Created by the TCJA in 2017, opportunity zones are designed to help economically distressed areas by encouraging investments. This article contains an introduction to the complex details of how these zones work.
The IRS describes an opportunity zone as “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.” How does a community become an opportunity zone? Localities qualify as opportunity zones when they’ve been nominated by their states. Then, the Secretary of the U.S. Treasury certifies the nomination. The Treasury Secretary delegates authority to the IRS.
The Tax Cuts and Jobs Act added opportunity zones to the tax code. The IRS says opportunity zones are new, although there have been other provisions in the past to help communities in need with tax incentives to spur business.
The new wrinkle is how opportunity zones are designed to stimulate economic development via tax benefits for investors.
- A Qualified Opportunity Fund is an investment vehicle set up as a partnership or corporation for investing in eligible property located in a qualified opportunity zone. A limited liability company that chooses to be treated either as a partnership or corporation for federal tax purposes can organize as a QOF.
- Investors can defer taxes on any prior gains invested in a QOF until whichever is earlier: the date the QOF investment is sold or exchanged or Dec. 31, 2026.
- If the QOF investment is held longer than five years, there is a 10 percent exclusion of the deferred gain.
- If the QOF investment is held for more thhttps://docs.google.com/spreadsheets/d/1oZBP2cixeXawW6ec7xh_Z6xpZEi2ZXpBUjaHV7_uT68/edit#gid=737633902an seven years, there is a 15 percent exclusion of the deferred gain.
- If the QOF investment is held for at least 10 years, the investor is eligible for an increase in basis on the investment equal to its fair market value on the date that the QOF investment is sold or exchanged.
- You don’t have to live, work or have a business in an opportunity zone to get the tax benefits. But you do need to invest a recognized gain in a QOF and elect to defer the tax on that gain.
- To become a QOF, an eligible corporation or partnership self-certifies by filing Form 8996, Qualified Opportunity Fund, with its federal income tax return.
The first set of opportunity zones covers parts of 18 states and was designated on April 9, 2018. Since then, there have been opportunity zones added to parts of all 50 states, the District of Columbia and five U.S. territories. More details are available on the U.S. Treasury website. Or see the IRS website for more information
…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).
Nothing can frighten a business owner like an audit notification. Is it the first step toward arrest and trial? No need to panic. Find out what a tax audit actually is and how to get through it with minimal fuss.
You may be surprised to learn that not every audit notification you receive will be legitimate. So, first, make sure you received an official audit notification. The Internal Revenue Service (IRS) will notify you either by letter or by a phone call followed by a letter. The IRS does not notify taxpayers about audits through email, so if you do get an email saying you’ve been selected for an audit, it’s probably fraudulent. If you’ve determined that you’re definitely getting audited, your next step is to learn what’s involved.
What Exactly Is an Audit?
According to the IRS, an audit is “a review/examination of an organization’s or individual’s accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is substantially correct.”
That’s it. It’s an audit – not an arrest and not a trial – so don’t panic. Contrary to popular belief, an audit doesn’t automatically mean you made a mistake. Yes, an inconsistency can trigger an audit if there’s a discrepancy between what’s on a tax form and what you actually reported. But the IRS may choose to audit a taxpayer based on random selection or a statistical formula. Also, an audit may be less intrusive than you feared. For example, it may be entirely through the mail, although in some cases, it may be at an office or the taxpayer’s home or place of business. And not all audits result in your owing money. In fact, your audit may lead to no changes at all.
Both businesses and individuals may be audited (even sole proprietorships), and there may be some differences in how they are handled. One thing that virtually all audits have in common, however, is access to records. The IRS is going to want to check some of your records, and maybe a lot of them. Did you deduct business expenses? Make some substantial charitable contributions? You’ll need to show the IRS some receipts. The good news is that in many cases the IRS accepts electronic records.
What Happens Next?
There is no typical length of time for an IRS audit, but if you have your records handy and cooperate fully and quickly, you increase your chances that it will be as brief and painless as possible. Ultimately, the IRS may determine that you owe more money. At this point, you can pay it or you can appeal. The audit doesn’t have to be the end of the road. There is a substantial appeal process and a long and expensive court trial may not even be necessary.
