Category: Article

Facing a flood of illegitimate claims for the Employee Retention Tax Credit (ERTC), the IRS has imposed an immediate moratorium through at least the end of 2023 on processing new claims for the credit. The IRS cited the increased risk of small business owners being scammed by unscrupulous promoters as the reason for the move.

The fraud problem

The ERTC is a refundable tax credit intended for businesses that either continued paying employees while they were shut down due to the pandemic in 2020 and 2021, or suffered significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible employers can receive credits worth up to $26,000 per retained employee. The ERTC can still be claimed on amended returns.

The requirements are strict, though. Specifically, you must meet one of three requirements:

• Sustained a full or partial suspension of operations due to orders from a governmental authority that limited commerce, travel, or group meetings due to COVID during 2020 or the first three quarters of 2021
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts in the first three quarters of 2021
• Qualified as a recovery startup business — which could claim the credit for up to $50,000 total per quarter, without showing suspended operations or reduced receipts — for the third or fourth quarters of 2021 (qualified recovery startups are those that began operating after February 15, 2020, and have annual gross receipts of less than or equal to $1 million for the three years preceding the quarter for which they are claiming the ERTC)

Additional restrictions also apply.

Nonetheless, the potentially high value of the ERTC, combined with the fact that some employers can file claims for it until April 15, 2025, has led to a cottage industry of fraudulent promoters offering to help businesses claim refunds for the credit. They wield inaccurate information to generate business from innocent clients who may pay upfront fees in the thousands of dollars or must pay the promoters a percentage of refunds they get.

Victims could end up on the hook for repayment of the credit, along with penalties and interest on top of the fees paid to the promoter. Moreover, as the IRS has noted, promoters may leave out key details, unleashing a “domino effect of tax problems” for unsuspecting businesses.

The impact of the moratorium

Payouts on legitimate claims already filed will continue during the moratorium period. But taxpayers should expect a lengthier wait. The IRS has extended the standard processing goal of 90 days to 180 days and potentially much longer for claims flagged for further review or audit.

Increased fraud worries are prompting the agency to shift its review focus to compliance concerns. The shift includes intensified audits and criminal investigations of both promoters and businesses filing suspect claims.

The IRS also is working to develop new initiatives to aid businesses that have fallen prey to aggressive promoters. For example, it expects to soon offer a settlement program that will allow those who received an improper ERTC payment to avoid penalties and future compliance action by repaying the amount received.

If you claimed the credit, but your claim hasn’t yet been processed or paid, you can withdraw your claim if you now believe it was improper. You can withdraw even if your case is already under or awaiting audit. The IRS says this option is available for filers of the more than 600,000 claims currently awaiting processing.

Still considering claiming the credit?

The IRS urges taxpayers to carefully review the ERTC guidelines during the moratorium period. Legitimate claimants shouldn’t be dissuaded, but, as the IRS says, it’s best to confirm the validity of your claim with a “trusted tax professional — not a tax promoter or marketing firm looking to make money” by taking a “big chunk” out of your claim.

© 2023 KraftCPAs PLLC

Merger and acquisition activity has been strong in many industries over the past few years. If your business is considering merging with or acquiring another business, it’s important to understand how the transaction will be taxed under current law.

Stocks vs. assets

From a tax standpoint, a transaction can basically be structured in two ways:

Stock (or ownership interest) sale. A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The now-permanent 21% corporate federal income tax rate under the Tax Cuts and Jobs Act (TCJA) makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The TCJA’s reduced individual federal tax rates may also make ownership interests in S corporations, partnerships, and LLCs more attractive. That’s because the passed-through income from these entities also will be taxed at lower rates on a buyer’s personal tax return. However, the TCJA’s individual rate cuts are scheduled to expire at the end of 2025, and depending on future changes in Washington, they could be eliminated earlier or extended.

Asset sale. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” We can help you determine whether this would be beneficial in your situation.

Buyer vs. seller preferences

For several reasons, buyers usually prefer to purchase assets rather than ownership interests. Generally, a buyer’s main objective is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.

A buyer can step up (or increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

Meanwhile, sellers generally prefer stock sales for tax and nontax reasons. One of their main objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock, or partnership or LLC interests) as opposed to selling business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Keep in mind that other areas, such as employee benefits, can also cause unexpected tax issues when merging with, or acquiring, a business.

Professional advice is critical

Buying or selling a business may be the most important transaction you make during your lifetime, so it’s important to seek professional tax advice as you negotiate. After a deal is done, it may be too late to get the best tax results.

© 2023 KraftCPAs PLLC

Every business owner should have an exit strategy that helps recoup the maximum amount for his or her investment. Understanding the tax implications of a business sale will help you plan for — and, in some cases, reduce — the tax impact. There are several things to consider that can help ensure the transition is as smooth as possible.

