Dreher Martin CPA

New 2024 Reporting Requirement

Wed, 28 Feb 2024 17:44:00 GMT

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Business Meals

Wed, 13 Sep 2023 14:30:00 GMT

Business Meals: 2023 Update

During 2021 and 2022, we encouraged business owners to take advantage of business meals as they were 100% deductible. In 2023, this expense reverts back to the 50% limit. There are some exceptions to the 50% rule where the full meal can be expensed such as dinner for employees working late at the office, food for at least half of your employees, or food for company holiday parties.

For meals to be deductible they should be necessary and related to the business. They should not be “lavish” or “extravagant”. The taxpayer or the employee should be present where the food and beverage is being furnished and is provided for their use.

Though the IRS does not require receipts for meals totaling less than $75, we highly recommend keeping all receipts to support the expense. If receipts are not kept for meals less than $75, it is worth noting the following: Total price of the meal, date of the meal, who attended, name of the restaurant, and how it related to the business. If entertainment is included in the bill, you will want to track this separately as entertainment is mostly nondeductible. Exceptions for deductible entertainment include company holiday parties or business conferences.

Understanding and staying updated on the rules of expenses can help you make the right decision for your business in 2023!

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Inflation Reduction Act of 2022

Tue, 16 Aug 2022 14:20:00 GMT

The Inflation Reduction Act of 2022 (IRA) passed in both the Senate (August 7, 2022) and the House (August 12, 2022). IRA is a much scaled-back version of President Biden’s Build Back Better Plan (BBB), blocked by Senators Joe Manchin, Krysten Sinema, and all 50 Republican Senators.

Many of the BBB Plan’s tax provisions that our clients feared were removed from the IRA. Items removed include an increase in capital gains tax rates, increased corporate income taxes, millionaires excise tax, and other targeted tax increases for those making over $400,000.

The tax changes in the IRA probably will not impact most taxpayers reading this letter. Those include:

The most notable changes for our clients will be the increase in the cap for residential energy credits to $1,200 per year from a lifetime cap of $500. Also, the $7,500 clean vehicle credit has changed with the removal of the limitation on the number of vehicles produced for a vehicle to be eligible for the credit (think Tesla). In addition, a new $4,000 credit is available to purchase a used clean vehicle.

While it appears that we have escaped many of the tax increases that we had feared, $80 billion of the proposed bill will go to the IRS, which includes $46 billion going specifically for more enforcement agents. Treasury Secretary Janet Yellen has sent a letter instructing the IRS not to increase audits on small businesses and households earning less than $400,000. Time will tell.

The good news is maybe the IRS will start answering their phones and process the 21.3 million unprocessed paper tax returns so that we can assist our clients.

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Single Member LLCs and the Pass-Through Entity Tax Election

Wed, 27 Jul 2022 14:38:00 GMT

This article is a follow-up to our article regarding the Pass-Through Entity Election located here /2022/06/north-carolinas-new-pass-through-entity-tax-election/ .

Suppose you have a profitable single-member LLC (SMLLC) reported directly on your personal income tax return. In that case, it may be advantageous for tax purposes to convert it to a partnership or an S-Corporation. By doing so, you now would have a separate entity that would have the ability to make the PTET election, potentially saving federal income taxes on the North Carolina income taxes paid by the entity. As discussed in the previous article, state and local income taxes (SALT) are capped t $10,000 at the individual level.

For SMLLCs holding real estate, a partnership would probably be the best structure and simply adding a spouse as a member would be the easiest way to accomplish this.

For SMLLCs that are operating companies making a subchapter S election would accomplish this. In addition, there are other potential tax savings in converting an operating company to an S-Corporation. These include potentially reduced self-employment taxes and the 20% qualified business income deduction maximization.

In addition to the tax savings, there would be additional administrative costs with filing a separate tax return for the new entity.

There are many moving pieces to making this decision. Our Dreher Martin team can evaluate your situation and recommend whether the tax savings warrant the additional cost. If you have any questions, contact one of our team members.

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North Carolinas New Pass-Through Entity Tax Election

Thu, 09 Jun 2022 13:43:00 GMT

On November 18, 2021 North Carolina governor Signed Senate bill 105 which includes a new elective Pass–Through Entity Tax (“PTET”). This law, first effective in 2022, has the potential to save federal income taxes by making NC income taxes on pass-through entities (“PTEs”) income deductible when they may have not been in the past. This is a so called state and local income tax (“SALT”) Cap workaround. Eligible PTEs defined as S-Corporations, and certain Partnerships may make this election. Partnerships excluded from making this election are those with partners that are corporations, other partnerships, and certain trusts.

