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BizBoost NewsVolume 11, Issue 8For distribution 10/04/21; publication 10/07/21
Updates to the Employee Retention Credit
In early August of this year, the IRS released additional guidance on the Employee Retention Credit. For 2021, the credit was expanded to allow businesses to receive a credit of up to $7,000 per employee per quarter if their operations were fully or partially shut down by government order or if they had a significant decline in gross receipts.
One of the biggest surprises and disappointments to come out of the guidance was the IRS conclusion that wages paid to majority owners and spouses do not qualify for the credit in most cases. How IRS arrived at this conclusion is a rather complex and confusing path that uses family attribution rules that view an entity as controlled by an owner’s family. Many tax professionals are split on whether the IRS has sufficient evidence to make this claim, so this is one that might see some court cases in the future.
The guidance also clarifies that employers are not required to use the alternative quarter election consistently from quarter to quarter. In 2021, this election allows employers to compare their gross receipts for the prior quarter, rather than the current quarter, to the corresponding calendar quarter in 2019. For example, an employer could elect to be a Q2 2021 eligible employer if its Q2 2021 gross receipts are less than 80 percent of its Q2 2019 gross receipts and could then make an alternative quarter election in Q3 2021, again relying on the gross receipts decline in Q2 2021.
Lawmakers are also considering ending the Employee Retention Credit early to move unused COVID relief funds to the infrastructure bill that the House will be voting on.
The ERC is a lucrative cash windfall for employers that do qualify. Don’t let complexity get in the way of claiming the credit if you are eligible. Give us a call so we can help you reduce your taxes with the ERC and any other credit you may be eligible for.
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Our latest blog: “Updates to the Employee Retention Credit” is available now! Subscribe here: [link]
In early August of this year, the IRS released additional guidance on the Employee Retention Credit. Find out what they released in our latest blog article: [link]
Our latest blog article reviews the additional guidance the IRS released on the Employee Retention Credit in August 2021. Get instant access here: [link]
For 2021, the Employee Retention Credit was expanded to allow businesses to receive a credit of up to $7,000 per employee per quarter if their operations were fully or partially shut down by government order or if they had a significant decline in gross receipts. Learn more here: [link]
One of the biggest surprises and disappointments to come out of the new Employee Retention Credit guidance was the IRS conclusion that wages paid to majority owners and spouses do not qualify for the credit in most cases. Learn more here: [link]
DID YOU KNOW… The new IRS guidance on the Employee Retention Credit clarifies that employers are not required to use the alternative quarter election consistently from quarter to quarter. In 2021, this election allows employers to compare their gross receipts for the prior quarter, rather than the current quarter, to the corresponding calendar quarter in 2019. Find out more here: [link]
According to the new guidance provided by the IRS in August 2021, lawmakers are considering ending the Employee Retention Credit early to move unused COVID relief funds to the infrastructure bill that the House will be voting on. Learn more in our latest blog article: [link]
Did you see the new guidance regarding the Employee Retention Credit provided by the IRS in August 2021? Do you know how it may affect your business? Sign up for our newsletter to learn more: [link]
BizBoost NewsVolume 11, Issue 7For distribution 9/20/21; publication 9/23/21
What the Heck Is a Wash Sale?
Investing has become much more accessible since Robinhood became a thing. But do you know what a wash sale is and how it will impact your tax return?
You have a stock, it dips, and you sell it thinking “Hey, I can use this loss on my tax return AND buy XYZ back at a lower price!” Sorry, but this is what creates a “wash sale,” and IRS does not allow the deduction of the loss in this type of scenario. The IRS defines a wash sale as selling a stock or security at a loss and within 30 days before or after the sale –
Interestingly, there are no specific IRS guidelines explaining what substantially identical means.
Notice that the window for the wash sale is 30 days before or after the sale that created the loss was made. And if you think you can have your spouse buy the substantially identical stock so you can claim the loss, forget it – that is not allowed either.
So, what does a wash sale look like?
