The Tax Implications

Hi and welcome back to the tax implications podcast.

I’m Sam Hicks, I’m a CPA and tax advisor and

This is your short form podcast covering the items that affect your bottom line.

Thank you for tuning in. Today I’ll be discussing child tax credit payments.

The first advance payments under the temporarily expanded child tax credit (CTC) began to arrive for nearly 39 million households in mid-July 2021 — unless, that is, they opt out. Most eligible families won’t need to do anything to receive the payments, but you need to understand the implications and why advance payments might not make sense for your household even if you qualify for them.

Understanding the CTC, then and now

The CTC was established in 1997. Unlike a deduction, which reduces taxable income, a credit reduces the amount of taxes you owe on a dollar-for-dollar basis. While some credits are limited by the amount of your tax liability, others, like the CTC, are refundable, which means that even taxpayers with no federal tax liability can benefit. Historically, the CTC has been only partially refundable in that the refundable amount was limited to $1,400.

The American Rescue Plan Act (ARPA) significantly expands the credit, albeit only for 2021. Specifically, the ARPA boosts the CTC from $2,000 to $3,000 per child ages six through 17, with credits of $3,600 for each child under age six. Plus, the CTC is now fully refundable. It also affords taxpayers the opportunity to take advantage of half of the benefit in 2021, rather than waiting until tax time in 2022.

Note, however, that there are limits to eligibility. The $2,000 credit is subject to a phaseout when income exceeds $400,000 for joint filers and $200,000 for other filers, and this continues under the ARPA — for the first $2,000. A separate phaseout applies for the increased amount: $75,000 for single filers, $112,500 for heads of household and $150,000 for joint filers.

Receiving advance payments

The ARPA directed the U.S. Treasury Department to begin making monthly payments of half of the credit in July 2021, with the remaining half to be claimed in 2022 on 2021 tax returns. For example, a household that’s eligible for a $3,600 CTC will receive $1,800 ($300 in six monthly payments) in 2021 and would claim the balance of $1,800 on the 2021 return. The payments will be made on the 15th of each month through December 2021, except for August, when they’ll be paid on August 13.

To qualify for advance payments, you (and your spouse, if filing jointly) must have:

Beyond 2021

The expanded CTC is available only for 2021 as of now. President Biden has indicated that he’d like to extend it through at least 2025, and some Democratic lawmakers hope to make it permanent. But it’ll be challenging to pass a bill to make either of these proposals happen. We’ll keep you informed about any developments that could affect your tax planning.

You should consult with experienced tax and legal professionals before making any decisions for your business.

Thank you for listening.

If you have any questions that you’d like discussed on a future episode please contact me at [email protected].

Hi and welcome back to the tax implications podcast.

I’m Sam Hicks, I’m a CPA and tax advisor and

This is your short form podcast covering the items that affect your bottom line.

Thank you for tuning in. Today I’ll be discussing upcoming tax proposals for the build back better act congress is currently working on.

You should consult with experienced tax and legal professionals before making any decisions for your business.

Thank you for listening.

If you have any questions that you’d like discussed on a future episode please contact me at [email protected].

Hi and welcome back to the tax implications podcast.

I’m Sam Hicks, I’m a CPA and tax advisor and

This is your short form podcast covering the items that affect your bottom line

Thank you for tuning in. Today I’ll be discussing employee retention credits

I thought you might be interested in the modification and extension of the employee retention tax credit (ERTC) by the American Rescue Plan Act (ARPA), signed by President Biden on March 11, 2021. We would be happy to assist you in analyzing whether claiming the modified and extended ERTC might benefit your business. Background. Congress originally enacted the ERTC in the Coronavirus Aid, Relief and Economic Security (CARES) Act in March of 2020 to encourage employers to hire and retain employees during the pandemic. At that time, the ERTC applied to wages paid after March 12, 2020 and before January 1, 2021. However, Congress later modified and extended the ERTC to apply to wages paid before July 1, 2021.

