Author: Kevin Sickels

KT Insights
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IRS Update on Employee Retention Credits

The IRS released an update on their review of the Employee Retention Credit (ERC). You may recall the IRS announced last fall a moratorium on processing claims submitted after September 14, 2023, to give the agency time to digitize information on the large study group of nearly 1 million ERC claims.

Read the release in its entirety – IR-2024-169.

Here are some key takeaways from this important update:

  • The review involved months of digitizing information and analyzing data since September 2023, to assess a group of more than 1 million ERC claims representing more than $86 billion.
  • IRS identified 10% to 20% of claims that fall into what the agency has determined to be the highest-risk group, which show clear signs of being erroneous claims for the pandemic-era credit.
  • The IRS analysis also estimates 60% to 70% of claims show an unacceptable level of risk. For this category of claims with risk indicators, the IRS will be conducting additional analysis to gather more information.
  • 10% to 20% of the ERC claims show a low risk. For those with no eligibility warning signs that were received prior to last fall’s moratorium, the IRS will begin judiciously processing more of these claims.
  • During the ERC review period, the IRS continued to process claims received prior to September 2023. The agency processed 28,000 claims worth $2.2 billion and disallowed more than 14,000 claims worth more than $1 billion.
  • IRS is assessing whether to reopen special ERC Voluntary Disclosure Program to help taxpayers get into compliance on paid claims and avoid future IRS compliance action, including audits.

Special IRS Withdrawal Program Remains Open

  • Given the large number of questionable claims indicated by the new review, the IRS continues to urge those with unprocessed claims to consider the special IRS ERC Withdrawal Program to avoid future compliance issues.
  • Businesses should quickly pursue the claim withdrawal process if they need to ask the IRS to not process an ERC claim for any tax period that hasn’t been paid yet.
  • Taxpayers who received an ERC check — but haven’t cashed or deposited it — can also use this process to withdraw the claim and return the check.
  • IRS will treat the claim as though the taxpayer never filed it. No interest or penalties will apply.

This continues to be an area of concern for the IRS. If you have claims still in process, you will probably see correspondence in the next 4 to 6 weeks informing you of the IRS’ position and next steps.

We strongly encourage anyone receiving an IRS notice or correspondence related to their ERC claim to seek professional assistance. As always, our team at KT is here to help if you have questions or concerns related to the ERC.

July 11, 2024
| Kevin Sickels
KT Insights
 |

The CTA: How KT Can Help Navigate the Murky Waters

For our past analyses and updates on the CTA, please visit our blog.

As a quick summary, the Corporate Transparency Act (CTA) requires most corporations, limited liability companies and similar entities formed or registered to do business in the United States to report beneficial ownership information (BOI) reports to the U.S. Treasury’s FinCEN division. Reporting companies formed prior to January 1, 2024, have the remainder of 2024 to file, those formed during 2024 have 90 days to file after formation, and those formed on or after January 1, 2025, have 30 days to file.

A “beneficial owner” is any individual who, directly or indirectly:

1) Exercises substantial control over a reporting company, OR

2) Owns or controls at least 25 percent of the ownership interests of a reporting company.

There are various exemptions from reporting allowed, but failure to file BOI reports may result in penalties of $500 per day up to $10,000.

Recent Judicial and Congressional Action Muddy the Waters

On March 1, 2024, a federal judge in the U.S. District Court for the Northern District of Alabama held the CTA unconstitutional and prevented FinCEN from enforcing the CTA against only the specific plaintiffs in the case limited to (members of the National Small Business Association (NSBA) and possibly companies in the Northern District of Alabama.

It is expected that the Treasury will appeal this decision to the Eleventh Circuit.

There is another challenge to the CTA in a district court in Ohio (Robert J. Gargasz Co. LPA v. Yellen) which seeks a nationwide injunction.

Since the Alabama ruling only helps NSBA members, and the Ohio case is still in process, we are recommending that our clients continue to comply with the CTA requirements.

Congress

Before breaking for the December 2023 recess, the U.S. House of Representatives approved a bipartisan bill, H.R. 5119, that would extend key deadlines of the CTA. The vote was 420-1. There is a companion bill in the Senate (S3625), but as of this writing, the Senate has not taken action on it.

How We Can Help

We have experts at our Firm who have been monitoring various provisions of the CTA. We can assist you in determining whether your Company meets various exemptions, who may be required to appear on a BOI report and whether particular ownership interests constitute “beneficial ownership.” We are also providing services to file the BOI report for your company.