You buy 100 shares of X stock for $1,000. You sell these shares for $750 and within 30 days from the sale you buy 100 shares of the same stock for $800. Because you bought substantially identical stock, you cannot deduct your loss of $250 on the sale. However, you add the disallowed loss of $250 to the cost of the new stock, $800, to obtain your basis in the new stock, which is $1,050.
So why did the IRS make the wash sale rule? Basically, it is intended to stop taxpayers from creating a convenient or artificial loss. You will not completely lose the loss; it will just be added to the basis of the new stock.
Our latest blog: “What the Heck is a Wash Sale?” is available now! Subscribe here: [link]
Investing has become much more accessible since Robinhood became a thing. But do you know what a wash sale is and how it will impact your tax return? Learn more in our latest blog article: [link]
What the heck is a wash sale? If you’re asking this question, check out our latest blog article, where we explain a what a wash sale is and how it could impact your tax return. Get instant access here: [link]
The IRS defines a wash sale as selling a stock or security at a loss and within 30 days before or after the sale you:
Learn more about wash sales here: [link]
Why did the IRS make the wash sale rule? Basically, it is intended to stop taxpayers from creating a convenient or artificial loss. You will not completely lose the loss; it will just be added to the basis of the new stock. Learn more about the wash sale rule here: [link]
The window for a wash sale is 30 days before or after the sale that created the loss was made. And if you think you can have your spouse buy the substantially identical stock so you can claim the loss, forget it – that is not allowed either. So, what does a wash sale look like? Find out more here: [link]
You have a stock, it dips, and you sell it thinking “Hey, I can use this loss on my tax return AND buy XYZ back at a lower price!” Sorry, but this is what creates a “wash sale,” and IRS does not allow the deduction of the loss in this type of scenario. Learn more about wash sales in our latest blog article: [link] Find out more here!
Now that investing has become easier with platforms like Robinhood, it is important to understand the terminology and rules of the investing world. For example, do you know what a wash sale is? Learn all about wash sales in our latest blog article. Sign up for our newsletter for instant access: [link]
BizBoost NewsVolume 11, Issue 6For distribution 9/06/21; publication 9/09/21
Short-Term Capital Gains vs. Long-Term Capital Gains – What’s the Difference?
Have you ever wondered why gains are separated between long-term and short-term when you receive your 1099 at tax time? There is a very good reason for that, and one you might want to consider more carefully when investing.
Short-term capital gains are derived if you hold an investment one year or less before disposing of it. Short-term gains are taxed as “ordinary income,” the same rate you pay on wages or business profits.
Long-term capital gains, on the other hand, are generally taxed no higher than 20% and could be taxed at 0%, depending on your income. See the table below:
Tax Filing Status
Income range at 0% Rate
Income range at 15% Rate
Income range at 20% Rate
Single
0 - $40,400
$40,401 to $445,850
> $445,850
Married Filing Jointly
0 - $80,800
$80,801 to $501,600
> $501,600
Married Filing Separately
$40,401 to $250,800
> $250,800
Head of Household
0 - $54,100
$54,101 to $473,750
> $473,750
Exceptions to the long-term capital gains tax rate are collectibles such as art, jewelry, and precious metals. These are taxed at 28% regardless of your income. Bear in mind, though, that tax rates on ordinary income range from 10% to 37%.
Be sure to keep this information in mind when managing your investments. It could make a BIG difference come tax time!
