 Now that the Corporate Transparency Act and its required Beneficial Ownership Information reporting requirements are in place, it is time for an update.
There are new reporting requirements for many small and medium-sized businesses, which can include single-member and multi-member LLC’s, C and S corporations. You may own or operate a business required to report under the Corporate Transparency Act (CTA), and we wanted to make you aware of the reporting requirements that went into effect at the start of this year, that may require your business entity to report its beneficial ownership information to the Federal government. Beginning on Jan. 1, 2024, many companies in the United States will have to report about their beneficial owners, i.e., the individuals who ultimately own or control the company. The required Beneficial Ownership Information Report (BOI) is filed with the Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau of the U.S. Department of the Treasury. These reports will be used to establish a database of companies and their beneficial ownership to be used by law enforcement agencies. This is not an Internal Revenue Service (IRS) or State issue. Please note, this will be a free filing that companies can complete themselves. Please be wary of official-looking mail from a third-party company offering to complete the beneficial ownership reporting on behalf of your company for a fee. Do you need to report? Most businesses that need to file are small or medium-sized businesses. Your company may need to report information about its beneficial owners if it is:
Why should you report? There are significant penalties for missing filing deadlines, including criminal (fines and/or imprisonment) or civil (monetary) penalties. There is a $500 per day penalty, up to $10,000, and imprisonment of up to two years for the WILLFUL failure to timely file initial or updated reports. It will be your exclusive responsibility to comply with CTA, including its BOI reporting requirements. How do you report? Reporting companies will have to report beneficial ownership information electronically through FinCEN’s website: www.fincen.gov/boi. When do you report? Reports will be accepted starting on Jan. 1, 2024.
What information will be reported? The following type of information will be required to file a report under the CTA: Reporting Company (The Business Entity)
Beneficial Owner(s) A Beneficial Owner is any person who is an Officer, Director or 25% or more Owner of the Reporting Company – those who ultimately own or control a company. Other persons who exercise control and/or perform the roles of Officers, Directors or act as an Owner but are not named as such may also be considered Beneficial Owners such as an LLC Manager who is not an owner. Please consult your legal counsel if you have questions as to who may qualify as a Beneficial Owner under the law.
Company Applicant (For a ‘Reporting Company’ formed Jan. 1, 2024, or thereafter)
What constitutes a change and requires an updated report filing? If there is any change to the required information listed above about your company or its beneficial owners in a BOI report that your company filed, your company must file an updated BOI report no later than 30 days after the date on which the change occurred. The same 30-day timeline applies to changes in information submitted by an individual in order to obtain a FinCEN identifier. A reporting company is not required to file an updated report for any changes to previously reported personal information about a company applicant. The same penalties described above pertain to updated report filings in addition to the initial report filing. Some likely triggers and or examples (not inclusive) of the changes that would require an updated beneficial ownership information report include:
Additional information can be found at https://www.fincen.gov/boi. Please consult with your legal counsel on additional questions and or concerns regarding how BOI reporting requirements and issues affects your company. Assisting with compliance and or filing of the CTA, including BOI reporting, is not within the scope of the tax and accounting services we provide. It will be your exclusive responsibility to comply with CTA, including its BOI reporting requirements. Under certain circumstances where there is not a question of law regarding the interpretation or determination of a beneficial owner (i.e. simple and straight-forward beneficial ownership) or where legal counsel has provided opinions, we may be engaged under a separate engagement from our tax and accounting services to prepare the initial filing compliance. Please reach out to us for more information if interested. As stated previously, compliance with the CTA, including the BOI reporting applies to most businesses including single member LLCs, which are treated as a disregarded entity for income tax reporting. A disregarded entity does not have a filing requirement with the Internal Revenue Service (no separate tax return). Finally, we are posting this blog to make you aware of these new current reporting requirements, associated risks, and suggest you contact legal counsel to assist you with the CTA and related BOI filings for entities that you own or control.
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 The Powerball lottery has yet to reach $80 billion but the IRS recently won its own $80 billion lottery when Congress noticed the IRS was struggling to keep up with its backlog of millions of unprocessed paper tax returns, poor or non-existent phone support and being tasked by administrations to do things that weren't in the IRS job description and took action by passing a massive funding of the IRS in the recently enacted Inflation Reduction Act.
