September 20, 2022

An Ounce of Prevention: Keeping Up with Physicians’ and Dentists’ Use Tax Obligations

State and local taxing authorities are stepping up their enforcement of medical and dental professionals’ use tax obligations. Medical and dental practices that do not properly report and pay applicable use taxes—or keep proper records of payment—risk sales and use tax audits that can create significant tax liabilities, along with substantial penalties and interest. For physicians and dentists to meet their use tax obligations and avoid a sales and use tax audit, an ounce of prevention truly is worth a pound of cure.

1. Use Tax Obligations

Most states impose use taxes that create obligations for physicians and dentists. For example, the state of Ohio imposes a tax on the storage, use, consumption, or benefit received in Ohio of goods and taxable services (the “use tax”). The use tax does not apply if sales tax has already been paid in Ohio. And if sales tax has been paid in another state, then the use tax only applies to the extent the use tax is higher than the sales tax paid in the other state.

Use tax is ordinarily collected the same way as sales taxes. Buyers of goods or taxable services are ultimately responsible for paying applicable use tax. But, the sellers of goods and taxable services must register with the Department of Taxation (the “Department”) and collect, pay, and file use tax returns. Both buyers and sellers have use tax obligations. But what if the seller does not properly collect, report, and remit applicable use tax?

Of course, the use tax statutes and regulations provide the answer. The buyer of taxable goods and services is ultimately responsible for the applicable use tax. So, if the seller does not collect applicable use tax from a buyer, then the buyer must file a monthly use tax return and pay use tax to the Department. Buyers who fail to report and pay applicable use tax are liable for the tax, substantial penalties, and interest that accrues on the unpaid amount of the tax until the buyer pays the tax or the Department issues a tax assessment.

How do medical and dental practices run afoul of state taxing authorities? The practices purchase medical and dental supplies and equipment from suppliers and one of two things happens: (1) either the equipment supplier does not collect the applicable sales and use taxes—and the practice does not pay the tax, or (2) the supplier collects the sales and use taxes and the practice pays, but the practice does not keep good records of taxes it paid. Either way, the state taxing authorities audit the practice’s sales and use tax returns—or lack thereof—and assess significant use tax liabilities against the practices.

2. An Ounce of Prevention

How can medical and dental practices avoid these substantial tax liabilities? Keep meticulous records of every purchase, and work with experienced accountants to determine whether the practice paid the applicable sales and use taxes.

If the practice paid the applicable tax, then keep records of the payment and be ready to present those records to the state taxing authority when an audit happens. If the practice did not pay the applicable tax—for whatever reason—then file the monthly use tax return and pay the applicable use tax when due.

Physicians and dentists who do everything right can still find themselves on the wrong side of an audit. But keeping accurate records and filing and paying use tax returns when due puts medical and dental practices in the best position to get through a sales and use tax audit.

3. A Pound of Cure

Physicians and dentists must prioritize patient care. But in prioritizing patient care, medical and dental practices can overlook their use tax obligations. Overlooking use tax obligations can result in an audit and assessments of tax, penalties, and interest. If you find yourself in a sales and use tax audit, it is critical to have the right legal and accounting team on your side to get you through the audit process with as little disruption as possible.


Nardone_Vince_cropped2022

Vince Nardone

Vince serves as a business advisor to owners and executives of closely-held businesses by counseling them on business planning, tax planning and controversy, mergers and acquisitions, succession planning, and legal issues that may arise in business operations.

 

Sorice_mike_cropped2022 Mike Sorice

Mike advises middle-market business owners on matters of business and management succession. He provides corporate and partnership tax advice to business owners and in-house accounting departments about federal income tax, state and local income tax, sales taxes, and excise taxes. In addition, Mike has represented taxpayers before the Internal Revenue Service and Ohio Department of Taxation related to federal, state, and local tax obligations.

May 03, 2022

Tax Planning Opportunities are Available in Almost Every Business Transaction, Including When a Dispute Arises

As a business advisor and tax attorney representing businesses, we inevitably run into circumstances where we are advising businesses on disputes with third parties. Although we do our best to minimize disruption within the business—to ensure that we maximize profits—disputes will arise. And, in some instances, those disputes require us to pursue court intervention, mediation, or arbitration. Thus, during the normal course of any business operation, a business may find itself the recipient or payer in a settlement or judgment as a result of that court intervention, mediation, or arbitration.