Our latest blog: “Short-Term Capital Gains vs. Long-Term Capital Gains – What’s the Difference?” is available now. Subscribe here: [link]
Short-term capital gains are derived if you hold an investment one year or less before disposing of it, and are taxed at the same rate you pay on wages or business profits. Long-term capital gains, on the other hand, are generally taxed no higher than 20% and could be taxed at 0%, depending on your income. Learn more here: [link]
Have you ever wondered why gains are separated between long-term and short-term when you receive your 1099 at tax time? Learn the difference between long and short-term gains in our latest blog article: [link]
Business Tip: The difference between short-term and long-term gains is important and should be considered carefully when investing. Learn about these differences in our latest blog article: [link]
DID YOU KNOW: Short-term capital gains are derived if you hold an investment one year or less before disposing of it. After one year, they become long-term gains. Learn more here: [link]
Long-term capital gains are generally taxed no higher than 20% and could be taxed at 0%, depending on your income. Exceptions to the long-term capital gains tax rate are collectibles such as art, jewelry, and precious metals. Find out more here: [link]
When investing, it is important to understand the difference between short-term and long-term capital gains, as the amount you are taxed on them can differ significantly. Find out more here! [link]
In our latest blog article, we explain the difference between short-term and long-term gains, and what effect they could have on your specific tax situation. Sign up for our newsletter to learn more: [link]
BizBoost NewsVolume 11, Issue 5For distribution 8/23/21; publication 8/26/21
Are Gains on Cryptocurrency Taxable?
The short answer to this question is: of course! As cryptocurrency has become a more popular investment vehicle among younger investors, this is a good question and one that is getting more attention from the IRS.
Buying and selling crypto, just like buying and selling a share of Tesla, is taxed as a capital gain. The capital gain holding periods apply as well. Keeping track of the gain or loss from crypto trading is easy if you are using a broker like Robinhood, which will issue you a Form 1099-B (Proceeds from Broker and Barter Exchanges).
However, if you use Coinbase or another crypto exchange, you will need to track the gains and losses on your own. Coinbase and Gemini are not brokers and will not issue a 1099-B. This means that you will need to keep track of the following:
This can get hairy if you are buying and selling pretty frequently, but it is taxable income and you are required to report it on your tax return.
What happens if you see a great deal on patio furniture at Overstock and purchase it with crypto? You will have a reportable gain or loss most likely. Currently, the IRS considers using crypto for purchases to be effectively selling the currency.
So, keep in mind that when investing or using crypto as currency, you need to keep track of the gains and losses for your tax return. The IRS is cracking down on these types of transactions, and you do not want anything to come back and bite you later!
As cryptocurrency has become a more popular investment vehicle among younger investors, wondering whether gains are taxable is a good question and one that is getting more attention from the IRS. Learn more in our latest blog: [link]
Are gains on cryptocurrency taxable? The short answer to this question is: of course! Learn more about taxes on cryptocurrency in our latest blog article: [link]
Business Tip: When investing or using crypto as currency, you need to keep track of the gains and losses for your tax return. The IRS is cracking down on these types of transactions, and you do not want anything to come back and bite you later! Learn more about cryptocurrency taxes here: [link]
Do you currently use cryptocurrency? With its popularity growing, understanding the tax implications of cryptocurrency is important in order to avoid problems with the IRS. Sign up for our newsletter to learn more about cryptocurrency taxes: [link]
DID YOU KNOW… you might have to keep track of your own cryptocurrency taxes depending on what platform you use. For example, Robinhood will issue you Form 1099-B for your tax return. However, if you use Coinbase or another crypto exchange, they will not issue you a Form 1099-B, so you will need to track the gains and losses on your own. Learn more here: [link]
Currently, the IRS considers using cryptocurrency for purchases to be effectively selling the currency. Therefore, you’ll need to make sure you understand the taxes surrounding your cryptocurrency. Learn more in our latest blog article: [link]
Taxes regarding cryptocurrency can be a bit confusing. Buying and selling crypto, just like buying and selling a share of Tesla, is taxed as a capital gain. The capital gain holding periods apply as well. Find out more here: [link]
Cryptocurrency is becoming more and more popular. As the popularity grows, so does the IRS scrutiny surrounding cryptocurrency taxes. If you buy and sell with crypto, you’ll want to make sure you understand the tax implications. Learn more about cryptocurrency taxes in our latest blog article: [link]
BizBoost NewsVolume 11, Issue 4For distribution 8/09/21; publication 8/12/21
The American Rescue Plan Act Creates ERTC Windfall for Startup Businesses
The American Rescue Plan Act extended the Employee Retention Tax Credit (ERTC) for the third and fourth quarters of 2021. It has also expanded the pool of eligible employers who can take the credit to include businesses started during the pandemic.