Extension. The ARPA extended and modified the ERTC to apply to wages paid after June 30, 2021 and before Jan. 1, 2022. Thus, an eligible employer can claim the refundable ERTC against ''applicable employment taxes'' (as defined below) equal to 70% of the qualified wages it pays to employees in the third and fourth quarters of 2021. Except as discussed below, qualified wages are generally limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERTC amount available is generally $7,000 per employee per calendar quarter or $28,000 per employee in 2021. For purposes of the ERTC, a qualified employer is eligible for the ERTC if it experiences a significant decline in gross receipts or a full or partial suspension of business due to a governmental order. Employers with up to 500 full-time employees (i.e., small employers) can claim the credit without regard to whether the employees for whom the credit is claimed actually perform services. But, except as discussed below, employers with more than 500 full-time employees (i.e, a large employer) can only claim the ERTC with respect to employees that do not perform services. Employers who got a Payroll Protection Program (PPP) loan in 2020 can still claim the ERTC. But, the same wages cannot be used both for seeking forgiveness of the loan or satisfy conditions of other COVID relief programs (such as the restaurant revitalization grants enacted as part of the ARPA) in calculating the ERTC.

Modifications. Beginning in the third quarter of 2021, the following modifications apply will apply to the ERTC:

The statute of limitations for assessments relating to the ERTC will not expire until five years after the date that the original return claiming the credit is filed or treated as filed. For example, if the Form 941 for the fourth quarter of 2021 claiming the ERTC is treated as filed on April 15, 2022, the return could be audited with respect to the ERTC as late as April 14, 2027.

You should consult with experienced tax and legal professionals before making any decisions for your business.

Thank you for listening.

If you have any questions that you’d like discussed on a future episode please contact me at [email protected].

Hi and welcome back to the tax implications podcast.

I’m Sam Hicks, I’m a CPA and tax advisor and

This is your short form podcast covering the items that affect your bottom line

Thank you for tuning in. Today I’ll be discussing lottery winnings

There are several tax considerations, as well as important nontax considerations, that you should take into account.

How lottery winnings are taxed. You should be aware that lottery winnings are taxable at the federal level, some states don’t tax winnings. This is the case for cash winnings and for the fair market value of any noncash prizes you may win, such as a car or vacation. Depending on your other income and the amount of your winnings, your federal tax rate may be as high as 37%. Your lottery winnings may also be subject to state income tax. Thus, depending on where you live, your total tax bill could be as high as 50%, or more. You don't get any capital gains rate break for lottery winnings. Nor is there any income averaging to help lower your tax bill.

On the other hand, you are entitled to a tax deduction for any gambling losses you had. These are taken as an itemized deduction but cannot exceed your winnings. If your lottery winnings are payable in annual installments, the installments you receive in future years are still gambling winnings, making losses in those future years deductible to the extent of the installments, even if you have no other gambling winnings in those years. Gambling losses aren't subject to the pre-2018/post-2025 2%-of-adjusted-gross-income floor on miscellaneous itemized deductions (miscellaneous itemized deductions are suspended for tax years 2018-2025), nor are they subject to the pre-2018/post-2025 overall limitation on itemized deductions (also suspended for tax years 2018-2025).

To establish your entitlement to a deduction for gambling losses, you should keep documentary evidence of the costs of your wagers—both the cost of your lottery tickets and of any other wagering you do, such as betting on races, casino games, etc. The evidence should consist of receipts for tickets, wagers, cancelled checks, credit card charges, losing tickets, etc. Make sure you do this for all the years in which you're receiving installment payments of your lottery winnings. In some cases, taxpayer estimates have been allowed, but you shouldn't rely on this. Documentary evidence is preferable by far.

