Category: Small Business

March 15, 2024 | by RSM US LLP

To improve traceability and detect and protect organic integrity across the supply chain, the United States Department of Agriculture created the National Organic Program (NOP) Strengthening Organic Enforcement (SOE) rule, which will become effective on March 19, 2024. This means all organic imports into the United States must be declared as such and contain an associated NOP import certificate. Importers and exporters of organic products who sell, process, treat, pack, containerize, repackage, label or store agricultural products, regardless of the product packaging, must have organic certifications and be listed on an NOP import certificate. Food and beverage companies must take note and address this new rule.

Each certificate must have a unique identification number to provide an auditable record trail of the import, supporting traceability and verification of organic integrity as products travel from a certified organic exporter outside the U.S. to a certified U.S. importer. Certificates must contain detailed information about the quantity and origin of organic products being imported into the U.S. The importer or its customs broker must enter the NOP import certificate number into the U.S. Customs and Border Protection’s Automated Commercial Environment (ACE) system to associate the shipment details in ACE with the import certificate information.

Pursuant to 7 CFR § 205.101 of the rule, the following operations are exempt from these requirements but must still comply with organic production and handling as well as applicable labeling requirements:

• Production or handling operations that sell agricultural products as “organic” but whose gross agricultural income from organic sales totals $5,000 or less annually
• Retail establishments that do not process organically produced agricultural products
• Retail establishments that process, at the point of final sale, agricultural products certified as “100% organic,” “organic,” or “made with organic (specified ingredients or food group(s))”
• Handling operations that only handle agricultural products that contain less than 70% organic ingredients or that only identify organic ingredients on the information panel
• Operations that only receive, store and/or prepare for shipment, but do not otherwise handle, organic agricultural products that are enclosed or will remain in sealed, tamper-evident packages or containers prior to being received or acquired by the operation
• Operations that only buy, sell, receive, store and/or prepare for shipment, but do not otherwise handle, organic agricultural products already labeled for retail sale that are enclosed or will remain in sealed, tamper-evident packages or containers that are labeled for retail sale prior to being received or acquired by the operation and are not otherwise handled while in the control of the operation
• Operations that only arrange for the shipping, storing, transport or movement of organic agricultural products but do not otherwise handle organic products

To obtain certification, the exporter must request an NOP import certificate from their certifier. They must identify products as organic on all export documents such as invoices, packing lists, bills of lading and U.S. Customs entry data and provide the NOP import certificate to the importer. The exporter must also verify that the product has not been exposed to a prohibited substance, treated with a prohibited substance because of fumigation, or treated with ionizing radiation at any point in the products’ movements across the country border.

Similarly, importers must ensure that they have accurate NOP import certificates and ensure products are identified as organic on all import documentation and customs entry data. They must maintain import documents and provide them during inspections. Importers also must verify that shipments do not come into contact with prohibited substances or be exposed to ionizing radiation since export and have a documented organic control system to conduct this verification.

Recommended next steps

U.S. food and beverage importers should take immediate action to comply with the SOE rule by taking the following steps:

• Review the SOE final rules
• Determine if operations meet the new rule requirements
• Obtain NOP import certificates for applicable products
• Develop a formal organic control program
• Audit internal processes and documentation to ensure compliance

February 26, 2024 | by RSM US LLP

The Employee Retention Credit (ERC) provided a refundable employment tax credit for eligible employers experiencing economic hardship, generally for wages paid between March 13, 2020 through Sept. 30, 2021. While the program provided necessary economic relief for employers experiencing financial hardship related to COVID-19, the Service was eventually inundated with claims by applicants that were either not eligible for relief or claimed an excessive amount of ERC. Many applicants were misled into claiming ERC because of aggressive marketing by third party promoters.

The Service is responding to the influx of dubious claims by aggressively targeting ERC claims for audit, placing a moratorium on the processing of new claims and launching criminal investigations on promoters and businesses associated with improper claims. 

The Service recently advised businesses to revisit their eligibility before March 22, 2024. The more beneficial ERC Voluntary Disclosure Program remains open only until March 22, 2024 for taxpayers that previously claimed and received the ERC but have now determined they were ineligible for some or all quarters. The voluntary disclosure program gives taxpayers an opportunity to repay only 80% of the erroneous ERC received and avoid certain penalties and interest while providing protection against future audit of the employment tax returns at issue. 

