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Download Volume 12, Issue 1 Document Here
BizBoost News Volume 12, Issue 1 For distribution 7/11/22; publication 7/14/22
IRS Mid-Year Mileage Rate Changes
We have all been impacted by the rising costs in 2022, and gas prices have been no exception. To help alleviate some of this burden for certain taxpayers, the IRS has announced an increase in three of the four standard mileage rates for the second half of 2022. This is an unusual step for the IRS – the last time a mileage rate change was put into effect in the middle of the year was in 2011 (the IRS normally updates the mileage rates once a year in the fall for the next calendar year).
This change is effective for miles driven from July 1, 2022 to December 31, 2022, and the increase is $.04/mile for each of the eligible mileage categories. This impacts self-employed drivers who use their cars for business purposes, taxpayers who travel for medical purposes, and active-duty military members who are moving. It also applies to mileage allowances / reimbursements paid to employees by their employers. The changes are as follows:
Be aware that the mileage rate for charitable use of a vehicle will stay at $.14/mile. It is set by statute and not subject to adjustments for inflation (it has remained the same since 1998).
Although these changes will not provide instant relief to all eligible taxpayers (other than employees benefiting from the immediate increase in mileage allowances and reimbursements), it could impact their taxes when they file their 2022 tax returns next April:
All of these result in a lower tax bill.
What You Need to Do
This mid-year change, while very much welcomed and needed, may cause confusion for taxpayers. It is important to keep solid records now to ensure that the deduction amounts are correct and to reduce stress and scrambling come tax time.
Because there are two different mileage rates for 2022, it will be critical to keep track of associated miles driven for each half of the year. Make sure to document beginning and ending mileage for each portion of the year, and keep a log of business, medical, and moving mileage during each half of 2022. There are mobile apps that automatically track mileage, which could make things easier for taxpayers.
Also, self-employed individuals should keep in mind that there are two ways to calculate their business auto deduction – the standard mileage deduction or actual expense deduction.
If you have questions about recordkeeping for this tax rate change or deductions for the business use of your vehicle in general, please reach out any time.
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Our latest blog: “IRS Mid-Year Mileage Rate Changes” is available now! Subscribe here: [link]
We have all been impacted by the rising costs in 2022, and gas prices have been no exception. To help alleviate some of this burden for certain taxpayers, the IRS has announced an increase in three of the four standard mileage rates for the second half of 2022. Learn more in our latest blog article: [link]
The IRS has announced an increase in some standard mileage rates for the second half of 2022. This is an unusual step for the IRS – the last time a mileage rate change was put into effect in the middle of the year was in 2011. Learn more in our latest blog article: [link]
The mid-year change of standard mileage rates by the IRS may cause confusion for taxpayers. It is important to keep solid records now to ensure that the deduction amounts are correct and to reduce stress and scrambling come tax time. Learn more in our latest blog article: [link]
The IRS increase in standard mileage rates is effective for miles driven from July 1, 2022 to December 31, 2022, and the increase is $.04/mile for each of the eligible mileage categories. The changes are as follows:
•Business use: $.625/mile (up from $.585/mile from January to June 2022)
•Medical travel: $.22/mile (up from $.18/mile from January to June 2022)
•Military moving transportation: $.22/mile (up from $.18/mile from January to June 2022)
Learn more in our latest blog article: [link]
The latest IRS increase in standard mileage rates could impact your taxes when you file your 2022 tax returns next April:
•Self-employed individuals who use the standard mileage deduction will benefit from a higher auto deduction against their taxable business profit.
•Taxpayers who itemize deductions and have total medical expenses exceeding 7.5 percent of their adjusted gross income will benefit from a higher medical mileage deduction.
•Military members who traveled for purposes of moving will receive a higher adjustment to income for moving expenses than they would have before. Find more here:
Learn more here: [link]
DID YOU KNOW…due to IRS changes, there are two different mileage rates for 2022. It will be critical to keep track of associated miles driven for each half of the year. Make sure to document beginning and ending mileage for each portion of the year, and keep a log of business, medical, and moving mileage during each half of 2022. Learn more here: [link]
Did you know that the IRS made changes to the standard mileage rates? Sign up for our newsletter to learn more about these changes and how they may affect your tax return: [link]
Download Volume 11, Issue 27 Document Here
BizBoost NewsVolume 11, Issue 27For distribution 6/27/22; publication 6/30/22
IRS Suspension of Certain Taxpayer Notices
Receiving a notice from the IRS is often a stressful and intimidating experience. What makes it even worse, however, is when a taxpayer cannot easily speak with an IRS representative to get it resolved or is unable to get a timely response to any correspondence sent to IRS to dispute the proposed changes or tax due. Unfortunately, this has been the situation for many taxpayers (and even their tax professionals) over the last two years - in large part because of processing delays and staff shortages brought on by the COVID-19 pandemic. It has been almost impossible to reach an IRS representative over the phone, and correspondence mailed to the IRS is taking months instead of weeks to process. The good news is that IRS has recognized this problem and, as a result, put a temporary hold on sending certain types of notices to taxpayers.
The suspended notices primarily focus on those which may require extra processing or manual review of payments/returns, so this does not include all taxpayer notices. Below are the notices that are currently included on this list:
The IRS has stated that this suspension will last until the backlog of returns and correspondence is cleared, but has not given a specific date. If one of these notices has already been received, IRS has said there is no need to respond if it is inaccurate or reflects something that has already been resolved – however, they have also warned that if a taxpayer or tax professional believes a notice is accurate, steps should still be taken to resolve the issue as soon as possible. With a balance due notice, if accurate, penalties and interest will continue to accrue until it has been paid.
