Category: Article

Confusion over employee retention credit rules resulted in a wave of claims filed by ineligible businesses, and now the IRS has launched a program to help those businesses pay back ERC money without harsh penalties and fines.

The IRS said that the new program is open to employers who meet multiple requirements:

• The business received the ERC for a tax period in which it was not actually qualified
• The employer is not under criminal investigation, either current or pending
• The employer is not under an IRS employment tax examination for the same tax period involving the mistaken ERC claim
• The employer did not receive an ERC disallowance letter mailed by the IRS in December 2023

The special disclosure program allows for the repayment of 80% of the claim received by the business. Installment payment plans are available but are subject to additional penalties and interest.

To apply, an employer must file Form 15434 with the IRS document upload tool. The employer also must provide the names and contact information of any tax advisors or preparers who assisted with the ineligible claim.

The deadline to apply is March 22, 2024.

Click here for additional information on the program and eligibility on the IRS website.

© 2024 KraftCPAs PLLC

If you’re interested in selling commercial or investment real estate that has appreciated significantly, one way to defer a tax bill on the gain is with a Section 1031 “like-kind” exchange. With this transaction, you exchange the property rather than sell it. Although the real estate market has been tough recently in some locations, there are still opportunities (with high resulting tax bills) when the like-kind exchange strategy may be attractive.

A like-kind exchange is any exchange of real property held for investment or for productive use in your trade or business (relinquished property) for like-kind investment, trade or business real property (replacement property).

For these purposes, like-kind is broadly defined, and most real property is like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale.

Asset-for-asset or boot

Under the Tax Cuts and Jobs Act, tax-deferred Section 1031 treatment is no longer allowed for exchanges of personal property — such as equipment and certain personal property building components — that are completed after December 31, 2017.

If you’re unsure if the property involved in your exchange is eligible for like-kind treatment, contact us to discuss the specifics.

Assuming the exchange qualifies, and it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still must report it on Form 8824, “Like-Kind Exchanges.”

However, in many cases, the properties aren’t equal in value, so some cash or other property is added to the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property reduced by the amount of boot you received but increased by the amount of any gain recognized.

How it works

For example, let’s say you exchange business property with a basis of $100,000 for a building valued at $120,000, plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain. That’s the amount of cash (boot) you received. Your basis in the new building (the replacement property) will be $100,000: your original basis in the relinquished property ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.

Note that no matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.

If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The reason is that if someone takes over your debt, it’s equivalent to the person giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).

Unload one property and replace it with another

Like-kind exchanges can be a great tax-deferred way to dispose of investment, trade, or business property. But be sure to meet all the requirements to enjoy the benefits.

© 2024 KraftCPAs PLLC

QuickBooks Online was built for small businesses, so you don’t have to be an expert in accounting or technology. It simplifies the complex process of double-entry accounting, using understandable language and a simple, easy-to-navigate user interface. It does all the required bookkeeping in the background, so you can focus on getting your work done and building your business.

Once you’ve learned the basics of navigation and financial data entry in QuickBooks Online, you may keep doing things the way you learned to do them. But the site can do more, in small ways. Consider incorporating these tips into your daily accounting work, and you’ll benefit from the time saved and the additional convenience.

1. Edit lines in your transactions

QuickBooks Online allows you to edit lines in transactions so you don’t have to delete them and start over. You can:

• Delete lines. Click the trash can icon at the end of a line.
• Reorder lines. Click the icon to the left of the line number and drag it to the desired position when you see the green arrow in the upper left. This is tricky. You may have to try a few times.
• Add lines and Clear all lines. Click the buttons below the line item table.

2. Find recent transactions faster

If you want to work with a transaction you’ve recently had open, you don’t have to search for it. Click the clock icon in the upper left corner of an invoice, for example, and a list of Recent Invoices will drop down. Click to open one.

QuickBooks Online no longer opens invoice forms when you click on them in the main invoice list (Sales | Invoices). A panel slides out from the right displaying the transaction’s details, including an activity timeline. Click More actions to see your options there. Edit invoice opens the original form.

3. Open a new tab

Sometimes you want to see two QuickBooks Online screens simultaneously. Right-click on a navigation link, like Expenses | Vendors. Click Open link in new tab. A new tab will open in Windows displaying the content from the link you just clicked.