An employer may enter the ERC Withdrawal Program to avoid potential penalties and interest if the ERC refund has not yet been paid by the IRS but the employer now believes it is ineligible (or partially ineligible). An employer may only withdraw a claim if it has not been selected for an IRS examination. The ERC withdrawal program continues to be effective even after March 22, 2024.

With the March 22, 2024 deadline quickly approaching, the Service encourages employers to carefully review their ERC claims while there is still time to voluntarily disclose errors under the most beneficial program. 

The agency also alerted employers of seven common signs that a claim may be incorrect:

1. Too many quarters being claimed.  It is uncommon for a taxpayer to qualify for ERC for all quarters that the credit was available. Employers are urged to carefully review their eligibility for each quarter, especially if they are asserting eligibility under the government orders test rather than the gross receipts test. Even employers satisfying the gross receipts test may need to examine eligibility if they are a large employer who must establish wages claimed for ERC were paid for the nonperformance of service.
2. Government orders that do not qualify. To claim the ERC under the government order test,
   1. The government orders impacting the employer’s operations must have been in effect and the operations must have been fully or partially suspended because of the government order during the period for which they are claiming the credit,
   2. The government order must be due to the COVID-19 pandemic, and
   3. The order must be a government order, as opposed to guidance, a recommendation or statement.
3. Too many employees and wrong calculations.  Employers need to meet certain rules for wages to be considered qualified wages, depending on the tax period. As the law changed throughout 2020 and 2021, the credit is likely to be overclaimed if the same credit amount is used across multiple tax periods for each employee. In addition, large eligible employers must follow a set of additional rules when calculating eligible wages that can be complex. 
4. Business citing supply chain issues. A supply chain disruption alone does not qualify an employer for ERC. Employers need to carefully review the rules on supply chain issues to ensure eligibility.
5. Business claiming ERC for too much of a tax period. Businesses should review their claim for overstated qualifying wages as it is uncommon to qualify for ERC for the entire calendar quarter if their business operations were suspended due to a government order during only a portion of a calendar quarter.
6. Business did not pay wages or did not exist during eligibility period. Employers can only claim ERC for tax periods in which they were in existence and paid wages to employees. Businesses should confirm they only submitted claims for tax periods for which they can verify that employees were paid and the business was ongoing.
7. ERC promoter claims there is nothing to lose.  Businesses that were told applying for the ERC presented no risk should carefully review their claims for eligibility. Incorrect ERC claims risk repayment, penalties, interest, and audit.

If an employer determines their claim was ineligible or partially ineligible, they should consult with a tax professional about taking advantage of the ERC Voluntary Disclosure Program or the ERC Withdrawal Program as soon as possible.

February 07, 2024 | by Atherton & Associates, LLP

 

If your entity does not fall into one of the categories above, you may still be exempt if your entity is considered a “large operating company.” The IRS defines a large operating company as an entity:

• With 20 full-time U.S. employees. A full-time employee is an employee who is employed an average of at least 30 hours per week. Employer aggregation rules do not apply
•  With a U.S. physical office; and
• That filed a federal income tax return in the prior year with more than $5 million in US gross receipts or sales (determined on a consolidated basis for taxpayers filing consolidated returns). Receipts or sales from outside the U.S. are excluded in determining the $5 million threshold.

All three of the rules above must apply to you at all times in order to be exempt from filing. So, if your employee count falls under twenty, you are required to report.

Entities in existence prior to January 1, 2024, have until January 1, 2025, to file these reports. However, entities formed in 2024 will have 90 days from the entity’s formation/registration to file these reports. The deadline changes to within 30 days of formation after 2024. If any of the reported information changes or a beneficial ownership interest is sold or transferred, the entity must report this information within 30 days of the change or face the potential of having the penalties described above imposed. Changes include reporting a beneficial owner’s change of address or name, a new passport number when a passport is replaced or renewed or providing a copy of a renewed driver’s license.

The BOI report must be completed electronically through the FINCEN’s secure filing system called “BOSS,” (Beneficial Ownership Secure System). 