Unfortunately, the federal tax implications of that settlement or judgment are often overlooked by the business owner/executive and the litigation/controversy attorney handling that dispute. The business generally just wants its pound of flesh, and the attorney usually just wants to “win.” But, what does all of that really mean? For both the payer and the recipient, the terms of a settlement or judgment may affect whether a payment is deductible or nondeductible, taxable or nontaxable, and its character—i.e., capital or ordinary—all of which may impact the perception of whether or not the settlement or judgement was a “win.” That perception and determination will likely come down to an analysis related to the “origin of the claim.”  

Origin of the Claim

Under the origin of the claim doctrine, the tax consequences of settlement proceeds are determined by the nature of the claim and the actual basis of recovery. According to the U.S. Supreme Court, courts must ask: In lieu of, what were the damages awarded? That is the U.S. Supreme Court’s mandated concept of the origin of the claim analysis. In United States v. Gilmore, the Court used this analysis to distinguish between deductible and nondeductible litigation expenses. Since Gilmore, courts have utilized the doctrine to determine whether proceeds from a lawsuit or settlement are taxable as ordinary income or as capital gain. As an example, an award for lost profits may be taxable as ordinary income, while an award for damage to an asset may be considered a return of capital to the extent of the basis in the asset, with the excess amount over basis treated as gain. Again, what is the origin of the claim?

Considerations Regarding Each Dispute

When we consult with business owners and executives on a potential dispute, we ask them to take into consideration a number of thoughts, including:

  • What is the big picture here, recognizing that your decision today will ultimately determine your final destination, both personally and for the business?
  • What may be the unintended consequences of that decision and resolution of that dispute?
  • What will the cost be, both from an actual dollar amount, that of a relationship, as well as the potential of opportunity cost?
  • What are the hazards of that dispute and chances of success?
  • Is this all about principle?
  • What is the likely outcome, in terms of the settlement or judgment, including the terms?
  • And, how can we ensure that the final outcome is structured in the most tax-efficient manner?

Conclusion

In sum, there is a lot to consider in every dispute. Taxes are only one aspect of that dispute, although many times overlooked. The time to consider the tax consequences, as well as all other consequences, is before the dispute arises through court intervention, mediation, or arbitration. That is, waiting until the final determination of that dispute to consider the tax consequences will be too late. The ground work for the “origin of the claim” analysis will have already been decided. Therefore, while tax consequences may not be the final determining factor of whether a dispute should be pursued, it should be one of the factors considered, before you decide to pursue that dispute.

March 06, 2022

US Government, including Department of Justice and the IRS, Take Further Steps to Shut-Down Syndicated Conservation Easements.

Many weeks ago, I posted a blog addressing the abusive nature of syndicated conservation easements being peddled by certain professionals. See blog here. The government made it clear then, and made it clear again, that the Department of Justice and the IRS does not take kindly to professionals promoting certain conservation easement transactions that, according to the Department of Justice and IRS, are "abusive tax shelters lacking in economic substance or business purpose.” 

Recently, a federal grand jury sitting in Atlanta, Georgia, returned a superseding indictment charging seven individuals with conspiracy to defraud the United States and other crimes arising out of their promotion of fraudulent tax shelters involving syndicated conservation easements.

Vince Nardone Comment: This indictment includes CPAs, an attorney, and appraisers. It is a big deal. Advisors and taxpayers should pay attention, and take notice.

In fact, the Department of Justice stated that the scheme dates back nearly two decades and involved the alleged sale of more than $1.3 billion in "false and fraudulent tax deductions." According to the government, the seven indicted "engaged in a conspiracy to design, market and sell false and fraudulent charitable contribution tax deductions to high-income clients."

Two of the people "allegedly caused partnerships to donate conservation easements over land owned by the partnership," according to the Department of Justice’s release. They then allegedly used "two hand-picked appraisers … to generate fraudulent and inflated appraisals of the conservation easements that frequently valued the easements at amounts at least 10 times higher than the price that was actually paid for the partnership." The partnerships then claimed a tax deduction for a charitable contribution in the inflated amount of the conservation easement, resulting in a fraudulent deduction flowing to the clients who bought units in the partnership, the DOJ added.

