Tag: tax

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Tax

IRS Provides Broad Penalty Relief for some 2019, 2020 Returns

The IRS on August 23, 2022, announced it will grant automatic penalty relief for late-file penalties imposed with respect to certain returns required to be filed for the 2019 and 2020 tax years.

Notice 2022-36 provides systemic penalty relief to taxpayers for certain civil penalties related to 2019 and 2020 returns. Penalty relief is automatic so that eligible taxpayers need not apply for it. If penalties have already been paid, the taxpayer will receive a credit or refund. However, the IRS has not yet announced if or when it will notify eligible taxpayers that it has waived their preexisting penalties pursuant to this announcement.

However, it is critical to note that some of these automatic penalty waivers are available only if a taxpayer files their delinquent returns on or before September 30, 2022. As such, there is a very short window for taxpayers with outstanding reporting obligations to file their delinquent 2019 and 2020 returns and receive this automatic penalty relief. Any penalty relief under these procedures will be credited or refunded as appropriate.

This automatic relief does not apply to penalties for fraudulent failure to file or when a taxpayer has already settled its late-file penalties via an offer in compromise, a closing agreement, or a judicial proceeding.

This chart summarizes the list of returns for which automatic penalty relief is now available.

If you have any questions about tax penalties or penalty relief, contact one of our experts.

Categories
Tax

Tax Credit for Higher Education

It’s that time of year when students are starting or returning to college or trade school. Higher education is expensive, but taxpayers who take post-high school coursework in 2022 (or who have dependents taking such coursework) may qualify for one of two tax credits that can reduce their tax bills. The American Opportunity Tax Credit is worth up to $2,500 per eligible student for the first four years at an eligible school. The Lifetime Learning Credit tops out at $2,000 per tax return for any number of years. Income-based limits and additional rules apply.

To find out if you qualify for either credit, use this tool: http://bit.ly/36Vk6Ev , or contact one of our experts. 

 

Categories
Tax

Home sweet home: Do you qualify for office deductions?

If you’re a business owner working from home or an entrepreneur with a home-based side gig, you may qualify for valuable home office deductions. But not everyone who works from home gets the tax break. Employees who work remotely can’t deduct home office expenses under current federal tax law. To qualify for a deduction, you must use at least part of your home regularly and exclusively as either: Your principal place of business, or A place to meet with customers, clients, or patients in the normal course of business. In addition, you may be able to claim deductions for maintaining a separate structure — such as a garage — where you store products or tools used solely for business purposes. Notably, “regular and exclusive” use means you must consistently use a specific identifiable area in your home for business. However, incidental or occasional personal use won’t necessarily disqualify you.

Rules for employees: What if you work remotely from home as an employee for an organization? Previously, people who itemized deductions could claim home office deductions as a miscellaneous expense, if the arrangement was for their employer’s convenience. But the Tax Cuts and Jobs Act suspended miscellaneous expense deductions for 2018 through 2025. So, employees currently get no tax benefit if they work from home. On the other hand, self-employed individuals still may qualify if they meet the tax law requirements. Direct and indirect expenses If you qualify, you can write off the full amount of your direct expenses and a proportionate amount of your indirect expenses based on the percentage of business use of your home. Indirect expenses include Mortgage interest, Property taxes, Utilities (electric, gas, and water), Insurance, Exterior repairs, maintenance, and Depreciation or rent under IRS tables. Important: If you itemize deductions, mortgage interest and property taxes may already be deductible. If you claim a portion of these expenses as home office expenses, the remainder is deductible on your personal return. But you can’t deduct the same amount twice as a personal deduction and again as a home office expense.

Calculating your deduction: Typically, the percentage of business use is determined by the square footage of your home office. For instance, if you have a 3,000 square-foot home and use a room with 300 square feet as your office, the applicable percentage is 10%. Alternatively, you may use any other reasonable method for determining this percentage, such as a percentage based on the number of comparably sized rooms in the home. The simplified method of keeping track of indirect expenses is time-consuming. Some taxpayers prefer to take advantage of a simplified method of deducting home office expenses. Instead of deducting actual expenses, you can claim a deduction equal to $5 per square foot for the area used as an office, up to a maximum of $1,500 for the year. Although this method takes less time than tracking actual expenses, it generally results in a significantly lower deduction. When you sell keep in mind that if you claim home office deductions, you may be in for a tax surprise when you sell your home. If you eventually sell your principal residence, you may qualify for a tax exclusion of up to $250,000 of gain for single filers ($500,000 for married couples who file jointly). But you must recapture the depreciation attributable to a home office for the period after May 6, 1997.