Maximizing value

Start by obtaining a professional valuation of your business to give you an idea of what the business is currently worth. The valuation process also will help you understand what factors drive the value of your business and identify any weaknesses that reduce its value.

Once you’ve received a valuation, you can make changes to enhance the business’s value and potentially increase the selling price. For example, if the valuator finds that the business relies too heavily on your management skills, bringing in new management talent may make the business more valuable to a prospective buyer.

A valuation can also reveal concentration risks. For instance, if a significant portion of your business is concentrated in a handful of customers or one geographical area, you could take steps to diversify your customer base.

Structuring the sale

Corporate sellers generally prefer selling stock rather than assets. That’s because the profit on a stock sale is generally taxable at more favorable long-term capital gains rates, while asset sales generate a combination of capital gains and ordinary income. For a business with large amounts of depreciated machinery and equipment, asset sales can generate significant ordinary income in the form of depreciation recapture. (Note: The tax rate on recaptured depreciation of certain real estate is capped at 25%.)

In addition, if your company is a C corporation, an asset sale can trigger double taxation: once at the corporate level, and a second time when the proceeds are distributed to shareholders as a dividend. In a stock sale, the buyer acquires the stock directly from the shareholders, so there’s no corporate-level tax.

Buyers, on the other hand, almost always prefer to buy assets, especially for equipment-intensive businesses, such as manufacturers. Acquiring assets provides the buyer with a fresh tax basis in the assets for depreciation purposes and allows the buyer to avoid assuming the seller’s liabilities.

Allocating the purchase price

Given the significant advantages of buying assets, most buyers are reluctant to purchase stock. But even in an asset sale, there are strategies for a seller to employ to minimize the tax hit. One strategy is to negotiate a favorable allocation of the purchase price. Although tax rules require the purchase price allocation to be reasonable considering the assets’ market values, the IRS will generally respect an allocation agreed on by unrelated parties.

As a seller, you’ll want to allocate as much of the price as possible to assets that generate capital gains, such as goodwill and certain other intangible assets. The buyer will prefer allocations to assets eligible for accelerated depreciation, such as machinery and equipment. However, depreciable assets are likely to generate ordinary income for the seller.

Allocating a portion of the purchase price to goodwill can be a good compromise between the parties’ conflicting interests. Sellers enjoy capital gains treatment while buyers can generally amortize goodwill over 15 years for tax purposes.

If your company is a C corporation, establishing that a portion of goodwill is attributable to personal goodwill — that is, goodwill associated with the reputations of the individual owners rather than the enterprise — can be particularly advantageous. That’s because payments for personal goodwill are made directly to the shareholders, avoiding double taxation.

You may need to take certain steps to transfer personal goodwill to the buyer. This may include executing an employment or consulting agreement that defines your responsibility for ensuring that the buyer enjoys the benefits of your ability to attract and retain customers. Buyers may want a noncompete agreement. These are common in private business sales and can help protect the buyer from competition from the seller after the deal closes.

ESOP as an option

An employee stock ownership plan (ESOP) might be a viable exit strategy if your business is organized as a corporation and you’re not interested in leaving it to your family or selling to an outsider. An ESOP creates a market for your stock, allowing you to cash out of the business and transfer control to the next generation of owners gradually.

An ESOP is a qualified retirement plan that invests in the company’s stock. Benefits to business owners include the ability to:

• Begin cashing out while retaining control over the business for a time
• Defer capital gains taxes on the sale of C corporation stock to the ESOP if certain requirements are met

ESOPs also provide significant tax benefits to the company, including tax deductions for contributions to the ESOP to cover stock purchases and — in the case of a leveraged ESOP — loan payments. S corporations may avoid taxes on income passed through to shares held by the ESOP.

But there are some downsides, too. For example, ESOPs are subject to many of the same rules and restrictions as 401(k) and other employer-sponsored plans. And they can involve significant administrative costs, including annual appraisals of the company’s stock.

Get started now

Different strategies can help you enhance your business’s value and minimize taxes, but they may take some time to put into place. Whatever your exit strategy, the earlier you start planning, the better.

© 2023 KraftCPAs PLLC

Many businesses see their day-to-day activity slow down during the holidays, giving management time to tie up loose ends. One rainy-day project to consider: Fraud risk management.

Internal controls are your company’s first line of defense against fraud. However, an internal control system that was effective years ago for an expanding retailer or a fledgling start-up may not meet the organization’s needs today.

Internal controls need to be continuously updated to stay atop changing market conditions and emerging fraud threats. Conducting a fraud sweep during the year-end lull can position your organization for success in the new year.