The important thing to remember is that you don’t have to go it alone! Your accountant can work with you throughout the audit process, including any appeals. The key factor is to call us as soon as you receive the notification about your audit. We’re ready to work through the details and help you gather any records you may need.
…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).
The Internal Revenue Service has updated the rules to reflect changes resulting from the Tax Cuts and Jobs Act. This article will help you zero in on changes involving deductible expenses and make sure you’re in compliance.
The IRS is offering some updated rules as guidance for deductible expenses that may have been murky as a result of the Tax Cuts and Jobs Act. The rules being updated involve using optional standard mileage rates when figuring the deductible costs of operating an automobile for business, charitable, medical or moving expense purposes, among other issues.
There are more succinct rules to substantiate the amount of an employee’s ordinary and necessary travel expenses reimbursed by an employer using the optional standard mileage rates. But know that you’re not required to use this method and that you may substantiate your actual allowable expenses, provided you maintain adequate records.
The TCJA suspended the miscellaneous itemized deduction for most employees with unreimbursed business expenses, including the costs of operating an automobile for business purposes. However, self-employed individuals and certain employees, armed forces reservists, qualifying state or local government officials, educators, and performing artists may continue to deduct unreimbursed business expenses during the suspension.
The TCJA also suspended the deduction for moving expenses. However, this suspension doesn’t apply to a member of the armed forces on active duty who moves pursuant to a military order and incident to a permanent change of station.
The IRS has also made it clear that the TCJA amended prior rules to disallow a deduction for expenses for entertainment, amusement or recreation paid for or incurred after Dec. 31, 2017. Otherwise, allowable meal expenses remain deductible if the food and beverages are purchased separately from the entertainment, or if the cost of the food and beverages is stated separately from the cost of the entertainment.
…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).
An employer’s SUTA tax rate is susceptible to fluctuation. If yours is escalating, contrary to popular belief, you actually might be able to reduce it! Check out these five strategiesn provided by personal tax accountant sydney to curb your SUTA tax rate.
Because the State Unemployment Tax Act – or SUTA – tax is mandatory, you may think you have no control over your SUTA rate. But to some extent, you do. The first thing to remember is that each state sets its own criteria for state unemployment tax, and rates vary by employer.
Typically, new employers are assigned a standard “new employer” rate. Over time, they receive an “experience rating,” which can be higher or lower than the new employer rate. The experience rating mainly depends on how many former employees have drawn unemployment benefits on the employer’s account. The more benefits claimed on an employer’s account, the higher its SUTA tax rate. Other determinants may include whether the employer is in the construction industry and the employer’s payroll size.
You may be powerless against some of these influencers – such as your business’s age and industry — but there are other ways to lower your SUTA rate. Here are five tactics.
1. Hire only when needed
Letting employees go because you don’t need them any more likely renders them eligible for unemployment benefits. If they file for unemployment benefits, your SUTA rate is likely to increase. So, make sure you truly need an employee before hiring him or her.
2. Help your employees succeed
Employees terminated for gross misconduct typically do not qualify for unemployment benefits. However, employees fired for poor performance – such as due to lack of skills – may be eligible. To reduce the likelihood of terminating employees for poor performance, give them the resources they need to succeed, including proper tools and training.
3. Use independent contractors
You can avoid unemployment claims by legally hiring independent contractors instead of employees. If you decide to take this route, ensure all mandatory requirements for independent contractor status are met, including the Internal Revenue Service’s “right-to-control” test and applicable state tests.
4. Contest dubious unemployment claims
Dubious unemployment claims may involve former employees providing the state workforce agency with false information to obtain benefits or filing a claim even though they were rightfully terminated for gross misconduct. Before you fight an unemployment claim, consult with unemployment benefits expert to gauge the strength of your case. Also, make sure you have supporting documents to back up your version of events.
5. Make voluntary contributions
Many states allow employers with an experience rating to voluntarily make a “buydown” payment, which cancels all or part of the benefits charged to their account, thereby reducing their SUTA tax rate.
Consider alternatives to layoffs, such as reducing employees’ work hours via your state’s work-sharing program.
Offer departing employees a solid severance package as well as outplacement services to help them quickly find a job. This way, they will be less inclined to rely on unemployment benefits.