Contact one of our experts if you have any questions related to writing off home office expenses, the best way to compute deductions, and the tax implications when you sell your home. © 2022

Categories
General Tax

Estates now have an additional three years to file for a portability election.

Portability allows a surviving spouse to apply a deceased spouse’s unused federal gift and estate tax exemption amount toward his or her own transfers during life or at death.

To secure these benefits, however, the deceased spouse’s executor must have made a portability election on a timely filed estate tax return (Form 706). The return is due nine months after death, with a six-month extension option.

Unfortunately, estates that aren’t otherwise required to file a return (typically because they don’t meet the filing threshold) often miss this deadline. The IRS recently revised its rules for obtaining an extension to elect portability beyond the original nine-months after death (plus six-month extension) timeframe.

What’s new? In 2017, the IRS issued Revenue Procedure 2017-34, making it easier (and cheaper) for estates to obtain an extension of time to file a portability election. The procedure grants an automatic extension, provided: The deceased was a U.S. citizen or resident, The executor wasn’t otherwise required to file an estate tax return and didn’t file one by the deadline, and The executor files a complete and properly prepared estate tax return within two years of the date of death.

Since the 2017 ruling, the IRS has had to issue numerous private letter rulings granting an extension of time to elect portability in situations where the deceased’s estate wasn’t required to file an estate tax return and the time for obtaining relief under the simplified method (two years of the date of death) had expired.

According to the IRS, these requests placed a significant burden on the agency’s resources. The IRS has now issued Revenue Procedure 2022-32. Under the new procedure, an extension request must be made on or before the fifth anniversary of the deceased’s death (an increase of three years). This method, which doesn’t require a user fee, should be used in place of the private letter ruling process. (The fee for requesting a private letter ruling from the IRS can cost hundreds or thousands of dollars.)

Don’t miss the revised deadline If your spouse predeceases you and you’d benefit from portability, be sure that his or her estate files a portability election by the fifth anniversary of the date of death.

Contact us with any questions you have regarding portability. © 2022

Categories
General Tax

The Kiddie Tax: Does It Affect your Family?

Many people wonder how they can save taxes by transferring assets into their children’s names. This tax strategy is called income shifting. It seeks to take income out of your higher tax bracket and place it in the lower tax brackets of your children. While some tax savings are available through this approach, the “kiddie tax” rules impose substantial limitations if: The child hasn’t reached age 18 before the close of the tax year, or The child’s earned income doesn’t exceed half of his or her support and the child is age 18 or is a full-time student age 19 to 23. The kiddie tax rules apply to your children who are under the cutoff age(s) described above, and who have more than a certain amount of unearned (investment) income for the tax year — $2,300 for 2022.

While some tax savings up to this amount can still be achieved by shifting income to children under the cutoff age, the savings aren’t substantial. If the kiddie tax rules apply to your children and they have over the prescribed amount of unearned income for the tax year ($2,300 for 2022), they’ll be taxed on that excess amount at your (the parents’) tax rates if your rates are higher than the children’s tax rates. This kiddie tax is calculated by computing the “allocable parental tax” and special allocation rules apply if the parents have more than one child subject to the kiddie tax. Note: Different rules applied for the 2018 and 2019 tax years, when the kiddie tax was computed based on the estates’ and trusts’ ordinary and capital gain rates, instead of the parents’ tax rates. Be aware that, to transfer income to a child, you must transfer ownership of the asset producing the income. You can’t merely transfer the income itself.

Property can be transferred to minor children using custodial accounts under state law. Possible saving vehicles The portion of investment income of a child that’s taxed under the kiddie tax rules may be reduced or eliminated if the child invests in vehicles that produce little or no current taxable income. These include: Securities and mutual funds oriented toward capital growth; Vacant land expected to appreciate in value; Stock in a closely held family business, expected to become more valuable as the business expands, but pays little or no cash dividends; Tax-exempt municipal bonds and bond funds; U.S. Series EE bonds, for which recognition of income can be deferred until the bonds mature, the bonds are cashed in or an election to recognize income annually is made.

Investments that produce no taxable income — and which therefore aren’t subject to the kiddie tax — also include tax-advantaged savings vehicles such as: Traditional and Roth IRAs, which can be established or contributed to if the child has earned income; Qualified tuition programs (also known as “529 plans”); and Coverdell education savings accounts. A child’s earned income (as opposed to investment income) is taxed at the child’s regular tax rates, regardless of the amount.