Please email [email protected] for further assistance.

June 17, 2024
| Kevin Sickels
KT Insights
 |

IRS Orders Stop to Employee Retention Credit Processing

In a news release (IR-2023-169), the Internal Revenue Service (IRS) announced it will be  temporarily stopping the processing of new Employee Retention Tax Credit (ERC) claims due to an increasing amount of fraudulent filings as many businesses are being coerced by ERC pop up scammers.

According to the IRS:

  • Current filings will continue to be processed, but the IRS expects processing times will lengthen this could be as much as an additional 6 months due to the increased scrutiny.
  • The processing moratorium on new claims will last at least through the end of 2023.

The IRS stated it will apply “enhanced compliance reviews” on claims going forward. According to the IRS, it has already initiated investigations involving more than $2.8 billion of potentially fraudulent ERC claims.

The IRS announced a repayment settlement program for businesses who have been victim to aggressive ERC promoters and a special withdrawal option for claims that businesses discover to be improper. Businesses are encouraged to wait for future IRS guidance and apply for the program once it becomes available.

Despite the temporary stoppage on processing of new filings, KT’s ERC team will continue to work through claims and be available to answer questions.

September 27, 2023
| Kevin Sickels
KT Insights
 |

PPP Loan Application Deadline Extended to May 31, 2021

Today, President Biden signed an extension of the popular Paycheck Protection Program (PPP), which was created last year to help small businesses weather the economic fallout from the coronavirus pandemic. The deadline to apply for a PPP loan has been extended from March 31 to May 31, 2021. The law extends authorization of loans to June 30, 2021 to give the Small Business Administration (SBA) additional time to process applications.

Businesses that haven’t taken advantage of the first draw PPP loans now have more time to apply.  If your business is applying for a second draw PPP loan there are additional qualifications, such as experiencing a 25% or greater drop in revenue in any 2020 calendar quarter when compared to the same quarter in 2019.

https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program

As a reminder, in early March, the SBA issued new rules which increased the maximum borrowing to self-employed individuals filing on a Schedule C. 

PPP Rule Change for Schedule C Filers

Contact your CPA at Ketel Thorstenson right away to ask questions about eligibility!

March 30, 2021
| Kevin Sickels
KT Insights
 |

Things to Remember if you have an Economic Injury Disaster Loan

The Small Business Administration (SBA) was tasked with helping struggling businesses with EIDLs loans.  These loans were are a great source of easy terms funding for those suffering the economic impact of the COVID-19 pandemic.

It is essential you read the detailed terms of your EIDL loan documents. Despite that the loans are not personally guaranteed, the contractual requirements are somewhat chilling.   Here are several issues you may want to review with your attorney.

  • No Change to the Business Ownership
    • Without SBA approval, borrowers may not sell the business or change its ownership structure.  This includes adding or removing a partner or shareholder.
  • Distributions Rules
    • The owners of the business may not make distributions outside the usual course of business without SBA approval. This includes loans, advances, bonuses, or asset transfers to owners, employees, or other companies.
    • Distributions to owners within the usual course of business may be permitted.  But the loan agreements are also unclear as to this issue.
  • Strict Collateral Requirements
    • Businesses that borrow more than $25,000 are required to pledge all their business’s personal property as collateral. Such collateral includes present and future inventory, equipment, deposit accounts, promissory notes, negotiable instruments, and receivables.
    • The SBA obtained a security interest in all such collateral at the time of the loan, as well as assets acquired during the loan term. The borrower must obtain hazard insurance for its collateral and ask the SBA for permission before selling or otherwise disposing of its collateral, other than selling inventory in the ordinary course of business.
  • Strict Record-Keeping Requirements
    • The SBA imposes strict record-keeping requirements on EIDL borrowers. They must keep itemized receipts showing how they spend the loan funds. A full set of financial statements are required to be furnished to the SBA each year. The SBA also has the option of requiring an expensive review of the borrower’s records by an independent CPA.
  • Buy American
    • EIDL borrowers must promise to buy American-made equipment and products with the loan proceeds, to the extent feasible.

Penalties for violations of the EIDL terms can be severe. Wrongfully applied proceeds may require immediate repayment. The SBA also reports defaults to credit reporting agencies.