The IRS Commissioner has said there is a possibility that more types of notices will get added to this list, but for now, the focus is to ramp up efforts to reduce the inventory of outstanding returns/correspondence before providing any further relief. The IRS has recently announced hiring of additional staff as well as reallocation of resources to help succeed in these efforts, but hopefully this temporary suspension will reduce frustration and provide some peace of mind to taxpayers and tax professionals.
As always, if you need assistance with any IRS correspondence, we’re happy to help.
Our latest blog: “IRS Suspension of Certain Taxpayer Notices” is available now! Subscribe here: [link]
Over the last two years, it has been almost impossible to reach an IRS representative over the phone, and correspondence mailed to the IRS is taking months instead of weeks to process, largely due to COVID-19 delays and shortages. Learn what the IRS is doing to handle this situation in our latest blog article: [link]
Receiving a notice from the IRS is often a stressful and intimidating experience. What makes it even worse is when a taxpayer cannot easily speak with an IRS representative. The good news is that the IRS has recognized this problem and, as a result, put a temporary hold on sending certain types of notices to taxpayers. Learn more in our latest blog article: [link]
DID YOU KNOW… The IRS has stated the recent suspension of certain types of notices will last until the backlog of returns and correspondence is cleared, but has not given a specific date. If you have already received one of these notices, the IRS has said there is no need to respond if it is inaccurate or reflects something that has already been resolved – however, they have also warned that if a taxpayer or tax professional believes a notice is accurate, steps should still be taken to resolve the issue as soon as possible. Learn more here: [link]
The IRS has put a temporary hold on sending certain types of notices to taxpayers. The suspended notices primarily focus on those which may require extra processing or manual review of payments/returns, so this does not include all taxpayer notices. Learn more here: [link]
The IRS Commissioner has said there is a possibility that more types of notices will get added to the recent list of suspended notices, but for now, the focus is to ramp up efforts to reduce the inventory of outstanding returns/correspondence before providing any further relief. Learn more about these changes here: [link]
The IRS has recently announced hiring of additional staff as well as reallocation of resources to help succeed in efforts to fix the problems in service due to delays and shortages, but hopefully the temporary suspension of certain types of notices will reduce frustration and provide some peace of mind to taxpayers and tax professionals. Learn more about these suspensions here: [link]
The IRS has suspended certain types of notices in an effort to reduce the inventory of outstanding returns/correspondence. Sign up for our newsletter to learn more about the recent changes made by the IRS: [link]
Download Volume 11, Issue 26 Document Here
BizBoost NewsVolume 11, Issue 26For distribution 6/13/22; publication 6/16/22
Learning About S Corporation Shareholder Basis
General Definition
If you have ownership in an S corporation, it is important to have a general understanding of basis. This number called “basis” increases and decreases with the activity of the company. The IRS defines it as the amount of a shareholder’s investment in the business for tax purposes.
When the S corporation files a tax return (Form 1120S), all shareholders receive a K-1 form to show profits, losses and deductions allocated to the shareholder. The K-1 does not state the taxable amount of the distribution, which is contingent on the stock basis.
The main purpose of basis is to determine if distributions are taxable or losses are deductible. The basis for each shareholder is calculated annually and must be tracked from day one of ownership.
Importance of Basis
It is important to calculate the basis for the following reasons:
How Basis is Calculated
Think of basis like a checking account. The account goes up and down, but can never go negative. When there is a deposit of income, the basis goes up for all shareholders based upon percentage of ownership. When there is a payment of an expense, the basis goes down.
When a shareholder contributes money to the company, the basis goes up. When a shareholder withdraws money, the basis goes down.
Basis is also decreased by several activities like penalties the company had to pay, Section 179 deductions on assets or the non-deductible portion of meals and entertainment.
In year one, you start out with a zero basis. For the activity of the first year in business, you then have an ending basis. This ending basis in year one is your beginning basis number for year two. This continues as long as a person has ownership in a company.
Suspended Losses
Normally a shareholder that has basis in the company can reduce their other income (W-2 wages, interest, dividends, rental, etc.) on their personal tax return with the losses of the company. This is a really nice advantage of the S-corporation! However, if the shareholder does not have basis to go against that loss, the loss is suspended and disallowed for that tax year. The losses are carried over indefinitely until the shareholder has more basis.
Distributions
In general, if a shareholder withdraws money from the company outside of payroll, the distribution will only reduce the basis in the company. This is another benefit of an S-corporation! Regular corporations (C-corps) tax the shareholder for pulling out money, called dividends. You’ve probably heard the phrase, “double taxation on C-corps.” In an S-corporation, that does not happen if you have basis.
What happens if you don’t have basis and you pull money out? The amount that exceeds the basis will be taxed as a capital gain on the shareholder’s personal return. Here is an example:
Beginning Stock Basis = $25,000
Current year Loss = $-20,000
-----------
Ending Stock Basis = $5,000
Distributions = $10,000
Distribution Above Basis $5,000 = this is the amount the shareholder will be taxed at the capital gains rate.
Now do you see why tracking basis is important?
Reconstructing Basis
When you change tax preparers, a good sign that they are competent is if they ask for your basis schedules the first year they prepare your return. If they do not have the schedule, they will need to recreate it from year one. Reconstructing the basis is not very difficult as long as all the K-1’s and records are available for every year in business.