4. Use the More menu

If you haven’t explored the action links at the very bottom of transactions, you should. This is where you find Print or Preview, Make recurring, and Customize. Click More, and you’ll be able to Copy, Void, or Delete the transaction. You can also see the Transaction journal and Audit history.

5. Use keyboard shortcuts

Keyboard shortcuts are available in QuickBooks Online. It takes a little time to learn them, but they’re intuitive and can save you time. For example, Ctrl+Alt+I opens a blank invoice form, and Ctrl+Alt+x displays a blank expense form. Ctrl+Alt+? opens a comprehensive list and shows your Company ID.

6. Add attachments to transactions

If you have original documentation for transactions like expenses and bills, it can be a good idea to have a scanned copy attached to the original transaction– especially if it’s something you’ll be claiming on your income tax return. You can do this easily in QuickBooks Online. Click the link at the bottom of the transaction form and find the document in your computer’s directory. The attachment will remain linked to the original transaction. You can view all your attachments by clicking the gear icon in the upper right and selecting Attachments under Lists.

If you’re using the mobile version of QuickBooks Online, you can also snap photos of receipts and have them converted to expense forms.

7. Freshen up your sales forms

It’s easy to make basic modifications to your sales forms in QuickBooks Online.  Give yourself more flexibility and present a better look for your customers. Click the gear icon in the upper right and select Your Company | Account and settings. Click the Sales tab to see your options there. You can even add custom fields by clicking the link on that page or by going to Lists | Custom fields.

© 2024 KraftCPAs PLLC

Residents and business owners in several Tennessee counties now qualify for tax relief from the IRS because of severe storms and tornadoes that struck on December 9.

Based on federal disaster area declarations by FEMA, the counties of Davidson, Dickson, Montgomery, and Sumner qualify for the IRS exemption. It provides individuals who reside or own a business in those counties a later deadline of June 17, 2024, to file returns or make payments that were due sooner.

For example, individual income tax returns and payments normally due April 15, 2024, will now be due June 17. The later deadline also applies to quarterly payroll, excise tax, partnership, S corporation, and fiduciary returns that were due between December 9 and June 17.

The new IRS provisions are applied automatically to taxpayers whose IRS address is located in one of the disaster area counties, so taxpayers are not required to request the additional time.

Visit the IRS disaster relief page for detailed information on the exemptions available, or contact a KraftCPAs advisor to find out how these changes might affect you.

© 2023 KraftCPAs PLLC

If your business completes minor repairs by December 31, you can deduct those costs on your 2023 tax return. But is that work a repair or an improvement? Know the difference, because it can matter when it comes time to file.

Safe harbors

Unlike repairs, improvements are capital expenditures that must be written off over time. Fixing a broken windowpane is clearly a repair. Adding an indoor parking facility is obviously an improvement. But many expenses fall in between those two examples. Fortunately, IRS tangible property regulations offer more clarity.

Notably, the final regulations provide a safe-harbor rule under which you can currently deduct for federal tax purposes amounts paid for tangible property if you deduct those amounts for financial accounting purposes or in keeping your books and records. However, a dollar limit applies with one of these two options:

• $5,000 if you have an “applicable financial statement,” generally meaning one that’s audited by a CPA
• $2,500 if you don’t have an applicable financial statement

Additional rules apply that may limit or eliminate your current deduction for a particular expense.

There’s also a small businesses safe harbor that allows businesses with $10 million or less in average gross receipts to currently deduct improvements to a building with an unadjusted basis of $1 million or less. However, the total amount paid for repairs, maintenance, and improvements to the building can’t exceed the lesser of $10,000 or 2% of the unadjusted basis.

Further IRS guidance

Routine maintenance costs generally are deductible in the year in which they’re incurred. An activity is “routine” if the business reasonably expects to perform it more than once during the property’s useful life (more than once over a 10-year period for buildings). A business may capitalize these costs if this is consistent with its financial statements.

In addition, the traditional rule that improvements are capitalized and depreciated over time remains in place. But the regulations authorize a business to deduct some improvements (for example, an HVAC unit) if they are properly segregated.