Unfortunately, we understand that this will impose burdensome reporting requirements on most businesses, but the willful failure to report information and timely update any changed information can result in significant fines of up to $500 per day until the violation is remedied, or if criminal charges are brought, fines of up to $10,000 and/or two years imprisonment. These penalties can be imposed against the beneficial owner, the entity, and/or the person completing the report.

While we can do our best to our your questions directly, we highly recommend you visit the following website, https://www.fincen.gov/sites/default/files/shared/BOI_Informational_Brochure_508C.pdf for more information or https://www.fincen.gov/boi-faqs for FAQs to answer your questions. The registration can be found at https://www.fincen.gov/boi.

We hope that this information is helpful. Due to the many requirements of this new law, our firm is unable to fill out this information for you. Therefore, this is something that you must complete on your own. Please be sure to review all requirements and ensure that you complete the BOI report in a timely manner.

 

Sincerely,

Atherton & Associates, LLP

January 25, 2024 | by RSM US LLP

As remote and hybrid work have become institutional factors in business operations and labor markets, an increasing number of organizations have formalized policies governing their employees’ work location.

However, policies that do not consider relevant state and local tax ramifications potentially expose companies to costs and penalties associated with noncompliance.

Whether a business is updating its policy or still developing one, incorporating the following state and local tax considerations may help the organization comply with laws in their jurisdictions and avoid unintended, costly consequences of noncompliance.

Nexus footprint and Public Law 86-272 considerations

A remote workforce can significantly affect a company’s state tax nexus footprint. Specifically, establishing nexus through remote workers could cause new income and franchise tax and sales and use tax obligations if nexus was not previously established in the employee’s resident state.

A company is generally considered to be doing business subject to a state’s tax laws if the company has employees working in the state. Businesses with employees working remotely, if they would have otherwise worked in an office location, could be subject to a state’s tax laws based merely on employees’ presence.

A commuting employee living in a different state than their employer’s location would not normally create nexus for the employer; but as a remote worker, that employee attributes presence to the employer through performance of their duties at home. Importantly, a business can establish nexus through many other mechanisms beyond the presence of employees, including through holding property in the state or based on sales into a state.

Additionally, some businesses may have had nexus in a state but were not subject to an income tax liability because of a federal safe harbor known as Public Law 86-272. This law prohibits a state from imposing a net income tax on a seller’s business activity if it is limited to soliciting orders for sales of tangible personal property. An employee working from their residence may cause the company to lose that protection.

Finally, a remote workforce that establishes nexus for any state tax could create and complicate registration and compliance obligations. Businesses subject to tax in new jurisdictions may result in remarkably different apportionment factors for income tax purposes. Businesses selling taxable goods or services in those jurisdictions may need to start charging and remitting sales tax as well.

Withholding individual income taxes

With remote employee scenarios, businesses must determine where, and in some cases if, they must withhold state and local income taxes.

Generally, individual income tax jurisdiction is governed by an employee’s state of residence or state of employment. However, there are exceptions.

Some states subject a nonresident employee of an in-state employer to tax on 100% of their wages if certain requirements are met under the “convenience of the employer” rule.

Other states and certain localities will subject any employee activity occurring in their jurisdiction to tax. While some bordering states in parts of the U.S. provide for reciprocal individual income tax agreements, most states do not. Navigating the application of nonresident individual income tax rules can be exceedingly complex.

Supporting compliance with human capital management technology

For businesses to remain in compliance with state and local tax laws, they must have up-to-date information about their employees’ remote work locations and the number of hours employees are working there. Human capital management (HCM) applications can support those compliance processes.

Businesses can structure work policies and practices to make it easy for workers to update information themselves into an HCM application. By engineering processes and workflows in an HCM system that’s integrated with the business’s payroll function, the business can capture data correctly and administer it efficiently.

For remote and hybrid employees, an HCM application can also help manage other issues with tax implications, including compensation, benefits, expenses and reimbursements. Those capabilities can enable companies to operationalize remote and hybrid work arrangements as an effective component of their strategy to recruit and retain employees.

The takeaways

Businesses with employees in remote or hybrid work arrangements could be creating new nexus jurisdictions or withholding requirements due to the nature of an employee working from their residence. A state and local tax advisor can help a company understand the complex laws that apply to their specific jurisdictions and circumstances.