Two Types of Bases
There are two types of bases numbers that need to be tracked: stock basis and debt basis. Most of what you read above applies to stock basis.
Debt basis is a tad more complicated. For a shareholder to receive debt basis, the shareholder must make a direct loan to the corporation. The shareholder bears some risk in loaning the company money. You’ll want to formalize the loan with a promissory note and collect interest on the loan. Repayments of the loan are calculated against the debt basis. If the shareholder’s stock basis is zero, then losses are still allowed if there is debt basis. If the debt is repaid before the stock basis is restored, then all or part of the repayment of the loan may be taxable.
The End in Mind
Understanding and keeping track of basis is a good recordkeeping habit and will help you avoid surprises come tax time.
Our latest blog: “Learning About S Corporation Shareholder Basis” is available now! Subscribe here: [link]
If you have ownership in an S corporation, it is important to have a general understanding of basis. This number called “basis” increases and decreases with the activity of the company. The IRS defines it as the amount of a shareholder’s investment in the business for tax purposes. Learn more in our latest blog article: [link]
When an S corporation files a tax return, all shareholders receive a K-1 form to show profits, losses and deductions allocated to the shareholder. The K-1 does not state the taxable amount of the distribution, which is contingent on the stock basis. Learn more in our latest blog article: [link]
The main purpose of “basis” is to determine if distributions are taxable or losses are deductible. The basis for each shareholder is calculated annually and must be tracked from day one of ownership. Learn more here: [link]
It is important to calculate “basis” for the following reasons:
DID YOU KNOW…You can think of basis like a checking account. The account goes up and down, but can never go negative. When there is a deposit of income, the basis goes up for all shareholders based upon percentage of ownership. When there is a payment of an expense, the basis goes down. Learn more in our latest blog article: [link]
There are two types of bases numbers that need to be tracked: stock basis and debt basis. Debt basis is a tad more complicated. For a shareholder to receive debt basis, the shareholder must make a direct loan to the corporation. The shareholder bears some risk in loaning the company money. Learn more in our latest blog article: [link]
Do you know the importance of basis in an S corporation and how to calculate it? Sign up for our newsletter to learn more: [link]
Download Volume 11, Issue 25 Document Here
BizBoost NewsVolume 11, Issue 25For distribution 5/30/22; publication 6/2/22
Form 7203 – S Corporation Shareholder Basis
Form 7203 is a new form developed by IRS to replace the Shareholder’s Stock and Debt Basis worksheet that has previously been generated as part of returns for S corporation shareholders in most tax software programs. While this worksheet was not a required form and was provided for the shareholder’s internal tracking purposes, starting with the 2021 tax year, Form 7203 is a required attachment to Federal income tax returns of S corporation shareholders who:
The purpose of this form is to determine and report potential limitations of a shareholder’s share of an S corporation’s deductions, credits, and other items that can be deducted on the tax return, as well as possible taxable gain amounts that would not be readily determinable without the basis details.
The form consists of three sections:
Part I Shareholder Stock Basis
This section starts out with the shareholder’s stock basis at the beginning of the year (ending basis from prior year), then adds in any items that increase basis (income, interest, dividends, capital gains, etc.) and subtracts items that decrease basis (shareholder distributions, nondeductible expenses, business credits, etc.). Depending on the circumstances there may be amounts from Parts II and III that need to be entered here, but ultimately the ending stock basis for the year is determined on Line 15.
Part II Shareholder Debt Basis
This section only applies for shareholders who have loaned money to the corporation and have not been fully paid back, which creates something called debt basis. If that doesn’t apply, Part II can be skipped entirely.
This section starts out with the loan balance(s) at the beginning of the year (balance at end of prior year), adds any additional loans made, and then subtracts the principal amount of the debt repaid, to get to the end-of-year loan balance.
Then, the debt basis from beginning to end of year is calculated, which may be adjusted by any amount repaid by the company, any basis restored from previous losses that were deducted using debt basis (when no stock basis was available), and any current year losses in excess of stock basis that are being deducted as a result of having debt basis available. The ending debt basis is reported on Line 31.
If debt basis is less than the actual debt balance and any of the debt was repaid during the year, a portion of the repayment will be taxable – the reportable gain is calculated at the end of this section.
Part III Shareholder Allowable Loss and Deduction Items
This section is where the shareholder’s allowable loss and deduction items are calculated. The current year losses and deductions are combined with carryover loss/deduction items from prior years, and then the allowable current year amounts are determined based on the stock or debt basis available, with any carryover amounts (not usable in current year) reflected in the final column. As noted above, any allowable losses or deduction items that impact stock or debt basis will be reported in Part I and Part II, respectively, so that the correct ending basis balances are calculated.
Form 7203
Along with calculating the deductible amount of any loss/deduction items and helping to keep track of basis from year to year, this form will help IRS recognize when
a) a shareholder has taken distributions in excess of available basis, in which case the excess amount is reportable as a long-term capital gain, and b) a shareholder has received repayment on a loan made to the company, but has a reduced debt basis because of previously claiming losses against that debt basis (in which case a portion of the loan repayment is taxable as a capital gain).
a) a shareholder has taken distributions in excess of available basis, in which case the excess amount is reportable as a long-term capital gain, and
b) a shareholder has received repayment on a loan made to the company, but has a reduced debt basis because of previously claiming losses against that debt basis (in which case a portion of the loan repayment is taxable as a capital gain).
In the past, these items were not as easily recognizable by IRS and had a higher potential of getting missed in the reporting process.