A potential tax trap

If your business makes repairs and improvements at the same time, be aware that the IRS may lump the costs together as a general plan of betterment, causing you to forfeit a current deduction for repairs. All else being equal, arrange repair work separately at another time — preferably before the end of the year to reduce next year’s tax liability.

© 2023 KraftCPAs PLLC

If you’re a business owner, you probably already know about the rule that allows you to deduct employee bonuses this year if bonuses are paid within 2½ months after the end of the tax year. It’s an attractive year-end planning technique that benefits your business and your employees: You enjoy the tax deduction this year, and your employees don’t report the income until next year.

These tax benefits aren’t always available, however, so it’s important to understand the requirements.

Accrual-basis taxpayers only

If your business uses the cash method of accounting, you must deduct bonuses in the year they’re paid  ̶̶  even if they’re earned in the previous year. To accelerate bonus deductions into this year, your business must be on the accrual method of accounting.

Favorable tax treatment is limited to bonuses paid to unrelated parties. For a corporation, a related party is an individual who owns more than 50% of the company. For S corporations, partnerships, and limited liability companies, related parties include any of their shareholders, partners, or members.

Fixed and determinable

Even if the first two requirements are met, you can’t deduct a bonus this year unless it’s fixed and determinable as of December 31. Generally, this means that:

• The recipient has earned the bonus
• All events have taken place that establish the company’s liability to pay it
• The amount of the bonus can be determined with reasonable accuracy

Many companies get tripped up by the “fixed and determinable” requirement because their bonus plans condition payment on the recipient’s continued employment through the payment date. If employees who leave the company before the payment date forfeit their bonuses, the company’s liability isn’t established by year’s end.

There may be a way to avoid this problem, however. Under IRS guidance, it’s possible to deduct bonuses earned this year even if there’s a risk of forfeiture. The solution can be to use a properly designed bonus pool. For this strategy to work, the aggregate amount in the pool must be fixed by the end of the year. In addition, any forfeited bonuses must be reallocated among the remaining employees.

Handle with care

If you wish to accelerate deductions for bonuses paid next year, it’s critical to design your bonus plan carefully to avoid any language that suggests bonuses aren’t fixed by the end of the year, such as retaining discretion to modify or cancel them or conditioning payment on board approval.

© 2023 KraftCPAs PLLC

Major events or transactions can happen after a reporting period ends but before financial statements are finalized. Deciding whether to report these so-called subsequent events is one of the gray areas in financial reporting. Here’s some guidance from the American Institute of Certified Public Accountants (AICPA) that CPAs use to determine the appropriate accounting treatment.

When to report it

Financial statements reflect a company’s financial position at a particular date and the operating results and cash flows for a period ended on that date. However, because it takes time to complete financial statements, there might be a gap between the financial statement date and the date the financials are available to be issued. During this period, unforeseeable events — such as a natural disaster, a cyberattack, a regulatory change, or the loss of a large business contract — may happen in the normal course of business.

Guidance from the American Institute of Certified Public Accountants (AICPA) is the standard used by CPAs to make that call. The AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities classifies subsequent events into two groups:

1. Recognized subsequent events. These provide further evidence of conditions that existed on the financial statement date. An example would be the bankruptcy of a major customer, highlighting the risk associated with its accounts receivable. There are often signs of a company’s financial distress — such as late payments or staff turnover — months before its bankruptcy filing.
2. Unrecognized subsequent events. These reflect conditions that arise after the financial statement date. An example could be a tornado or earthquake that severely damages the business. There’s usually little or no advanced notice that a natural disaster is going to happen.

Generally, the former must be recorded in the financial statements. The latter events aren’t required to be recorded, but the details may have to be disclosed in the footnotes.

When to disclose it

When deciding which events to disclose in the footnotes, consider whether omitting the information about them might mislead investors, lenders, and other stakeholders. Disclosures should describe the nature of the event and, if possible, estimate the financial effect.

The going-concern assumption

In rare situations, the effect of a subsequent event may be so pervasive that the viability of the business is questionable. A rapid deterioration in operating results or financial position after the date of the financial statements may call into question whether it’s appropriate to use the going-concern assumption. Under U.S. Generally Accepted Accounting Principles (GAAP), financial statements are normally prepared based on the assumption that the company will continue normal business operations into the future. It’s up to the company’s management to decide whether there’s a going-concern issue and to provide related footnote disclosures. But auditors still must evaluate the appropriateness of management’s assessment.