Prep work

Forensic accounting experts are often called in to help conduct a thorough, objective review of internal control weaknesses that may leave a business vulnerable to fraud perpetrators. Among the documents a fraud expert will examine are:

• Bookkeeping records
• Invoices
• Bank statements
• Payments
• Journal entries
• Financial reports

Management can assist by ensuring easy access to records and personnel. If employees take too long to produce documents or some records are missing, management needs to ask why, as well as determine what steps employees took to find them. Delayed responses, adversarial attitudes, and missing or incomplete documents can be red flags for fraud.

Review process

When conducting a fraud sweep, forensic accountants typically look for signs of doctored, forged, or missing documents — or anything else that appears inconsistent or unusual. For example, a cluster of journal entries posted near the end of the fiscal year could be adjustments made to cover theft or misappropriation.

Adjustments to receivables and payables are possible signs that employees are misappropriating customer payments or engaging in billing schemes. Another red flag is out-of-balance books. An end-of-year inventory of merchandise or cash can bring missing assets to light.

Experts pay particular attention to payroll documents. Missing or otherwise unaccounted-for employees could indicate the presence of “ghost” employees. In these schemes, perpetrators pay nonexistent staff members and pocket the money themselves. Management can help expose these crimes by personally handing out year-end paychecks or bonuses (or paper stubs if employees have their checks direct deposited). Any leftover checks merit further investigation.

Management should also observe employee behavior. Fraud perpetrators often avoid taking vacation or sick time for fear someone will uncover their activities in their absence. And thieves may seem irritable or defensive when asked to comply with an organized fraud sweep.

Taking action

If something appears suspicious, management must be willing to confront it and resist the temptation to explain away exceptions. If an employee is caught, it can’t be assumed that this employee is the only culprit. Unfortunately, fraud schemes often involve more than one person, including collusion between employees and involvement of people outside the company.

It’s important to keep in mind that warning signs don’t always indicate theft. Accounting irregularities may be explained by genuine errors or an ill-designed process. Honest mistakes can be corrected and avoided in the future with better training, process improvements, or the addition of more-effective controls.

Reporting mechanisms

If a company doesn’t already have a system for employees, vendors, customers, and the public to report suspicious activities, it should create one. While not required of private companies as they are of public ones, confidential hotlines can cut fraud losses by approximately 50% per scheme, according to Occupational Fraud 2022: A Report to the Nations, a biennial survey published by the Association of Certified Fraud Examiners (ACFE). The survey also found that companies with whistleblower hotlines detect frauds more quickly — the median duration of fraud schemes was 12 months for companies with hotlines compared to 18 months for those without.

Tips are the most common method of detecting fraud, and increasingly those tips come from phone and online reporting mechanisms. In 2012, the ACFE reported that 42% of fraud tips were made through hotlines. By 2022, that statistic increased to 58%.

Clean sweep

Year-end fraud sweeps allow businesses to close the books on the old year and welcome the new one with confidence. Although management and internal auditors can provide valuable information and assistance, an experienced outside fraud expert can provide fresh insights.

© 2023 KraftCPAs PLLC

The passage of the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act in December 2022 brought significant changes to so-called catch-up contributions, with implications for both employers and employees.

With the new catch-up provisions scheduled to kick in after 2023, many retirement plan sponsors have been struggling to institute the necessary processes and procedures to comply. In recognition of taxpayer concerns, the IRS recently provided a measure of relief in Notice 2023-62. In addition to extending the deadline, the new guidance corrects a technical error in SECURE 2.0 that had left taxpayers and their advisors confused about the continued availability of catch-up contributions for employees.

The new requirements

Tax law allows taxpayers age 50 or older to make catch-up contributions to their 401(k) plans and similar retirement accounts. The permissible amount is adjusted annually for inflation. For 2023, you can contribute an additional $7,500 over the current $22,500 annual 401(k) contribution limit. The contributions are allowed regardless of a taxpayer’s income level.

Under the existing rules, all eligible taxpayers can choose whether to make their contributions on a pre-tax basis or a Roth after-tax basis (assuming the employer allows the Roth option). Section 603 of SECURE 2.0, however, mandates that any catch-up contributions made by higher-income participants in 401(k), 403(b) or 457(b) retirement plans must be designated as after-tax Roth contributions.

Higher-income participants are those whose prior-year Social Security wages exceeded $145,000 (the threshold will be adjusted for inflation going forward). In addition, a plan that allows higher-income participants to make such catch-up contributions also must allow other participants age 50 or older to make their catch-up contributions on an after-tax Roth basis. The law provides that these requirements are effective for tax years beginning after December 31, 2023.

The imminent effective date had plan sponsors and payroll providers worried due to multiple administrative hurdles. For example, sponsors must develop processes to identify higher-income plan participants — they generally haven’t had the need to calculate employees’ Social Security wages previously — and provide that information to their plan administrators. Sponsors also must institute procedures to restrict catch-up contributions to Roth contributions and communicate the changes to their employees.