Keep an eye on your SUTA tax rate. If it’s spiking for unknown reasons, contact your state’s workforce agency for an explanation.
As long as there have been taxes, shady promoters have tried to sell taxpayers on schemes to get out of paying their fair share. Learn about abusive tax shelters, and how to recognize and avoid them.
Tax avoidance? Accelerating tax deductions, deferring income, changing one’s tax status through incorporation, and setting up a charitable trust or foundation. All of these are legal tax shelters.
Tax evasion – that’s a different story. In tax evasion, you plan to reduce tax payable through illegal means. Abusive tax shelters reduce taxes, promoting the promise of tax benefits with no meaningful change in your income or net worth.
Turns out that in the 1990s, because penalties were too small to have a deterrent effect, tax shelters became quite popular to cushion one-time large capital gains. But these days, the tide has turned against promoting abusive tax shelters. Today, Treasury regulations and IRS rules dealing with tax shelters note that certain types of transactions will no longer pass muster.
The bottom line? Talk to a professional about legitimate ways to reduce your tax burden. Don’t go to some shady guy your brother-in-law knows, or follow advice in a book written by someone with no distinguished credentials such as “CFP,” “CPA” or “JD” after their names. Various trusts can help with long-term tax planning. And even modest families can legally game the tax system with such vehicles as IRAs, 401(k) plans and 529 plans.
Just in case you’re already considering something not too kosher, note that the IRS has its Dirty Dozen list of tax scams – schemes that encourage the use of phony tax shelters designed to avoid paying what is owed. The IRS warns that you could end up paying a lot more in penalties, back taxes and interest than the phony tax shelter saved you in the first place.
Don’t Try This at Home
One such tax scam on the IRS radar is abusive micro-captive structures: crooked promoters persuade owners of closely-held entities to participate in poorly structured or illegal insurance arrangements. For example, coverages may insure implausible risks, fail to match genuine business needs, or duplicate the taxpayer’s commercial coverages. Premium amounts may be unsupported by underwriting or actuarial analysis may be geared to a desired deduction amount or may be significantly higher than premiums for comparable commercial coverage, according to the IRS. It’s all in the name of illusory tax savings. So only work with qualified professionals.
There is a fine line between legitimate tax avoidance and illegal tax evasion. The IRS says it won’t hesitate to impose penalties on both participants and promoters of abusive tax shelters. Tax fraud convictions can mean fines or even prison. In brief, if something sounds too good to be true, it probably is.
The IRS urges businesses to file all tax returns that are due, regardless of whether you can pay in full. Indeed, you have options if you’re having problems raising the cash.
File all tax returns due, even if you can’t pay in full. File them the same way and to the same location that you file on-time returns. If you’ve received a notice, send your past due return to the location indicated on the notice.
This is advice straight from the IRS. You may be eligible for a long-term payment plan — your specific tax situation will determine what options are available – an installment plan, if you will, that allows you to pay in more than 120 days is one of the available options.
How do you get in on this? You’ve filed all required returns and realize you owe $25,000 or less in combined tax, penalties, and interest. Apply online because setup fees are higher if you apply by phone or mail or in person.
What do you need to apply? The basics – log in with the user ID and password that you receive when you register for an online payment agreement. You’ll need:
- Your Employer Identification Number.
- The date your business was established.
- The address you used on your most recently filed tax return.
- Your caller ID from the notice, if you received one.
- Possibly your balance due amount, the tax form filed or examined, and the relevant tax period.
How much is this going to cost you? If the IRS approves your payment plan, you’ll have a fee added to your tax bill. And you should know that if you owe a balance over $10,000, you must pay by direct debit.
If you’ve chosen a long-term payment plan, you’ll be slapped with a $31 setup fee, plus accrued penalties and interest until the balance is paid in full. This works with direct debit. If you don’t want direct debit, you’ll have to pay a $149 setup fee and accrued penalties and interest until the balance is fully paid. Suppose you want to revise an existing payment plan or reinstate a default – the fee is only $10.
To view the details of your current payment plan and log in to the online payment agreement tool, use the Apply/Revise button and make the following changes:
- Change your monthly payment amount.
- Change your monthly payment due date.
- Convert an existing agreement to a direct debit agreement.
- Reinstate after default.