An organization that understands how remote and hybrid work arrangements affect their state and local tax footprint may structure their policies to address tax costs. HCM applications can help operationalize those policies by managing the flow and administration of employee data.

When a company’s policies, processes and technology work in harmony, they can support tax compliance and help the organization effectuate its strategy to appeal to workers with the flexibility a remote or hybrid arrangement offers.

January 19, 2024 | by RSM US LLP

Executive summary 

Momentum continues to build towards a potential tax agreement that would couple an expanded child tax credit with a temporary reinstatement of certain TCJA-related business tax benefits, including:

1. Research and development (R&D) expensing (section 174)
2. Less stringent business interest limitations (section 163(j))
3. Continuation of 100% bonus depreciation

To that end, proposed legislation H.R. 7024, the “Tax Relief for American Families and Workers Act of 2024” key tax writers in the Senate and the House, building upon a framework agreement released Jan. 16, that would further advance these provisions toward potential enactment. However, significant obstacles remain, including the need for buy-in from senior lawmakers, as well as the support (and vote) from enough lawmakers in both the House and the Senate to ensure passage. The framework also includes disaster relief provisions, enhanced section 179 expensing benefits, expansion of the low-income housing tax credit, and relief from double taxation for Taiwan residents. The proposals would be completely paid for by barring new employee retention credit (ERC) claims after Jan. 31, 2024. 

Discussion

Senate Finance Chairman Ron Wyden and House Ways and Means Chairman Jason Smith have proposed legislation that would temporarily postpone certain scheduled tax increases for the “big 3” business provisions that were enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA) in exchange for an expanded child tax credit. The Tax Relief for American Families and Workers Act of 2024 represents the culmination of a months-long negotiating process between key lawmakers, and the measure must now navigate a tricky political environment where Congress is faced with several competing priorities, and where action before the impending tax filing season is critical. The House Ways & Means Committee marked up, and ultimately approved by a 40-3 vote signifying strong bipartisan support, the legislative text on Friday Jan. 19, and the full House will likely take up the measure when they return from recess on Jan. 29, if not sooner. ?

Both the legislative text as well as the Joint Committee on Taxation’s summary of the measure provide additional details of the initial proposals, which may change as the bill advances through Congress. A summary of those initial proposals, as set forth in the framework, as well as our preliminary observations, is provided below. Further changes or modifications will be addressed as needed in subsequent insights from RSM. 

Deduction for research and experimental expenditures.?The framework delays the date on which taxpayers must begin capitalizing their domestic research or experimental costs and amortizing them over a five-year period, as required under the TCJA. Under the proposal, taxpayers would be able to deduct currently (rather than capitalize) domestic research or experimental costs that are paid or incurred in tax years beginning after Dec. 31, 2021, and before Jan. 1, 2026. Foreign research and experimental costs would continue to be capitalized and subject to amortization over a 15-year period.

Observation: Hope for restoration of full expensing for qualifying R&E expenditures under section 174 has been at the top of the wish list for many impacted businesses since the law change became effective in 2022 and is considered a critical component to the package. 

Less stringent business interest deduction limitation.?Under the framework, deductibility of business interest would increase for many taxpayers. The limitation or cap on business interest would revert to an amount based on an EBITDA approach (i.e., earnings before interest, taxes, depreciation, and amortization) , in place of the current more-stringent EBIT (i.e., earnings before interest and taxes) calculation. The provision would take effect for taxable years beginning after Dec. 31, 2023 (and, if elected, for taxable years beginning after Dec. 31, 2021), and before Jan. 1, 2026, thus allowing for potential retroactive treatment.

Observation: How a taxpayer would elect retroactive application for taxable years beginning after Dec. 31, 2021 is not specified in the legislation. Should this bill become enacted, taxpayers wishing to make the election would need to wait for additional procedures from the Treasury and IRS that specify how to make the election.

Observation: Where control of a business entity has changed in a sale (or other transaction), the framework’s retroactive aspects may give rise to business issues. Additional tax deductions retroactively available for either interest or for research and experimental expenditures can still provide tax benefit for the business after the sale. However, the transaction documents for the sale may restrict who can make the tax filings needed to pursue the tax benefit and may dictate whether the additional tax benefit could result in a purchase price adjustment, Taxpayers engaging in merger and acquisition activity should consider the provisions of their transaction documents prior to pursuing any retroactively available tax benefits.