Shared ownership of winning lottery ticket. If you are sharing the prize on a winning lottery ticket (for example, with members of your family, or friends), you may still wind up paying tax on the entire amount, depending on the sharing arrangement. The key is to establish that the ticket was owned by multiple persons—you and the persons with whom you are sharing the prize—before the ticket was declared to be a winner. If you can do this, then you and the other co-owners of the ticket each report only your individual shares as income.

You should consult with experienced tax and legal professionals before making any decisions for your business.

Thank you for listening.

If you have any questions that you’d like discussed on a future episode please contact me at [email protected].

I’m Sam Hicks, I’m a CPA and tax advisor and

This is your short form podcast covering the items that affect your bottom line

Thank you for tuning in. Today I’ll be discussing Office deductions for at home and telecommuting employees

If you're an employee who “telecommutes”—that is, you work at home, and communicate with your employer mainly by telephone, e-mail, fax, electronic data transfer, express mail services, etc.—you should know about the strict rules that govern whether you can deduct your home office expenses.

For 2018–2025 employee home office expenses aren't deductible. Employee business expense deductions (including the expenses an employee incurs to maintain a home office) are miscellaneous itemized deductions and are disallowed from 2018 through 2025.

After 2025 (and before 2018) employee office expenses are deductible, within limits. Starting in 2026, you may deduct your home office expenses if your home office is for the convenience of your employer (see below), and if you meet any of the three tests described further below: the separate structure test, the place for meeting patients, clients or customers test, or the principal place of business test.

If you do qualify, you may compute your home office deductions (described below) on a special worksheet. You report the expenses on Schedule A as below-the-line miscellaneous itemized deductions that are deductible only to the extent that they (together with all other miscellaneous itemized deductions) exceed 2% of your adjusted gross income.

Convenience of the employer requirement. The convenience of the employer requirement is satisfied if:

· you maintain your home office as a condition of employment—in other words, if your employer specifically requires you to maintain the home office and work there;

· your home office is necessary for the functioning of your employer's business; or

· your home office is necessary to allow you to perform your duties as an employee properly.

The convenience of the employer requirement means that you must maintain your home office for your employer's convenience, and not for your own. This requirement isn't satisfied if your use of a home office is merely “appropriate and helpful” in doing your job.

Under the above rules, if your employer requires you to telecommute, and doesn't make on-premises office space available for you, your maintenance of a home office for telecommuting will probably be treated as for the convenience of the employer. Otherwise, it's not clear whether your home office will be treated as satisfying this requirement. Therefore, if you can, you should get your employer to put in writing that it's a requirement of your job to work from an office in your home.

You should consult with experienced tax and legal professionals before making any decisions for your business.

Thank you for listening.

If you have any questions that you’d like discussed on a future episode please contact me at [email protected].

I’m Sam Hicks, I’m a CPA and tax advisor and

This is your short form podcast covering the items that affect your bottom line

Thank you for tuning in. Today I’ll be discussing home office deductions

Taxpayers who use their home for business may be eligible to claim a home office deduction. It allows qualifying taxpayers to deduct certain home expenses on their tax return. This can reduce the amount of the taxpayer’s taxable income. Here are some things to help taxpayers understand the home office deduction and whether they can claim it:

o    Includes a house, apartment, condominium, mobile home, boat or similar property.

o    Also includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse.

o    Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.

o    There must be exclusive use of a portion of the home for conducting business on a regularly basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.

o    The home must be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home, but also uses their home to conduct business may still qualify for a home office deduction.

o    The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.

o    When using the regular method, deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.

You should consult with experienced tax and legal professionals before making any decisions for your business.

Thank you for listening.

If you have any questions that you’d like discussed on a future episode please contact me at [email protected].

I’m Sam Hicks, I’m a CPA and tax advisor and

This is your short form podcast covering the items that affect your bottom line

Thank you for tuning in. Today I’ll be discussing cost segregation studies

Business and individual taxpayers that acquire nonresidential real property or residential rental property have an opportunity to reduce the depreciable lives on assets which are building components. Certain assets may qualify for shorter lives and recovery periods under MACRS depreciation. The reduction of the asset lives provides accelerated deductions to offset income.