January 27, 2021
| Kevin Sickels
KT Insights
 |

Summary of the Consolidated Appropriations Act (CAA) of 2021

CONSOLIDATED APPROPRIATIONS ACT (CAA) of 2021

On Sunday, December 27, exactly 9 months after the CARES Act was signed, President Trump signed another historic bill.  The Consolidated Apportions Act of 2021 which includes the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), (collectively the Act).  This massive bill is over 5,500 pages and includes over $2.3 trillion in funding that includes economic relief to Americans and businesses amid the ongoing coronavirus pandemic. This Act will affect every taxpayer.

The following is a high level summary of the individual related provisions:

Recovery Rebates: The new law provides eligible individuals with another round of recovery rebates. This is tax-free and does not need to be repaid.

Individuals will qualify for a $600 rebate, while joint filers will receive $1,200, with a $600 credit for each child under age 17.

Rebate amounts will initially be advanced based on 2019 adjusted gross income, but the rebate is really a credit on your 2020 tax return.  Phase-out will begin at adjusted gross income of $87,000 for single filers, $124,500 for heads of households and $174,000 for joint filers.

Rebates will be phased out by $5 for every $100 in excess of a threshold amount. Therefore, rebates are completely phased out for single filers with adjusted gross income over $99,000, heads of household with $136,500 and joint filers with $198,000.

If your rebate was limited due to the income thresholds or missing dependents on your 2019 tax return, you will still be able to claim the balance of missed credit when filing your 2020 tax return if income does not exceed the above thresholds. You will not be required to repay excess credits on your 2020 tax return if the advance rebate check exceeded the entitled amount. 

$250 Educator Expense applies to PPE: If an educator purchased personal protective equipment (PPE), it will be allowed to be used toward the $250 educator expense deduction. 

Child Tax Credits & Earned Income Tax Credits:  The Act allows taxpayers to calculate both the refundable child tax credit and the earned income credit using either 2020 earned income or 2019 earned income whichever is higher.

Charitable Contributions: Individuals will be allowed to claim an above-the-line deduction up to $300 for cash charitable contributions ($600 for married joint filers) for the 2020 and for the 2021 tax years. Furthermore, individuals will be able to claim unlimited itemized deductions for 2020 and 2021 charitable contributions, which are normally limited to 50% of adjusted gross income. 

Health and Dependent Care Flexible Spending Arrangement: Carryover period for 2020 and 2021 extended a full 12 months after the end of such plan year for any unused benefits and contributions related to health flexible spending and dependent care flexible spending.

The following is a high level summary of the business related provisions:

PPP Loan expenses fully deductible: During 2020, the IRS issued notices prohibiting deduction of expenses paid with PPP Loan funds.  The Act reverses the IRS position; hence, making the PPP Loans forgiveness not taxable.

EIDL Grants do not offset PPP Loan forgiveness: If you received both the EIDL Grant and a PPP Loan, prior to the Act, the SBA offset the PPP Loan forgiveness by the amount of the EIDL Grant ($1,000 – $10,000).  The Act makes the EIDL grants not taxable and removes the offset requirement.  If you have already applied for forgiveness and repaid the EIDL grant watch for updates and work with your banker on pursing a potential refund.

Employee Retention Credit (ERC): Under the CARES Act, employers are allowed a refundable credit against applicable employment taxes equal to 50% of qualifying wages up to $10,000, for a maximum credit of $5,000 for wages paid from March 12, 2020 to December 31, 2020.  This was available to employers experiencing over a 50% decline in gross receipts or whose business was closed by government mandate, and the employer was not eligible for a PPP Loan.  The Act greatly expanded this measure. 

The Act retroactively allows PPP Loan participants to qualify for the ERC on any wages not paid with PPP Loan funds effective to March 12, 2020.  If you met the conditions for 2020 as outlined below, we highly recommend you reach out and discuss this with your KTLLP advisor. This is an immediate refund opportunity.