The indictment makes it clear that the government believes the conservation easement transactions were "abusive tax shelters lacking in economic substance or business purpose." According to the government, attempts were made to disguise the transactions as real estate deals, but the deals were merely the illegal sale of inflated tax deductions.

I would encourage clients to read the full version of the indictment, and form your own opinion. And, as I will always say: It is proper and legal to plan for and participate in transactions that involve tax avoidance—as long as the transactions are motivated by a legitimate and substantial business purpose that includes economic substance. But, it is never proper to pursue transactions that involve tax avoidance, when the primary motive is tax avoidance, and the transaction itself lacks business purpose and economic substance. Why? Because, as the indictment makes clear, those transactions represent tax evasion, not tax avoidance. It is this simple: If it seems too good to be true, then it is too good to be true. Use your spider senses and stay away.

The DOJ indictment is available here: Download Indictment (04051846x9EF3B)

January 19, 2022

Good Habits for Business Owners as We Begin 2022 “Avoid the IRS”

As a business advisor, tax attorney, and consultant that works with closely-held businesses, including doctors and dentists, as well as other high-income earning individuals, we are always thinking about the idea of continuous improvement. So, recognizing that it is the beginning of the year, and we are all trying to focus in on our habits, I thought a discussion about business practices and creating good habits would be a great discussion. Hopefully you do as well.

Background and Introduction

The idea here is: let’s focus in on the good habits that we can create over time, one step at a time, without setting ourselves up for failure, and without focusing on the bad habits that we have already established. So, here we go. As business owners we sometimes are overwhelmed by life and the busyness that surrounds us. And, when that happens, things around us fail to get done or are simply ignored. In fact, we may be really good at taking care of our customers, clients, or patients, but we fail to take care of our own “house.” One area where that occurs is on the tax side with individual business owners failing to pay their estimated taxes, other tax liabilities, or filing their tax returns. Have you ever received a letter like this from the IRS?

What is the Bad Habit?

If you have received one of these IRS notices, it is really important not to procrastinate and ignore it. In fact, before we can focus on establishing good habits, we need to address the current circumstances related to the IRS notice. That is the first step towards creating the good habit. Here are my thoughts:  

  1. First of all, and most importantly, we want to avoid any sort of criminal enforcement action by Criminal Investigation. Criminal Investigation refers to the Internal Revenue Service’s arm that investigates and prosecutes individuals and businesses for the failure to file and failure to pay their individual income tax liabilities. That should be goal number 1.
  1. Recognize and acknowledge that you need help and then reach out for that help.
  1. Identify and work with a well-qualified tax attorney that focuses their practice in the area of tax controversy. And, recognize that just because someone calls them self a tax attorney does not necessarily mean that they have the appropriate experience. Ask questions and make an informed decision as to that particular professional.
  1. Also, identify a well-qualified CPA and bookkeeper to assist with whatever task may be necessary for the preparation of and filing of the relevant delinquent tax returns.
  1. Then, work with that well-qualified tax attorney, CPA, and bookkeeper to get into compliance, both from a tax filing and tax payment perspective.
  1. Then, as a business owner, identify and put into place your best practices to minimize the disruption going forward and to ensure timely payment of all taxes and timely filing of all relevant tax returns, as discussed below—the good habit.

The Good Habit and Best Practices

For Attending to Our Tax Obligations

Those best practices for our closely-held business owners that operate their businesses are the following:

  1. First of all, determine what your strengths and weaknesses are, and surround yourself with folks that complement both your strengths and weaknesses.
    1. One of the areas that I have found very helpful in determining our strengths and weaknesses is the Working Genius by Patrick Lencioni. I would encourage you to take this assessment. Please see the website link, which I have listed at the bottom of this blog article.
  2. Second, form and establish a team of professionals that you work with both internally and externally. That team of professionals will vary depending upon your individual and business circumstances. But, it would generally include a financial advisor, CPA, business and tax attorney, and, potentially, a business consultant or coach.
  3. Third, meet with your CPA, financial advisor, or business consultant on a monthly basis to discuss your key performance indicators within your business and your overall financial circumstances, including your monthly business financials.
  4. Fourth, calculate and pay your estimated federal and state tax liabilities monthly.
    1. To be clear, do not meet on a quarterly basis; do it on a monthly basis. I know that you will hear from many advisors about meeting on a quarterly basis and paying your estimated tax payments on a quarterly basis. But, after working with business owners for over 22 years, I have found that cash flow is king. Cash flow is very important for those businesses, and the individual owners on the personal side. So, if we are managing and paying our estimates on a monthly basis, the cash flow is more consistent and we avoid surprises at the end of the year, or early next year.
    2. Do you know how many times I have heard a business owner say: I had no idea I was going to owe this much? My CPA never told me. Is it the CPA’s obligation to tell you, or your obligation to stay on top of your business and personal matters?
    3. Do not attempt to blame, justify, or make excuses for your actions or inactions. We avoid surprises by calculating those tax liabilities on a regular and continuous basis and paying those liabilities on a regular and continuous basis. Think monthly, not quarterly.
  5. Fifth, be self-aware and listen to your team and professional advisors.
    1. Listen does not mean follow. It simply means listen, consider all the facts and circumstances, and then make an informed decision from there.
    2. But, be willing to scrutinize yourself and truly be self-aware. The more humble you are and the more open you are, the better you will be, the better those around you will be, and the better your business will perform.
    3. And, as I like to say: The Path We Choose Will Determine Our Final Destination. So, take your time, listen, and respond accordingly.
  6. Finally, ask questions and be well-informed about your business, while delegating, not abdicating, to the appropriate team member or outside professional. And, recognize that simply because you delegated a certain task to another does not mean you do not have to oversee and ensure that the task gets done. It is your responsibility.

If you take these very simple but powerful steps, and consistently apply them going forward, not only will you never find yourself receiving that IRS notice again, you will find yourself with more time to focus on both your personal life and business matters. So, think about making changes and forming good habits, “Poco a Poco,” little by little.

If you have questions, feel free to contact me. You can find additional information on the home page of my personal website here.

See the Working Genius assessment here. I would encourage you to take the assessment. It is a good one.

July 06, 2021

Capital Gain Rates and Increase in Marginal Tax Rates Will Impact Our Doctors, Dentists, and Other Closely-Held Business Owners, if It Is up to Biden?

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As a business advisor and tax planning attorney that works with closely-held businesses, including doctors, dentists, and other high-income earning individuals, I am receiving many questions about Biden’s tax proposals, including capital gains rates. I wanted to provide you an update on those tax proposals. Overall, however, it is important to recognize that these are simply proposals. I certainly would not make a business decision or plan a purchase, sale, or restructuring of a business, solely based upon these proposals. Yes, we should consider them. But, they are not currently law. Please note, this summary is based mainly on the General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals issued by the Department of the Treasury—commonly referred to as the: Green Book. Also, it is not a summary of all proposed changes. Rather, I have listed those proposals that I believe are the most impactful on what you do. So, here you go.

28 Percent Corporate Tax Rate

    Current Law

Income of a business entity can be subject to federal income tax in a manner that varies depending upon the classification of the entity for federal income tax purposes. Most small businesses are owned by individuals and taxed as “pass-through” entities, meaning that their income is passed through to their owners who are taxed under the individual income tax system. Most large businesses, including substantially all publicly traded businesses, are classified as “C corporations” because these corporations are subject to the rules of subchapter C of chapter 1 of the Internal Revenue Code (Code) and pay an entity-level income tax.

Additionally, taxable shareholders of such corporations generally pay federal income tax on most distributions attributable to their ownership in the corporation. This is where the concept of double taxation comes into play. If you recall, the Tax Cuts and Jobs Act of 2017 replaced a graduated tax schedule—with most corporate income taxed at a marginal and average rate of 35 percent—with a flat tax of 21 percent applied to all C corporations.

    Proposal

The proposal would increase the income tax rate for C corporations from 21 percent to 28 percent. The proposal would be effective for taxable years beginning after December 31, 2021. For taxable years beginning after January 1, 2021, and before January 1, 2022, the tax rate would be equal to 21 percent plus 7 percent times the portion of the taxable year that occurs in 2022.

Increase the Top Marginal Tax Rate for Individual and Fiduciary Taxpayers

    Current Law 

For taxable years beginning after December 31, 2017, and before January 1, 2026, the top marginal tax rate for the individual income tax is 37 percent. For taxable years beginning after December 31, 2025, the top marginal tax rate for the individual income tax is 39.6 percent.