Many taxpayers mistakenly include the cost of such components in the depreciable basis of the building and the cost is recovered over a longer depreciation period.  A nonresidential real property is depreciated over a 39-year life and a residential rental property is depreciated over 27.5-years. Certain building components may qualify for a reduced recovery period over 5-years, 7-years, or 15-years.

Some examples of building components include: parking lots, sidewalks, curbs, roads, fences, storm sewers, landscaping, signage, lighting, security and fire protection systems, removable partitions, removable carpeting and wall tiling, furniture, counters, appliances and machinery (including machinery foundations) unrelated to the operation and maintenance of the building, and the portion of electrical wiring and plumbing properly allocable to machinery and equipment that is unrelated to the operation and maintenance of the building.

A taxpayer may engage a specialist to conduct a cost segregation study to identify the separately depreciable components and their depreciable basis. Ideally, a cost segregation study should be conducted prior to the time that a building is placed into service (i.e., when it is under construction or at the time of purchase). However, a cost segregation study can be completed after a building is placed in service. Even if a detailed cost segregation study is impractical, a practitioner should carefully consider whether there are any obvious land improvements and personal property components of a building that can be separately depreciated over a shorter recovery life.

The change to the depreciation lives requires either an amended return or an accounting method change (if two years after the property is acquired or placed in service). The reporting to the IRS includes the change of basis, depreciable lives, and any adjustments for the impact of the depreciation acceleration from the date placed in service to the year of the method change.

You should consult with experienced tax and legal professionals before making any decisions for your business.

Thank you for listening.

If you have any questions that you’d like discussed on a future episode please contact me at [email protected].

Hi and welcome back to the tax implications podcast.

I’m Sam Hicks, I’m a CPA and tax advisor and

This is your short form podcast covering the items that affect your bottom line

Thank you for tuning in. Today I’ll be discussing net operating losses

Taxpayers have an opportunity to utilize net operating losses (NOLs) generated on their personal and corporate tax returns generated in tax year 2021 by carrying forward the losses. The usage of the loss carryover is subject to certain limitations.

Net operating losses (NOLs) and limitations. An NOL is generally determined by subtracting deductions from gross income. For NOLs arising in tax years beginning after 2020, the loss carryforward period is unlimited. However, the carryforward may only offset 80 percent of taxable income. There is no carryback period, except for farming losses and non-life insurance company (property and casualty insurance company) losses, which have a two-year carryback period. The 80 percent limitation does not apply to non-life insurance companies. Taxable income for the percentage limitation is computed without regard certain deductions, including capital losses, qualified business income and foreign-derived intangible income.

For losses from tax years beginning before 2018, there is a 20-year carry forward period and no percent limitation. Under the CARES Act net operating losses (NOLs) arising in tax years beginning in 2018, 2019, and 2020 have a five-year carryback period and an unlimited carryforward period. The provision limiting an NOL deduction to 80 percent of taxable income does not apply to NOLs arising in these years.

Reporting procedures. In calculating the amount of an NOL or an NOL carryover, a noncorporate taxpayer (an individual, trust or estate) and C corporation must make several adjustments to adjusted gross income and taxable income. In order to deduct an NOL, the taxpayer must file the appropriate form or statements with the IRS, depending on whether the NOL is being carried back to a prior year or carried forward to a future year.

If the NOL is carried forward, the NOL is entered as a deduction on the return in the first carryforward year and a recalculation of taxable income is not required. To file a carryback claim, a taxpayer can file an amended income tax return for the carryback year or a tentative refund claim. If an NOL is carried back, the taxable income in the carryback year is recomputed to determine the refund due in the carryback year.