The CAA expands the ERC to include wages paid from January 1, 2021 to June 30, 2021:

  • Increases the ERC credit from 50% to 70% of qualified wages for 2021 only. The 50% credit still applies to 2020 and this was not changed retroactively.
  • For the first two quarters of 2021, the law expands eligibility for the credit by reducing the required year-over-year calendar quarter comparison of gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.  The 50% test still applies to 2020, as this was not changed retroactively.
  • For 2021, increases the limit on the per-employee wages credit from $10,000 for the year to $10,000 per quarter. As such, a credit of up to $14,000 per employee is available in 2021.
  • Increases the 100 employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees.
  • Allows certain public institutions to claim the credit.
  • Provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit.
  • Clarification of tax treatment of certain loan forgiveness and other business financial assistance under the CARES Act:  The Act clarifies that gross income does not include forgiveness of EIDL Loans, Emergency EIDL grants and SBA 7(a) Loan Subsidies. 
  • 100% business meals deduction for meals provided by restaurants:  Business meals in the past have been 50% deductible.  The Act carves out meals provided by restaurants in 2021 and 2022 are 100% deductible.  Presumably, meals purchased at a grocery store, for instance, would remain only 50% deductible. However, we recommend you start breaking out business meals provided by restaurants into a separate account on your profit and loss statement.
  • Corporation Donations to Qualified Disaster Relief deductible up to 100% of taxable income: Corporations are allowed a 10% deduction related to charitable contributions.  The Act allows for a 100% deduction for “qualified disaster relief contributions” paid between January 1, 2020 and within the next 60 days.
  • Energy Efficient Commercial Buildings Deduction (179D): The Act made this provision permanent and set it to be inflation indexed after 2020.   This is good news for general contractors and certain subcontractors.
  • New Market Tax Credit: The Act extends the $5 billion New Markets Tax Credit allocation from 2020 through 2025.
  • Work Opportunity Tax Credit (WOTC): The Act extends the credit through 2025.   Keep this in mind as a planning opportunity as your hire employees in the new year.
  • Empowerment Zone Credits: The Act extends the credit through 2025.
  • Employer Credit for Paid Family and Medical Act: The Act extends the credit through 2025 for wages paid after December 31, 2020.
  • Indian Employment Credits: The Act extends the credit through 2021.
  • Paid Sick and Family and Medical Leave Credits: The Act extends employer credits for Families First Coronavirus Response Act (FFCRA) wages paid for those who are unable to work or telework due to circumstances related to COVID-19 until March of 2021. 
  • Payroll Tax Deferral: Employers that chose to defer payment on their employees’ share of Social Security taxes in 2020 can withhold and remit the taxes ratably from January 1, 2021 to December 31, 2021.

Paycheck Protection Program (PPP) Second Draw (PPP2): The PPP allowed small businesses to receive a forgivable Small Business Administration (SBA) loan. The second draw will have many of the same rules as the first PPP, but with a cap of $2 million per loan.

For PPP2, an eligible employer employs no more than 300 employees per physical location, has or will use all of the first PPP loan, and demonstrates at least a 25% reduction in gross receipts in any quarter of 2020 relative to the same 2019 quarter. 

Loan funds can be used for expanded costs including payroll, medical or family leave, insurance premiums, mortgage, or rent, etc.  

Similar to the original PPP, borrowers may be eligible for forgiveness of the principal amount of the covered loan in an amount equal to the costs incurred and payments made during the covered period for payroll costs, which must be 60% of the covered expenses, payment of interest on any covered mortgage, or rent, and any covered utility payment. Guidelines will continue to be issued regarding the amount of the loan forgiveness that will be reduced based on a formula that accounts for any reduction in the number of the borrower’s employees (FTE) during the covered period, as well as a formula that accounts for reductions in the total salary or wages of any lower paid employee. 

The SBA has 15 days to issue guidance on how to apply for the second draw.  If an original PPP loan was received, these funds must be used before applying for a second draw PPP loan.  There is no requirement to have the original PPP loan forgiven prior to applying for a second draw.

Selection of Covered Period for Forgiveness.

As with the original PPP, PPP2 allows the borrower to elect a covered period ending at the point of the borrower’s choosing between 8 and 24 weeks after origination.

Simplified Application for loans under $150,000.

A simplified application process is now available for loans under $150,000, up from $50,000.  SBA must establish this form by January 21, 2021 and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. In addition, borrowers are required to retain relevant records related to employment for four years and other records for three years. The Administrator may review and audit these loans to ensure against fraud.

Calculation of Maximum Loan Amount for Farmers and Ranchers under the Paycheck Protection Program.