The IRS will get an additional $80 billion over the next decade. This includes $35 billion for taxpayer services, operations support, and business systems. Among other things, the IRS plans to use these funds to update its antiquated IT systems (some of which date back to the 1960s), improve phone service, and speed up the processing of paper tax returns. Despite what you may have heard in the media, the IRS will not expand by 87,000 new employees. It will still be smaller than it was 30 years ago. It may grow by 20,000 to 30,000 workers over the next decade, and the number of revenue agents could increase to 17,000 by 2031—over twice as many as today. The IRS will have an additional $45 billion to spend on enforcement. Treasury Secretary Janet Yellen has promised that IRS audit rates will remain at “historical levels” for taxpayers earning less than $400,000 annually. Audit rates will rise for taxpayers earning $400,000 or more per year. If you’re in this group, it’s wise to plan ahead to avoid trouble with a beefed-up IRS. You should keep complete and accurate records and file a timely tax return. Of course, this is something you should be doing anyway. Here are a few special areas of concern: · Cryptocurrency. You can expect increased IRS audits dealing with cryptocurrency transactions. If you’re one of the millions of Americans who engage in such transactions, make sure you keep good records and report any income you earn. Remember that selling or using cryptocurrency as your wallet/currency triggers a taxable transaction. · S Corporations. If you’re an S corporation shareholder-employee, you should have your S corporation pay you an arguably reasonable salary and benefits, and document how you arrived at the amount. · Syndicated Conservation Easements. Be aware that the IRS is auditing all of these deals, and its scrutiny of them will likely grow. · Offshore Accounts. You’re supposed to report these to the U.S. Treasury. Failure to do so subjects you to substantial penalties. In recent years, the IRS has gone after banks and bank account holders who hide assets in offshore accounts. In future years, we can expect the IRS to place even greater emphasis on identifying and tracking such offshore assets. · Partnerships. Partnerships and multi-member LLCs taxed as partnerships (this describes most of them) are already the subject of the Large Partnership Compliance program, which uses data analytics to select large partnership returns for audit. The IRS will likely devote more resources to this program in the future. Remember that Congress wants a return on its investment. That return will come from us.  Do you have an activity that you do on the side that you think of as a business? Are you claiming losses on your personal tax return (Schedule C, Form 1040)? Will the IRS allow those losses?
I have had a few questions lately about what the IRS considers to be a hobby and what it considers to be a business. If a business, losses are deductible. If a hobby, you can only deduct expenses up to your revenue and therefore are unable to deduct a loss. The IRS likes to claim that money-losing sideline activities are hobbies rather than businesses. The federal income tax rules for hobbies have been anti-taxpayer for years, and an unfavorable change enacted in the Tax Cuts and Jobs Act (TCJA) made things even worse for 2018-2025. If you have such an activity, I should have your attention. Here’s the deal: if you can show a profit motive for your now-money-losing sideline activity, you can classify that activity as a business for tax purposes and deduct the losses. If you can't, you don't get to deduct the losses. Factors that can prove (or disprove) such for-profit intent include:
If you have a loss-producing activity that you consider a business but the IRS might consider a hobby, it would be wise to firm up your supporting factors to make sure that it looks and smells more like a business than a hobby.  Well, that was quick...what a difference a week makes.
Due to the overwhelming pressure from CPAs, State Societies, Enrolled Agents and other organizations, the IRS announced late on Tuesday February 15th that certain domestic partnerships and S corps qualify for special relief from having to prepare the new K-2 and K-3 forms if they have no foreign activities, foreign partners, or shareholders. The IRS said, "For 2021, these qualifying domestic partnerships and S corporations will not have to file the new schedules,” ... “We are taking this step in response to feedback we received from the tax community and our stakeholders. The IRS will provide full details of this relief soon.” It seems we have an extra year to get processes in place to determine if the individual taxpayer owners of pass-through entities are eligible to file Form 1116 to claim a foreign tax credit and thus the entity needs to file the K-2/K-3 forms. Hopefully, it won't be as hectic in 2023 when trying to file next tax season.  Last year in June, the IRS issued two new form schedules to accompany pass-through entity returns (Forms 1065 and 1120S) starting in the 2021 tax year - The Schedule K-2 and K-3. The K-2 consists of 11 parts over 19 pages and the K-3, 13 parts over 20 pages. The purpose of these schedules is to help reduce money laundering, better improve international activity reporting and to report foreign activity at the entity level to the individual owners. The IRS also issued draft instructions shortly after issuing the schedules which stated that the forms would be required if the entity had foreign transactions (“Who Must File: The partnership need not complete this schedule if the partnership does not have items of international tax relevance (typically, international activities or foreign partners)”) .