For 2021, the 37 percent marginal individual income tax rate applies to taxable income over $628,300 for married individuals filing a joint return and surviving spouses, $523,600 for unmarried individuals—other than surviving spouses—and head of household filers, and $314,150 for married individuals filing a separate return.

    Proposal

The proposal would increase the top marginal individual income tax rate to 39.6 percent. This rate would be applied to taxable income in excess of the 2017 top bracket threshold, adjusted for inflation. In taxable year 2022, the top marginal tax rate would apply to taxable income over $509,300 for married individuals filing a joint return, $452,700 for unmarried individuals—other than surviving spouses—$481,000 for head of household filers, and $254,650 for married individuals filing a separate return. After 2022, the thresholds would be indexed for inflation using the C-CPI-U, which is used for all current tax rate thresholds for the individual income tax.

The proposal would be effective for taxable years beginning after December 31, 2021.

Increase Tax Rate on Capital Gains

    Current Law

Most realized long-term capital gains and qualified dividends are taxed at graduated rates under the individual income tax, with 20 percent generally being the highest rate—23.8  percent including the net investment income tax, if applicable, based on the taxpayer’s modified adjusted gross income.

    Proposal

Tax capital income for high-income earners at ordinary rates. Long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income tax rates, with 37 percent generally being the highest rate—40.8 percent including the net investment income tax—but only to the extent that the taxpayer’s income exceeds $1 million—$500,000 for married filing separately—indexed for inflation after 2022.

This proposal would be effective for gains required to be recognized after the date of announcement. It appears that the "date of announcement" is April 28, 2021, the date that the Administration first detailed this proposal.

Accelerate Capital Gains on Gifts by Treating Transfers of Appreciated Property by Gift or on Death as Realization Events

    Current Law

Capital gains are taxable only upon realization, such as the sale or other disposition of an appreciated asset. When a donor gives an appreciated asset to a donee during the donor’s life, the donee’s basis in the asset is the basis of the donor; in effect, the basis is “carried over” from the donor to the donee. There is no realization of capital gain by the donor at the time of the gift, and there is no recognition of capital gain (or loss) by the donee until the donee later disposes of that asset. When an appreciated asset is held by a decedent at death, the basis of the asset for the decedent’s heir is adjusted (usually “stepped up”) to the fair market value of the asset at the date of the decedent’s death. As a result, the amount of appreciation accruing during the decedent’s life on assets that are still held by the decedent at death completely avoids federal income tax.

    Proposal

Treat transfers of appreciated property by gift or on death as realization events. Under the proposal, the donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer. For a donor, the amount of the gain realized would be the excess of the asset’s fair market value on the date of the gift over the donor’s basis in that asset. For a decedent, the amount of gain would be the excess of the asset’s fair market value on the decedent’s date of death over the decedent’s basis in that asset. That gain would be taxable income to the decedent on the Federal gift or estate tax return or on a separate capital gains return. The use of capital losses and carry-forwards from transfers at death would be allowed against capital gains income and up to $3,000 of ordinary income on the decedent’s final income tax return, and the tax imposed on gains deemed realized at death would be deductible on the estate tax return of the decedent’s estate—if any.

Importantly, the gain on unrealized appreciation also would be recognized by certain trusts, partnerships, or other non-corporate entities in limited circumstances. There are numerous changes in the law that would be required under this proposal, which would be incorporated by regulations issued by Treasury. There is a more detailed discussion of these anticipated changes in the Treasury’s Green Book.

The proposal would be effective for gains on property transferred by gift, and on property owned at death by decedents dying, after December 31, 2021, and on certain property owned by trusts, partnerships, and other non-corporate entities on January 1, 2022.

Rationalize Net Investment Income (NII) and Self-employment Contributions Act (SECA) Taxes

    Current Law

Individuals with incomes over a threshold amount are subject to a 3.8 percent tax on net investment income. The threshold is $200,000 for single and head of household returns and $250,000 for joint returns. Net investment income generally includes (i) interest, dividends, rents, annuities, and royalties, other than such income derived in the ordinary course of a trade or business; (ii) income derived from a trade or business in which the taxpayer does not materially participate; (iii) income from a business of trading in financial instruments or commodities; and (iv) net gain from the disposition of property other than property held in a trade or business in which the taxpayer materially participates. The net investment income tax (NIIT) does not apply to self-employment earnings.

