Tax Tips: Employee Retention Credit

Does your business qualify?  What is it? 

The Employee Retention Credit (ERC) is a refundable tax credit against certain payroll taxes for wages paid after March 12, 2020 through September 30, 2021.  If wages were paid during this time and operations were impacted by COVID-19 as result a reduction in gross receipts or government mandates, you may be eligible.

The CARES Act created the Employee Retention Credit as an option for employers to keep employees on payroll through the pandemic even though revenue had dropped or government mandates restricted operations.  For each employee paid up to $10,000 per quarter in 2020 and 2021 there is a 50% and 70%, respectively, credit available.  Money in your pocket!

Still don’t know if you qualify?

  • When comparing gross receipts in 2020 to 2019 is there a 50% decrease in one of the quarters?  If so, you may qualify.
  • When comparing gross receipts in 2021 to 2019 is there a 20% decrease in one of the quarters?  If so, you may qualify.
  • In 2020 were government mandates in place for a specific period of time that affected normal operations of your business?  If yes, then you may qualify.
  • Were business operations affected by supply chain issues where material that is crucial to production was being upheld?  If so, you may qualify. Click here to read ERC Supply Chain article.

This is a very complex topic and there have been several changes to the credit, making it hard to keep current.  It is highly recommended that you seek professional guidance when calculating the Employee Retention Credit or deciding if your business qualifies.

Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever-changing tax codes and legislation on your own.  Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation affects or questions.

February 22, 2022

Tips for the New Tax Year

Change can be good but change can be hard. Taking a step back and re-evaluating processes and efficiencies is important from time to time. Our firm has experienced this over the last year due to the lingering effects from the pandemic, staff changes, constant tax law changes, and ongoing technology challenges.

It’s important to know that even though change happens, our firm strives to provide the best customer service to our clients.

Still worried about the pandemic and going out in public? Not sure if you want to meet in person or have the time to meet? That’s okay. Email or drop off your tax information and someone will follow up with questions or requests once things are sorted through. Or try our secure portal. We are encouraging clients to only meet with your tax professional during the busy tax season if you feel specific topics need to be addressed.  

Are there any life changing events your tax professional should know about? Change in marital status, dependents, address, or job? Did you receive advanced child tax credits or stimulus payments? If so, watch for a letter from the IRS in January to give your tax professional in order to reconcile those payments.

Do you have a business and wonder if 1099’s need to be issued? Did your business receive COVID-19 related credits and funding? Are you in the agriculture industry and were affected by the drought?

These are just a few of the several things your tax professional will need to know when preparing the 2021 tax return. This past year has created ongoing challenges, but it’s also provided great opportunities for some taxpayers. When faced with a challenge, it can force individuals and businesses to look for new ways to move forward. Ketel Thorstenson LLP continues to be a useful resource and support when facing those obstacles.

January 12, 2022

Importance of Financial Statements

Why are financial statements so important?  Does it matter if the information used to create them is accurate or not?  Ask your tax advisor.  Ask your banker.  Ask an investor.  Accurate financial statements matter.  Preparing financial statements with accurate information in a timely manner is a critical component to running a successful business.

The most common types of financial statements are the Balance Sheet, Income Statement, and Statement of Cash Flows.  The Balance Sheet displays the financial position of the company at a specific point in time.  It reports the assets owned and the liabilities owed as a figurative snapshot at a point in time.  The difference between assets and liabilities is what you “own.”  What you own called “equity”— also known as the owner’s investment in the business.

The Income Statement reports the results of operations for a period of time.  This is not a cash flow statement.  The best income statement is recorded on the accrual basis.  For instance, revenues are recorded when earned, and not when cash is received.  The Income Statement is the record of the operating performance of the business.  The bottom line will report net income or net loss, which is revenue minus expenses.  It is crucial the chart of accounts be set up correctly and amounts coded properly so the information flows to the appropriate revenue and expense categories.

The Statement of Cash Flow reports the change in cash during a period time.  This report shows cash sources and uses, in addition to cash supply.  This statement summarizes cash inflow and outflow that has already happened in order to provide the reader with the amount of cash that was made available over a period of time.

In order for financial statements to be useful, they must be prepared on a timely basis.  The objective is to provide management with a tool or guide used for running successful operations.  This needs to be on a consistent basis using accurate information.  Make sure bank accounts as well as other balance sheet accounts are reconciled monthly to ensure all transactions are accounted in the proper periods.  Issuing reports in a timely fashion can also help identify adverse trends which in turn, helps pinpoint issues and how the company compares to prior years.

Ratios are also helpful for management or whomever the audience is for quickly determining liquidity, profitability, and leverage of the business.  A few key ratios are:  The Current Ratio is used to determine short-term assets which can be converted to cash to pay short-term liabilities.  The Gross Profit Ratio is used to monitor what portion of sales can be applied to overhead and profit.  And the Debt-to-Equity Ratio is used to measure financial leverage and the related risks.