A couple of weeks ago, the IRS issued final instructions and with them a trap. Instead of the trigger for the schedules being at the entity level, the trigger now resides at the individual owner level. Even if the entity did not have foreign transactions, the entity must file these schedules if the owner claims a foreign tax credit (Form 1116) on their personal returns. As such, every pass-through entity needs to determine if it has items of international tax relevance with respect to its direct and indirect owners. A U.S. entity with no foreign-sourced income, no assets generating foreign-sourced income, no foreign taxes paid or accrued, and no foreign owners may still need to report information on Schedules K-2 and K-3 if an owner is eligible to claim a credit for foreign taxes paid on other sources of foreign income on their own tax return. The forms are required if the entity lacks positive evidence that each owner is not eligible to claim a foreign tax credit on their return. Put another way, if the entity is unsure if an owner may be claiming a foreign tax credit on their return, these new forms are required. Penalties for failing to file these forms can be as much as $570 per missing form. The process of gathering, analyzing, and reporting all of this data that is now required is complex and may consume a substantial amount of time, resources, and significantly increase the cost to complete properly. Costs for return preparation when these forms are required will double or triple when compared to returns without them. To avoid penalties and be in compliance, I will be requiring positive evidence from each entity owner that they are not subject to filing Form 1116 as part of their individual returns or I will prepare the extra schedules and charge for them. There is still a lot unknown and undetermined about these new forms, as they are complex and extensive and may require many filers to be placed on extension.  If you are a business owner, the US government would like to get to know your business.
I wanted to take a moment this morning to make you aware of an upcoming broad sweeping requirement that will most likely begin in 2022. The Corporate Transparency Act (CTA) is a historic new law (1/1/2021 with a delayed start) impacting millions of America's existing small corporations and LLCs and other business entities registered to do business in the United States. The CTA also applies to newly formed entities and requires disclosure of personal ownership information to the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN). The proposed regulations are still in the comment period, but the comment period ends in February and then Treasury officials will most likely begin to prepare the forms and reporting infrastructure and set the reporting due dates. Willful violations are subject to substantial monetary ($500/day up to $10,000) and criminal penalties, including prison time. Accordingly, you do not want to wait to comply once the reporting process is finalized. The purpose of the Corporate Transparency Act is to improve U.S. national security by helping to prevent the misuse of corporations and LLCs for money laundering, cyber-crime, fraud, tax evasion, human and drug trafficking, proliferation of weapons of mass destruction and the financing of terrorism. This new legislation marks the first time in history the federal government will maintain a private government database of company ownership for law enforcement purposes. Items that will need to be reported include:
It is currently proposed to file an initial filing and one upon any changes to the information included in the initial filing. To prepare for compliance, if any uncertainty exists as to the beneficial ownership of a company you are a part of, immediately start identifying who the owners are and gather the needed information to avoid significant civil and criminal penalties. Please keep this one on your radar. I will update as more information becomes available.  If you have tried to talk with the IRS lately, you probably weren’t successful.
Last week, the IRS gave an update on its backlog. Normally, the IRS has about 1 million returns that are waiting to be processed when the new tax year begins. Currently, the IRS has about six times that many returns waiting to be processed. On top of that, there are other amended income tax returns and other payroll tax returns and amendments generated to claim Employee Retention Credits in their inbox. Congress also tasked them to manage the advanced child tax credits and continued economic recovery payment (or stimulus) payments which added to their workload. Inbound call volume increased fourfold while the workforce still feels impact of COVID, that resulted in the IRS only able to answer a fraction of the calls. Refunds have been delayed which has led to the question “Where is my refund?” Your accountant can’t answer that question. Only the IRS can answer that and the IRS has warned that more people will be asking the question as refund processing delays continue. If you can’t talk to them, what should you do? Thankfully, the IRS has prepared some online and application tools you can use to get an answer. Even if the answer is “Still in Process”, it is better to hear that quickly than after being on hold for three hours on the phone. The first method is the IRS website, https://www.irs.gov. On the home page is a list of frequently asked topics under the “How can we help you?” Header. Click the “Get your Refund Status” and input some information from your tax return to identify yourself and get your answer. You can also find information about the advanced child tax credit you received and stimulus payments in 2021 that you will need to prepare your 2021 tax returns under other options in that menu. The second method is to create an IRS account with ID.me (See the “Sign into Your Account” option). You are able get a whole bunch of information about your tax account, including your refund, after you go through the somewhat challenging account setup which includes uploading photo ID and a live selfie in addition to validation using a credit card and credit report. With this account setup, you can also use the IRS2Go app on your cell phone and make tax payments. The third option is the least preferred, but is to call them. Plan on a long wait if you are lucky enough to not have the system tell you to try again later and hang up on you. Use should also use direct deposit when claiming a refund as the process is much faster than issuing a check. While we are all frustrated from the continued impact of the pandemic, may we continue to exercise patience and flexibility as we deal with others – including the IRS.  Once again, the annual tax season is about to begin. The IRS has announced that it will begin accepting returns on January 24th, 2022. The IRS also said that it is still behind on processing millions of prior year returns, refunds and correspondence so we can expect some on-going frustration that we will have a chance to practice patience with.
