Month: November 2023

The IRS is on a tear against improper employee retention credit (ERC) claims. Here are four recent actions taken by the IRS:

1. Unfair Stop to Processing New ERC Claims

On September 15, 2023, the IRS announced a temporary halt on processing new ERC claims until after the end of this year at the very least.

Why the stop? The IRS pinpointed a surge in improper ERC claims as the core issue. While numerous tax experts and associations commend the IRS for halting its ERC claim processing, we disagree with this approach.

We firmly believe that all valid claims should be addressed immediately, especially to assist businesses that have faced, and continue to face, financial hardships.

Although the IRS might not address your claim until after 2023 concludes, it’s crucial to submit it now and secure your place in the front of the line.

2. Slowdown in Processing of Existing Claims

The IRS has more than 600,000 ERC claims in its processing queue.

Instead of its standard processing goal of 90 days for the claims in process, the new goal is 180 days—and much longer if the claim needs further review or audit.

Two points here:

1. If your ERC claim is legitimate, be patient. Also, make sure you have the documents to back up your claim. Frankly, you should have had the documentation before you filed for the ERC.
2. If your ERC is not legitimate, review the possibilities in IR-2023-169 and discuss them with your tax professional.

3. New IRS Q&A Document

Before we get to the new Q&A document, let’s examine its headline—we bolded what we think are problems with the headline: “Client not convinced they’re ineligible for Employee Retention Credit? New IRS Q&A document may help.”

Really? How negative can you get? Here’s the IRS giving us a tool to convince you that you don’t qualify for the ERC.

This is all wrong. The IRS should provide clear guidance on qualification and non-qualification. After all, the IRS’s mission in life is to help you pay the proper tax, no more, no less. It’s not to intimidate you and your tax professional.

IRS Tells You to Watch Out for Red Flags

The ERC is a legitimate tax credit. But the IRS notes that the credit has been increasingly the target of aggressive marketing to businesses that may not qualify for the credit.

In a September 14, 2023, news release, the IRS warns businesses to beware of nefarious actors who improperly assist businesses in claiming credits for which they don’t qualify.

But the IRS is correct in that you need to beware. Say your promoter helps you file for a $1 million credit, and you pay the promoter 25 percent ($250,000). Say next, the IRS disallows your claim. You could be out the $250,000 fee you paid the promoter.

Rule of thumb. Make sure your claim is valid.

IRS Hiring 3,700 New Employees, Primarily for Audits

In this hiring effort, and somewhat under the radar, is the fact that the IRS wants this new audit workforce to examine high-income earners, partnerships, large corporations, and promoters.

On the promoter front, the IRS wants to examine promoters aggressively peddling abusive schemes.

If you want to discuss the ERC, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 10, 2023

After years of delays, the first stage of the Corporate Transparency Act (CTA) goes into effect on January 1, 2024. It imposes a new federal filing requirement for most corporations and limited liability companies (LLCs) formed in 2024 and later.

The CTA’s purpose is to prevent the use of anonymous shell companies for money laundering, tax evasion, and other illegal purposes. But it applies to honest business owners as well as criminals.

The CTA does not apply to all new businesses. It applies only to entities such as corporations, LLCs, and others formed by filing a document with a state secretary of state or similar official. It doesn’t apply to sole proprietors.

Some businesses are exempt, including

• large businesses—businesses with more than 20 full-time employees and $5 million in receipts on their prior-year tax return,
• certain businesses already heavily regulated by the government, such as banks and insurance companies,
• nonprofits, and
• several others.

Note that the exemption for large businesses may apply to updates but not to the initial formation because there is no prior-year tax return.

The CTA’s purpose is to compile a massive government database containing the identities and contact information of the “beneficial owners” of most types of business entities. Beneficial owners are the humans who own or exercise substantial control over the entity.

For most reporting companies, identifying the beneficial owners is simple. For example, a three-member LLC in which each member has a one-third ownership interest has three beneficial owners. Identifying beneficial owners for reporting companies with complex ownership structures can be more difficult.

Here’s what happens if you form a new LLC or corporation in 2024. Within 90 days of formation, you must file the beneficial owner information report with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN)—the Treasury Department’s financial intelligence unit. The report must contain the following for each beneficial owner:

• Full legal name
• Date of birth
• Complete current residential street address
• A unique identifying number from a current U.S. passport, state or local ID document, driver’s license, or foreign passport
• An image of the document that contains the unique identifying number

You must provide similar information for the people who filed the documents to form the entity, such as the articles of incorporation or articles of organization for an LLC.

The beneficial owner information report is filed online at a new federal database called BOSS (an acronym for Beneficial Ownership Secure System). You can’t file until January 1, 2024. You don’t pay any filing fees. The information in the BOSS database is strictly for use by law enforcement, the IRS, and other government agencies. FinCEN does not disclose the BOSS information to the public.

BOSS reporting is separate from your state and local filings when forming a new business entity. But from now on, filing the BOSS report must become a routine part of creating most new business entities.

