Tax

The ERC Story: From Double Benefits to IRS Warnings

Here’s a brief review of the significant changes and updates related to the Employee Retention Credit (ERC).

Background and Evolution

Originally established under the CARES Act in March 2020, the ERC has experienced numerous transformations. Initially, businesses had to choose between claiming the ERC and taking out a forgivable loan under the Paycheck Protection Program (PPP)—a restriction retroactively changed in December 2020 through the Consolidated Appropriations Act, 2021 (CAA).

The CAA not only retroactively allowed the 2020 ERC for those who opted for PPP but also expanded the ERC’s availability into the first two quarters of 2021 and increased its value.

Changes and Challenges

Several subsequent IRS notices and congressional acts, including the American Rescue Plan Act of 2021 (ARPA), further extended and enhanced the ERC.

But then, sadly, the Infrastructure Investment and Jobs Act enacted in November 2021 retroactively removed the ERC for the fourth quarter of 2021, causing potential complications for businesses that had already processed their claims.

Professional Responsibility and IRS Warnings

Recent communications from the IRS highlight the crucial role of tax professionals in ensuring ERC compliance.

A March 7, 2023, notice reminded practitioners of their Circular 230 responsibilities, underscoring the need for diligence in evaluating ERC eligibility and compliance—even for claims not prepared by the practitioner. Further, the IRS’s inclusion of the ERC in its Dirty Dozen list on March 20, 2023, signals increased scrutiny of ERC claims and emphasizes the potential risks of scams and improper claims.

Maximizing Benefits While Minimizing Risks

Despite these challenges and increased scrutiny, the ERC remains a valuable opportunity for eligible businesses, offering up to $26,000 per qualifying employee. It is crucial for employers to thoroughly assess their eligibility, maintain robust documentation, and seek professional guidance to navigate the complexities of ERC claims.

We are here to assist you in evaluating your eligibility, ensuring compliance, and maximizing your benefits under the ERC. Our team is well versed in the latest developments and stands ready to provide the guidance and support you need. If you would like to discuss the ERC, please don’t hesitate to call me on my direct line at 408-778-9651.

2023 Last-Minute Year-End Medical Plan Strategies

All small-business owners with one to 49 employees should have a medical plan for their business.

Sure, it’s true that with 49 or fewer employees, the tax law does not require you to have a plan, but you should.

When you have 49 or fewer employees, most medical plan tax rules are straightforward.

Here are six opportunities for you to consider:

  1. If you have not claimed the federal tax credits equal to 100 percent of the required (2020) and the voluntary (2021) emergency sick leave and emergency family leave payments, amend those returns now. You likely made payments that qualify for the credits.
  2. If you have a Section 105 plan in place and have not been reimbursing expenses monthly, do a reimbursement now to get your 2023 deductions, and then put yourself on a monthly reimbursement schedule in 2024.
  3. If you want to implement a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), but you have not yet done so, make sure to get that done correctly now. You are late, so you could suffer that $50-per-employee penalty should your lateness be found out.
  4. But if you are thinking of the QSEHRA and want to help your employees with more money and flexibility, consider the Individual Coverage Health Reimbursement Arrangement (ICHRA) instead. It’s got more advantages.
  5. If you operate your business as an S corporation and want an above-the-line tax deduction for the cost of your health insurance, you need the S corporation to (a) pay for or reimburse you for the health insurance and (b) put that insurance cost on your W-2. Make sure the reimbursement happens before December 31 and you have the reimbursement set up to show on the W-2.
  6. Claim the tax credit for the group health insurance you give your employees. If you provide your employees with group health insurance, see whether your pay structure and number of employees put you in a position to claim a 50 percent tax credit for some or all of the monies you paid for health insurance in 2023 and possibly in prior years.

If you need more insights into the opportunities described above, please call me on my direct line at 408-778-9651.

How to Deduct Travel by Car, Train, Plane, or Boat

Say you are going to travel from your home in Washington, D.C., to San Francisco.

Will the tax law allow you to travel to San Francisco by car, train, plane, or boat, your choice?

Answer. Yes. But special rules apply. You need to know these rules to guarantee your deductions.

Travel by Car

The tax code does not dictate the fastest or cheapest form of travel. Therefore, you can travel for business by automobile or other vehicle from Washington, D.C., to San Francisco.

When you travel by automobile, your direct route expenses for meals, lodging, and other costs of sustaining life on the road are deductible in addition to the vehicle expenses.

Side trips, say to the Grand Canyon, count as personal days and miles. You can combine business and pleasure, but you can deduct only the business part.

Business Day

You might ask: how many miles do I have to drive in my direct route to qualify the day as a business day? There’s no guidance here. This is a facts and circumstances test. Here are some facts and circumstances.

You need to prove that your days traveling in the direct route to San Francisco were business days. In general, this requires passing the primary purpose test, where time spent is an important factor.

Example. On day three of the trip, you spend one hour packing and unpacking and five hours driving 300 miles in a direct route from Washington, D.C., to San Francisco. Day three of this trip is a business day. Your miles are business miles. In addition, you deduct your meals, lodging, and other expenses of sustaining life for the day.

What If You Bring Your Family?

When you travel by car, you spend nothing extra to have the family in the car.

But family presence makes the trip smell more like a vacation than a business trip. This gives you another good reason to make sure your records are in good shape.

Example. You stop at a hotel and the single rate is $209 a night and the two-person rate is $229. You are limited to the $209 rate—what it would have cost you if you traveled alone.

With meals, your business meals are deductible. Meals for your other family members are non-deductible personal meals.

Travel by Train

Your travel by train faces no special rules other than the reasonably direct route.

You can deduct the cost of the tickets if you buy sleeping rooms or simply travel by first class or coach.

Example. You travel for business from Washington, D.C., to San Francisco by train. You buy a sleeping room on the train for the trip. Your Amtrak travel fare is $3,000, and it is fully deductible.

Travel by Plane

By plane, you can travel in coach, in first class, by charter, or in your own aircraft.

No special rules apply to commercial travel. You simply deduct the cost of getting to your business destination by a reasonably direct route.

Example. Say that on your trip from Washington, D.C., to San Francisco, you take a side trip to Kansas City. You figure your deduction based on the direct route airfare and deduct that. Say you spent $900 on the trip that included Kansas City. If the direct route fare to San Francisco was $500, you deduct $500, and $400 is the cost of your personal side trip.

Travel by Boat

Special rules apply to travel by boat. For this purpose, your boat is considered a cruise ship, and any vessel that sails is a cruise ship.

If you travel by cruise ship from Washington, D.C., to San Francisco, you may not deduct more than the daily luxury boat limits, which for 2023 are as follows:

  • $1,128 a day from 1/1 to 3/31
  • $996 a day from 4/1 to 4/30
  • $796 a day from 5/1 to 5/31
  • $1,076 a day from 6/1 to 9/30
  • $776 a day from 10/1 to 10/31
  • $734 a day from 11/1 to 11/30
  • $1,128 a day from 12/1 to 12/31

Example. You travel from Washington, D.C., to San Francisco in November by cruise ship. It takes 10 days. The law limits your cruise ship deduction to a maximum of $7,340 per business traveler ($734 x 10).

If you want to talk to me about your business travel, please call me on my direct line at 408-778-9651.

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