Although this form reports information related to S corporation activity, it is generated with the shareholder’s 1040 (individual) return and not the 1120-S return. Most tax programs will likely still generate the basis worksheet with 1120-S returns as has been done in the past, and it’s important to make sure they are consistent with each other and that the information on each is accurate.
Our latest blog: “Form 7203 – S Corporation Shareholder Basis” is available now! Subscribe here: [link]
Form 7203 is a new form developed by IRS to replace the Shareholder’s Stock and Debt Basis worksheet that has previously been generated as part of returns for S corporation shareholders in most tax software programs. Learn more in our latest blog article: [link]
Form 7203 is a required attachment to Federal income tax returns of S corporation shareholders who:
The purpose of Form 7203 is to determine and report potential limitations of a shareholder’s share of an S corporation’s deductions, credits, and other items that can be deducted on the tax return, as well as possible taxable gain amounts that would not be readily determinable without the basis details. Learn more here: [link]
Form 7203 consists of three parts:
Learn more about this new form here: [link]
Along with calculating the deductible amount of any loss/deduction items and helping to keep track of basis from year to year, Form 7203 will help IRS recognize when:
Although Form 7203 reports information related to S corporation activity, it is generated with the shareholder’s 1040 (individual) return and not the 1120-S return. Most tax programs will likely still generate the basis worksheet with 1120-S returns as has been done in the past, and it’s important to make sure they are consistent with each other and that the information on each is accurate. Learn more in our latest blog article: [link]
Do you know how the new Form 7203 works? Sign up for our newsletter to access our latest article: [link]
Download Volume 11, Issue 24 Document Here
BizBoost NewsVolume 11, Issue 24For distribution 5/16/22; publication 5/19/22
Do You Need to File Schedules K-2 & K-3? A Look at Requirements, Exceptions/Relief, Filing Issues
Starting with the 2021 tax year, IRS forms K-2 and K-3 are new schedules that may need to be included with 1065 (Partnerships), 1120S (S Corporations), or 8865 (Certain Foreign Partnerships) filings. These are all pass-through entity filings that include Schedule K-1, which reports a partner’s or shareholder’s share of the entity’s profits, losses, deductions, and credits for the year, and the K-2/K-3 schedules are an extension of that.
Specifically, these forms go into greater detail regarding items of international relevance that may impact foreign reporting at the individual member or shareholder level. These schedules were created to accommodate international provisions enacted as part of the Tax Cuts and Jobs Act in 2017, which increased the amount and type of information needed to calculate items of foreign tax relevance (for example, calculating the foreign tax credit).
Who Must File?
The general guidance from the IRS states that a pass-through entity “with items of international tax relevance” would be subject to these new reporting requirements. However, there has been a great deal of confusion about what this means. The basic interpretation might be that if a pass-through entity has no international activities and no foreign members or shareholders, the K-2/K-3 filing requirement won’t apply – however, that is not necessarily the case.
IRS updated its instructions to state that an entity “with no foreign source income, no assets generating foreign source income, and no foreign taxes paid or accrued may still need to report information on Schedules K-2 and K-3.” The most common example of this would be for partners/shareholders who claim a foreign tax credit on their individual returns – they may need information from the K-2 and K-3 filings to complete the associated form and calculate the credit.
Your tax professional will ask you and all of your partners and shareholders about your foreign activity, so please be patient with the extra questions this year. (It’s not us; it’s the IRS!) Also, any one partner could ask for Schedules K2 and K3, and this would mean that they need to be completed regardless of whether any partner/shareholder had foreign activity. Simply by the partner’s asking, it triggers the requirement.
The big takeaway here is that items of international tax relevance and the K2/K3 requirement should be determined at the partner/shareholder level, not just the entity level.
Exceptions/Relief
IRS released initial information regarding transitional relief, knowing that there would be an adjustment period for entities to achieve compliance. Per Notice 2021-39, certain transitional penalty relief could be granted to those filers who made a good faith effort to comply with the new reporting requirements.
However, after significant pushback, the IRS announced that it would provide additional relief for 2021. S corps and partnerships that have no foreign activities, no foreign partners or shareholders, and no knowledge of partners’ or shareholders’ need for information on international items of relevance will not be subject to the K-2/K-3 filing requirements for tax year 2021. There is no indication at this point that the relief will extend beyond the 2021 tax year, so these entities should be prepared to complete the filings for 2022 and beyond.
Filing Issues
Because Schedules K-2 and K-3 are new for 2021, it has taken/will take some time for tax software programs to have electronic filing capability for these forms. If a tax return was or will be electronically filed prior to the availability dates listed below, the schedules much be submitted as separate PDF files attached to the return (most tax programs should be able to accommodate electronic attachment of miscellaneous PDF forms).
Per IRS, here are the availability dates for electronic filing of the K-2/K-3 forms:
Although IRS expects that all of these will be available for e-filing for the upcoming (2022) tax year, the ability to file via PDF attachment will still be available, if preferred.
Frequently Asked Questions/Questions or Feedback for IRS
IRS has created a K-2 and K-3 Frequently Asked Questions (FAQ) page, which it has been keeping updated as new information comes to light. Be sure to monitor this page for any new updates: Schedules K-2 and K-3 Frequently Asked Questions (Forms 1065, 1120S, and 8865) | Internal Revenue Service (irs.gov) IRS has also provided an email address for questions/comments that come up, and is welcoming feedback from taxpayers about this new compliance requirement: lbi.passthrough.international.form.changes@irs.gov.