If management identifies that a going-concern issue exists, it should consider whether any mitigating plans will alleviate the substantial doubt. Examples of corrective actions include plans to raise equity, borrow money, restructure debt, or dispose of an asset or business line. When liquidation is imminent, the liquidation basis of accounting may be used instead of the going-concern basis.

© 2023 KraftCPAs PLLC

It’s the time of year when your business might choose to show its appreciation to employees and customers in the form of gifts or a holiday party.

But even generosity has tax implications — and many of them can be beneficial for a business owner.

Employee gifts and taxes

In general, anything of value that you transfer to an employee is part of his or her taxable income. It’s also subject to income and payroll taxes and deductible by your business.

But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit. These are items small in value and given so infrequently that they are administratively impracticable to account for. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.

De minimis fringe benefits aren’t included in your employees’ taxable income, but they are deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts.

Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small they are and infrequently they’re given.

Customer gifts and taxes

If you provide gifts to customers or clients, they’re only deductible up to $25 per recipient, per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value (such as engraving, gift wrapping, packaging, or shipping). Also excluded from the $25 limit is branded marketing collateral — such as small items imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4 each.

The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for a customer’s entire staff to share) if the cost is “reasonable.”

Holiday parties and taxes

Under the Tax Cuts and Jobs Act, certain deductions for business-related meals were reduced, and the deduction for business entertainment was eliminated. However, there’s an exception for certain recreational activities, including holiday parties.

Holiday parties are fully deductible (and excludible from recipients’ income) if they’re primarily for the benefit of employees who aren’t highly compensated. If customers or clients attend, a holiday party may be partially deductible.

Holiday cards and taxes

Sending holiday cards is a long tradition that shows customers and clients your appreciation. If you use the cards to promote your business, you can probably deduct the cost.

© 2023 KraftCPAs PLLC

Budgets are hard to maintain through the best of times, let alone amid a series of economic challenges over the past three years. It’s probably not a surprise if you’ve been struggling to stick with a budget lately.

The biggest challenge, of course, is coming up with realistic target numbers for your budget while building in flexibility. Second to that is the actual process of getting the numbers into a format that you can easily revisit and revise.

If getting a budget back on track is in your list of 2024 resolutions, consider these 10 tips:

1. Separate essential from non-essential expense types. Don’t add the non-essentials until you’ve entered the bills you’ll need to pay and the purchases you’ll have to make during the next calendar year.
2. Take advantage of historical data. If you need a budget for a business that hasn’t started yet, you won’t have any of this in digital form, of course. But if you’ve been operating for a while, you can use past financial information to help shape a new budget.
3. Keep your sales cycle in mind. If you’re a seasonal business, you know your busy months. If not, you may still be able to analyze the ebb and flow of your sales.
4. Keep it simple – at least at first. Think macro, not micro. You don’t have to include a line item for rubber bands. Too much complexity can cause budget burnout, and your reports will be way too detailed to be as useful as they could be.
5. Have an emergency fund. Just as you set aside money for your personal needs, you should build in backup funding for your business.
6. Try to get input from others. If you have employees, consider making them a part of the process. They might be helpful, and it’s good to think about the limitations they might have in specific areas.
7. Overestimate rather than underestimate. If you’ve ever tried to work within a budget, you may have had to “borrow” from one category to make up for a shortfall in another. Try to avoid this by setting realistic goals.
8. Pay down debt with any excess funds. Debt costs money. If you come up with extra dollars once your budget needs are satisfied, consider applying it to outstanding debts. Start with the ones that have the highest interest rates.
9. Take a hard look at your suppliers. Can you find less costly alternatives for the goods and services you must purchase to keep your business going?
10. Revisit your budget on occasion. Analyze how your budget is working monthly. In fact, start budgeting for a couple of months at a time. It won’t be as intimidating, and you’ll catch problems early.

Building your framework

Let’s look at QuickBooks’ budgeting tools. Open the Company menu and click Planning & Budgeting | Set Up Budget. The Budget field in the upper left should default to the next fiscal year (Profit & Loss by Account). Click Create New Budget in the upper right. Change the year if you need to, then click Next. Leave no additional criteria selected and click Next.