Therefore, to save taxes within the family, consider employing the child at your own business and paying reasonable compensation. If the kiddie tax applies, it’s computed and reported on Form 8615, which is attached to the child’s tax return. Two reporting options Parents can elect to include the child’s income on their own return if certain requirements are satisfied. This is done on Form 8814 and avoids the need for a separate return for the child. Contact us if you have questions about the kiddie tax. © 2022

Categories
Tax

Is Your Company Effectively Managing Tax Risk?

The concept of “tax risk” is an increasingly important and regular topic of discussion across organizations and in boardrooms, and for good reason. Businesses that operate across state lines or internationally can in certain cases trigger tax liabilities in jurisdictions where they do not have a physical presence. In addition, many countries are adopting policies requiring greater transparency in tax and financial reporting, providing tax administrations more information with which to raise investigations and issue assessments. As companies place additional focus on social responsibility and fiscal transparency, the benefits of having a tax risk policy in place can be substantial. Given the rapidly changing global tax environment combined with the continued demand for tax departments to add value to the organization, an effective tax risk policy is a necessity for any business needing to better manage tax risk.

Is tax risk currently top of mind for business leaders? According to the 2022 BDO Tax Outlook Survey, 51% of tax executives surveyed said they have a tax risk policy “complete and ready,” and 46% said their tax risk policy is a “work in progress.” Additionally, 94% of respondents reported that tax risk is “highly” or “moderately” included as part of their board of director’s oversight function. Whether they have fully implemented policies or are still in the drafting stage, all businesses should take the appropriate steps to be certain their tax risk policy contains what it needs to effectively manage tax risk.

Insight

Every business decision has a tax implication, and with each decision comes the potential for tax risk. An important part of managing tax risk rests with the ability of the tax department to proactively analyze and plan for the tax effects of business transactions as well as correctly report the associated tax consequences. A sound tax risk policy should involve the tax department having a seat at the table as business decisions are being planned and executed so that the associated tax implications may be effectively assessed in real time. Effective processes and controls that include regular, transparent communication with non-tax leaders and decision makers are essential.

A comprehensive tax risk policy will help tax departments mitigate financial reporting risk and potentially adverse operational consequences including negative cash flow impacts. In addition, a tax risk policy can provide shareholders and other stakeholders, tax authorities and regulators greater assurance that an organization has a thoughtful and robust approach to tax strategy and tax risk.

 

What is tax risk?

Tax risk is a company’s risk of incurring additional tax, interest or penalty costs due to incorrectly underreporting its tax obligations in its financial statements or in tax or other regulatory filings. It also includes the risk a company will unnecessarily pay more taxes than it might otherwise legally owe due to missed planning opportunities and lack of clear tax strategy. Tax risk generally is heightened when a company has, for example, multi-jurisdictional or cross-border transactions or complex supply chains, remote employees or agency arrangements, valuable intellectual property or digital operations. Further, businesses that do not effectively manage tax risk also run the risk of reputational damage, for example, with investors or other stakeholders, or with tax or other governmental administrations. In addition, where errors are significant, companies may be required to restate their financial statements.

Some examples of potential areas of tax risk include:

  • Failing to properly consider the tax impacts of a transaction or other business development due to a lack of communication between tax and the business organization.
  • Incorrectly underreporting taxes due to computational errors or misapplication of tax rules and regulations. Underreporting errors can expose a company not only to additional tax cost but also underpayment interest and civil or even criminal penalties.
  • Unnecessarily over reporting taxes due to insufficient or erroneous tax analysis or lack of tax planning. Over reporting errors can result in needless cash flow drains, as well as potential examinations and delayed refunds.
  • Failing to identify changes in tax law or other new developments affecting the company’s tax positions due to a lack of tax department resources.

 

The benefits of a tax risk policy

As part of an overall tax policy, every business should have a documented policy that addresses tax risk. According to the BDO 2022 Tax Outlook Survey, there is a correlation between tax department involvement in strategic planning decisions and having a tax risk policy. Of the survey respondents who said that leadership “always” includes tax in strategic planning decisions, 72% also indicated they had completed a tax risk policy. By comparison, only 38% of respondents who said they are “sometimes” included have a tax risk policy in place.