Irrevocable elections to waive the loss carryback period for certain taxpayers. For tax years beginning after 2020, a taxpayer in the farming business and non-life insurance companies can make an irrevocable election to waive the two-year carryback period. An election to waive carryback of a NOL may make sense for a number of reasons, even though it postpones the NOL deduction. Waiving the carryback could benefit a taxpayer who experienced low income years before the loss year and expects high income tax liability in the years after the loss year.

You should consult with experienced tax and legal professionals before making any decisions for your business.

Thank you for listening.

If you have any questions that you’d like discussed on a future episode please contact me at [email protected].

I’m Sam Hicks, I’m a CPA and tax advisor and

This is your short form podcast covering the items that affect your bottom line

Thank you for tuning in. Today I’ll be discussing Record Keeping

Small business owners should keep good records. This applies to all businesses, whether they have a couple dozen employees or just a few. Whether they install software or make soft-serve. Whether they cut hair or cut lawns. Keeping good records is an important part of running a successful business. Here are some questions and answers to help business owners understand the ins and outs of good recordkeeping.

Why should business owners keep records?

Good records will help them:

What kinds of records should owners keep?

Small business owners may choose any recordkeeping system that fits their business. They should choose one that clearly shows income and expenses. Except in a few cases, the law does not require special kinds of records.

How long should businesses keep records?

How long a document should be kept depends on several factors. These factors include the action, expense and event recorded in the document. The IRS generally suggests taxpayers keep records for three years.

How should businesses record transactions?

A good recordkeeping system includes a summary of all business transactions. These are usually kept in books called journals and ledgers, which business owners can buy at an office supply store. All requirements that apply to hard copy books and records also apply to electronic business records.

What is the burden of proof?

The responsibility to validate information on tax returns is known as the burden of proof. Small business owners must be able to prove expenses to deduct them.

How long should businesses keep employment tax records?

Business owners should keep all records of employment taxes for at least four years.

You should consult with experienced tax and legal professionals before making any decisions for your business.

Thank you for listening.

If you have any questions that you’d like discussed on a future episode please contact me at [email protected].

Hi and welcome back to the tax implications podcast.

I’m Sam Hicks, I'm a CPA and tax advisor and

This is your short form podcast covering the items that affect your bottom line

Thank you for tuning in. Today I’ll be discussing hobby loss rules.

Like many, you've probably dreamed of turning a hobby into a regular business. You won't have any unusual tax headaches if your new business is profitable. However, if the new enterprise consistently generates losses (deductions exceed income), IRS may step in and say it's a hobby—the IRS considers these an activity not engaged in for profit—rather than a business.

What are the practical consequences of an activity being treated as a “hobby”?

There are two ways to avoid the hobby loss rules presumption. The first way is to show a profit in at least three out of five consecutive years (two out of seven years for breeding, training, showing, or racing horses). The second way is to run the venture in such a way as to show that you intend to turn it into a profit-maker, rather than operate it as a mere hobby. The IRS regs themselves say that the hobby loss rules won't apply if the facts and circumstances show that you have a profit-making objective.

How can you prove that you have a profit-making objective? In general, you can do so by running the new venture in a businesslike manner. More specifically, IRS and the courts will look to the following factors:

how you run the activity;

your expertise in the area (and your advisers' expertise);

the time and effort you expend in the enterprise;

whether there's an expectation that the assets used in the activity will rise in value;

your success in carrying on other similar or dissimilar activities;

your history of income or loss in the activity;

the amount of occasional profits (if any) that are earned;

your financial status;

and whether the activity involves elements of personal pleasure or recreation.

The classic “hobby loss” situation involves a successful businessperson or professional who starts something like a dog-breeding business, or a farm. But IRS's long arm also can reach out to more usual situations, such as businesspeople who start what appears to be a bona-fide sideline business.

You should consult with experienced tax and legal professionals before making any decisions for your business.

Thank you for listening.

If you have any questions that you’d like discussed on a future episode please contact me at [email protected].