To help alleviate the stress of tax season, the following suggestions for getting ready for tax time will be beneficial whether you prepare your own tax returns or use a professional. Look at last year’s return or the organizer your preparer sends out (not all preparers use organizers) to help you refresh your memory about what documents were used last year and might be needed again. Gather the following documents and put them in one place, whether electronically or paper. These represent your income and deductions. Having them in one place will prevent the dreaded document hunt or help prevent missing something that should be on your return:
 It seems like taxes are a game sometimes. When you know the rules, you can play the game better and save a lot in taxes. The tax code contains the basic rules for this game, and once you know the rules, you can apply the correct strategies.
Here’s the basic strategy:
To avoid the higher rates, here are seven possible tax planning strategies. Strategy 1 Examine your portfolio for stocks that you want to unload, and make sales where you offset short-term gains subject to a high tax rate such as 40.8 percent with long-term losses (up to 23.8 percent). In other words, make the high taxes disappear by offsetting them with low-taxed losses, and pocket the difference. Strategy 2 Use long-term losses to create the $3,000 deduction allowed against ordinary income. (You are allowed to deduct up to $3,000 of capital losses a year.) Again, you are trying to use the 23.8 percent loss to kill a 40.8 percent rate of tax (or a 0 percent loss to kill a 12 percent tax, if you are in the 12 percent or lower tax bracket). Strategy 3 As an individual investor, avoid the wash-sale loss rule. Under the wash-sale loss rule, if you sell a stock or other security and purchase substantially identical stock or securities within 30 days before or after the date of sale, you don’t recognize your loss on that sale. Instead, the code makes you add the loss amount to the basis of your new stock. If you want to use the loss in 2021, then you’ll have to sell the stock and sit on your hands for more than 30 days before repurchasing that stock. Strategy 4 If you have a lot of capital losses or capital loss carryovers and the $3,000 allowance is looking extra tiny, sell additional stocks, rental properties, and other assets to create offsetting capital gains. If you sell stocks to purge the capital losses, you can immediately repurchase the stock after you sell it—there’s no wash-sale “gain” rule. Strategy 5 Do you give money to your parents to assist them with their retirement or living expenses? How about children (specifically, children not subject to the kiddie tax)? If so, consider giving appreciated stock to your parents and your non-kiddie-tax children. Why? If the parents or children are in lower tax brackets than you are, you get a bigger bang for your buck by
Strategy 6 If you are going to make a donation to a charity, consider appreciated stock rather than cash, because a donation of appreciated stock gives you more tax benefit. It works like this:
Here is an example. You bought a publicly traded stock for $1,000, and it’s now worth $11,000. If you give it to a 501(c)(3) charity, the following happens:
Two rules to know:
Strategy 7 If you could sell a publicly traded stock at a loss, do not give that loss-deduction stock to a 501(c)(3) charity. Why? If you sell the stock, you have a tax loss that you can deduct. If you give the stock to a charity, you get no deduction for the loss—in other words, you can just kiss that tax-reducing loss goodbye. These stock strategies have a long history in tax planning and can benefit you. Use them now that you know them.  As the end of the year approaches, you may be considering what equipment and asset purchases you need to make for your business before the end of the year to get a current year tax deduction.
If you use the asset in your business, you can deduct the full cost using regular depreciation, bonus depreciation, or IRC Section 179 expensing. Regular depreciation takes three to 39 years depending on the property involved (deducting a portion of the cost each year over the useful life of the asset), while bonus depreciation allows you to deduct 100 percent of the cost of personal property in one year through 2022. Up to $1,050,000 of personal property may also be deducted in one year under IRC Section 179 subject to profit limitations. If you are considering buying personal property (such as a car, a computer, or other equipment) or real property (such as a building), if you use the property for personal purposes, it’s not deductible. If used for both business and personal, the asset must be used more than 50% for business in order for a portion of the cost to be deducted. If used more than 50% for personal purposes, there is no deduction. Depreciation won’t begin if you purchase property with the intent of beginning a new business. You must actually be in business to claim depreciation. This doesn’t require that you make sales or earn profits—only that your business is a going concern. Also, depreciation doesn’t begin the moment you purchase property for your business. It begins only when you place property in service in your business. You don’t have to use the property to place it in service, but the property must be available for use in your active business. This could occur after you purchase the property. Finally, if you use regular depreciation, you must apply rules called conventions to determine the month in which your depreciation deduction begins. The earlier in the year, the larger your deduction for the first year. The default rule is that regular depreciation for personal property begins July 1 the first year (mid-year convention). But if you purchase 40 percent or more of your total personal property for the year during the fourth quarter, your depreciation begins at the midpoint of the quarter in which it is placed in service (mid-quarter convention). First-year depreciation for real property begins at the middle of the month during which the property is placed in service (mid-month convention). Buying needed equipment and assets for your business before the end of the year can lower your taxable income. (P.S. You should never buy something you don’t need to get a tax deduction.) |
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