Our latest blog: “Do You Need to File Schedules K-2 & K-3? A Look at Requirements, Exceptions/Relief, Filing Issues” is available now! Subscribe here: [link]
Starting with the 2021 tax year, IRS forms K-2 and K-3 are new schedules that may need to be included with 1065 (Partnerships), 1120S (S Corporations), or 8865 (Certain Foreign Partnerships) filings. Learn more in our latest blog article: [link]
IRS forms K-2 and K-3 go into greater detail regarding items of international relevance that may impact foreign reporting at the individual member or shareholder level. These schedules were created to accommodate international provisions enacted as part of the Tax Cuts and Jobs Act in 2017. Learn more in our latest blog article: [link]
The basic interpretation regarding requirements for IRS forms K-2 and K-3 might be that if a pass-through entity has no international activities and no foreign members or shareholders, the K-2/K-3 filing requirement won’t apply – however, that is not necessarily the case. Click here to learn more: [link]
DID YOU KNOW… The general guidance from the IRS states that a pass-through entity “with items of international tax relevance” would be subject to the new K-2 and K-3 forms’ reporting requirements. Learn more here: [link]
Although IRS expects that all of these will be available for e-filing for the upcoming (2022) tax year, the ability to file via PDF attachment will still be available, if preferred. Learn more here: [link]
DID YOU KNOW… Because Schedules K-2 and K-3 are new for 2021, it has taken/will take some time for tax software programs to have electronic filing capability for these forms. If a tax return was or will be electronically filed prior to the availability dates, the schedules much be submitted as separate PDF files attached to the return. Learn more in our latest blog article: [link]
Do you know if you need to file schedules K-2 and K-3? Sign up for our newsletter to learn more about the requirements, exceptions, and issues surrounding these new forms: [link]
Download Volume 11, Issue 23 Document Here
BizBoost NewsVolume 11, Issue 23For distribution 5/2/22; publication 5/5/22
Mortgage Interest Credit for First-Time Homebuyers
With the cost of home ownership on the rise, it is important for first-time homebuyers to be aware of certain possible benefits available to help with affordability. One of these is the Section 25 mortgage interest credit, which can be claimed on a taxpayer’s Federal tax return for a portion of the mortgage interest paid.
Who Qualifies?
To receive this credit, a taxpayer must be issued a mortgage credit certificate (MCC). This is issued by a state or local government agency in the state of residence. In order to qualify for one, the taxpayer must be a first-time homebuyer, and the home securing the mortgage must be the taxpayer’s principal residence. Furthermore, the taxpayer must meet certain income and sales price limitations, and may be required to undergo some type of homebuyer education (these qualifications vary by state).
How Much Is It?
The mortgage interest credit is calculated on Form 8396, Mortgage Interest Credit. There are two amounts provided on the MCC that are used to calculate the credit – the certificate credit rate (CCR) and the certified indebtedness amount. The CCR is a percentage that is applied to mortgage interest amount paid to determine the amount of the credit – however, if it is more than 20 percent, the maximum allowable credit for a given year is $2,000 (it ranges from a minimum of 10 percent to a maximum of 50 percent). The certified indebtedness amount is the amount of the loan covered by the MCC – only the interest on that amount is eligible for the credit.
Another possible limit to the credit amount is based on tax liability. The credit is limited to something called the “applicable tax limit,” which is:
Example 1:
Mortgage amount $200,000
Mortgage Interest paid during year $7,300
CCR: 30%
Interest paid x CCR = $2,190, but limited to $2,000 because CCR is more than 20%
Example 2:
CCR: 20%
Applicable tax limit $1,300
Interest paid x CCR = $1,460, but credit limited to applicable tax limit of $1,300
What Happens to the Credit Amount I Can’t Use?
If a portion of the calculated credit amount is disallowed because of the CCR exceeding 20%, the excess over $2,000 cannot be carried forward. However, any credit amount in excess of the applicable tax limit can be carried forward for up to three years. So, in Example 2 above, the $160 of unused credit above the applicable tax limit amount is carried forward to the next year.
What Happens If I Refinance?
If you refinance your mortgage, you can still qualify for the credit if your existing MCC is reissued. The reissued certificate must meet the following requirements:
Possible Disadvantages
For those taxpayers who deduct their mortgage interest on Schedule A, the deductible amount must be reduced by the amount of the credit received. It is still more advantageous to receive the credit than the additional deduction – furthermore, many taxpayers wouldn’t be impacted by this anyway, because more taxpayers are taking the standard deduction than previously (due to the increase in the standard deduction when the Tax Cuts and Jobs Act was passed). For those taking the standard deduction, there is no mortgage interest deduction to offset the credit against.
There are some situations where the credit may be subject to recapture, meaning that it must be repaid. If a taxpayer disposes of the residence within a nine-year period, some or all of the credit will be subject to recapture. However, if the taxpayer does not make significantly more income in the year of sale than in the year of purchase, or the taxpayer does not realize a gain on the sale of the home, the recapture amount would be reduced or possibly even eliminated. Some MCC programs will even reimburse taxpayers if they become subject to a recapture tax!