Garbage in is garbage out.  Make sure the appropriate information is being used to create financial statements.  The end product is used by tax professionals to prepare the tax return and do tax planning, the bank when needing operating funds or loans for expansion, and investors for financial growth or selling opportunities.  These all contribute to the many reasons that timely and accurate financial statements are so important to a business.

June 28, 2021

Tax Tip: Did You Receive a PPP Loan?

Make sure you relay the following information to your tax accountant for the upcoming 2020 tax season:

On Dec 27th President Trump signed the Consolidated Appropriations Act, 2021 (CAA 2021) that included the PPP guidance for which we all were waiting.

Forgiven PPP loans and EIDL grants are not taxable AND you can deduct expenses that were paid from those funds.  Sounds too good to be true–but it is!

How were these funds recorded in the books?  Was the PPP loan forgiven?  Knowing this kind of information is crucial when filing 2020 tax returns.  We don’t want to take the chance of picking up income that really is tax-exempt.

On a side note – applications for round 2 of the PPP loans are available until March 31st or the money runs out.  Small businesses are likely eligible if you experienced a 25% or greater drop in revenue in any 2020 calendar quarter when compared to the same quarter in 2019.

https://www.sba.gov/document/sba-form-2483-sd-ppp-second-draw-borrower-application-form

Contact your CPA right away to have these discussions and ask questions about eligibility!

Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever changing tax codes and legislation on your own.  Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation affects or questions.

February 2, 2021

Gear Up for Tax Season – Are You Ready for Tax Filing?

If you have a small business, are bank accounts reconciled?  Are year-end credit card account and loan balances correct?  Do you have W-9 forms from individuals that received a payment of $600 or more for services provided to you? Is your tax appointment scheduled?  These are all things to start thinking about.

In a perfect world accountants would love to receive business books that are reconciled and income and expenses allocated correctly! But we know that isn’t always the case.

Now is a good time to start sorting through income and expense accounts for your business to ensure items are classified correctly.  This is extremely important for producing accurate financial statements and issuing 1099s and W-2s.  Remember – the due date to file these year-end forms is January 31st.

2018 produced one of the largest changes to tax law in decades.  The layout for Form 1040 changed, new business deductions were created, tax brackets changed, and the standard deduction doubled causing fewer taxpayers to itemize.  It appears these same tax laws will carry through the 2019 tax year.

Have you moved? Sold your house? Marital status changed? These are important life changing events your accountant needs to know about.  Also, the IRS is now requiring tax professionals to verify and audit certain parts of your information to ensure you are not fraudulently claiming personal tax credits.  As such, we may need to see social security cards and tuition statements.  

Are you retired?  Do you still have a filing requirement?  If earned income is less than the standard deduction there is a good chance you won’t need to file.  Once you have all income tax information gathered up, visit with your CPA to help answer that question. 

Were estimated tax payments made for the 2019 tax year?  Will there be significant changes in income for 2020?  These are other important items to discuss with your CPA during your tax appointment.  Although 2019 will be the focus it doesn’t hurt to get geared up for 2020 as well!

January 13, 2020

Another Change to Form 1040

Didn’t Form 1040 just change as part of the 2018 Tax Cut and Jobs Act?  Now Congress is changing it again for 2019? 

Form 1040 was reported on two pages for decades.  It was then decided to cut those pages into two half pages and six schedules. The initial goal was to simplify the 1040 individual tax return and hope to have taxpayers file on a form the size of a postcard.  It was quickly realized this was not the case for most individuals. 

There were complaints on the layout of the form as there is much wasted paper and the taxpayer is signing the front page that is reporting taxpayer information – no income.  Six schedules accompanied the first page but were only used if applicable.  The idea behind the structure of the form was a building-block approach.

A draft of the 2019 Form 1040 has been released for comments.  It is now going back to two pages with less schedules to attach.  Here are some of the highlights:

  • The signature box goes back to page two. 
  • A space for the spouse’s name has been added to page one if filing Married Filing Separate and a space for a child’s name if a qualifying person but not your dependent when Head of Household or Qualifying Widow is selected.
  • Healthcare coverage checkbox has been removed as this is no longer mandatory for the 2019 tax year.
  • Income reporting, standard deduction, and qualified business deduction all move to page one.
  • Adjusted gross income moved from line 7 in 2018 to line 8b now. 
  • Tax credits have changed back to using separate lines on page two instead of consolidated into one or two like it was in 2018.
  • Third party designee moves back to page two.
  • There is a spot for the original divorce date under alimony as it is not deductible after January 1, 2019.

It has been discussed Form 1040 is being revised to enhance matching features.  For example, in 2018 page two reported a full page of numbers with no signature.  Tax preparers feared that could lead to fraud or other reporting problems.