Extension of 100% bonus depreciation. The provision extends 100% bonus depreciation for qualified property placed in service after Dec. 31, 2022, and before Jan. 1, 2026 (Jan. 1, 2027, for longer production period property and certain aircraft.)

Increased expensing of depreciable business assets. The provision increases the maximum amount a taxpayer may expense under section 179 for qualifying property to $1.29 million, reduced by the amount by which the cost of qualifying property exceeds $3.22 million. The $1.29 million and $3.22 million amounts are adjusted for inflation for taxable years beginning after 2024. The proposal would apply to property placed in service in taxable years beginning after Dec. 31, 2023.

Child tax credit. As currently proposed, the framework would expand and extend the child tax credit for three years and would modify the calculation of the refundable child tax credit to enable more families with multiple children to claim a larger credit before running into limits based on earned income. The framework would increase the current child tax credit of $2,000 per child for inflation in tax years 2024 and 2025. In determining their maximum child tax credit, taxpayers would be able to use earned income from the prior taxable year to the extent it exceeds the current year’s amount. The provisions on the child tax credit would be effective for tax years 2023 through 2025.

Observation: It remains to be seen whether proponents of an expanded child tax credit will view these changes as sufficient to meet their demands for a COVID-era equivalent credit, including full refundability, and whether proponents of adding work requirements to the credit will support this provision, or require additional modifications. ???? 

Increasing global competitiveness. The framework provides targeted and expedited relief from double taxation on US-Taiwan cross border investment through changes to the U.S. tax code Notably, it would provide certain treaty-like benefits for income from US sources that is earned or received by qualified residents of Taiwan, contingent on reciprocity to U.S. persons with income subject to tax in Taiwan. Such benefits would generally include (i) reduced withholding tax rates on interest, dividends and royalties; (ii) an increased permanent establishment threshold, and (iii) favorable tax treatment on certain wages of qualified residents of Taiwan that are performing personal services in the U.S. (subject to certain exclusions). The framework includes a provision that would authorize the President to consult with Congress and negotiate an agreement with Taiwan, as none currently exists. 

Observation: In broad brush, these provisions would allow the Biden Administration to negotiate and conclude an executive agreement that would contain provisions similar to those contained in a tax treaty that the U.S. might conclude with a new treaty partner. We expect that the agreement would contain provisions that would grant relief from double taxation including access to the U.S. competent authority.?It remains to be seen whether any future agreement(s) would provide benefits more advantageous than those available under the U.S.-China double tax treaty. Presumably, the agreement will include information reporting/exchange provisions as well.?

Assistance for disaster-impacted communities 

Casualty loss relief for certain disasters

The framework extends the rules for the treatment of certain disaster related personal casualty losses passed in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, including the elimination of the requirement that casualty losses must exceed 10% of adjusted gross income (“AGI”) to qualify for the deduction, to a potentially large amount of disasters. While the AGI limitation would be removed, each separate casualty would still be subject to a $500 floor (a very small limitation in the grand scheme). Further, the taxpayer would be able to take this casualty loss “above the line”, meaning even if they don’t itemize their deductions, they are allowed to claim the casualty loss in addition to the standard deduction. 

Observation: It is our understanding that this provision would relate to many, if not all, of the disasters listed on the IRS website, Tax relief in disaster situations | Internal Revenue Service, starting with the ones listed in 2020 through 2023 and any that occur within 60 days after the date of enactment of this proposal – so a significant amount of disasters. Any future disasters within this 60-day period must still be declared a major disaster by the President. This proposed legislation would provide much needed relief to Taxpayers who experienced casualty losses, especially those victims of Hurricane Ian, Hawaii Wildfires, California Storms and Wildfires, among many other disasters. 

Qualified wildfire relief payments

The framework also includes relief in the form of an exclusion from gross income for compensation for losses or damages resulting from qualified wildfires relief payments. Qualified wildfire relief payments mean any amount received as compensation for losses, expenses, or damages (including compensation for additional living expenses, lost wages (other than compensation for lost wages paid by the employer which would have otherwise paid such wages), personal injury, death or emotional distress) as a result of a qualified wildfire disaster that were not compensated by insurance or otherwise. A qualified wildfire disaster is defined as any federally declared disaster as a result of any forest or range fire. This provision applies to qualified wildfire relief payments received by the individual during taxable years beginning after Dec. 31, 2019 and before Jan 1, 2026. It should be noted that this provision is clear that no double benefit is allowed and as such, no deduction or credit shall be allowed for any expenditure to the extent the amount was excluded from income. Further, if the taxpayer uses these qualified payments on any property they shall not be allowed to increase their basis in the property. 