A Recovery Startup Business (RSB) is a business that was started after February 15, 2020 and has average annual receipts of no more than $1,000,000. While under the CARES Act, an employer had to experience a full or partial suspension of operations due to COVID-19-related governmental orders or a significant decline in gross receipts to take advantage of the ERTC, an RSB does not need to meet those requirements.
The time period to claim this credit for an RSB is from July 1, 2021 through December 31, 2021. It can be claimed on an originally filed Form 941 or an amended 941. As with other businesses, the credit continues to be capped at 70% of qualified wages limited to $10,000 per employee per quarter ($7,000 per quarter per employee), but an RSB is also limited to a maximum $50,000 in ERTC per quarter, regardless of the number of employees.
For new businesses, this is an incredible tax benefit and a great safety net to the normal struggles of any startup. The goal is to get employment back to pre-pandemic levels. The total benefit could be as high as a $100,000 cash infusion for 2021, so it’s definitely worthwhile for eligible employers to take advantage of this while available!
The American Rescue Plan Act extended the Employee Retention Tax Credit (ERTC) for the third and fourth quarters of 2021. Learn more about this extension in our latest blog: __ Subscribe here: [link]
The American Rescue Plan Act extension of the Employee Retention Tax Credit (ERTC) expanded the pool of eligible employers who can take the credit to include businesses started during the pandemic. Learn more here: [link]
Business Tip: The time period to claim the Employee Retention Tax Credit for a Recovery Startup Business is from July 1, 2021 through December 31, 2021. It can be claimed on an originally filed Form 941 or an amended 941. Learn more about this extension here: [link]
The American Rescue Plan Act has created an alternate path for the Employee Retention Credit with its extension and expansion of the credit. Learn more in our latest blog article: [link]
A Recovery Startup Business is limited to a maximum $50,000 in ERTC per quarter, regardless of the number of employees, but it’s still a great cash flow boost to smaller startup businesses. Learn more here: [link]
A Recovery Startup Business (RSB) is a business that was started after February 15, 2020 and has average annual receipts of no more than $1,000,000. While under the CARES Act an employer had to experience a full or partial suspension of operations due to COVID-19-related governmental orders or a significant decline in gross receipts to take advantage of the ERTC, an RSB does not need to meet those requirements. Find out more here: [link]
Did you open a business after February 15, 2020 and have average annual receipts of no more than $1,000,000? If so, your business would classify as a Recovery Startup Business and does not need to meet the same requirements for the Employee Tax Credit. Find out more here: [link]
If you qualify as a Recovery Startup Business, the benefits of the Employee Retention Creditcould translate into $100,000 for 2021. It is definitely worthwhile for eligible employers to take advantage of this while available! Sign up for our newsletter to learn more about the expansion of the ERTC: [link]
BizBoost NewsVolume 11, Issue 3For distribution 7/26/21; publication 7/29/21
PPP Forgiveness – Timing and Deadlines
If your business received Paycheck Protection Program (PPP) funds as part of the COVID-19 pandemic and you still have not applied for or received forgiveness, you may be wondering about the deadline and/or next steps. While some banks may be pressuring you to apply for forgiveness right away, or you are feeling stressed because you have not applied or haven’t heard back yet, it’s important to know what the rules are and how much time you truly have.
A PPP recipient can apply for forgiveness once all loan proceeds for which forgiveness is being requested have been used. However, you do not necessarily have to apply for forgiveness right after the funds have been spent. A borrower can technically submit a forgiveness application any time before the maturity date of the loan (either two or five years from origination).
With that said, if you do not submit the application within 10 months of the end of your covered period (which starts when the money is deposited in your account and is the period over which the PPP funds are spent on eligible expenses – 8 to 24 weeks, depending on your situation), loan payments are no longer deferred, and you must start making payments to the lender. Therefore, it is highly recommended that you apply for forgiveness before the end of this deferral period (8 to 24 weeks + 10 months).