Remember – the proposed changes are not final.  There are several versions of the draft out there for comment.  Doesn’t it seem like the format is going back to its old ways prior to 2018?

Contact your KTLLP CPA to discuss the upcoming form changes or any other tax questions for the upcoming tax year!

September 30, 2019

Business Tax Reform

FINALLY….a decision has been made!  The House and Senate made a combined effort to get one of the biggest tax reforms to the President before the holidays in over 30 years!  The tax reform started months ago and has gone back and forth deciding on what goes, what stays, and what changes.

Do you understand how the tax reform affects your business?  The good news is nearly all of this law does not take effect until 2018 or beyond which means we have time to plan!  It’s very important you visit with a tax professional in order to understand the changes, understand how they apply to your business, and make sure you are taking full advantage of any benefits.

Let’s take a look at the major business changes in the tax reform bill effective after 12/31/17:

  • Immediate expensing and depreciation. Changes related to Section 179, improvements, qualified property, and short-lived assets. (See Carrie Christensen’s article, Tax Reform- Expensing and Depreciation).
  • Pass-through business income, which is income from sole proprietorships, S Corporations, partnerships, and LLCs passed to the individual owners,
    • A deduction equal to 20% of business income is limited to 50% of W2 wages, among other limitations. The wage limitations don’t apply to certain small businesses.
    • Most entities in the business of providing “professional services” are excluded from the deduction. However, there are exceptions to the rule as well as phase-out limitations to consider.
    • This is by far the most complicated legislation affecting our South Dakota clients. (See Paul Thorstenson’s article, New 20% Deduction For Businesses)
  • Corporate tax rate is now a flat 21%, which is a considerable drop from the 35% rate under the previous law.
  • Net Operating Loss (NOL) two year carryback rule is repealed except for certain farmers and ranchers.
    • The NOL is then limited to 80% of taxable income. Carryovers take this limitation into account and carried forward indefinitely.
  • Alternative Minimum Tax (AMT) is repealed for corporations
  • Domestic Production Activities Deduction (DPAD) is repealed for non-corporate taxpayers. C Corporations will be repealed after 12/31/2018.
  • Research and experimentation expenses (R&E) paid or incurred after 12/31/2021 must be capitalized and amortized over a 5 year period.
  • Interest deductions have been limited except for businesses with average annual gross receipts of less than $25 million. Taxpayers do have an option to elect out of being limited on interest but that will require extended depreciation lives.
  • 1031 Exchanges are still in effect for real property, but no longer tangible personal property disposed of or purchased after 12/31/17.
  • Meals and Entertainment: Entertainment expenses paid after 12/31/17, will need to be classified separately and are disallowed. Business meals as well as meals provided on employer premises are both limited to being 50% deductible.  After 12/31/2025, expenses for meals will also be disallowed.

There are several other items listed in the tax bill – too many to list.  That’s why it’s important you contact us as soon as possible to start planning for 2018!

January 3, 2018

Does the R&D Tax Credit Suit Your Company?

Does your company design, develop, or improve products and processes?  If it does, the federal research and development (R&D) tax credit may be an option to consider that could generate great tax savings!

Whether you are businesses such as construction, engineering, manufacturing, agricultural production, , or wine making, for example, you may be doing some form of qualified research and development (R&D).  The R&D tax credit was designed to encourage new business innovations that lead to company growth and stimulate the economy.

A common misperception is that the research needs to create something  “new to the world.” That is not true as you just need to produce something (or create a process) that “is new  to you.”  Another misperception is that the research needs to be done for your own business.  On the contrary, engineers and contractors can take the credit for research work done on a construction project.

Congress has passed laws to improve the criteria so more businesses are able to take advantage of the R&D tax credit.

The two most recent changes are (1) small business start-ups have the option to offset the credit towards payroll tax liabilities and (2) Congress has eliminated the alternative minimum tax (AMT) restrictions (the credit did not previously offset AMT tax liability).   The expenses that qualify for the credit are research wages, supplies, and contract research.  To qualify as a research activity, it first needs to be new to the business and not just a change to a current product or process. Second, the research must have been performed to answer an uncertainty.  The credit is then offset against federal income tax liability, or for start-up businesses, the credit offsets payroll tax liabilities.

For example, an engineering firm discovered qualified R&D expenses of $910,000 in 2016 that produced a net federal R&D tax credit of $60,000.  This is a dollar for dollar offset against the individual income tax for those shareholders!

As are all tax related topics, there is a great deal to learn as well as options to consider for each business.  There are specific requirements to meet in order to qualify for the R&D tax credit.  Contact your KTLLP CPA to discuss the possibility of qualifying for the R&D credit to ensure you are not missing out on this great opportunity.

 

May 25, 2017