Self-employment earnings and wages are subject to employment taxes under either the Self-Employment Contributions Act (SECA) or the Federal Insurance Contributions Act (FICA), respectively. Both SECA and FICA taxes apply at a rate of 12.4 percent for social security tax on employment earnings—capped at $142,800 in 2021—and at a rate of 2.9 percent for Medicare tax on all employment earnings—not subject to a cap. An additional 0.9 percent Medicare tax is imposed on self-employment earnings and wages of high-income taxpayers, above the same NIIT thresholds of $200,000 for single and head of household filers and $250,000 for joint filers.

General partners and sole proprietors pay SECA tax on the full amount of their net trade or business income, subject to certain exceptions. Section 1402(a)(13) of the Internal Revenue Code provides that limited partners are statutorily excluded from paying SECA tax with respect to their distributive shares of partnership income or loss, although they are subject to SECA tax on their section 707(c) guaranteed payments from the partnership that are for services they provide to, or on behalf of, the partnership. Because the statutory exclusion only refers to limited partners, questions have arisen as to the meaning of this term and whether the limited partner exclusion might be applicable to limited liability company (LLC) members. According to the Treasury, partners who might more accurately be considered general partners and some LLC members avoid SECA by claiming the treatment of limited partners.

S corporation shareholders are not subject to SECA tax. But, tax law requires that owner-employees pay themselves “reasonable compensation” for services provided, on which they pay FICA tax like any other employee. Nonwage distributions to shareholders of S corporations are not subject to either FICA or SECA taxes.

    Proposal

The proposal would (i) ensure that all pass-through business income of high-income taxpayers are subject to either the NIIT or SECA tax; (ii) make the application of SECA to partnership and LLC income more consistent for high-income taxpayers, and (iii) apply SECA to the ordinary business income of high-income non-passive S corporation owners.

First, the proposal would ensure that all trade or business income of high-income taxpayers is subject to the 3.8-percent Medicare tax, either through the NIIT or SECA tax. In particular, for taxpayers with adjusted gross income in excess of $400,000, the definition of net investment tax would be amended to include gross income and gain from any trade or business that is not otherwise subject to employment taxes.

Second, limited partners and LLC members who provide services and materially participate in their partnerships and LLCs would be subject to SECA tax on their distributive shares of partnership or LLC income to the extent that this income exceeds certain threshold amounts. The exemptions from SECA tax provided under current law for certain types of partnership income—e.g., rents, dividends, capital gains, and certain retired partner income—would continue to apply to these types of income.

Third, S corporation owners who materially participate in the trade or business would be subject to SECA taxes on their distributive shares of the business’s income to the extent that this income exceeds certain threshold amounts. The exemptions from SECA tax provided under current law for certain types of S corporation income—e.g., rents, dividends, and capital gains—would continue to apply to these types of income.

There is a more detailed discussion of this proposal in the Treasury Green Book, including how to determine the amount of partnership income and S corporation income that would be subject to SECA tax under the proposal.

The proposal would be effective for taxable years beginning after December 31, 2021.

Repeal Deferral of Gain From Like-Kind Exchanges

    Current Law

Currently, owners of appreciated real property used in a trade or business or held for investment can defer gain on the exchange of the property for real property of a “like-kind.” As a result, the tax on the gain is deferred until a later recognition event, provided that certain requirements are met.

    Proposal

The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer—$1 million in the case of married individuals filing a joint return—each year for real property exchanges that are like-kind. Any gains from like-kind exchanges in excess of $500,000—or $1 million in the case of married individuals filing a joint return—during a taxable year would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange.

The proposal would be effective for exchanges completed in taxable years beginning after December 31, 2021.

Permanently Extend Excess Business Loss Limitation of Non-Corporate Taxpayers

    Current Law

Section 461(l) of the Internal Revenue Code limits the extent to which pass-through business losses may be used to offset other income. In particular, for taxable years beginning after December 31, 2020, and before January 1, 2027, non-corporate taxpayers may not deduct an “excess business loss” from taxable income. Instead, these losses are carried forward to subsequent taxable years as net operating losses.

Excess business loss is defined as the excess of losses from business activities over the sum of (a) gains from business activities, and (b) a specified threshold amount. In 2021, these thresholds are $524,000 for married couples filing jointly and $262,000 for all other taxpayers; these amounts are indexed for inflation thereafter. The determination of excess business loss is made at the taxpayer level, aggregating across all business activities. But, gains or losses attributable to any trade or business of performing services as an employee are not considered.