If you want my help with your BOSS reporting, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 7, 2023

If you can convert a personal vehicle to business use, you likely can increase your tax benefits—and do that without spending any money or driving another business mile.

Here’s an example: Once Mel and Sharpe, his wife, started using both cars, they had 73.7 percent business use of each car. Before their agreement to switch cars every week, Mel drove one car and achieved 93.3 percent business use. After the switch, business miles applied to each car.

If you are single and have two or more vehicles, you likely come out ahead by using all vehicles for business. Why? Let’s look at an example.

Jim has three cars with the following basis for depreciation:

• $50,000 for vehicle 1
• $33,000 for vehicle 2
• $27,000 for vehicle 3

If Jim drives only vehicle 1 for business, the most he could deduct for depreciation would be $50,000. But if he drives all three, the most he could deduct would be $110,000.

You get the idea.

Now, let’s get into some of the rules.

Depreciating the Former Personal Vehicle

When you convert a personal vehicle to business use, the law sees you as placing the vehicle in service in your business at that time. That means on that placed-in-service date, you can begin depreciating the asset and claiming your tax deductions.

To determine the basis for depreciation, use the lesser of

• fair market value on the date of conversion from personal to business use; or
• adjusted basis of the property (generally the amount you paid for the vehicle plus the cost of any improvements).

Example 1. Your spouse paid $43,000 for her personal vehicle. Today, the day you convert it to business use, it has a fair market value of $31,000. Your basis for depreciation is $31,000.

Bonus Depreciation and Section 179 Expensing

You may not use Section 179 expensing on assets that you convert from personal to business use.

But you likely can use bonus depreciation. This depends on when you acquired the vehicle that you are converting from personal to business use:

• If you acquired the vehicle before September 28, 2017, you may not claim bonus depreciation by converting that vehicle to business use in 2023.
• If you acquired the vehicle on or after September 28, 2017, you use today’s 2023 bonus depreciation rules on the converted vehicle.

Example 2. Henry converts his 2016 personal SUV to business use in 2023. He may not claim bonus depreciation on the 2016 SUV.

Example 3. Helen converts her personal 2021 SUV, which has a gross vehicle weight rating (GVWR) of over 6,000 pounds, to business use in 2023 when it has a fair market value of $35,000—far less than the $60,000 she paid for it. Helen will use the SUV 70 percent for business.

She can deduct $19,600 in bonus depreciation ($35,000 x 70 percent business use x 80 percent bonus depreciation). In addition, Helen can claim MACRS depreciation on the remaining basis and 70 percent of her vehicle operating expenses.

Bonus Depreciation Rule You Must Know

The law makes bonus depreciation your method of depreciation if you don’t elect out of it on your tax return. This is unusual. Generally, to qualify for an additional tax break, you must take action. But with bonus depreciation, you are in for the tax break if you don’t elect out of it.

And beware: when you “don’t elect out” of bonus depreciation, the 80 percent 2023 bonus depreciation deduction applies to all assets in the class.

Example 4. You place in service a vehicle that’s in the five-year class, and also seven other non-vehicle five-year-class assets. You must claim 80 percent bonus depreciation on either (a) all eight assets or (b) none.

Key point. To get to the “none,” you must elect out of bonus depreciation for this class of assets on your tax return.

Three Bonus Depreciation Basics for Vehicles

1. Optional mileage rates. When, during 2023, you place a business vehicle in service and elect to use the IRS optional mileage rate of 65.5 cents a mile, your 28 cents-a-mile depreciation deduction is included inside the 65.5 cent mileage rate. So for the optional mileage rate user, that’s it—there’s no bonus or other depreciation.

2. Heavy vehicles. SUVs, crossover vehicles, pickup trucks with beds six feet long or longer, cargo vans, and certain passenger vans with GVWRs in excess of 6,000 pounds are exempt from the luxury vehicle limits and thus qualify for 2023 bonus depreciation of up to 80 percent.

3. Luxury passenger vehicles. Cars with curb weights of 6,000 pounds or lighter and SUVs and other vehicles from number 2 above with GVWRs of 6,000 pounds or less with acquisition dates after September 27, 2027, qualify for bonus depreciation of up to $8,000.

Basis When You Sell

There’s a trick to basis when you sell property that you converted from personal to business use—you have a rule for calculating losses and then a different rule for calculating gains:

• Losses. To calculate losses, use your tax return’s adjusted basis (i.e., the lower of cost or market basis at time of conversion minus depreciation).
• Gains. To calculate gains, use original cost basis minus post-conversion depreciation. In most cases, original cost gives you a higher basis and thus less tax on your gains. So don’t accidentally use adjusted basis.

Takeaways

When it comes to your taxes, most personal assets other than your home are disappointments because

• you pay taxes on the personal gains, and
• you may not deduct the personal losses.

But when you convert a personal vehicle or other personal asset to business use, you create tax benefits. And you create these new tax benefits without spending any new money.

If you want to discuss converting personal assets to business use, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 3, 2023