Author: Leon Clinton

In what clearly must be a mistake, the IRS issued Notice 2021-49 to deny the employee retention credit (ERC) on the wages paid to most C and S corporation owners.

According to the IRS:

• Your corporation can qualify for the ERC on the wages paid to a more than 50 percent owner of an S or C corporation if that owner does not have any living brothers and sisters (whether whole- or half-blood), spouse, ancestors, or lineal descendants.
• Your corporation cannot qualify for the ERC on the more than 50 percent owner’s wages if one of those relatives (other than the spouse) is alive.

Example 1. Tom owns 100 percent of his S corporation, and he has no living relatives. Under this new IRS notice, Tom’s corporation can qualify for up to $33,000 in ERC on Tom’s wages.

Example 2. John owns 100 percent of his S corporation, but he has one living relative, a two-year-old daughter. John’s corporation does not qualify for the ERC. Under the new IRS notice, the two-year-old daughter owns by attribution 100 percent of the S corporation, and the IRS says that John, now a tainted relative, works for her and does not qualify for the ERC.

Whoa, that’s not logical!

Also, it may be technically incorrect.

And it’s possible that lawmakers will kill this IRS rule.

To Amend or Not to Amend

Let’s start with this premise. You are a more than 50 percent owner of a corporation. You thought that your corporation qualified for the ERC. At various times before August 4, 2021, the day when the IRS issued Notice 2021-49, you filed your claim to the ERC for 2020 and the first two quarters of 2021.

As we mentioned, when you filed, you believed (as a more than 50 percent owner of a C or S corporation) that wages paid to you by the corporation qualified for the ERC. We did too.

But then, on August 4, 2021, the IRS issued Notice 2021-49 and said no—you don’t qualify. What now? Here’s what we think you should do:

1. Wait. Do nothing now. There’s no hurry. You have until April 15, 2024, before you have to do anything about your 2020 ERC.
2. Wait. Don’t claim the ERC for the more than 50 percent corporate owner for calendar year 2021 quarters 3 and 4 until you have clarification that you qualify. Again, there’s no hurry. You can file a Form 941-X anytime within the three-year statute of limitations.

If you are upset by this IRS notice, it’s a good idea to communicate that dissatisfaction to your U.S. senators and congressional representatives. For some ideas on what message to convey, here’s a sample letter for your use.

And if you would like to discuss this ERC development, don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 25, 2021

If you buy a property, fix it up, and then sell it, is that property a dealer or an investor property?

Here are five thoughts on this:

1. Periodically buying property, fixing it up, and selling it makes it look like dealer property. But when you seldom do this, the property can look like investor property.
2. If you hold the property for more than a year from the time of purchase to the close of escrow, investor status gives you tax-favored, long-term capital gains treatment.
3. When you buy and sell without fixing up the property, or when you buy and rent and then sell, you have strong investor attributes.
4. The fix-up, remodel, development, etc., give you dealer attributes.
5. The whole issue of dealer versus investor status is a facts-and-circumstances classification, and it’s a tough call.

If you are planning on buying investment property and have tax questions, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 22, 2021

Here’s a sad story of a dentist who did not file his tax returns. 

Of course, as you know, the failure to file tax returns often gets the IRS’s attention. In this case, it did, and this dentist suffered accordingly.

The IRS used the 1099s issued to this dentist by insurance companies and some of the insurance company checks he cashed to identify $43,886 in taxes due, a $10,072 penalty for failure to file, and a $1,754 penalty for failure to pay estimated taxes.

What made this dentist think the IRS would not notice his missing tax return? If he read any newspapers or even watched any television, he had to know that

• the 1099s report his income; 
• the IRS matches the 1099s to tax returns; and 
• missing 1099s get the attention of the IRS audit process.

It’s true. When you don’t file a tax return, you increase your chances of an IRS audit.

If you are having trouble getting your tax information together to complete your return, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 18, 2021