Taxpayers who have not filed their forgiveness application yet have likely benefited from waiting. Many who were eligible for PPP were also eligible for the Employee Retention Credit (ERC) and other payroll credits. Careful strategy is required to optimize both tax benefits since wages used for PPP forgiveness cannot also be claimed for the ERC. A slight downside of waiting is that the tax impact of PPP forgiveness at the federal and state level could require 2020 returns to be amended in some cases.
Some of you may have already applied for forgiveness but are concerned because you have not received a decision yet. It is important to note that the lender has up to 60 days to review your application, and once the lender makes a decision, it is forwarded to the Small Business Administration (SBA) for evaluation. The SBA review can take up to 90 additional days, so overall it could be a few months before you receive a final determination. If you do not agree with the lender’s decision you can ask SBA to review it again, and if you don’t agree with the SBA decision you can appeal it.
So, if you are feeling antsy because you have not been able to submit your forgiveness application yet, be aware that you still have time. With the number of applications being reviewed by lenders and the SBA, the process will take time, so do not worry if you have already applied and haven’t heard back. If you are confident that you meet the requirements for forgiveness and have provided the documentation to support it, it WILL happen – eventually!
If your business received Paycheck Protection Program (PPP) funds as part of the COVID-19 pandemic and you still have not applied for or received forgiveness, you may be wondering about the deadline and/or next steps. Learn more in our latest blog: __ Subscribe here: [link]
While some banks may be pressuring you to apply for PPP forgiveness right away, or you are feeling stressed because you have not applied or haven’t heard back yet, it’s important to know what the rules are and how much time you truly have. Learn more in our latest blog article: [link]
Business Tip: A PPP recipient can apply for forgiveness once all loan proceeds for which forgiveness is being requested have been used. However, you do not necessarily have to apply for forgiveness right after the funds have been spent. Learn more here: [link]
DID YOU KNOW… A borrower can technically submit a PPP forgiveness application any time before the maturity date of the loan (either two or five years from origination). Learn all about timing and deadlines for PPP in our latest blog article: [link]
Some of you may have already applied for forgiveness but are concerned because you have not received a decision yet. It is important to note that the lender has up to 60 days to review your application, and once the lender makes a decision, it is forwarded to the SBA for evaluation. Learn more here: [link]
If you are feeling antsy because you have not been able to submit your PPP forgiveness application yet, be aware that you still have time. Find out more about PPP timing and deadlines here: [link]
Have you applied for PPP forgiveness yet? If you are still considering submitting an application, you’ll want to make sure you understand all of the deadlines involved. Find out more in our latest blog article: [link]
The timing and deadlines surrounding PPP forgiveness can be very confusing. If you are looking for guidance concerning your PPP loan, sign up for our newsletter to learn more: [link]
BizBoost NewsVolume 11, Issue 2For distribution 7/12/21; publication 7/15/21
Child Tax Credit Payouts – What to Expect
The Child Tax Credit (CTC) is not new, but it was expanded as part of the American Rescue Plan Act of 2021, and you may be wondering what that means and how it will impact your situation. The biggest takeaway is that instead of waiting until filing your 2021 tax return (in 2022) to take advantage of the credit, you can instead opt to receive part of the credit in advance, during 2021.
First, the overall amount of the credit was increased for taxpayers under a certain income level. For those individuals, the CTC is $3,600 for each child 5 and under, and $3,000 for each child between the ages of 6 and 17. This is an increase from $2,000 per child under the existing rules. To receive the full amount of the expanded credit, your Adjusted Gross Income (AGI) must fall within the following limits:
Beginning on July 15, 2021, IRS will begin sending monthly payments to parents with eligible dependent children. These payments represent an advance on the full CTC, and the rest can be claimed on the 2021 tax return. The full monthly payment will be $300 per child under 6 or $250 per child 6 to 17 years old, and will be paid each month from July to December 2021. Keep in mind that if you are over the above income thresholds but within the existing income thresholds for receiving the CTC, you can still receive up to $2,000 per child, just like in years past.