The new law establishes a specific loan calculation for the first round of PPP loans for farmers and ranchers who operate as a sole proprietor, independent contractor, self-employed individual, and who report income and expenses on a Schedule F, and were in business as of February 15, 2020. These entities may utilize their gross income in 2019 as reported on a Schedule F. Lenders may recalculate loans that have been previously approved to these entities if they would result in a larger loan. This provision applies to PPP loans before, on, or after the date of enactment, except for loans that have already been forgiven. If this applies to you, please consult with your banker.

Eligibility of 501(c)(6), Destination Marketing Organizations and Housing Cooperatives

PPP2 was expanded to include Code Sec. 501(c)(6) organizations and marketing organizations, and housing cooperatives, if the organization has 300 or fewer employees and it does not receive more than 15% of receipts from lobbying and the lobbying activities do not comprise more than 15% of activities. There are additional conditions, please contact your advisor.

As you have questions, please reach out to your KTLLP advisor.  We are thankful for your business and your support in the coming year.  We wish you a Happy New Year.

December 29, 2020
| Kevin Sickels
KT Insights
 |

Cares Act Business Provisions

Updated April 23, 2020

On Friday, March 27, a historic, bipartisan deal was signed into law to offer $2 trillion in health care and economic relief to Americans and businesses amid the ongoing novel coronavirus pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act is a massive aid package containing a combination of funding for public health programs, tax benefits for businesses and individuals, appropriations for government programs supporting coronavirus relief efforts, and other items to help stabilize the economy.

The CARES Act is includes numerous provisions that impact both business and individual taxpayers.  The following is a high level summary of the business related provisions:

Paycheck Protection Program (PPP): The PPP allows small businesses to receive a possibly forgivable Small Business Administration (SBA) loan. Loan funds can be used for several purposes including: payroll costs, medical or family leave, insurance premiums; mortgage, or rent, etc.  Eligible borrowers include business concerns, nonprofit organizations, and veterans’ organizations that employ no more than 500 employees.  Businesses of any organization type qualify, including sole proprietorships.  Large businesses in the accommodations and food services sector, also qualify if they have no more than 500 employees per physical location.

The maximum loan amount will be the lesser of $10 million or an amount equal to a multiple equal to 2.5X of the business’s average monthly “payroll costs.” While payroll costs are defined broadly and include a variety of expenses (vacation or family leave, payments for certain group health care, etc.), it does not encompass the compensation of employees whose annual salary is in excess of $100,000.

Under the PPP, borrowers may be eligible for forgiveness of the principal amount of the covered loan in an amount equal to the costs incurred and payments made during the covered period (the eight weeks following receipt of the loan) for payroll costs, payment of interest on any covered mortgage, or rent, and any covered utility payment. The amount of the loan forgiveness will be reduced based on a formula that accounts for any reduction in the number of the borrower’s employees (FTE) during the covered period, as well as a formula that accounts for reductions in the total salary or wages of any lower paid employee.  As such, if all your employees are laid off during the covered period, there is no loan forgiveness.

To apply for the loan you need to reach out to a banking institution which can help look at the best options for you.

Employee Retention Credit: Employers are allowed a refundable credit against applicable employment taxes equal to 50 percent of qualifying wages up to $10,000, for a maximum credit of $5,000 per person.

Eligible employers include those forced by a government to entirely or partially suspend operations because of COVID-19 or those experiencing a significant decline in gross receipts because of COVID-19. 

A significant decline in business’ gross income is defined as the first calendar quarter in 2020 where gross receipts are less than 50% of the gross receipts for the same calendar quarter in 2019 and continues through the first calendar quarter after the quarter in which gross receipts are greater than 80% of gross receipts for the same calendar quarter in the prior year. 

For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19 related circumstances described above.

For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order.

The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from Mar. 13, 2020, through Dec. 31, 2020.

If you qualify for a PPP loan, you are not eligible for this credit.

Payroll Tax Deferral: Employers can defer payment on their share of Social Security taxes through 2020. Half of the deferred taxes must be paid by December 31, 2021 and the other half by December 31, 2022.

Net Operating Loss: Temporarily suspends the 80 percent taxable income limitation on Net Operating Losses for tax years before 2021.

Net Operating Loss Carryback: Allows net operating losses (“NOL”) arising in 2018, 2019, and 2020 to be carried back five years.  Businesses will be able to amend tax returns for tax years dating back to 2013 to utilize the carrybacks.

AMT Credits: Allows refunds of unused alternative minimum tax credits.