If your new monthly payment amount doesn’t meet the requirements, you’ll be prompted to revise the payment amount. If you’re unable to make the minimum required, you’ll receive directions for completing Form 433-F, Collection Information Statement, as a PDF, and how to submit it.
If your plan has lapsed through default and is being reinstated, you may incur a reinstatement fee.
Form 941 is a crucial tool for ensuring your payroll data is accurately reported to the government and for balancing payroll in general. Get insight into reconciling Form 941 with your payroll on a quarterly and a year-end basis.
Most employers must report employees’ wages paid and taxes withheld plus their own share of certain payroll taxes quarterly to the IRS. Additionally, employers must report each employee’s wages and taxes annually, on Form W-2, to the Social Security Administration. Employers use Form 941, Employer’s Quarterly Federal Tax Return, to report income taxes, Social Security tax or Medicare tax withheld from employees’ paychecks and to pay their portion of Social Security or Medicare tax.
In the end, the information on your quarterly 941s must match your submitted Form W-2s. By reconciling your 941 forms with your payroll, you can verify the accuracy of these filings. For best results, reconciliation should be done on a quarterly and a year-end basis.
Quarterly 941 Reconciliation
Step 1: Run a payroll register for the quarter. The register should show wages and deductions for each employee during that quarter.
Step 2: Compare the data on the payroll register with your 941 for the quarterly period.
Areas to check are:
- Number of employees who received wages, tips or other compensation.
- Total compensation paid to employees.
- Federal income tax withheld from employees’ wages.
- Taxable Social Security wages and tips.
- Taxable Medicare wages and tips.
- Total tax payments made for the quarter, including federal income tax, Social Security tax and Medicare tax withheld from employees’ wages plus your own share of Social Security and Medicare taxes.
Step 3: Fix discrepancies as soon as you find them. For example, you might need to correct the employee’s wages and taxes in your payroll system and file an amended Form 941 for the quarter with the IRS.
Year-End 941 Reconciliation
Step 1: Run a report that shows annual payroll amounts. Compare those figures with the totals reported on all four 941s for the year.
Step 2: Make sure the amounts reported on all the 941s for the year match the respective data fields for your W-2 forms.
- For compensation, compare Line 2 of all your 941s with Box 1 of your W-2s.
- For federal income tax withheld, compare Line 3 of all your 941s with Box 2 of your W-2s.
- For Social Security wages, compare Line 5a Column 1 of all your 941s with Box 3 of your W-2s.
- For Social Security tips, compare Line 5b Column 1 of your 941s with Box 7 of your W-2s.
- For Medicare wages, compare Line 5c Column 1 of your 941s with Box 5 of your W-2s. Also, make sure your total Social Security and Medicare taxes for the year are correct.
Step 3: Perform the necessary adjustments. For example, you may need to file a corrected W-2 form with the SSA and/or an amended 941 with the IRS.
As you can see, this form can get complicated, so it’s a good idea to get professional help with it.
The Social Security Administration has released new numbers for those paying Social Security and those collecting it. Check out the new maximum taxable earnings amount as well as COLA and other key adjustments.
Every year, the Social Security Administration takes a fresh look at its numbers and typically makes adjustments. Here are the basics for 2020 — what has changed, and what hasn’t.
First, the basic percentages have not changed:
- Employees and employers continue to pay 7.65% each, with the self-employed paying both halves.
- The Medicare portion remains 1.45% on all earnings, with high earners continuing to pay an additional 0.9% in Medicare taxes.
- The Social Security portion (OASDI) remains 6.20% on earnings up to the applicable taxable maximum amount — and that’s what’s changing:
Starting in 2020, the maximum taxable amount is $137,700, up from the 2019 maximum of $132,900. This actually affects relatively few workers; the Society for Human Resource Management notes in an article that only about 6% of employees earn more than the current taxable maximum.
Also changing is the retirement earnings test exempt amount. Those who have not yet reached normal retirement age but are collecting benefits will find the SSA withholds $1 in benefits for every $2 in earnings above a certain limit. That limit is $17,640 per year for 2019 and will be $18,240 for 2020. (See the SSA for additional information on how this works.)