The challenges are even greater for employers that don’t already have Roth contribution features in their traditional retirement plans. They must choose between amending their plans to allow such contributions, which can take months to process and implement, or eliminating the ability to make catch-up contributions for all employees.

The IRS guidance

In Notice 2023-62, the IRS acknowledges the concerns related to the original effective date for the new requirements. In response, it has created an “administrative transition period,” extending the effective date to January 1, 2026. In other words, employers can allow catch-up contributions that aren’t designated as Roth contributions after December 31, 2023, and until January 1, 2026, without violating SECURE 2.0. And plans without Roth features may allow catch-up contributions during this period.

The guidance also addresses a drafting error in SECURE 2.0 that led to questions about whether the law eliminated the ability of taxpayers to make catch-up contributions after 2023. The IRS made clear that plan participants age 50 or older can continue to make catch-up contributions in 2024 and beyond.

After-tax vs. pre-tax

Unlike pre-tax contributions, after-tax contributions don’t reduce your current-year taxable income, but they grow tax-free. This is a significant advantage if you expect to be subject to a higher income tax rate in retirement than you are at the time of your contributions.

You generally can withdraw “qualified distributions” without paying tax if you’ve held the account for at least five years. Qualified distributions are those made one of three ways:

• Because of disability
• On or after death
• After you reach age 59½

You may be able to reap other savings from after-tax contributions, as well. For example, lower taxable income in retirement can reduce the amount you must pay for Medicare premiums and the tax rate on your Social Security benefits.

But you could have reasons to reduce your current taxable income with pre-tax contributions. For example, doing so could increase the amount of your Child Tax Credit, which phases out at certain income thresholds, as well as the amount of financial aid your children can obtain for higher education.

Roth 401(k) contributions are currently subject to annual required minimum distributions (RMDs), like traditional 401(k)s. Beginning in 2024, though, designated Roth 401(k) contributions won’t be subject to RMDs until the death of the owner.

Potential future guidance

The IRS also used Notice 2023-62 to preview some additional guidance regarding Section 603 that’s “under consideration.” After considering any comments received, the IRS stated it is considering releasing future guidance concerning multi-employer plans and other out-of-the-ordinary situations.

The IRS’s extension of the effective date for the Section 603 requirements is good news for employers and employees alike. As noted, though, the requisite changes to achieve compliance will take some time and effort to put into place. Plan sponsors would be wise to start sooner rather than later.

© 2023 KraftCPAs PLLC

As you put together your holiday shopping list this year, the option of giving cash or stocks might come to mind. With provisions of the Tax Cuts and Jobs Act still in effect until 2026, you can reduce the size of your taxable estate, within generous limits, without triggering any estate or gift tax. The exclusion amount for 2023 is $17,000.

The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer $51,000 to the children this year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there’s no need to file a federal gift tax return. If annual gifts exceed $17,000, the exclusion covers the first $17,000 per recipient, and only the excess is taxable. In addition, even taxable gifts may result in no gift tax liability thanks to the unified credit (detailed below).

Keep in mind that these rules don’t apply to gifts made to a spouse because those gifts aren’t subject to the gift tax.

Married taxpayers can split gifts 

If you’re married, a gift made during a year can be treated as split between you and your spouse, even if the cash or gift property is given by only one of you. Thus, by gift-splitting, up to $34,000 a year can be transferred to each recipient by a married couple because of their two annual exclusions. For example, a married couple with three married children can transfer a total of $204,000 each year to their children and to the children’s spouses ($34,000 for each of six recipients).

If gift-splitting is involved, both spouses must indicate their consent on the gift tax return (or returns) that the spouses file. The IRS prefers that both spouses indicate their consent on each return filed. Because more than $17,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $34,000 exclusion covers total gifts.

Unified credit for taxable gifts 

Even gifts that aren’t covered by the exclusion, and are thus taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $12.92 million for 2023. However, to the extent you use this credit against a gift tax liability, it reduces or eliminates the credit available for use against the federal estate tax at your death.

Be aware that gifts made directly to a financial institution to pay for tuition or to a health care provider to pay for medical expenses on behalf of someone else don’t count towards the exclusion. For example, you can pay $20,000 to your grandson’s college for his tuition this year, plus give him up to $17,000 as a gift.

Annual gifts help reduce the taxable value of your estate. The estate and gift tax exemption amount is scheduled to be cut drastically in 2026 to the 2017 level when the related Tax Cuts and Jobs Act provisions expire (unless Congress acts to extend them). Making large tax-free gifts may be one way to recognize and address this potential threat. They could help insulate you against any later reduction in the unified federal estate and gift tax exemption.

© 2023 KraftCPAs PLLC

The Tax Cuts and Jobs Act liberalized the rules for depreciating business assets. However, the amounts change every year due to inflation adjustments, and due to high inflation, the adjustments for 2023 were big.