More Information
To find out more about the mortgage interest credit and how it is administered/how it might apply to their situation, taxpayers should contact their state or local government housing agency that is authorized to issue MCCs.More information can also be found in the IRS instructions for Form 8396: 2021 Form 8396 (irs.gov)
Our latest blog: “Mortgage Interest Credit for First-Time Homebuyers” is available now! Subscribe here: [link]
With the cost of home ownership on the rise, it is important for first-time homebuyers to be aware of certain possible benefits available to help with affordability. Learn more in our latest blog article: [link]
One possible benefit available to help with affordability of home ownership is the Section 25 mortgage interest credit, which can be claimed on a taxpayer’s Federal tax return for a portion of the mortgage interest paid. Learn more in our latest blog article: [link]
There are some situations where the Section 25 mortgage interest credit may be subject to recapture, meaning that it must be repaid. For example, if a taxpayer disposes of the residence within a nine-year period, some or all of the credit will be subject to recapture. Click here to learn more about this credit here: [link]
DID YOU KNOW… To receive the Section 25 mortgage interest credit, a taxpayer must be issued a mortgage credit certificate (MCC). This is issued by a state or local government agency in the state of residence. In order to qualify for one, the taxpayer must be a first-time homebuyer, and the home securing the mortgage must be the taxpayer’s principal residence. Learn more here: [link]
A possible limit to the Section 25 mortgage interest credit amount is based on tax liability. The credit is limited to something called the “applicable tax limit,” which is:
DID YOU KNOW… The mortgage interest credit is calculated on Form 8396, Mortgage Interest Credit. There are two amounts provided on the MCC that are used to calculate the credit – the certificate credit rate (CCR) and the certified indebtedness amount. Learn more in our latest blog article: [link]
For those taxpayers who deduct their mortgage interest on Schedule A, the deductible amount must be reduced by the amount of the credit received. It is still more advantageous to receive the Section 25 mortgage interest credit than the additional deduction. Sign up for our newsletter to learn more about this credit: [link]
Download Volume 11, Issue 22 Document Here
BizBoost News Volume 11, Issue 22 For distribution 4/18/22; publication 4/21/22
529 Plans
What is a 529 Plan?
A 529 Plan is an investment account that offers tax benefits when used to pay for qualified education expenses. Investments grow tax free and withdraws are tax- and penalty-free as long as they are used to pay for eligible expenses.
Most states offer their own 529 plan; you don’t have to be a resident of the particular state in order to establish an account. Many states also offer a state income tax deduction or tax credit for 529 plan contributions. There are even a handful of states that will give you a tax benefit for contributing to a different state’s 529 plan!
Who can contribute to a 529 Plan?
Anybody! The account has one owner and one beneficiary, but anyone (friends, family members) can contribute.
What happens if the beneficiary doesn’t use all of the funds?
The owner of the 529 plan is always in control of the account. They can name another person as a beneficiary (check with your 529 plan for eligibility), they can use the money themselves for qualified education expenses, or withdraw the funds (penalty applies).
Can 529 Plan Funds be used for other types of schooling?
You can withdraw up to $10,000 per year to pay for private elementary or high school tuition, penalty-free. Some states don’t conform to federal law, so be certain to check with your tax professional for your individual circumstances.
Eligible expenses related to attending trade schools, vocational programs, and registered apprenticeship programs are also allowed under a 529 plan.
What is a qualified expense?
For a withdraw to be free from penalty, the funds have to be used for a qualified expense. Qualified expenses include:
Tuition—full or part time attendance at an accredited institution
Room and Board—for on-campus students, this is the cost of housing and a meal plan. For off campus students, rent and food are a qualified expense, but the amount can’t exceed the school’s published Cost of Attendance. For example, if the school charges $7,000 per semester for housing, but the student’s off-campus housing costs $8,000 per semester, only $7,000 is a qualified expense and can be withdrawn tax- and penalty-free. The remaining $1,000 either needs to be paid out-of-pocket or would be subject to tax and penalties if paid from the 529 plan
Books and Supplies – textbooks, ebooks, lab fees, course fees, pens, paper, etc. required for a class is a qualified expense
Technology – computers, printers, and internet service are qualified expenses while you are enrolled in college
Student Loan Repayment – the IRS allows you to take up to $10,000 from a 529 plan to repay student loans. Check with your state to ensure that they conform to this law; some states do not and will assess taxes/penalties on the withdraw.
What isn’t a qualified expense?
There are certain expenses that seem like they should be a qualified expense but actually aren’t covered. Examples include:
Health Insurance
Fitness Club Memberships
Transportation
Cell Phone Plans
College Application and Testing Fees
An Easy Way to Save on Taxes
529 plans are a very common way to save taxes for families with children planning to go to college. If anyone in your household is currently attending educational programs or even plans to in the future, give us a call, and let us help you save on taxes with this deduction.
Our latest blog: “529 Plans” is available now! Subscribe here: [link]
A 529 plan is an investment account that offers tax benefits when used to pay for qualified education expenses. Investments grow tax free and withdraws are tax- and penalty-free as long as they are used to pay for eligible expenses. Learn more in our latest blog article: [link]
DID YOU KNOW… Most states offer their own 529 plan; you don’t have to be a resident of the particular state in order to establish an account. Many states also offer a state income tax deduction or tax credit for 529 plan contributions. Learn more about 529 plans in our latest blog article: [link]
Do you know what happens if the beneficiary of a 529 plan doesn’t use all of the funds? The owner of the 529 plan is always in control of the account. They can name another person as a beneficiary (check with your 529 plan for eligibility), they can use the money themselves for qualified education expenses, or withdraw the funds (penalty applies). Learn more here: [link]
Do you have a 529 plan? If so, do you know who can contribute to it?