A comprehensive and properly implemented tax risk policy helps ensure a company’s tax behavior is in alignment with the company’s overall risk profile. An effective tax risk policy also strengthens tax risk awareness across the wider organization through better communication, processes and controls that include executive oversight of tax strategy. A well-developed tax risk policy will include:

  • A clearly articulated tax strategy, approved by management and the board of directors, that is aligned with the risk appetite of the broader organization.
  • Robust internal control policies, processes and review and oversight procedures around tax reporting and planning that can be shared with tax authorities and stakeholders or published as part of ESG reporting.
  • Sufficient tax department resources, technology and training along with clearly defined roles and responsibilities for tax department personnel.
  • A documented policy setting out the company’s approach to interaction with tax authorities and regulators.
  • A regular cadence of communication with organization leaders and board members regarding tax strategy, as well as procedures to help ensure that tax risk is considered when engaging in business planning.

 

Is your company’s tax risk policy effectively managing tax risk?

Every business should have a tax risk policy in place that not only articulates their tax strategy and vision but also reflects the way the company operates. In other words, to be effective, a tax risk policy must be consistent with the policies of the broader business organization.

In an ever-changing business and tax environment, an effective tax risk policy will include procedures that require the policy to be regularly assessed and modified as needed. Indications that your tax risk policy should be reviewed include:

  • Increased tax examination activities or unexpected tax examination findings.
  • Recent control deficiencies related to the tax function.
  • Legislative changes.
  • Tax department turnover or a department reorganization that could lead to loss of institutional tax knowledge.
  • Upcoming M&A or other significant business transactions.
  • Changes to business operating models or supply chains, organizational transformation or similar business factors.
  • Increased board or stakeholder inquiries related to tax, including around ESG concerns.

Contact one of our experts to discuss tax risk policies for your business.

Categories
General

Key Tax-Related Deadlines for Businesses and Employees

Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may not be additional deadlines that apply to you.

The IRS announced tax relief for Tennessee severe storms, straight-line winds and tornadoes that may affect taxpayers’ deadlines. Read below for more information.

Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 18

If you’re a calendar-year corporation, file a 2021 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due. Corporations pay the first installment of 2022 estimated income taxes.

For individuals, file a 2021 income tax return (Form 1040 or Form 1040-SR) or file for an automatic six-month extension (Form 4868) and paying any tax due. (See June 15 for an exception for certain taxpayers.) For individuals, pay the first installment of 2022 estimated taxes, if you don’t pay income tax through withholding (Form 1040-ES).

May 2

Employers report income tax withholding and FICA taxes for the first quarter of 2022 (Form 941) and pay any tax due.

May 10

Employers report income tax withholding and FICA taxes for the first quarter of 2022 (Form 941), if you deposited on time and fully paid all of the associated taxes due.

June 15

Corporations pay the second installment of 2022 estimated income taxes. The second estimated tax installment for individual taxpayers is due June 15 as well.

Our 2022 tax calendar gives you a quick reference to the most common forms and 2022 tax due dates for individuals, businesses, and tax-exempt organizations. Communicate any questions you may have with your ATA representative. © 2022

However, there is tax relief for Tennessee victims of severe storms, straight-line winds and tornadoes beginning December 10, 2021 now have until May 16, 2022, to file various individual and business tax returns and make tax payments, the Internal Revenue Service announced today.

Following the recent disaster declaration issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in certain areas will receive tax relief.

Individuals and households affected by severe storms, straight-line winds and tornadoes that reside or have a business in Cheatham, Davidson, Decatur, Dickson, Dyer, Gibson, Henderson, Henry, Lake, Obion, Stewart, Sumner, Weakley, and Wilson counties qualify for tax relief. The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after December 10, 2021, and before May 16, 2022, are postponed through May 16, 2022.

Read the full details in this IRS update.

Categories
General

Mandatory Capitalization of R&E Expenses — Will The New Rules Impact Your Business?

Businesses that invest in research and development, particularly those in the technology industry, should be aware of a major change to the tax treatment of research and experimental (R&E) expenses. Under the 2017 Tax Cuts and Jobs Act (TCJA), R&E expenditures incurred or paid for tax years beginning after December 31, 2021, will no longer be immediately deductible for tax purposes. Instead, businesses are now required to capitalize and amortize R&E expenditures over a period of five years for research conducted within the U.S. or 15 years for research conducted in a foreign jurisdiction. The new mandatory capitalization rules also apply to software development costs, regardless of whether the software is developed for sale or license to customers or for internal use.