Make sure Create budget from scratch is selected on the new page, then click Finish. Your empty budget will open, containing income and expense types taken from your Chart of Accounts, like Insurance Expense, Office Supplies, and Meals and Entertainment. The only way to modify those categories is by changing your Chart of Accounts, which you should only do with professional supervision. We’d be happy to help with that.

Now comes the hard part. You’ll have to start estimating your monthly budget amounts and entering them in QuickBooks’ budget template. The software offers two tools to help with this. If you anticipate the costs to be the same every month, like your internet access charges, enter that number in the first column, then click Copy Across. That number will appear in every box.

If you want to have QuickBooks increase or decrease the number every month, click Adjust Row Amounts and indicate your preference in the small window that opens.

When you’re finished working on your budget, click Save.

Evaluating your progress

QuickBooks makes it easy to see how well you’re adhering to your budget by providing four insightful reports: Budget Overview, Budget vs Actual, Profit & Loss Budget Performance, and Budget vs Actual Graph. These are self-explanatory, but if you want help analyzing the trouble spots in your budget, reach out to a QuickBooks ProAdvisor.

© 2023 KraftCPAs PLLC

If you’re concerned about your 2023 tax bill, there might still be time to reduce it. Here are four strategies that could help you trim your taxes before January 1.

Accelerate deductions and/or defer income. Certain tax deductions are claimed for the year of payment, such as the mortgage interest deduction. So, if you make your January 2024 payment in December, you can deduct the interest portion on your 2023 tax return (assuming you itemize).

Pushing income into the new year also will reduce your taxable income. If you’re expecting a bonus at work, for example, and you don’t want the income this year, ask if your employer can hold off on paying it until January. If you’re self-employed, you can delay sending invoices until late in December to postpone the revenue to 2024.

You shouldn’t follow this approach if you expect to be in a higher tax bracket next year. Also, if you’re eligible for the qualified business income deduction for pass-through entities, you might reduce the amount of that deduction if you reduce your income.

Harvest your investment losses. Losing money on your investments has a bit of an upside — it gives you the opportunity to offset taxable gains. If you sell underperforming investments before the end of the year, you can offset gains realized this year on a dollar-for-dollar basis.

If you have more losses than gains, you generally can apply up to $3,000 of the excess to reduce your ordinary income. Any remaining losses are carried forward to future tax years.

Donate to charity using investments. If you itemize deductions and want to donate to IRS-approved public charities, you can simply write a check or use a credit card. Or you can use your taxable investment portfolio of stock and/or mutual funds. Consider making charitable contributions according to these tax-smart principles:

• Underperforming stocks. Sell taxable investments that are worth less than they cost and book the resulting tax-saving capital loss. Then, give the sales proceeds to a charity and claim the resulting tax-saving charitable write-off. This strategy delivers a double tax benefit: You receive tax-saving capital losses plus a tax-saving itemized deduction for your charitable donations.
• Appreciated stocks. For taxable investments that are currently worth more than they cost, you can donate the stock directly to a charity. Contributions of publicly traded shares that you’ve owned for over a year result in a charitable deduction equal to the current market value of the shares at the time of the gift. Plus, when you donate appreciated investments, you escape any capital gains taxes on those shares. This strategy also provides a double tax benefit: You avoid capital gains tax, and you get a tax-saving itemized deduction for charitable contributions.

Take full advantage of retirement contributions. Federal tax law encourages individual taxpayers to make the allowable contributions for the year to their retirement accounts, including traditional IRAs and SEP plans, 401(k)s and deferred annuities.

For 2023, you generally can contribute as much as $22,500 to 401(k)s and $6,500 to traditional IRAs. Self-employed individuals can contribute up to 25% of net income (but no more than $66,000) to a SEP IRA.

© 2023 KraftCPAs PLLC

If you encounter a serious cash shortfall, one potential solution is to take an early withdrawal — which is one before you’ve reached age 59½ — from your traditional IRA. But an early withdrawal is a big decision, especially considering the 10% tax penalty that usually goes with it.

Here are a few things to consider before you dive into your IRA, SEP-IRA, or SIMPLE-IRA funds.