East Palestine (Ohio) disaster relief payments 

This provision provides necessary relief from the victims of the East Palestine Ohio train derailment insofar that relief payments will be treated as qualified disaster relief payments as defined in section 139(b). Section 139(b) allows these relief payments to be excluded from gross income. East Palestine Train Derailment Payments means any amount received by an individual as compensation for loss, damages, expenses, loss in real property value, closing costs with respect to real property (including realtor commissions), or inconvenience (including access to real property) result from the East Palestine train derailment if such amount was provided by (1) a Federal, State, or local government agency, (2) Norfolk Southern Railway, or (3) any subsidiary, insurer, or agent of Norfolk Southern Railway. East Palestine train derailment means the derailment of a train in East Palestine, Ohio on Feb. 3, 2023. This provision applies to payments received on or after Feb. 3, 2023.

More affordable housing. This provision of the framework seeks to increase the supply of affordable housing by increasing the ceiling on the state housing credit (for purposes of the low-income housing tax credit) for calendar years 2023 through 2025. This would allow states to allocate more credits towards affordable housing projects. In addition, the framework would lower the bond-financing threshold (as part of the tax-exempt bond financing requirement) to 30% for projects financed by bonds with an issue date before 2026, subject to a transition rule for certain buildings that already have bonds issued.

Employee retention credit. The framework would end the period for filing ERC claims for both 2020 and 2021 as of Jan. 31, 2024 and would beef up penalties on a “COVID-ERTC promoter” (as separately defined) who is aiding and abetting the understatement of a tax liability or who fails to comply with certain due diligence requirements relating to the filing status and amount of certain credits. While these changes would stop any claims from being filed before the standard period for filing ERC claims ends (April 15, 2024 and April 15, 2025), it would not have any retroactive effect for claims filed prior to Jan. 31, 2024. However, the framework would extend the statute of limitations period on assessment for all quarters of the ERC to six years from the later of the original filing or the date of the claim. This could potentially allow, for example, a claim filed on Jan. 1, 2024, for the second quarter of 2020, to be examined and adjusted until Jan 2, 2030. This would enable the IRS to examine and seek the return of ERC refunds for years to come. 

The proposed legislation also provides for an extension on the period of time to amend corresponding income tax returns on which employers may have reduced wage deductions to account for the prohibition on claiming ERC on wages deducted from income; however as currently drafted this additional extension seems to only apply to individual and corporate returns and not partnership returns. This proposal would bring parity to the period for making an adjustment to the wage deduction with the period of time the IRS has to make adjustments to the ERC claimed, correcting a mismatch between the limitations period currently in existence on the third and fourth quarters of 2021. 

Next steps

As indicated above, the House Ways & Means Committee marked up the bill on Friday, Jan. 19, where the measure passed by a very strong vote of 40-3 in favor. According to the House’s calendar, a recess is planned for the week of Jan. 22, with members returning Monday, Jan. 29 which happens to coincide with start of the tax filling season, as announced recently by the IRS. The next step would be for the full House to consider the measure on the floor, and if passed, would be sent to the Senate for consideration. Timing will be tight, however, as many lawmakers view Jan. 29 as a deadline for House passage. It is possible that timing could shift beyond this date somewhat to the extent significant progress has been made. There are no guarantees, however, and additional timing and procedural constraints could similarly surface in the Senate, where leading Republican Senators have expressed reservations, particularly around the child tax credit and have called for changes. This could further inject uncertainty into the process.  

It is important to keep in mind this is a very fluid and evolving development, and that ultimate passage of a tax bill is far from certain. Moreover, the provisions (and accompanying observations) described above are subject to potential change as the negotiation process moves forward. 

RSM US LLP’s Washington National Tax and Tax Policy team members are actively monitoring developments and will be issuing additional insights as warranted.