Tax Implications of Mandatory Capitalization Rules

Under the new mandatory capitalization rules, amortization of R&E expenditures begins from the midpoint of the taxable year in which the expenses are paid or incurred, resulting in a negative year 1 tax and cash flow impact when compared to the previous rules that allowed an immediate deduction.

For example, assume a calendar-year taxpayer incurs $50 million of U.S. R&E expenditures in 2022. Prior to the TCJA amendment, the taxpayer would have immediately deducted all $50 million on its 2022 tax return. Under the new rules, however, the taxpayer will be entitled to deduct amortization expense of $5,000,000 in 2022, calculated by dividing $50 million by five years, and then applying the midpoint convention. The example’s $45 million decrease in year 1 deductions emphasizes the magnitude of the new rules for companies that invest heavily in technology and/or software development.

The new rules present additional considerations for businesses that invest in R&E, which are discussed below.

Cost/Benefit of Offshoring R&E Activities

As noted above, R&E expenditures incurred for activities performed overseas are subject to an amortization period of 15 years, as opposed to a five-year amortization period for R&E activities carried out in the U.S. Given the prevalence of outsourcing R&E and software development activities to foreign jurisdictions, taxpayers that currently incur these costs outside the U.S. are likely to experience an even more significant impact from the new rules than their counterparts that conduct R&E activities domestically. Businesses should carefully consider the tax impacts of the longer 15-year recovery period when weighing the cost savings from shifting R&E activities overseas. Further complexities may arise if the entity that is incurring the foreign R&E expenditures is a foreign corporation owned by a U.S. taxpayer, as the new mandatory capitalization rules may also increase the U.S. taxpayer’s Global Intangible Low-taxed Income (GILTI) inclusion.

Identifying and Documenting R&E Expenditures

Unless repealed or delayed by Congress (see below), the new mandatory amortization rules apply for tax years beginning after December 31, 2021. Taxpayers with R&E activities should begin assessing what actions are necessary to identify qualifying expenditures and to ensure compliance with the new rules. Some taxpayers may be able to leverage from existing financial reporting systems or tracking procedures to identify R&E; for instance, companies may already be identifying certain types of research costs for financial reporting under ASC 730 or calculating qualifying research expenditures for purposes of the research tax credit. Companies that are not currently identifying R&E costs for other purposes may have to undertake a more robust analysis, including performing interviews with operations and financial accounting personnel and developing reasonable allocation methodologies to the extent that a particular expense (e.g., rent) relates to both R&E and non-R&E activities.

Importantly, all taxpayers with R&E expenditures, regardless of industry or size, should gather and retain contemporaneous documentation necessary for the identification and calculation of costs amortized on their tax return. This documentation can play a critical role in sustaining a more favorable tax treatment upon examination by the IRS as well as demonstrating compliance with the tax law during a future M&A due diligence process.

Impact on Financial Reporting under ASC 740

Taxpayers also need to consider the impact of the mandatory capitalization rules on their tax provisions. In general, the addback of R&E expenditures in situations where the amounts are deducted currently for financial reporting purposes will create a new deferred tax asset. Although the book/tax disparity in the treatment of R&E expenditures is viewed as a temporary difference (the R&E amounts will eventually be deducted for tax purposes), the ancillary effects of the new rules could have other tax impacts, such as on the calculation of GILTI inclusions and Foreign-Derived Intangible Income (FDII) deductions, which ordinarily give rise to permanent differences that increase or decrease a company’s effective tax rate. The U.S. valuation allowance assessment for deferred tax assets could also be impacted due to an increase in taxable income. Further, changes to both GILTI and FDII amounts should be considered in valuation allowance assessments, as such amounts are factors in forecasts of future profitability.

Insights

The new mandatory capitalization rules for R&E expenditures and resulting increase in taxable income will likely impact the computation of quarterly estimated tax payments and extension payments owed for the 2022 tax year. Even taxpayers with net operating loss carryforwards should be aware of the tax implications of the new rules, as they may find themselves utilizing more net operating losses (NOLs) than expected in 2022 and future years, or ending up in a taxable position if the deferral of the R&E expenditures is material (or if NOLs are limited under Section 382 or the TCJA). In such instances, companies may find it prudent to examine other tax planning opportunities, such as performing an R&D tax credit study or assessing their eligibility for the FDII deduction, which may help lower their overall tax liability.

Will the new rules be delayed?

