible for a credit, so it’s easy to miss in the long list of tax organizer questions if the client doesn’t know to ask or to submit the form.

Per the IRS: If you benefit from advance payments of the premium tax credit, it is important to report life changes to the Marketplace as they happen throughout the year. Certain changes to your household, income or family size may affect the amount of your premium tax credit. These changes can alter your tax refund, or cause you to owe tax. Reporting these changes promptly will help you get the proper type and amount of financial assistance. For more information, see Claiming the Credit and Reconciling Advance Credit Payments.

To be fair to tax preparers everywhere, there is far more in the Internal Revenue Code (IRC) than any one person could ever know, which is part of why CPAs are required in most states to obtain more continuing education credits than almost any other professional designation. (Though keep in mind — there is no requirement that a tax preparer be a CPA, or even an EA. See here for my guide to finding a qualified tax preparer in your area.) The past five years have seen unprecedented increases in tax law complexity, and quite frankly — it’s hard to keep it all straight. So if you’re concerned your tax preparer is missing something, please approach the matter with respect and deference, and do not judge too harshly if they happen to have missed something. Just be glad you read this article and caught it in time! (And if you didn’t catch it in time, ask them about filing an amendment.)

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.