To automatically receive these payments if eligible, you need to have filed a tax return for 2020 by the extended May 17,2021 filing deadline, even if you are usually a non-filer. You are eligible for these payments even if you do not have any income to report or taxes due. If you were not able to file by then, you will still get the higher credit amount if eligible, but will need to wait until filing your 2021 tax return to take advantage of it.
If you would prefer to NOT receive the advance payments and instead take advantage of the full CTC when filing your 2021 tax return, you will be able to opt out using an online portal that IRS will be opening on July 1, 2021. There will also be another portal where you can update your information, such as changing the number of dependents you have.
Beginning on July 15, 2021, IRS will begin sending monthly payments to parents with eligible dependent children. These payments represent an advance on the full Child Tax Credit, and the rest can be claimed on the 2021 tax return. Subscribe here to learn more: [link]
The Child Tax Credit (CTC) is not new, but it was expanded as part of the American Rescue Plan Act of 2021. Learn what to expect from the Child Tax Credit Payouts in our latest blog article: [link]
DID YOU KNOW: The Child Tax Credit will come early for eligible taxpayers, as early as this month. Learn more here: [link]
Are you wondering what the Child Tax Credit expansion means and how it will impact your situation? Learn what to expect from this expansion in our latest blog article: [link]
The biggest takeaway from the expansion of the Child Tax Credit is that instead of waiting until filing your 2021 tax return (in 2022) to take advantage of the credit, you can instead opt to receive part of the credit in advance, during 2021. Learn more here: [link]
With the expansion of the Child Tax Credit, the overall amount of the credit was increased for taxpayers under a certain income level. The CTC is now $3,600 for each child 5 and under, and $3,000 for each child between the ages of 6 and 17. Find out more here: [link]
To receive the full amount of the expanded Child Tax Credit, your Adjusted Gross Income (AGI) must fall within the following limits:
•Single Filer - $75,000 or less •Head of Household Filer - $112,500 or less •Joint Filers - $150,000 or less Find out more here! [link]
The new expansion of the Child Tax Credit can be confusing. For example, if you prefer to NOT receive the advance payments and instead take advantage of the full CTC when filing your 2021 tax return, you will have to opt out using an online portal that IRS will be opening on July 1, 2021. Learn more in our latest blog article: [link]
BizBoost NewsVolume 11, Issue 1For distribution 6/28/21; publication 7/01/21
Business Expenses – What is NOT Deductible?
While it seems like a straightforward question, there can sometimes be confusion about what expenses can be deducted from your business for tax purposes and what expenses cannot be. Deductions are critical in helping to lower your tax bill, but knowing what expenses you can deduct is critical to keeping you out of trouble in the event of an IRS audit.
Let’s start with understanding how business expenses are defined according to the IRS. A business expense must be both “ordinary and necessary” to be tax deductible. An ordinary expense is one that is common and accepted in your industry, and a necessary expense must be helpful to your operations and appropriate for your business. An expense that is considered ordinary and necessary for a manufacturer might not be ordinary and necessary for a consultant, so it is important to focus on your specific industry and what is acceptable – there is not always a “one-size-fits-all” answer.
There are certain expenses that, in most cases, are tax deductible regardless of the industry. Some examples include advertising, accounting fees, bank charges, continuing education, legal fees, office supplies, rent expenses, payroll expenses/related, and so on. However, what are some expenses that are NOT deductible regardless of the industry or specific circumstances? The following expenses are generally off-limits for a business tax deduction:
Here’s the bottom line: as a business owner, imagine sitting in front of an IRS auditor, needing to explain how a deduction would be ordinary and necessary for your business. Would you be able to do it?