    Proposal

The proposal would make permanent the section 461(l) excess business loss limitation on non-corporate taxpayers.

The proposal would be effective for taxable years beginning after December 31, 2026.

Conclusion

So, what do we do with this? You consider it, but that is it. Recognize that many things will change between now and what the actual tax law change may look like. Do not delay or accelerate a sale or purchase simply because the law may change. It is something to consider. But, there are likely many other business issues and terms that we need to consider as well.

Have a great day!

May 19, 2021

Why Do Problems Arise? Ethical Problems in the Practice of Tax

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I recently had the pleasure of writing an article for the CPA Voice community. CPA Voice is a bimonthly magazine that gives members of The Ohio Society of CPAs (OSCPA) relevant information on trends in the tax profession. It is a great publication. My article covers why ethical problems arise in the practice of tax. When I was considering the topic, and the writing, I identified that there are really three reasons, and each are addressed in my article, Why did a problem arise, even though I thought I was doing everything right?

I want to thank The Ohio Society of CPAs for allowing me to write for CPA Voice and allowing me to post the article on social media. The article is an outline and summary of my annual discussion on ethics ahead of the MEGA Tax Virtual Conference, which will be held this year on December 14th and 15th 2021. I speak pretty regularly at the Ohio Society of CPA’s MEGA Tax Conference on ethics in taxation and a variety of other topics. OSCPA always does a great job on the content, and I am happy to be a part of it.  

To read my full ethics article, download the May/June 2021 issue of CPA Voice, or access the article directly here. And, be sure to catch me talk about ethics in tax practice in more detail at the MEGA Tax Virtual Conference in December.

January 28, 2021

IRS Provides Additional Guidance on Employee Retention Credit

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As a business and tax attorney that routinely works with individuals and owners of closely-held businesses, we try to continuously stay on top of current trends and events, including those coming from the IRS. On January 26, 2021, the IRS issued some additional and welcomed guidance on tax law changes made on December 27, 2020, and specifically related to the newly-extended employee retention credit. I wanted to address this because it does impact many of the clients that I work with.

In the recent guidance, the IRS urged employers to take advantage of the employee retention credit, designed to make it easier for businesses that, despite challenges posed by COVID-19, choose to keep their employees on the payroll. We encourage everyone to review it and consider whether or not it may impact their business going forward.

Please see the discussion below:

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made a number of changes to the employee retention tax credits previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including modifying and extending the Employee Retention Credit (ERC), for six months through June 30, 2021. Several of the changes apply only to 2021, while others apply to both 2020 and 2021.

As a result of the new legislation, eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.

Employers can access the ERC for the 1st and 2nd quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit—subject to certain limits—on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available for employers larger than this.

Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either:

  1. A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
  1. A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020, the gross receipts were required to be less than 50%).

Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts. In addition, for the first and second calendar quarters in 2021, employers may elect in a manner provided in future IRS guidance to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.

In addition, effective January 1, 2021, the definition of qualified wages was changed to provide:

  • For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts. 
  • For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services. 

Retroactive to the March 27, 2020, enactment of the CARES Act, the law now allows employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.

If you have questions, feel free to contact me. You can find additional information on the home page of my personal website here.

December 17, 2020

Vince Nardone Discusses Ethics in Tax Practice at The Ohio Society of CPAs MEGA Tax Conference

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On Tuesday, December 15, 2020, Vince Nardone discussed ethics in Ohio tax practice at The Ohio Society of CPAs MEGA Tax Conference.

During his session, “Ethics in Tax Practice: Ohio,” Vince tackled the numerous considerations for having an ethics discussion as a CPA, the importance of understanding your client and understanding yourself, as well as state regulations, and best practices and pitfalls.

The Ohio Society of CPAs is the #1 provider of CPE for Ohio CPAs year after year, and the MEGA Tax Conference is always an excellent opportunity for CPAs to learn about the latest advancements on a variety of essential topics in the industry. Despite this year’s virtual circumstances, the conference was a success. We want to thank Tiffany Crosby and the rest of the team at The Ohio Society of CPAs for inviting us to participate.