The answer: Anybody! The account has one owner and one beneficiary, but anyone (friends, family members) can contribute. Learn more here: [link]
529 plans are a very common way to save taxes for families with children planning to go to college. If anyone in your household is currently attending educational programs or even plans to in the future, give us a call, and let us help you save on taxes with this deduction: [link]
Have you heard of a 529 plan? A 529 plan is an investment account that offers tax benefits when used to pay for qualified education expenses. Learn more in our latest blog article: [link]
The difference between qualified and unqualified expenses when it comes to 529 plans can be confusing. Sign up for our newsletter to access our latest article, where we explain the difference as well as provide a full overview of 529 plans: [link]
Download Volume 11, Issue 21 Document Here
BizBoost NewsVolume 11, Issue 21For distribution 4/4/22; publication 4/7/22
New Research & Development Credit Documentation Requirements
In the fall of 2021, the IRS released guidance regarding new documentation requirements for companies looking to claim a Research & Development (R&D) credit refund. The extra documentation requirement is effective beginning in January 2022, and the information must be submitted with the annual tax return. The goal of the new requirements is to help IRS process R&D credit refunds more quickly and efficiently.
There are five items that will be needed for all R&D refund requests, using Form 6765:
1. All business components 2. All research activities performed 3. All individuals who performed each research activity 4. All information each individual looked to discover 5. Total qualified employee wage, supply, and contract research expenses
A business component is defined as “any product, process, computer software, technique, formula, or invention which is to be held for sale, lease, or license, or used by the taxpayer in a trade or business of the taxpayer.” Taxpayers can disclose the relevant business components without going into details about how each one complied with the four-part test associated with the R&D credit.
The four-part test states that a claim must refer to an activity that is technological in nature, part of a process of experimentation, looks to eliminate uncertainty, and has a specific purpose or goal. As part of clarifying who was involved in research activities, the new information is required to include the purpose or goal of anyone who was part of the process. Additionally, IRS has stated that only titles or positions need to be provided for the individuals involved in the refund claim, but that companies should be prepared to provide full names if the IRS performs a more substantive review.
Because taxpayers will need to adjust to the new requirements and may provide partial or incorrect information initially, IRS is giving a grace period in the first year to fully comply with the new requirements. This grace period has been extended to 45 days and is only effective for the first year of transition. If the IRS determines that any part of the information is incomplete or incorrect, they will notify the taxpayer in writing, and missing information can be submitted via fax or mail. If the updated documentation is not supplied within 45 days, the refund claim will be denied – and after January 9th, 2023, any originally-filed incomplete refund claim will be rejected.
It's important to note that IRS is still accepting public comments regarding these new rules, so it’s possible the instructions could be revised based on any modifications as a result of this input. The American Institute of Certified Public Accountants (AICPA) has also formally requested that the start date of the new requirements be pushed back to allow more time for the public to comment, but IRS has not yet agreed to this recommendation. This new documentation requirement may create additional complications, so it will be critical for taxpayers to ensure that they understand the new requirements and submit the correct information on a timely basis.
Our latest blog: “New Research & Development Credit Documentation Requirements” is available now! Subscribe here: [link]
In the fall of 2021, the IRS released guidance regarding new documentation requirements for companies looking to claim a Research & Development (R&D) credit refund. Learn more in our latest blog article: [link]
There are five items that will be needed for all R&D refund requests, using Form 6765: 1.All business components 2.All research activities performed 3.All individuals who performed each research activity 4.All information each individual looked to discover 5.Total qualified employee wage, supply, and contract research expenses Learn more in our latest blog article: [link]
#BusinessTip: The extra documentation requirement for companies looking to claim a Research & Development (R&D) credit refund is effective beginning in January 2022, and the information must be submitted with the annual tax return. Click here to learn more: [link]
DID YOU KNOW… A business component is defined as “any product, process, computer software, technique, formula, or invention which is to be held for sale, lease, or license, or used by the taxpayer in a trade or business of the taxpayer.” Learn more here: [link]
The four-part test associated with the Research & Development Credit states that a claim must refer to an activity that is technological in nature, part of a process of experimentation, looks to eliminate uncertainty, and has a specific purpose or goal. Learn more about the new documentation requirements for R&D here: [link]
DID YOU KNOW… The American Institute of Certified Public Accountants (AICPA) has formally requested that the start date of the new Research & Development Credit requirements be pushed back to allow more time for the public to comment, but IRS has not yet agreed to this recommendation. Learn more in our latest blog article: [link]
The new documentation requirements for the Research & Development Credit may create complications, so it will be critical for taxpayers to ensure that they understand the new requirements and submit the correct information on a timely basis. Sign up for our newsletter to learn more about these changes: [link]
Download Volume 11, Issue 20 Document Here
BizBoost NewsVolume 11, Issue 20For distribution 3/21/22; publication 3/24/22
Understanding Your IRS Notice
Dealing with the IRS can be stressful! There are taxpayers who receive an IRS notice and because they are so fearful, they will pay the notice without verifying the accuracy. The IRS may not have all the facts, so do not pay anything without checking the details. Also, do not ignore any letter sent by the IRS—doing so will only make the situation worse. Understanding your IRS notice empowers you to make the most informed decision for your situation.
The IRS sends notices and letters for the following reasons:
(Remember, the IRS will never call you on the phone to collect money or verify your identity; if someone says they are the IRS on the phone, it’s a scam! Don’t fall for it.)
First, check the type of notice that the IRS sent you (example: Notice CP2000 indicates that the information contained in the tax return doesn’t match what was reported to the IRS by third parties) and review which tax year this applies to. This information will be included in either the upper right- or left-hand corner of the notice.
Read the notice carefully. If the tax return was changed by the IRS, compare the information listed on the notice with your tax return. Review line items thoroughly and determine what numbers are different.