Here are key numbers that small business owners need to know.

Section 179 deductions

For qualifying assets placed in service in tax years beginning in 2023, the maximum Sec. 179 deduction is $1.16 million. But if your business puts in service more than $2.89 million of qualified assets, the maximum Sec. 179 deduction begins to be phased out.

Eligible assets include depreciable personal property such as equipment, computer hardware and peripherals, vehicles, and commercially available software.

Sec. 179 deductions can also be claimed for real estate qualified improvement property (QIP), up to the maximum allowance of $1.16 million. QIP is defined as an improvement to an interior portion of a nonresidential building placed in service after the date the building was placed in service. However, expenditures attributable to the enlargement of a building, elevators or escalators, or the internal structural framework of a building don’t count as QIP and usually must be depreciated over 39 years. There’s no separate Sec. 179 deduction limit for QIP, so deductions reduce your maximum allowance dollar for dollar.

For nonresidential real property, Sec. 179 deductions are also allowed for qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems.

Finally, eligible assets include depreciable personal property used predominantly in connection with furnishing lodging, such as furniture and appliances in a property rented to transients.

Deduction for heavy SUVs

There’s a special limitation on Sec. 179 deductions for heavy SUVs, meaning those with gross vehicle weight ratings (GVWR) between 6,001 and 14,000 pounds. For tax years beginning in 2023, the maximum Sec. 179 deduction for heavy SUVs is $28,900.

First-year bonus depreciation cut

For qualified new and used assets that were placed in service in calendar year 2022, 100% first-year bonus depreciation percentage could be claimed.

However, for qualified assets placed in service in 2023, the first-year bonus depreciation percentage dropped to 80%. In 2024, it’s scheduled to drop to 60%, then to 40% in 2025, 20% in 2026, and 0% in 2027 and beyond.

Eligible assets include depreciable personal property such as equipment, computer hardware and peripherals, vehicles, and commercially available software. First-year bonus depreciation can also be claimed for real estate QIP.

A noteworthy exception to remember: For certain assets with longer production periods, these percentage cutbacks are delayed by one year. For example, the 80% depreciation rate will apply to long-production-period property placed in service in 2024.

Passenger auto limitations

For federal income tax depreciation purposes, passenger autos are defined as cars, light trucks, and light vans. These vehicles are subject to special depreciation limits under the so-called luxury auto depreciation rules. For new and used passenger autos placed in service in 2023, the maximum luxury auto deductions are as follows:

• $12,200 for Year 1 ($20,200 if bonus depreciation is claimed)
• $19,500 for Year 2
• $11,700 for Year 3
• $6,960 for Year 4 and thereafter until fully depreciated

These allowances assume 100% business use. They’ll be further adjusted for inflation in future years.

Advantage for heavy vehicles

Heavy SUVs, pickups, and vans (those with GVWRs above 6,000 pounds) are exempt from the luxury auto depreciation limitations because they’re considered transportation equipment. As a result, heavy vehicles are eligible for Sec. 179 deductions (subject to the special deduction limit explained earlier) and first-year bonus depreciation.

But there is a catch: Heavy vehicles must be used over 50% for business. Otherwise, the business-use percentage of the vehicle’s cost must be depreciated using the straight-line method and it’ll take six tax years to fully depreciate the cost.

Reach out to a KraftCPAs advisor to discuss depreciation tax breaks specific to your situation.

© 2023 KraftCPAs PLLC

Manual transaction entry doesn’t make sense anymore – not when QuickBooks Online makes the process of importing them from your bank so easy. If you enter them on your own, you risk data transposition errors, which can create inaccuracies in your customer billing, reports, and income taxes. Plus, it takes an inordinate amount of time that you could use in running other areas of your business.

If you’re still using a manual method, consider setting up connections to your online banks. Once your transactions are delivered to QuickBooks Online, the site provides tools that allow you to view them and make sure they’re complete before you store them. Whenever you need to see them, you’ll be able to find them easily.

Here are step-by-step instructions to how this all works.

Making a connection

You’ll need to have set up a username and password for your online bank accounts if you haven’t done so already. In QuickBooks Online, click Bookkeeping in the navigation toolbar. It should open to Transactions | Bank transactions. Click Link account over to the right.

A page opens with suggested financial institutions. If yours isn’t there, enter it in the search field at the top. If there are multiple options, be sure to select the correct one and click it.

Click Continue and go through any of the security steps your financial institution may have. You’ll get to a page that says, Which accounts do you want to connect?, with a drop-down list displaying options from your Chart of Accounts. Select the type of account you’re creating (checking, credit card, etc.) and continue to follow the onscreen instructions until your connection is complete and QuickBooks Online has downloaded your transactions.