November 20, 2020

IRS Rules on Deductibility of Qualifying Expenses Related to the Paycheck Protection Program (PPP)

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Everyone, I just worked with one of our associates in my firm to issue a client alert on our firms’ website. The IRS recently ruled that if a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. I would encourage you to read the more detailed client alert, which you can access here.

October 30, 2020

IRS Voluntary Disclosure Program; Alive and Well, or Dormant?

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As a business and tax attorney that routinely works with individuals and owners of closely-held businesses on IRS tax delinquencies, we try to continuously stay on top of current trends and events. As many of us have experienced since the impact of COVID-19, the IRS has basically come to a screeching halt in terms of customer service and enforcement. From my perspective, however, there is no better time than the present in terms of pursuing and submitting a voluntary disclosure. Thus, we thought it would be helpful to provide an update as to the voluntary disclosure process.

Background

On November 20, 2018, the IRS released a memorandum to taxpayers, detailing the new process for voluntarily disclosing violations due to willful behavior. The new program titled the "Updated Voluntary Disclosure Practice" ("UVDP"), applies to both domestic and offshore matters, whereas the OVDP only applied to undisclosed offshore accounts. The purpose of the UVDP is to provide taxpayers—who are concerned that their conduct is willful or fraudulent—a way to come into compliance with the law and avoid potential criminal prosecution. The IRS set out the following procedures regarding the UVDP. I provided a detailed summary of that November 20, 2018 memorandum in a prior blog dated April 23, 2019.  

Update and Process

Since that April 23, 2019 blog, however, the IRS has been slow in terms of processing voluntary disclosure applications under the November 20, 2018 memorandum procedures. To be clear, the slow response is not related to the lack of the IRS personnel’s willingness to process the applications—I do not believe. Rather, it is the lack of resources, and now with COVID-19 in play, it is the lack of resources and the lack of personnel actually working in the various offices to process the applications. Overall, this is a difficult time. But, difficult times also provide us with opportunities. And, in this instance, if you are a taxpayer that has been in the dark for some time, and have either not filed tax returns, not reported income, or otherwise filed false returns in the past, the lack of the IRS enforcement activities provides you with an opportunity to come out of the cold, and get into compliance.

Now, if we look back at a number of our current voluntary disclosures that have been submitted, we can see that it is really taking upwards of six months for us to receive an initial response. The Voluntary Disclosure Practice Preclearance Request and Application consists of two parts. In Part I, the “Preclearance Request,” the taxpayer provides more general information in regards to their noncompliance. Part I does not specifically ask for any account valuations, nor does it ask for any specific detail in regards to the taxpayer’s noncompliance. This is the initial response I am referring to above. In Part II, the “Voluntary Disclosure,” the taxpayer goes into detail, fully disclosing their financial accounts, including offshore accounts. The taxpayer is also required to provide a full narrative, detailing the circumstances and motive behind their noncompliance.

Filing a Preclearance Request and a Voluntary Disclosure does not prevent the IRS from pursuing a criminal investigation, and it does not prevent the IRS from pursuing criminal charges related to a taxpayer’s noncompliance. But, to the extent a taxpayer meets the minimum qualifications of the voluntary disclosure program, it would be a rare instance where the IRS chose to pursue criminal charges against a taxpayer that has voluntarily and timely stepped forward. That is, rather than incurring the cost to investigate, prosecute, and collect from a non-compliant taxpayer, the Service would rather encourage the noncompliant taxpayer to step forward and pay their previously unreported tax liability. As such, the Voluntary Disclosure process can serve as an effective means to shield the taxpayer from potential prosecution. To do so, however, the taxpayer must be completely open and upfront in regards to their noncompliance. The taxpayer should strive to provide the most accurate information they can provide, and should provide as complete a picture as they can to the IRS.

Conclusion

 In sum, when we are working with our individual and our closely-held business clients, no matter the specific project, we always focus on the concept and idea of: minimizing disruption to maximize profit. In the context of a voluntary disclosure, we minimize disruption by timely submitting a voluntary disclosure, fully disclosing, and fully cooperating with the IRS. There is no better time than the present to do so. If you have questions, you can contact me at vnardone@walterhav.com. And, you can find additional information on the home page of my personal website here.

September 20, 2022

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January 19, 2022

July 06, 2021

May 19, 2021

January 28, 2021

December 17, 2020

November 20, 2020

October 30, 2020

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