Those collecting Social Security will see a slight increase in their checks: Social Security and Supplemental Security Income beneficiaries will receive a 1.6% COLA for 2020. This is based on the increase in the consumer price index from the third quarter of 2018 through the third quarter of 2019, according to the SSA.
A detailed fact sheet about the changes is available on the SSA site.
Any business with employees must withhold money from its employees’ paychecks for income and employment taxes, including Social Security and Medicare taxes (known as Federal Insurance Contributions Act taxes, or FICA), and forward that money to the government. A business that knowingly or unknowingly fails to remit these withheld taxes in a timely manner will find itself in trouble with the IRS.
The IRS may levy a penalty, known as the trust fund recovery penalty, on individuals classified as “responsible persons.” The penalty is equal to 100% of the unpaid federal income and FICA taxes withheld from employees’ pay.
Who’s a Responsible Person?
Any person who is responsible for collecting, accounting for, and paying over withheld taxes and who willfully fails to remit those taxes to the IRS is a responsible person who can be liable for the trust fund recovery penalty. A company’s officers and employees in charge of accounting functions could fall into this category. However, the IRS will take the facts and circumstances of each individual case into consideration.
The IRS states that a responsible person may be:
- An officer or an employee of a corporation
- A member or employee of a partnership
- A corporate director or shareholder
- Another person with authority and control over funds to direct their disbursement
- Another corporation or third-party payer
- Payroll service providers
The IRS will target any person who has significant influence over whether certain bills or creditors should be paid or is responsible for day-to-day financial management.
Working With the IRS
If your responsibilities make you a “responsible person,” then you must make certain that all payroll taxes are being correctly withheld and remitted in a timely manner. Talk to a tax advisor if you need to know more about the requirements.
If your business operates in two or more taxing jurisdictions, the Supreme Court’s decision in South Dakota v. Wayfair applies to you.
In June 2018, the U.S. Supreme Court decided South Dakota v. Wayfair. Since then, businesses that operate in two or more of the nation’s 10,000-plus tax jurisdictions have been struggling to understand what they need to do to comply with the new definition of economic nexus. Wayfair affects all businesses, from strictly online sellers to manufacturers and wholesalers to brick-and-mortar retailers.
The Court’s ruling was vastly different from its 1992 ruling in Quill Corp. v. North Dakota, which found that sales tax did not have to be collected unless the company had a physical presence in the state. Then again, Quill was decided when the Internet was in its infancy.
Wayfair did not expressly state a threshold for collecting sales tax, but the South Dakota statute in the case stipulates that any out-of-state business that makes $100,000 in sales or that has 200 or more sales in South Dakota must collect sales tax. Although that is a good guideline, businesses need to remember that not all jurisdictions follow it: some are higher and others are lower.
This creates problems for businesses for a number of reasons, including the following:
- Business registration. Every state has different rules about how businesses must register as taxing entities. In some states, it is enough to register at the state level, whereas in others, the business needs to register at the county and municipality level as well. Some jurisdictions may ask businesses to prove they do or do not meet its thresholds. Noncompliance with these requests can lead to steep penalties. Other jurisdictions have voluntary disclosure programs that can help limit exposure.
- Goods and service exemptions. There is no one standard for taxing goods and services. For example, clothing is not taxed in New Jersey, but in New York, a neighboring state, the only clothing that costs more than $110 is taxed. There is a never-ending list of discrepancies between jurisdictions, and this list can change quickly.
- Other factors. Your business may need to rethink its operations. For example, is your inventory stored in another jurisdiction?
- Effective dates. Just as there is no universal list of which goods and services are taxed, there is no one list of effective dates. A new effective date takes effect every time a jurisdiction decides to tax a good or service, exempt one from taxation or impose a new dollar limit.
The Wayfair ruling is not going away, so businesses need to take several steps to analyze their exposure. Businesses need to:
- perform a detailed analysis of the business’s annual sales and number of transactions in every jurisdiction in which it operates;
- determine which goods and services are taxable in each of those jurisdictions;
- figure out when and where to register, what penalties it may incur and whether registering will make it subject to other taxes, such as franchise taxes; and
- determine how it will manage sales tax compliance going forward.
Businesses don’t need to do this on their own. Contact us today for professional help in figuring out your business’s sales tax responsibilities.