How It Works

Currently, state and local income taxes paid are capped at $10,000 on schedule A of form 1040. These taxes include real estate, personal property (ad volorem), and state & local income taxes. Many high-income taxpayers and those with large real estate tax bills are capped at $10,000 on their personal income tax return. So for those eligible PTEs that make this election, the NC tax would be paid at the entity level and deducted from the PTE’s income that is reported to the shareholders or partners on their K1s.

Example

NC S-Corporation with one shareholder and $500,000 of income: The shareholder is in the maximum federal income tax bracket of 37%. The S-Corporation makes the PTET election and pays the NC tax at the entity level of $24,950 (4.99% in 2022). We will assume the shareholder has in excess of $10,000 in SALT on their personal tax return due to real estate taxes and state withholding on wages. The NC Tax paid by the PTE of $24,950 now becomes deductible on the S-Corporation tax return, and the federal tax savings are $9,231 at the 37% federal tax rate. Normally, this $24,950 would not be deductible as the shareholder had already reached the SALT Cap on their personal tax return.

Important Takeaways

IRS Notice 2020-75, clarifying the deductibility of SALT payments at the entity level, states that the PTET must be “paid” during the taxable year to be deductible. Thus, estimated tax payments should be made by the electing PTE in 2022 to ensure their deductibility. Additionally, if the shareholder or partner would normally make NC estimated tax payments personally, they may need to be re-evaluated and adjusted or discontinued to avoid overpaying NC.

Our team at Dreher Martin CPAs will continue to review the guidance from NC as it is released and will post updates as they become available. If you have any questions in the interim, please reach out to one of our team members.

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Will the State and Local Tax (SALT) Deduction Cap be repealed?

Thu, 26 Aug 2021 22:29:00 GMT

In 2017, the Tax Cuts and Jobs Act went into effect, limiting the SALT deduction to $10,000 and doubled the standard deduction amount. This action was thought to be punitive to high tax Northeastern states and California, predominantly controlled by democrats.

Recently, the U.S. Senate and House passed a $3.5 trillion FY2022 Budget Resolution Framework. The Framework, which is only nine pages, will be used as a template to write the budget legislation that will become 1000’s of pages of text. On page three of this document, it has the words “SALT cap relief.” What does this mean?

If you count the Vice President’s tiebreaker vote, the democratically controlled House and Senate would like to do away with the SALT Cap and/or increase it substantially. If it becomes law, this change would probably not become effective until 2022.

You may want to take action now to address this opportunity. There are several things you could do to take advantage of the upcoming changes. For instance, you could choose to not pay 3 ^rd and 4 ^th quarter state estimated tax payments until 2022. Postponing payments could enable you to reduce your 2022 federal income tax while not affecting 2021 taxes because of the SALT Cap limitation. However, there is a possible cost of an underpayment of estimated tax penalty at the state level. Additionally, you could possibly delay paying your property taxes until 2022 might also be an effective strategy.

There are important questions to answer to plan properly:

While there is no guarantee that the legislation will become law, deferring state tax payments to 2022 may be a viable tax savings strategy without increasing 2021 taxes.

Planning will be key to ensure if this will work with your individual situation.

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New Lease Standard – Now is the Time to Prepare!

Tue, 27 Jul 2021 16:17:00 GMT

On February 25, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The new lease standard will take effect for fiscal years beginning after December 15, 2021. Early application is permitted. Below is a brief outline of the standard.

ASC 842 and ASC 840

The new lease accounting standards are significantly changing the accounting for operating leases. Under ASC 842, both operating and financing leases must be recorded on an entity’s balance sheet (previously, only capital, financing, leases were recorded).

Under the old standard, ASC 840, operating leases were considered an off-balance sheet transaction, and the associated expense was recognized in the income statement; there was no balance sheet impact. The absence of operating leases on the balance sheet made it difficult to understand the volume of a company’s commitments. Further, it made comparisons between companies difficult, depending on if they had different approaches to leased vs. capital assets.

In an effort to increase transparency, the FASB issued ASC 842, Leases. One of the provisions of this new standard is that all leases must be recognized on a company’s balance sheet. In addition, for operating leases, ASC 842 requires recognition of a right of use (ROU) asset and a corresponding lease liability upon lease commencement.