It’s important that you set up your linked accounts correctly since you’re dealing with the Chart of Accounts. If any step is confusing, we can schedule a session to go over online account connections with you.

Dealing with transactions

Once you’ve connected to all your online accounts, you’ll see that they appear on the Bank transactions page, displayed in small boxes containing their balances and the number of transactions they contain (there might be quite a few when you first download). You can also see how recently each account was updated (click Update anytime you want to refresh an account).

Click one, and its register will appear below. Above that, you’ll see three labeled bars:

• For review. QuickBooks Online puts all downloaded transactions in this list.
• Categorized. Your transactions will move to this list after you’ve assigned categories to them.
• Excluded. If you happen to run into duplicate transactions, you can move them here.

Below that, you’ll see that you can filter your transactions by date, by type, or by description, check number, or amount.

As you continue to work with accounts, you occasionally might find that a connection has been unlinked. When that happens, just repeat the connection process again.

Working with individual transactions

You’ll want to set some time aside the first time you download transactions so you can look at each one and add or edit its content. Click one to open its detail box, as shown below. The top line defaults to Categorize. First, select the correct Vendor/Customer (or  + Add new), then check the Category and change it from the drop-down menu if it’s incorrect.

There’s one more field here that’s very important. If you’re purchased something on behalf of a customer, be sure to select the correct one from the drop-down list under the Customer field and click the Billable box. QuickBooks Online will make this transaction information available to you the next time you invoice the customer. Other fields not shown in the above image are optional, like Tags, Memo, and Add attachment. When your transaction is complete, click Confirm to move it to the Categorized list.

There are two other options in these individual transaction boxes besides Categorize: Find match (match downloaded payments to invoices, for example) and Record as transfer (move money from one account to another). These are advanced topics that aren’t necessarily intuitive, so we can schedule a session to go over them if you anticipate needing to use them.

The mechanics of connecting to your banks in QuickBooks Online aren’t complicated, but you may run into problems in moving transactions along when they’re first downloaded. It’s much easier to get it right from the start than to try to untangle transactions that weren’t processed properly.

© 2023 KraftCPAs PLLC

A job that includes life insurance as a fringe benefit is usually one of many selling points to employees. However, if group term life insurance is part of your benefits package, and the coverage is higher than $50,000, there may be undesirable income tax implications.

You’re taxed on income you didn’t receive

The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesn’t add anything to your income tax bill. But the employer-paid cost of group term coverage in excess of $50,000 is taxable income to you. It’s included in the taxable wages reported on your Form W-2 — even though you never actually receive it. In other words, it’s phantom income.

What’s worse, the cost of group term insurance must be determined under a table prepared by the IRS even if the employer’s actual cost is less than the cost figured under the table. With these determinations, the amount of taxable phantom income attributed to an older employee is often higher than the premium the employee would pay for comparable coverage under an individual term policy. This tax trap gets worse as an employee gets older and as the amount of his or her compensation increases.

Look at your W-2

What should you do if you think the tax cost of employer-provided group term life insurance is higher than you’d like? First, you should establish if this is the case. If a specific dollar amount appears in Box 12 of your Form W-2 (with code “C”), that dollar amount represents your employer’s cost of providing you with group term life insurance coverage in excess of $50,000, less any amount you paid for the coverage. You’re responsible for federal, state and local taxes on the amount that appears in Box 12, and for the associated Social Security and Medicare taxes as well.

But keep in mind that the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2, and it’s the Box 1 amount that’s reported on your tax return.

What to do

If you decide that the tax cost is too high for the benefit you’re getting in return, find out whether your employer has a “carve-out” plan (a plan that carves out selected employees from group term coverage) or, if not, whether it would be willing to create one. There are different types of carve-out plans that employers can offer to their employees.

For example, the employer can continue to provide $50,000 of group term insurance (since there’s no tax cost for the first $50,000 of coverage). Then, the employer can provide the employee with an individual policy for the balance of the coverage. Alternatively, the employer can give the employee the amount the employer would have spent for the excess coverage as a cash bonus that the employee can use to pay the premiums on an individual policy.

© 2023 KraftCPAs PLLC

Business owners are being overrun with messages that they might be missing out on the lucrative Employee Retention Tax Credit (ERTC). While some employers do remain eligible if they meet certain criteria, the IRS has added new urgency to its warnings cautioning businesses about third-party scams related to the credit.

Employers are always encouraged to claim any credit they’re entitled to, but those that claim the ERTC improperly could find themselves in hot water with the IRS and face penalties as a result.

ERTC in a nutshell

The ERTC is a refundable tax credit intended for businesses in two ways: It continued paying employees while businesses were shut down due to the pandemic in 2020 and 2021, or to businesses that suffered significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible employers could receive credits worth up to $26,000 per retained employee. The credit may still be available on an amended tax return.