In 2020 and 2021, the IRS fell behind processing returns and especially those that were filed on paper. That resulted in a LOT of IRS letters going out that were just plain wrong because the paper returns had not been entered into the system yet.
If you agree with the notice and there is a balance owed, make certain to pay it by the due date to avoid additional fees and penalties. If you can’t afford to pay the full amount listed, pay as much as you can now. If you need to pay over time, consider applying online for an installment agreement.
If you disagree with the notice, be sure to follow the instructions included in the letter that indicate how to dispute their findings. Often, you will need to provide not only an explanation of why you disagree, but also the documents that support your position. The notice will also tell you the timeframe you need to respond in and how to do it (ex: mail or fax). Responding timely preserves your right to appeal an IRS decision if you don’t agree with it!
And this is where you will probably want to get expert representation anyway, especially if the IRS says you owe a lot. The only three types of tax professionals that can represent you in front of the IRS are CPAs, Enrolled Agents, and attorneys.
Always provide any IRS correspondence to your tax preparer. There may be information contained in the notice that impacts the following tax year, which is important for your tax preparer to be aware of. Most of all, reach out to your tax preparer for assistance if you do not fully understand the notice. Getting them involved early could save you a lot of worry, and maybe even some money if penalties can be waived.
Insert a link to your newsletter, web site or blog before you post these:
Our latest blog: “Understanding Your IRS Notice” is available now! Subscribe here: [link]
If you receive a letter from the IRS do not ignore it - doing so will only make the situation worse. Understanding your IRS notice empowers you to make the most informed decision for your situation.Learn how to understand your IRS notice in our latest blog article: [link]
Our latest blog article will help you understand your IRS notice and what steps to take to handle the situation. Get instant access here: [link]
Dealing with the IRS can be stressful! There are taxpayers who receive an IRS notice and because they are so fearful, they will pay the notice without verifying the accuracy. The IRS may not have all the facts, so do not pay anything without checking the details. Learn more here: [link]
If you receive an IRS notice, first, check the type of notice that the IRS has sent (example: Notice CP2000 indicates that the information contained in the tax return doesn’t match what was reported to the IRS by third parties) and review which tax year this applies to. Learn more here: [link]
DID YOU KNOW… The IRS sends notices and letters for the following reasons:
Learn how to handle an IRS notice here: [link]
Tax Tip: Always provide any IRS correspondence to your tax preparer. There may be information contained in the notice that impacts the following tax year, which is important for your tax preparer to be aware of. Learn more in our latest blog article: [link]
Do you know the steps to follow when you receive an IRS notice? Sign up for our newsletter to learn how to handle this stressful situation: [link]
Download Volume 11, Issue 19 Document Here
BizBoost NewsVolume 11, Issue 19For distribution 3/7/22; publication 3/10/22
Business Meals Deduction for 2021-2022 Tax Years
As an incentive to help restaurants recover economically due to the COVID-19 pandemic, Congress has temporarily allowed that expenses for business-related meals are 100 percent tax deductible from January 1, 2021 through December 31, 2022. After that date, the federal tax deduction for business-related meals will return to the 50 percent level.
It’s important for a business owner to understand when the temporary 100 percent deduction applies and when the 50 percent limit is in effect. For that, the IRS has issued Notice 2021-25 for clarity.
For the cost of a meal to be 100 percent deductible, the food and beverages must be purchased from a restaurant. The IRS defines a restaurant as “a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” The 100 percent deduction is allowed as long as the expense isn’t “lavish or extravagant,” the business owner or their employee is present at the meal, and the meal is provided to the business owner or their client.
There are certain circumstances where the temporary 100 percent deduction does not apply. For example, pre-packaged food or beverages, such as food sold at a grocery store or a vending machine, do not qualify for the enhanced deduction. Additionally, because eating facilities located on a business premise are not considered restaurants, meals purchased from these sources remain limited to a 50 percent deduction.
Business owners are advised to keep track of the different types of meal expenses to determine their deductibility. A good way to do this is to create separate categories, accounts, or sub-accounts for 100 percent deductible meals and 50 percent deductible meals on their chart of accounts in their accounting software.
Our latest blog: “Business Meals Deduction for 2021-2022 Tax Years” is available now! Subscribe here: [link]
DID YOU KNOW… Pre-packaged food or beverages, such as food sold at a grocery store or a vending machine, do not qualify for the enhanced business meal deduction. Additionally, because eating facilities located on a business premise are not considered restaurants, meals purchased from these sources remain limited to a 50% deduction. Learn more in our latest article: [link]
Our latest blog article reviews the rules for business meal deductions for the 2021-2022 tax years. Get instant access here: [link]
As an incentive to help restaurants recover economically due to the COVID-19 pandemic, Congress has temporarily allowed that expenses for business-related meals are 100% tax deductible from January 1st, 2021 through December 31st, 2022. Learn more here: [link]
It’s important for a business owner to understand when the temporary 100% deduction applies and when the 50% limit is in effect. Learn more in our latest blog article: [link]
DID YOU KNOW… There are certain circumstances where the temporary 100% business meal tax deduction does not apply. Find out more here: [link]
In regards to business meal deductions, business owners are advised to keep track of the different types of meal expenses to determine their deductibility. A good way to do this is to create separate categories for 100% deductible meals and 50% deductible meals on their chart of accounts. Learn more in our latest blog article: [link]
Do you know how business meal tax deductions work, and when meals are 100% deductible or 50% deductible? Sign up for our newsletter to learn more: [link]