Tax-free and not tax-free

In almost all cases, all or part of a withdrawal from a traditional IRA will constitute taxable income. The taxable percentage depends on whether you’ve made any nondeductible contributions to your traditional IRAs. If you have, each withdrawal from a traditional IRA consists of a proportionate amount of your total nondeductible contributions. That part is tax-free. The proportionate amount of each withdrawal that consists of deductible contributions and accumulated earnings is taxable. If you’ve never made any nondeductible contributions, 100% of a withdrawal is taxable.

Wide range of exceptions

Want to avoid the 10% penalty on your IRA withdrawal? There are 11 exceptions that would nullify the penalty, although some of them include additional requirements and specific details to discuss with a professional advisor.

1. Substantially equal periodic payments (SEPPs). These are annual annuity-like withdrawals that must be taken for at least five years or until the you reach age 59½, whichever comes later. Because the SEPP rules are complicated, consult with us to avoid pitfalls.

2. Withdrawals for medical expenses. If you have qualified medical expenses more than 7.5% of your adjusted gross income, the excess is exempt from the penalty tax.

3. Higher education expense withdrawals. Early withdrawals are penalty-free to the extent of qualified higher education expenses paid during the same year.

4. Withdrawals for health insurance premiums while unemployed. This exception is available to an IRA owner who has received unemployment compensation payments for 12 consecutive weeks under any federal or state unemployment compensation law during the year in question or the preceding year.

5. Birth or adoption withdrawals. Penalty-free treatment is available for qualified birth or adoption withdrawals of up to $5,000 for each eligible event.

6. Withdrawals for first-time home purchases. Penalty-free withdrawals are allowed to an account owner within 120 days to pay qualified principal residence acquisition costs, subject to a $10,000 lifetime limit.

7. Withdrawals by certain military reservists. Early withdrawals taken by military reserve members called to active duty for at least 180 days or for an indefinite period are exempt from the 10% penalty.

8. Withdrawals after disability. Early withdrawals taken by an IRA owner who is physically or mentally disabled to the extent that the owner cannot engage in his or her customary gainful activity or a comparable gainful activity are exempt from the penalty tax. The disability must be expected to lead to death or be of long or indefinite duration.

9. Withdrawals to satisfy certain IRS debts. This applies to early IRA withdrawals taken to pay IRS levies against the account.

10. Withdrawals after death. Withdrawals taken from an IRA after the account owner’s death are always exempt from the 10% penalty. However, this exemption isn’t available for funds rolled over into the surviving spouse’s IRA or if the surviving spouse elects to treat an IRA inherited from the deceased spouse as the spouse’s own account.

11. Penalty-free withdrawals for emergencies coming soon. The SECURE 2.0 law adds a new exception for certain distributions used for emergency expenses, which are defined as unforeseeable or immediate financial needs relating to personal or family emergencies. Only one distribution of up to $1,000 is permitted a year and a taxpayer has the option to repay it within three years. This provision is effective for distributions made after December 31, 2023.

Potential drawbacks

Since most or all of an early traditional IRA withdrawal will probably be taxable, it could push you into a higher marginal federal income tax bracket. You may also owe the 10% early withdrawal penalty plus, in some states, additional state income tax.

© 2023 KraftCPAs PLLC

Certain companies will soon be required to provide information related to their “beneficial owners” — the individuals who ultimately own or control the company — to the Financial Crimes Enforcement Network (FinCEN), although some will benefit from a newly extended deadline.

The reporting rules, which are included as part of the Corporate Transparency Act (CTA), were to go into effect across the board on January 1, 2024. FinCEN estimates that the rule will impact 32.6 million companies in 2024 alone. Failure to comply may result in civil or criminal penalties, or both.

AICPA, others appeal for deadline change

With many businesses not ready for the looming deadline, the American Institute of Certified Public Accountants (AICPA) and more than 50 affiliated organizations recently urged FinCEN to issue a one-year deadline extension of the effective date for the beneficial ownership information (BOI) reporting rules. In a four-page letter co-signed by CPA associations in all 50 states; Washington, D.C.; Guam; and the Virgin Islands, it requested a one-year extension of the effective date for the BOI reporting requirements for all new entities created in 2024, all entities created thereafter, and all entities making updates or corrections to their original filings.