Our latest blog: “Business Expenses – What is NOT Deductible” is available now! Subscribe here: [link]
While it seems like a straightforward question, there can sometimes be confusion about what expenses can be deducted from your business for tax purposes and what expenses cannot be. Learn more in our latest blog article: [link]
Business Tip: When looking for deductible expenses, it is important to focus on your specific industry and what is acceptable – there is not always a “one-size-fits-all” answer. Learn more here: [link]
As a business owner, imagine sitting in front of an IRS auditor, needing to explain how a deduction would be ordinary and necessary for your business. Would you be able to do it? Learn what is not deductible in our latest blog article: [link]
A business expense must be both “ordinary and necessary” to be tax deductible. An ordinary expense is one that is common and accepted in your industry, and a necessary expense must be helpful to your operations and appropriate for your business. Learn what you can and cannot deduct here: [link]
Deductions are critical in helping to lower your tax bill, but knowing what expenses you can deduct is critical to keeping you out of trouble in the event of an IRS audit. Find out more here: [link]
Do you know whichexpenses are off-limits for a business tax deduction? Find out in our latest blog article here: [link]
There are certain expenses that are tax deductible regardless of the industry, including advertising, accounting fees, continuing education, office supplies, and so on. But, do you know the expenses that are NOT deductible regardless of the industry? Sign up for our newsletter to learn more: [link]
BizBoost NewsVolume 10, Issue 26For distribution 6/14/21; publication 6/17/21
Requesting a Private Letter Ruling
You may someday find yourself in a unique tax situation and want to remove any uncertainty of the tax treatment of that situation. In that case, you can request a Private Letter Ruling (PLR) from the Internal Revenue Service.
A PLR is a written statement that interprets and applies tax law to your particular facts. As long as the taxpayer frames the question properly and provides accurate information, the ruling can be considered binding for that specific situation and taxpayer.
A private letter ruling request has no specific form; it is basically a letter explaining your particular facts. The following are required to be addressed in a PLR request:
o The names, addresses, phone numbers, and taxpayer identification numbers of all interested parties; o The annual accounting period and overall method of accounting; o A description of the taxpayer’s business operation (if applicable); o A complete statement of the reasons for the transaction; and o A detailed description of the transaction.
Requesting a PLR is not free – a “user fee” is required to be submitted when making the request. The user fees start at $275 but can be in the thousands of dollars in certain situations, and they must be submitted with the request. The first Revenue Procedure issued each year outlines the rules surrounding PLR submissions and the fees.
Because of the cost involved and the complexity, assess whether the IRS is likely to rule in your favor before going this route. Consider working with an experienced tax professional or tax attorney first to determine if this is the best option for you!
Our latest blog: “Requesting a Private Letter Ruling” is available now! Subscribe here: [link]
You may someday find yourself in a unique tax situation and want to remove any uncertainty of the tax treatment. In that case, you may want to request a Private Letter Ruling (PLR) from the Internal Revenue Service. Learn more in our latest blog article: [link]
Business Tip: Statement of facts, copies of contracts, and a statement regarding whether the same issue is on an earlier return are all required pieces of an IRS Private Letter Ruling request. Learn more here: [link]
DID YOU KNOW… An IRS private letter ruling request has no specific form; it is basically a letter explaining your particular facts. Learn more in our latest blog article: [link]
DID YOU KNOW…Requesting a PLR is not free – a “user fee” is required to be submitted when making the request. The user fees start at $275 but can be in the thousands of dollars in certain situations, and they must be submitted with the request. Learn all about them in our latest blog article: [link]
A PLR is a written statement that interprets and applies IRS tax law to your particular facts. As long as the taxpayer frames the question properly and provides accurate information, the IRS ruling can be considered binding for that specific situation and taxpayer. Find out more here: [link]
Because of the cost involved and the complexity of requesting a Private Letter Ruling, you should assess whether the IRS is likely to rule in your favor before going this route. Find out more about PLRs here: [link]
A Private Letter Ruling request needs to include:
Sign up for our newsletter to learn more: [link]
BizBoost NewsVolume 10, Issue 25For distribution 5/31/21; publication 6/03/21
How Business Owners Get Paid
If you have recently or not so recently started a business, two things you need to understand is how you will be paid and how taxes will be paid. You may be taxed as a sole proprietorship, partnership, S corporation or C corporation. Understanding the differences is important.