The version of the Build Back Better Act that was passed by the U.S. House of Representatives in November 2021 would have delayed the effective date of the TCJA’s mandatory capitalization rules for R&E expenditures until tax years beginning after December 31, 2025. While this specific provision of the House bill enjoyed broad bipartisan support, the BBBA bill did not make it out of the Senate, and recent comments by some members of the Senate have indicated that the BBB bill is unlikely to become law in its latest form. Accordingly, as of the date of this publication, the original effective date contained in the TCJA (i.e., taxable years beginning after December 31, 2021) for the mandatory capitalization of R&E expenditures remains in place.

How We Can Help

The changes to the tax treatment of R&E expenditures can be complex. While taxpayers and tax practitioners alike remain hopeful that Congress will agree on a bill that allows for uninterrupted immediate deductibility of these expenditures, at least for now, companies must start considering the implications of the new rules as currently enacted.

Stay informed with R & E  and business information by registering for our newsletter.

Categories
General

Can you deduct the costs of a spouse on a business trip?

If you own your own company and travel for business, you may wonder whether you can deduct the costs of having your spouse accompany you on trips. The rules for deducting a spouse’s travel costs are very restrictive. First of all, to qualify, your spouse must be your employee. This means you can’t deduct the travel costs of a spouse, even if his or her presence has a bona fide business purpose, unless the spouse is a bona fide employee of your business. This requirement prevents tax deductibility in most cases.

A spouse-employee

If your spouse is your employee, then you can deduct his or her travel costs if his or her presence on the trip serves a bona fide business purpose. Merely having your spouse perform some incidental business service, such as typing up notes from a meeting, isn’t enough to establish a business purpose. In general, it isn’t sufficient for his or her presence to be “helpful” to your business pursuits — it must be necessary. In most cases, a spouse’s participation in social functions, for example as a host or hostess, isn’t enough to establish a business purpose. That is, if his or her purpose is to establish general goodwill for customers or associates, this is usually insufficient.

Further, if there’s a vacation element to the trip (for example, if your spouse spends time sightseeing), it will be more difficult to establish a business purpose for his or her presence on the trip. On the other hand, a bona fide business purpose exists if your spouse’s presence is necessary to care for a serious medical condition that you have. If your spouse’s travel satisfies these tests, the normal deductions for business travel away from home can be claimed. These include the costs of transportation, meals, lodging, and incidental costs such as dry cleaning, phone calls, etc.

A non-employee spouse

Even if your spouse’s travel doesn’t satisfy the requirements, however, you may still be able to deduct a substantial portion of the trip’s costs. This is because the rules don’t require you to allocate 50% of your travel costs to your spouse. You need only allocate any additional costs you incur for him or her. For example, in many hotels the cost of a single room isn’t that much lower than the cost of a double. If a single would cost you $150 a night and a double would cost you and your spouse $200, the disallowed portion of the cost allocable to your spouse would only be $50.

In other words, you can write off the cost of what you would have paid traveling alone. To prove your deduction, ask the hotel for a room rate schedule showing single rates for the days you’re staying. And if you drive your own car or rent one, the whole cost will be fully deductible even if your spouse is along. Of course, if public transportation is used, and for meals, any separate costs incurred by your spouse wouldn’t be deductible.

Contact us if you have questions about this or other tax-related topics. © 2022

Categories
Helpful Articles Tax

New Reporting Guidelines for Third-Party Payment Services

As a result of the American Rescue Plan Act of 2021, sellers that receive at least $600 in a calendar year for goods and services transactions through a Third-Party Settlement Organization (TPSO) such as PayPal or Venmo will be required to report this income to the IRS when filing taxes for 2022. This reporting threshold was significantly lowered from 2021’s threshold of $20,000 in payments and 200 transactions. 

This is not a tax change, it is a reporting change. The new regulations make it possible for the IRS to verify the income business owners receive through TSPOs. No extra tax will be applied to these amounts.

These guidelines are not applicable to:

  • Amounts sent as a gift
  • Amounts from selling personal items at a loss
  • Amounts sent as reimbursements

Several TSPOs, including Venmo, allow users to mark a payment as a goods and services transaction, making it easier for sellers to keep records of their income. 

At the end of the calendar year, TSPOs will send Form 1099-K to users that received more than $600. This form will be provided to the user’s tax preparer when filing a 2022 tax return in 2023. These guidelines will not affect 2021 tax returns. 

Business owners and independent contractors should be prepared to provide their employer identification number (EIN), individual tax identification number (ITIN), or Social Security number to TSPOs in order to continue utilizing the services and to receive their 1099-K.

For more information regarding this reporting change, contact your ATA representative today.