On November 29, FinCEN announced it would extend the filing deadline for entities created or registered during 2024 to 90 days — previously 30 days — from the earlier of either:

• The date on which the company receives actual notice that its creation or registration has become effective
• The date on which the secretary of state first provides public notice that the company has been created or registered

The AICPA argues that change doesn’t go far enough.

Broad scope

The rules generally apply to both domestic and foreign privately held reporting companies. For these purposes, a reporting company includes any corporation, limited liability company or other legal entity created through documents filed with the appropriate state authorities. A foreign entity includes any private entity formed in a foreign country that’s properly registered to do business in a U.S. state.

There’s a key exemption for “large operating companies” that:

• Employ more than 20 employees on a full-time basis
• Have more than $5 million in gross receipts or sales (not including receipts and sales from foreign sources)
• Physically operate in the United States

In total, the CTA provides exemptions from the BOI reporting requirements for 23 types of entities, including financial institutions, securities brokers and insurance companies. Many exempt entities are already regulated by federal or state governments and already have BOI filing requirements.

Extensive reporting requirements

A beneficial owner is defined as someone who, directly or indirectly, exercises substantial control over a reporting company, or owns or controls at least 25% of its ownership interests. The CTA requires reporting companies to provide detailed information about their “company applicants.” A company applicant is defined as the person who is either:

• Responsible for filing the documents that created the entity (for a foreign entity, this is the person who directly files the document that first registers the foreign reporting company to conduct business in a state)
• Primarily responsible for directing or controlling filing of the relevant formation or registration document by another.

BOI reports must include the following information:

• The legal name of the entity (or any trade or doing-business-as name)
• The address of the entity
• The jurisdiction where the entity was formed
• The entity’s Taxpayer Identification Number
• The name, address, date of birth, unique identifying number information of the beneficial owners (such as a U.S. passport or state driver’s license number), and an image of the document that contains the identifying number

Reporting companies have 30 days, 90 days, or one year from the effective date (January 1, 2024) to comply with the reporting requirements. The deadline to comply depends on the entity’s date of formation. Reporting companies created or registered prior to January 1, 2024, have one year to comply by filing initial reports. Those created or registered on or after January 1, 2024, but before January 1, 2025, will have 90 days upon receipt of their creation or registration documents to file their initial reports. Those created or registered on or after January 1, 2025, will have 30 days upon receipt of their creation or registration documents to file their initial reports.

BOI reports filed with FinCEN aren’t accessible by the public. However, certain government agencies will have access to the information, including those involved in national security, intelligence and law enforcement, as well as the IRS and U.S. Treasury Department.

An omission or fraudulent BOI filing could result in civil fines of $500 a day for as long as the reports are missing or remain inaccurate. Failure to comply may also trigger criminal penalties of a $10,000 fine — or even jail time of two years.

Learning curve

The AICPA cites a recent survey by the National Federation of Independent Business that showed 90% of its members, particularly smaller companies, weren’t familiar with the BOI reporting rules. “Regardless of FinCEN’s activities to raise awareness, their efforts remain ineffective, and most businesses are unaware of this filing requirement,” said the letter. It also said that FinCEN has “woefully underestimated” the time and stress the new requirements will cause businesses.

FinCEN estimates that compliance will take over 32.8 million burden hours (about one hour per entity) with an estimated cost of more than $2,600 per entity, depending on its structure. These estimates don’t include additional resource requirements for businesses, particularly in the first year, to understand and identify who’s a “beneficial owner,” who exercises “substantial control,” who’s a “company applicant” or whether a small business even is considered a “reporting company.”

Plus, businesses will need to continuously track all beneficial owners’ information for changes that could or have happened each month. According to the AICPA, something as simple as an expired driver’s license would require an updated BOI filing. The AICPA letter concludes, “FinCEN should give all businesses a fair time frame to gain awareness and a reasonable time frame to comply with the BOI requirements.”

More to come?

Two bills (H.R. 4035 and S. 2623) are being considered in Congress that would delay implementation of the BOI reporting rules. FinCEN hasn’t yet responded directly to the request from the AICPA to further extend the deadline or expand the scope to cover more businesses.

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