Business Interest Deduction: Increases the limitation on the deductibility of interest expense that may be deducted for 2019 and 2020 from 30 percent to 50 percent of adjusted taxable income.

Limitation on Losses for Non-Corporate Taxpayers: Removes the excess business loss limitation for 2018 – 2020.

Qualified Improvement Property: Includes a technical correction to the TCJA by fixing the qualified improvement property error, which has inadvertently excluded certain investments from the TCJAs full expensing allowance. Qualified Improvement Property placed in service after September 27, 2017, can now be depreciated under a 15 year life and eligible for 100% bonus depreciation.

Charitable Contributions:  Limitations for charitable contributions by C Corporations increased from 10% to 25% of taxable income.  This provision also increases the limitation on deductions for contributions of food inventory from 15% to 25% of taxable income.

Paid Sick and Family Medical Leave: With respect to the Emergency Family and Medical Leave Expansion Act in H.R. 6201, the bill clarifies that an employer will not be required to pay more than $200 per day and $10,000 in aggregate to each qualifying employee. Further, with respect to the Emergency Paid Sick Leave Act in H.R. 6201, the bill explains that an employer will not be required to pay more than $511 per day and $5,110 in aggregate to an individual qualifying for sick leave and not more than $200 per day and $2,000 in aggregate when caring for a quarantined individual or child. If an employee is laid off after March 1, 2020 and later rehired, the bill provides access to paid family and medical leave under certain circumstances as long as the employee worked for the employer for more than 30 days prior to being laid off. Lastly, it allows employers to seek an advanced tax credit for payments made to employees.

April 1, 2020
| Kevin Sickels
KT Insights
 |

Taxpayers may revoke or make late bonus depreciation election – for years containing 9/28/17

The IRS last week issued a taxpayer friendly revenue procedure (Rev. Proc. 2019-33).  It will permit taxpayers to change their bonus depreciation treatment for property acquired after Sept. 27, 2017, and placed in service during a tax year that includes Sept. 28, 2017.

This relief is being granted in response to comments received about the bonus depreciation proposed regulations that were issued in August of 2018.  With the late issuance of these proposed regulations many taxpayers had already filed their federal returns for the tax year and didn’t have a chance to analyze how the proposed regulations would have effected their returns and make a timely election.

Taxpayers may make the late elections or revocations of elections provided in the revenue procedure by filing amended returns or, for taxpayers that are partnerships subject to the centralized partnership audit regime, by filing an administrative adjustment request, for the 2016 tax year or the 2017 tax year before the taxpayer files its federal tax return for the first tax year succeeding the 2016 tax year or the 2017 tax year.

The alternative would be for taxpayers to file a Form 3115, Application for Change in Accounting Method, with the taxpayer’s timely filed federal tax return for the first, second, or third tax year succeeding the 2016 tax year or the 2017 tax year. Late elections or revocations under this revenue procedure will be treated as automatic changes in method of accounting with a Sec. 481(a) adjustment only during this limited period of time.

If you have additional questions contact the tax professionals at Ketel Thorstenson, LLP.

August 8, 2019
| Kevin Sickels
KT Insights
 |

Tax Reform Affects Meals and Entertainment Deductibility

Entertaining or dining with clients, vendors and potential employees is a strong strategy for business owners looking to build lasting relationships. While these expenses are necessary for a successful business, the related tax benefits may be gone due to tax reform. The Tax Cuts and Jobs Act (TCJA) changed the business expense deduction for entertainment and changed the meals deduction for company activities. With all the changes that TCJA brought, business owners might not be aware of these changes and how they apply to their meals and entertainment expenses.

Prior to 2018, a business could deduct up to 50 percent of entertainment expenses directly related to the active conduct of a trade or business or, if incurred immediately before or after a business discussion, associated with the active conduct of a trade or business. TCJA eliminated the deduction for any expenses related to activities generally considered entertainment or amusement.

Taxpayers can still deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact. However, the TCJA reduced the deduction for food and beverage provided to employees in the office and for company business meetings.  While a company used to be able to get a 100 percent deduction benefit, they now will only get a 50 percent benefit. Recreation or social meals for employees stay at 100% deductibility, examples include a company picnic or company Christmas party.

Here is a chart of some of the changes.

