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).
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.
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.
Obtaining financing to start or expand small businesses and buy homes can sometimes be difficult. If your child or grandchild is having a hard time getting a loan from a commercial lender, you may be willing to help out by lending the money yourself.
Have a Written Agreement
Start by putting the loan agreement in writing. This may seem like an unnecessary formality, but without a written loan document, the IRS could argue that the transaction was a gift instead of a loan, potentially creating gift tax issues.
Having written documentation is also important in case the borrower fails to repay all or part of the loan. In that situation, you’d want to be able to show you’re entitled to write off the unpaid amount as a nonbusiness bad debt.
Charge Adequate Interest
The second step is setting an interest rate. While there’s no rule against interest-free loans or loans that have below-market interest rates, in a family context they can lead to tax complications. If you don’t charge sufficient interest, the difference between the amount of interest you actually receive (if any) and the amount you should have received — referred to as “imputed” interest — is taxable to you.
You can avoid the imputed interest rules by charging interest at the appropriate “applicable federal rate” (AFR). The IRS publishes AFRs monthly for loans of different maturities. These rates have been relatively low recently, reflecting the current market interest rate environment. For example, in November 2019, the annual AFR (using a monthly compounding assumption) was:
- 1.68% for a short-term loan (three or fewer years)
- 1.59% for a mid-term loan (more than three but no more than nine years)
- 1.94% for a long-term loan (more than nine years)
These are the minimum rates for intra-family loans initiated in November 2019. For a term loan, the rate can remain fixed for the life of the loan. For a demand loan (one that gives you the right to demand full repayment at any time), you have to charge a floating AFR to avoid imputed interest issues.
When you lend your child or grandchild no more than $100,000, the amount that can be added to your taxable interest income under the below-market interest rate rules generally can’t exceed the borrower’s net investment income. Even better, you won’t have to report any imputed interest if the borrower’s net investment income amounts to $1,000 or less. You can also sidestep imputed interest on small loans of no more than $10,000 (all outstanding principal) provided the borrowed funds aren’t used to buy or carry income-producing assets.
You don’t have to wear a while lab coat to claim the federal research and development tax credit if you meet the four criteria outlined in Internal Revenue Code Section 41 and its regulations. Learn why failing to explore this credit may be leaving money on the table.
Many manufacturing companies fail to take advantage of the generous research and development (R&D) tax credit simply because they don’t have staff working in a lab. The Internal Revenue Service’s (IRS) definition of R&D is codified at Internal Revenue Code Section 41 and its related regulations — and it may not be exactly what you think it is.
From 2018 to 2027, the estimated value of R&D tax credits to be claimed by U.S. companies is estimated at $163 billion, with $148 billion of that going to corporations.
You can take advantage of this tax credit as long as your company performs activities such as the following:
- Redesigns its production process to be more efficient.
- Introduces artificial intelligence or robotics into your manufacturing process.
- Develops software that enhances your company’s processes or procedures.
- Designs, constructs or tests product prototypes.
- Develops second-generation or improved products.
This list is not all-inclusive. According to the IRS, many activities may qualify if they are performed in the United States and meet the following four-part test.
Part 1. Permitted purpose
The IRS test is to create a new or improved product, business component or process that increases performance, function, reliability, composition or quality or that reduces costs for your company. It does not have to be new to your industry.
Development of internal use software may meet the permitted purpose test if it:
- is an innovation that provides economically significant results;
- requires a certain amount of economic risk and use of resources to develop when recovery of the cost is uncertain over a reasonable time; and
- is not commercially available for the intended purpose, although commercially available software may be eligible if it is significantly modified.
Part 2. Technological in nature
The research must fundamentally rely on the hard or physical sciences, such as engineering, physics, chemistry, biology or computer science.
Part 3. Uncertainty eliminated
You must be able to demonstrate that you’ve attempted to eliminate any uncertainty about the usefulness of the development, improvement or design.
Part 4. Process of experimentation
You must be able to demonstrate during the research process that you’ve experimented and evaluated alternatives. This may have been done through research techniques like modeling, simulation, trial and error or some other method.
Documenting R&D Activities
Claiming the credit requires a lot of supporting documentation, however. It is worth taking the time to assess whether the amount of tax relief you’ll get is worth the effort. For example, you’ll need to determine how much of a credit your company is eligible for, how difficult it will be to document your company’s R&D activities, whether the credit can be used to offset alternative minimum tax liability and whether you can claim previously unused credits.
Many, if not all, manufacturers may find they can reduce their taxes by taking advantage of the federal R&D tax credit. In addition, many states have an R&D credit that is available to manufacturers. It’s worth investigating and we can help. Contact us today to determine whether you should be claiming this credit.
It isn’t easy deciding whether a worker should be treated as an employee or an independent contractor. But the IRS auditors will look at the distinction closely.
For an employee, a business generally must withhold income and FICA (Social Security and Medicare) taxes from the employee’s pay and remit those taxes to the government. Additionally, the employer must pay FICA taxes for the employee (currently 7.65% of earnings up to $137,700).*
The business must also pay unemployment taxes for the worker. In contrast, for an independent contractor, a business is not required to withhold income or FICA taxes. The contractor is fully liable for his or her own self-employment taxes, and FICA and federal unemployment taxes do not apply.
Employees Versus Independent Contractors
To determine whether a worker is an independent contractor or employee, the IRS examines factors in three categories:
- Behavioral control — the extent to which the business controls how the work is done, whether through instructions, training, or otherwise.
- Financial control — the extent to which the worker has the ability to control the economic aspects of the job. Factors considered include the worker’s investment and whether he or she may realize a profit or loss.
- Type of relationship — whether the worker’s services are essential to the business, the expected length of the relationship, and whether the business provides the worker with employee-type benefits, such as insurance, vacation pay, or sick pay, etc.
In certain cases where a taxpayer has a reasonable basis for treating an individual as a non-employee (such as a prior IRS ruling), non-employee treatment may be allowed regardless of the three-prong test.
If the proper classification is unclear, the business or the worker may obtain an official IRS determination by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
Generally, if a business has made payments of $600 or more to an independent contractor, it must file an information return (Form 1099-MISC) with the IRS and send a corresponding statement to the independent contractor.
Consequences of Misclassification
Where the employer misclassifies the employee as an independent contractor, the IRS may impose penalties for failure to deduct and withhold the employee’s income and/or FICA taxes. Penalties may be doubled if the employer also failed to file a Form 1099-MISC, though the lower penalty will apply if the failure was due to reasonable cause and not willful neglect.
Employers with misclassified workers may be able to correct their mistakes through the IRS’s Voluntary Classification Settlement Program (VCSP). For employers that meet the program’s eligibility requirements, the VCSP provides the following benefits:
- Workers improperly classified as independent contractors are treated as employees going forward.
- The employer pays 10% of the most recent tax year’s employment tax liability for the identified workers, determined under reduced rates (but no interest or penalties).
- The government agrees not to raise the issue of the workers’ classification for prior years in an employment-tax audit.
Your tax advisor can help you sort through the IRS rules and fulfill your tax reporting obligations. *Internal Revenue Service. For 2020, the Social Security tax rate is 6.2% and is applied to earnings up to $137,700. The Medicare tax rate is 1.45% on the first $200,000 and 2.35% above $200,000.