Note: An entity can make an accounting policy election to treat operating leases with a 12-month lease term consistent with the ASC840 recognition approach (no capitalization of the lease asset and no liability on the balance sheet). However, that election can only be made at the transition or commencement of the lease, and the lease does not have a purchase option that is reasonably certain of exercise.

Further, while ASC 842 does not have an exclusion for low-value assets, some companies choose to establish a capitalization threshold. Similar to a capitalization threshold for fixed assets, the company has determined that leases below this value are not material to the company and are not recognized.

Disclosure Requirements: Quantitative and Qualitative

The new standard requires expanded quantitative and qualitative disclosures by both lessees and lessors. Quantitative disclosures include:

Summing It All Up

The final standard can be summarized as moving operating lease obligations from the footnotes to the balance sheet. Bringing operating leases onto the entity’s balance sheet could make a significant difference in the numbers a company is reporting.

Now is the time to review all your lease agreements in effect at the transition date (January 1, 2022, for calendar year companies).

Please contact us with any questions or to schedule a time to discuss implementation. We can also provide you with the AICPA’s lease classification tool.

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The New 1099-NEC and 1099-MISC: What Every Organization Needs to Know

Thu, 10 Dec 2020 17:15:00 GMT

In the continually changing landscape of 2020, we can add a new form for 1099 Reporting. All payments for Contract Labor previously reported in Box 7 of the 1099-MISC will now be reported on the new 1099-NEC.

1099-NEC: A New Form for Independent Contractor Reporting

The 1099-NEC is designed for contract labor or nonemployee compensation. The amount that was paid during 2020 will be reported in box 1. Boxes 2 and 3 are currently not for use and are on the form for future IRS purposes.

1099-MISC: Same Form New Way of Using

As a reminder, 1099s are issued by a business (non-profit, estate, or trust) when payments were made of $600 or more for rent, medical payments, contract labor, and payments to an attorney. Also, 1099s are required for payments of $10 or more in the case of Royalties.

Payments made to an individual or partnership require a 1099, but payments to a Corporation generally do not require a 1099. If payments were made to an LLC, the W-9 must indicate if the entity was taxed as an individual/single-person LLC, as a C corporation, S-corporation, or partnership to determine if a 1099 is required. The W-9 is designed to protect the payor, and it is ultimately the contractor’s responsibility. While there is no IRS guidance on how often a business should update the W-9 for each vendor, it is a good practice to have a policy in place that obtains new ones at least annually. You can verify an EIN with the IRS e-services by going to https:/www.irs.gov/tax-professionals/taxpayer-identification-number-tin-matching.

1099-MISC Use Changes

So we know who gets a 1099-MISC, now we need to know about the changes in how the form is used.

Attorney Fees on 1099-MISC and 1099-NEC

Your payments to your attorney for services, the type of service, and contract terms, will determine if you use the 1099-MISC, the 1099-NEC, or both forms. Under the previous use of the 1099-MISC, ‘Gross Payments paid to an Attorney’ would have included all payments to an attorney in Box 14. The new form reports these payments now in Box 10 on the 1099-MISC. Take special note of the following change. If the Attorney fees are for legal work and are treated as a contract labor payment, these are reported in Box 1 of the new 1099-NEC. If the monies paid to attorneys were part of a legal settlement, they are reported in Box 10 of the 1099-MISC.

Reminders and Tips for Preparing 1099s

Here are a few helpful tips when preparing to file your 1099s.

Keep in mind that there are penalties for not reporting timely and/or not reporting at all. The penalties begin at $50 per form and increase to $550 per form depending upon the timeliness and “intentionally disregarding” the filing rules. In this way, the IRS encourages accurate and timely reporting.

Best of luck to you as you navigate the tax season ahead.

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Beer and Taxes: An Industry Perspective

Tue, 03 Nov 2020 17:46:00 GMT

When I think of my favorite brewery, it is an image of laughter with friends, a relaxed atmosphere, and a great IPA. Unfortunately, the picture gets destroyed when I look at the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) website (www.ttb.gov/beer). It is not a laughing matter, but it doesn’t have to ruin the party with proper preparation and planning.

As an auditor, I do not want to talk about compliance. I want to enjoy my beer! But even my favorite IPA can’t always turn off my mind when it comes to my favorite brewery. With every business, there are laws and regulations, and that means compliance on some level.