Expense Type Pre-Tax Reform Deductibility Post-Tax Reform Deductibility
Food and beverage for employees 100% 50%
Employee, stockholder, business meetings 100% 50%
Recreation and social meals for employees 100% 100%
Entertainment or amusement 50% 0%

Now more than ever, businesses need to understand their meals and entertainment expenses and ensure they are properly categorized and deducted to maximize tax benefits.

To properly accomplish integrating tax reform changes, businesses will need to make changes to their accounting and expense reporting systems. The KTLLP Tax Team is here to help, don’t hesitate to contact us with any meal and entertainment questions or best practices for tracking and reporting expenses.

January 28, 2019
| Kevin Sickels
KT Insights
 |

2017 – Tax Cuts and Jobs Act – What Individual Taxpayers Need to Know

After months and months of discussion, the tax reform legislation has passed Congress and the President has signed.  One interesting tidbit is that the chief architect of the bill, Congressman Kevin Brady, is a 1973 graduate of Rapid City Central High School.  Now we can help guide how this bill will impact your income taxes in 2018 and beyond.

Because we don’t have a state income tax, substantially all South Dakota taxpayers will pay less federal income tax under the new law.

Income Tax Brackets:  The seven tax bracket format we currently have will remain.  However, the rates and the size of the brackets have changed.  Interestingly, these new brackets eliminate the marriage penalty through the 32% bracket, as the joint bracket is exactly double the single.

Standard Deductions and Personal Exemptions:  The standard deduction will increase to $12,000 for individuals, $18,000 for Head of Household, and $24,000 for married filing joint.  This sounds like a great increase, until you factor in that they removed the personal exemptions.  If you were a married couple with no kids and do not itemize, this is a benefit to you.  However, if you do itemize or have several dependents, this may create more tax due for you. The good news, is that the expanded Child Tax Credit will likely offset any additional tax.

Kiddie Tax:  If you have kids that have unearned income greater than $2,100, I have good news and bad news.  The good news is you no longer have to wait for your return to be done to calculate their return.  The bad news is their tax is now calculated using the Trust and Estate tax rates which have very small brackets which reach the top tax bracket very quickly.

Child Tax Credit:  For dependent children under 17, the credit will double to $2,000 per child with $1,400 being refundable, if you otherwise don’t owe tax.

Mortgage Interest Deduction:  Under the old rules, you could deduct interest on loans up to $1,000,000 for home acquisition debt and another $100,000 on home equity lines.  Under the new law, the $100,000 home equity line interest deduction is eliminated and the cap on new loans goes down to $750,000.  However, if you have an existing loan between the $750,000 and $1,000,000 you are still okay to deduct the interest.  Under the sunset provisions of this bill, beginning in 2026, the old law is brought back and you will be able to deduct the interest for both the $1,000,000 mortgage and the home equity debt.  Interest on a second home is still deductible under the new law, as long as the total debt is under the limits.

State and Local Taxes and Property Taxes:  There will now be an annual cap of $10,000 for the Schedule A deduction relating to the total of state and local income, property or sales taxes. With this cap and the higher standard deduction, it will be less likely for taxpayers to be able to itemize their deductions.

Charitable Contributions: The current annual limit on contributions is 50% of your Adjusted Gross Income.  Under the new law, this is increased to 60%.  Any amounts above this threshold is still eligible to be carried forward for up to five years.

Miscellaneous Itemized Deductions: You can no longer deduct unreimbursed employee expenses, home office expense (if you are not in business for yourself), certain attorney fees, and investment advisor fees.

Medical Expense Deductions: The deductible threshold is going back to 7.5% of AGI for all taxpayers.  And this law is retroactive to the beginning of 2017.

Alimony Deduction:  This deduction is repealed for divorces finalized in in 2019 and after.  Likewise, the recipient spouse will not have to report the Alimony as income.

Moving Expense Deduction.  This deduction is eliminated for most taxpayers.

ACA Individual Mandate: Beginning in 2019, you will no longer have to tell the IRS whether you have health insurance and there will be no penalty for not having it.  However, for 2018, the penalty will still apply.

AMT (Alternative Minimum Tax):  The law Increases the exemptions to $70,300 individuals and $109,400 for married filing joint.  But more important, the exemptions will not phase out until very high income limits.  This should dramatically reduce the number of taxpayers impacted by the AMT.

Expiration:  Due to the Senate’s budgeting rules, a majority of the individual changes listed above will expire on December 31, 2025 and will revert back to the 2017 law without additional legislation.

January 3, 2018
| Kevin Sickels