The requirements are strict, though. Specifically, a qualifying business must have:

• Sustained a full or partial suspension of operations due to orders from a governmental authority that limited commerce, travel or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,
• Experienced a significant decline in gross receipts during 2020 or in the first three quarters of 2021, or
• Qualified as a recovery startup business — which can claim the credit for up to $50,000 total per quarter without showing suspended operations or reduced receipts — for the third or fourth quarters of 2021. Qualified recovery startups are those that began operating after February 15, 2020, and have annual gross receipts of less than or equal to $1 million for the three tax years preceding the quarter for which they are claiming the ERTC.

In addition, a business can’t claim the ERTC on wages that it reported as payroll costs when it applied for Paycheck Protection Program (PPP) loan forgiveness, or it used to claim certain other tax credits. Also, a business must reduce the wage deductions claimed on its federal income tax return by the amount of credits.

Prevalence of scams

The potentially high value of the ERTC, combined with the fact that employers can file claims for it on amended returns until April 15, 2025, has led to a wave of fraudulent promotions offering to help businesses claim the credit. These scams wield inaccurate information and inflated promises to generate business from innocent clients. In return, they reap excessive upfront fees in the thousands of dollars or commissions as high as 25% of the refund received.

The IRS has called the amount of misleading marketing around the credit “staggering.” For example, in recent guidance, the tax agency explained that contrary to advice given by some promoters, supply chain disruptions generally don’t qualify an employer for the credit unless the disruptions were due to a government order. It’s not enough that an employer suspended operations because of disruptions — the credit applies only if the employer had to suspend operations because a government order caused the supplier to suspend its operations.

ERTC fraud has grown so serious that the IRS has included it in its annual Dirty Dozen list of the worst tax scams in the country. In Utah, for example, the U.S. Department of Justice has charged two promoters, who did business as 1099 Tax Pros, with participating in a fraudulent tax scheme by preparing and submitting more than 1,000 forms to the IRS. They claimed more than $11 million in false ERTC filings and COVID-related sick and family leave wage credits for their clients.

Scammers have been able to monopolize on the general confusion and uncertainty around the ERTC. A recent congressional hearing found that some of the problems can be traced back to the entirely paper application process created for the credit. This has contributed to a backlog of nearly 500,000 unprocessed claims, out of more than 2.5 million claims that have been submitted.

Although it’s unclear how much progress the IRS has made on the backlog, the agency has announced that it has entered a new phase of intensified scrutiny of ERTC claims. It’s stepping up its compliance work and establishing additional procedures to deal with fraud in the program. The IRS already has increased its audit and criminal investigation work on ERTC claims, focusing on both the promoters and the businesses filing dubious claims.

If you fell into the trap and are among those businesses, you could end up on the hook for repayment of the credit, along with penalties and interest on top of the fees you paid the fraudulent advisor.

Even if you’re eligible for the credit, you could run into trouble if you failed to reduce your wage deductions accordingly or claimed it on wages that you also used to claim other credits. As the IRS has noted, promoters may leave out key details that potentially set off a domino effect of tax problems for unsuspecting businesses.

Moreover, providing your business and tax documents to an unscrupulous promoter could put you at risk of identity theft.

Red flags to watch for

The IRS has identified several warning signs of illegitimate promoters, including:

• Unsolicited phone calls, text messages, direct mail, or ads highlighting an easy application process or a short eligibility checklist (in reality, the rules for eligibility and computation of credit amounts are quite complicated)
• Statements that the promoter can determine your ERTC eligibility within minutes
• Hefty upfront fees
• Fees based on a percentage of the refund amount claimed
• Preparers who refuse to sign the amended tax return filed to claim a refund of the credit
• Aggressive claims from the promoter that you qualify before you’ve discussed your individual tax situation (the credit isn’t available to all employers)
• Refusal to provide detailed documentation of how your credit was calculated

The IRS also warns that some ERTC mills are sending out fake letters from nonexistent government entities such as the Department of Employee Retention Credit. The letters are designed to look like official IRS or government correspondence and typically include urgent language pushing immediate action.

Protect yourself

Taking several simple steps can help you cut your risk of being victimized by scammers. First, if you think you may qualify for the credit, work with a trusted professional — one who isn’t proactively soliciting ERTC work. Those who are aggressively marketing the credit (and in some cases, only the credit) are more interested in making money themselves and are unlikely to prioritize or protect your best interests.

You also should request a detailed worksheet that explains how you’re eligible for the credit. The worksheet should show the math for the credit amount as well.

If you’re claiming you suspended business due to a government order, ensure that you have legitimate documentation of the order. Don’t accept a generic document about a government order from a third party. Rather, you should acquire a copy of the actual government order and review it to confirm that it applies to your business.