A sole proprietorship is an individual engaged in a business without a formal tax structure. The net profit or loss from the business is reported on Form 1040 and is reported along with any other income. A net loss can offset other income reported on 1040. Self-employment tax is calculated on the net profit and is included on the 1040. Self-employment tax is basically Social Security and Medicare tax, both the employer and employee portion but is calculated using the net profit of the business from Schedule C.
A sole proprietor takes distributions from the business, which are not taxable, since tax is computed on the net profit from the business. A distribution is not a salary and has no federal or state withholding tax taken out. The owner will need to make estimated tax payments if the expected tax liability exceeds $1,000.
A partnership is a business with two or more members engaged in business. Partnerships file a Form 1065, which is an informational return, to determine how much income is allocated to each partner. The partners report the income or loss on their personal tax returns and, similar to the sole proprietor, must calculate self-employment tax.
Like the sole proprietor, partners can take distributions from the business. The distributions are not taxable since the partnership is taxed on its net profit. Partners may also loan money to the partnership and borrow money from the partnership.
Partners can also receive guaranteed payments which are not dependent on the net profit or loss of the partnership. Guaranteed payments are not subject to withholding.
An S corporation is a tax structure that can have one or more shareholders. It is often referred to as a “flow through” entity, which avoids double taxation. What this means is that the net profit or loss from an S corporation “flows through” and is reported on the shareholder’s tax return. The S corporation itself doesn’t pay income taxes and files a tax return that is purely informational. However, S corporations may be subject to filing state returns and paying other taxes such as franchise taxes.
Shareholders must receive “reasonable” compensation from the S corporation in the form of a salary. This is because net profit that exceeds the salary is not subject to Social Security and Medicare tax, which may incentivize shareholders to pay themselves lower wages or salaries. Reasonable compensation is very important to avoid having net profit re-characterized as salary if you are audited by the IRS.
Shareholders in the S corporation can also take distributions as long as there is enough tax basis to absorb the distribution. Tax basis is the amount of profit and capital contributions less losses and distributions. Distributions exceeding tax basis become taxable as capital gains on the shareholder’s personal tax return.
Loans to and from the S corporation are also permissible. Loans to the S corporation will increase tax basis, but need to be properly documented.
A C corporation is a tax structure in which the business is the actual taxpayer. This is different from the S corporation in the fact that there is no “flow through” from the C corporation to shareholders. Shareholders are compensated in the form of salary or wages. Any distributions taken from the C corporation are taxable as dividends to the shareholders. This entity creates double taxation: the corporation cannot take a deduction for dividends paid and therefore pays taxes on the profits used to pay those dividends, and shareholders are then taxed again on dividends received on their individual returns. However, this entity type might still be desirable for an individual who is in a higher tax bracket since a C corporation is taxed at a 21% flat tax rate.
Note that a Limited Liability Company (LLC) is a legal structure, not a tax structure. The default entity classification for an LLC is sole proprietorship if owned by one individual and partnership if owned by two or more individuals. There are elections available to treat an LLC as an S or C corporation for tax purposes – the owner(s) may need to file Form 8832 or Form 2553 to make the appropriate election, depending on the specific circumstances.
If you feel like your business could benefit from an entity evaluation or if you have questions about your taxes, please feel free to reach out any time.
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DID YOU KNOW… A Limited Liability Company (LLC) is a legal structure, not a tax structure. The default entity classification for an LLC is sole proprietorship if owned by one individual and partnership if owned by two or more individuals. Find out more here: [link]
An S corporation is a tax structure that can have one or more shareholders. It is often referred to as a “flow through” entity, which avoids double taxation. Find out what business classification is best for you here: [link]
A C corporation is a tax structure in which the business is the actual taxpayer. This is different from an S corporation in the fact that there is no “flow through” from the C corporation to shareholders. Shareholders are compensated in the form of salary or wages. Sign up for our newsletter to learn more: [link]