For breweries, the TTB has a section of their website titled, “Common Compliance and Tax Issues Found During Brewery Audit.” It is always helpful to learn from others’ mistakes and not be the example on the website. These common issues cover the categories of records, production, and inventory, taxes, and reporting.

Compliance success insights include:

It is crucial to have a knowledgeable and qualified advisor work with you to ensure your business processes and systems support compliance.

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Audits Ahead! Prepare Now for your Calendar Year 2020 Audits

Tue, 03 Nov 2020 17:44:00 GMT

If 2020 hasn’t been challenging enough, the cherry on top of this year – your annual audit!

Since 2020 has been like no other, why should your audit be any different? If you participated in a COVID relief program, your audit will be impacted.

This fact is not intended to scare you, but to prepare you to address some items now. It is better to be ready, so you want to think about these items before the end of the year.

For many, 2020 has been a blur. In our organizations, we may feel like we were adjusting to change every minute and making decisions to survive with documentation of new processes and procedures being the last thing on our mind. We can’t delay dealing with the documentation of our new ways of doing business.

Now is the time to pull out your internal control documentation and think about what you changed. Think also about the impact the changes had on your internal control structure. Ask yourself and your team these questions:

Steps to take now:

1. Take the time to reflect on the changes that you made.

2. Ask your team to identify the changes they made or were asked to make.

3. Identify the impact of each change.

4. Prepare your documentation and responses for your audit.

5. Schedule time for a pre-audit discussion with your auditor.

Now is the time to prepare your organization for the audit and for the calendar year 2021.

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Tax Planning: What should business owners be thinking about right now?

Tue, 03 Nov 2020 17:41:00 GMT

As we head into the end of the year, specific questions need to be asked to ensure that you are prepared for 2020 taxes.

For business owners, now is the time to ask the following:

Is my accounting up to date, and are all my accounts reconciled?

How do my current year financials compare to last year?

Have I contacted my CPA to discuss planning?

Are the estimated payments that I made sufficient for this year?

Have there been any significant transactions that I need to talk to my CPA about?

Do I understand the tax implications of the PPP loan that will hopefully get forgiven?

Again, have I contacted my CPA to discuss planning?

Do I have the W-9s for all the vendors that are required to get 1099’s in January?

The only way to avoid surprises at tax time is to have:

Tax miracles don’t happen in February for transactions with a tax impact. Tax planning is needed in 2020 to minimize your taxes and maximize your business results.

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Change Management Experts

Tue, 03 Nov 2020 17:38:00 GMT

After 2020, no one gets to claim that they cannot change. Being forced to change is a very revealing process that allows you to see how scrappy you are.

COVID revealed that there are times that there is no debating whether you want to change, and it doesn’t matter if you like it. You have to figure out how you are going to respond. I was impressed by the creativity of some businesses to change their business model to continue to operate.

COVID and the related changes have been painful. Unfortunately, we will continue to deal with change, and it will likely be painful. But it also provides an opportunity to assess decisions that have been made about technology, business strategy, and continuity planning. Do not let this reflection time pass by without documenting the things you had to change and the benefits and the struggles that came with implementation. It is also time to assess if other processes and procedures you did not change could be improved. Going through “what-if” scenarios with your management team, board, or yourself, can help you determine where the risk may still exist in your business. All risk will never be eliminated, but you will have a new awareness and ability to respond.

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Loan or Income: How should my PPP loan be classified?

Tue, 03 Nov 2020 17:37:00 GMT

For your business, is the PPP program a loan or income? As 2020 is coming to a close, organizations are starting the PPP loan forgiveness process. You can check all the boxes that indicate you have fully complied with the regulations. You can produce all the documentation to support the forgiveness application. But you can’t control the timing of the loan forgiveness process. So, if your loan isn’t forgiven by year-end 2020, is it a loan or income?

The AICPA addressed this question in its Technical Questions and Answers Section 3200: Long-Term Debt. The question is – if you have satisfied all the requirements and it will ultimately be forgiven, should it be recorded on your balance sheet as a loan?

Based on the AICPA guidance, you might conclude that it is in substance a government grant that is conditional based on the requirements being met and once those requirements have been met, recognize it as revenue. How do you know if your business should record the PPP funds as income? I recommend you review the guidance in FASB ASC 958-605 and read the AICPA’s Technical Q&A and talk with your CPA to determine how your organization should record the funds.

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