Proceed with caution

No taxpayer ever wants to leave money on the IRS’s table, but skepticism is warranted whenever something seems too good to be true. If you believe your business might be eligible for the ERTC, we can help you verify eligibility, compute your credit, and file your refund claim.

© 2023 KraftCPAs PLLC

The annual three-day sales tax holiday in Tennessee will stretch into October this year, but with caveats.

Sales on school supplies, clothing, and computers will be exempt from sales tax during the traditional back-to-school sales tax holiday that starts at 12:01 a.m. Friday, July 28, and ends at 11:59 p.m. Sunday, July 30. That translates into a savings of as much as 9.75% in some areas where sales tax nears double digits.

Items sold online are also eligible for the sales tax exemptions. Click here for a full list of items that qualify.

This year, Tennessee has also added a three-month sales tax holiday on groceries that begins Tuesday, August 1, and ends on Tuesday, October 31.

Here are a few of the specifics for the July 28-30 event:

What is tax-free: School supplies, art supplies, and clothing items, including backpacks, books, binders, pens, paper, drawing pads, artist paint brushes, clay, glaze, shoes, shirts, pants, socks, dresses, and diapers. Desktop computers and laptop computers intended for personal use and priced at $1,500 or less are also tax-free.

Not tax-free: Jewelry, purses, sports and recreational equipment, compact discs, printer supplies, computer software, and flash drives. Individual items (with the exception of computers) priced at more than $100 each are not tax-free.

For the three-month grocery holiday, qualifying items are described broadly as any liquid, concentrated, solid, frozen, dried, or dehydrated substance sold to be ingested or chewed by humans and consumed for taste or nutritional value.

Among items not included are alcohol, tobacco, candy, and dietary supplements.

© 2023 KraftCPAs PLLC

If you’re age 50 or older, you can probably make extra catch-up contributions to your tax-favored retirement account(s). It is worth the trouble? Absolutely.

The deal with IRAs 

Eligible taxpayers can make extra catch-up contributions of up to $1,000 annually to a traditional or Roth IRA. If you’ll be 50 or older as of December 31, 2023, you can make a catch-up contribution for the 2023 tax year by April 15, 2024.

Extra deductible contributions to a traditional IRA create tax savings, but your deduction may be limited if you (or your spouse) are covered by a retirement plan at work and your income exceeds certain levels.

Extra contributions to Roth IRAs don’t generate any up-front tax savings, but you can take federal-income-tax-free qualified withdrawals after age 59½. There are also income limits on Roth contributions.

Higher-income individuals can make extra nondeductible traditional IRA contributions and benefit from the tax-deferred earnings advantage.

How company plans stack up 

You also have to be age 50 or older to make extra salary-reduction catch-up contributions to an employer 401(k), 403(b), or 457 retirement plan — assuming the plan allows them and you signed up. You can make extra contributions of up to $7,500 to these accounts for 2023. Check with your human resources department to see how to sign up for extra contributions.

Salary-reduction contributions are subtracted from your taxable wages, so you effectively get a federal income tax deduction. You can use the resulting tax savings to help pay for part of your extra catch-up contribution, or you can set the tax savings aside in a taxable retirement savings account to further increase your retirement wealth.

Tally the amounts

IRAs: Let’s say you’re age 50 and you contribute an extra $1,000 catch-up contribution to your IRA this year and then do the same for the following 15 years. Here’s how much extra you could have in your IRA by age 65 (rounded to the nearest $1,000).

• 4% annual return: $22,000
• 6% annual return: $26,000
• 8% annual return: $30,000

Making larger deductible contributions to a traditional IRA can also lower your tax bills. Making additional contributions to a Roth IRA won’t, but you can take more tax-free withdrawals later in life.

Company plans: If you’ll turn 50 next year, let’s say you contribute an extra $7,500 to your company plan next year. Then, you do the same for the next 15 years. Here’s how much more you could have in your 401(k), 403(b), or 457 plan account (rounded to the nearest $1,000).

• 4% annual return: $164,000
• 6% annual return: $193,000
• 8% annual return: $227,000

In this scenario, making larger contributions can also lower your tax bill.

IRA and company plans: Finally, let’s say you’ll turn age 50 next year. If you’re eligible, you contribute an extra $1,000 to your IRA for next year, plus you make an extra $7,500 contribution to your company plan. Then, you do the same for the next 15 years. Here’s how much extra you could have in the two accounts combined (rounded to the nearest $1,000).

• 4% annual return: $186,000
• 6% annual return: $219,000
• 8% annual return: $257,000

Make retirement more golden 

Obviously, making extra catch-up contributions can add up to pretty big numbers by the time you retire. If your spouse can make them too, you can potentially accumulate even more. Contact a KraftCPAs advisor if you have questions or want more information.

 © 2023 KraftCPAs PLLC