December 22, 2023 | by RSM US LLP

Executive summary:

Employee Retention Credit Voluntary Disclosure program

On Dec. 21, 2023, the IRS announced the details of an anticipated employee retention credit Voluntary Disclosure program (ERC-VDP) for employers who claimed and received an ERC refund for a quarter but were not eligible. The program allows claimants to repay ERC at a reduced rate of 80% of the credit.  In addition, the program waives penalties and interest on the full amount, not just the 80% returned. The IRS is only accepting applications for the program until March 22, 2024. Accepted applicants will be required to execute a closing agreement stating they are not entitled to ERC and must provide the name and contact information for any preparer or advisor who assisted in claiming the ERC. The IRS has also published a set of FAQs relating to the ERC-VDP.

The IRS also announced that they are issuing another round of letters proposing adjustments to tax issued to 20,000 employers that claimed an erroneous or excessive amount of ERC.

IRS announces details for ERC Voluntary Disclosure program 

ERC VDP continuation of ongoing IRS initiative to combat dubious ERC claims

Following the October announcement of the ERC withdrawal process, the IRS has released the details of the new ERC-VDP which will allow ERC claimants who have already received the refund or credit against employment taxes to apply to repay the ERC at a reduced rate of 80% of the claim, without penalties or interest. The ERC-VDP was developed mostly for employers who were induced into claiming ERC and now realize they were not entitled to the credits. In particular, the reduced amount required to be repaid was designed to allow employers who paid a contingency fee to a promoter to repay the improper credit at a lower financial cost. The required disclosure about preparers who assisted in filing the claim will help the IRS gather information on promoters who took aggressive positions in advising taxpayers to claim ERC.

Eligibility for ERC-VDP

Taxpayers who claimed ERC and have received the refund or the credit against their employment taxes are eligible to participate in the program. (Taxpayers who have not yet received an ERC credit or refund but no longer believe they are entitled to ERC can use the withdrawal process to withdraw their claim). Taxpayers are not eligible for ERC-VDP if any of the following apply:

• The taxpayer is under criminal investigation or has been notified that the IRS intends to commence a criminal investigation;
• The IRS has already received information alerting it to the taxpayer’s noncompliance;
• The taxpayer is undergoing an employment tax examination for the period for which it is applying; or 
• The taxpayer has already received a notice and demand for repayment of all or part of the claimed ERC.

Employers who claimed ERC using a third-party payer, such as a professional employer organization (PEO) or payroll agent, are eligible for ERC-VDP, but the third-party payer must submit the application on the employer’s behalf.  The announcement provides some guidance for third-party payers assisting with such applications.

In order to use the program for a given quarter, the taxpayer must give up the full amount of ERC that was applied for on the Form 941 X for that quarter.  Taxpayers who want to reduce only a portion of the ERC claimed in a quarter are not eligible for ERC-VDP or the withdrawal process; these taxpayers must file an amended return to adjust the ERC claimed.

Terms of participation in ERC-VDP

Employers who are approved to participate in the program (’participants’) will be required to execute a closing agreement which provides that they are not eligible for, or entitled to, any ERC for the tax period(s) at issue. The participant will repay 80% of the claimed ERC to the Department of Treasury. Participants will also be excused from repaying overpayment interest received on any issued ERC refund. Underpayment interest will not be required if the participant makes full payment prior to executing the closing agreement.

The program also provides for the possibility of repaying the ERC amount through an installment arrangement.  If the IRS approves repayment under an installment agreement, interest will only accrue prospectively from the agreement date. The IRS will not assert civil penalties against participants that make full payment of the 80% of claimed ERC prior to executing the required closing agreement.

For many taxpayers, the ERC impacted their income tax obligations as well. Because ERC cannot be claimed on wages that are claimed as a deduction against income, recipients of ERC were expected to reduce wage deductions for the 2020 and/or 2021 tax years equal to the ERC amounts. If participants had not already amended their income tax returns to reduce their wage deduction by any claimed ERC, they will not need to file amended returns or Administrative Adjustment Requests (AARs) to reduce their wage deduction. Participants who already reduced their wage deduction by the claimed ERC may file an amended return or AAR to reclaim the previously reduced wage expense. No income will be attributed to participants as a result of participating in the program.

If a return preparer or advisor assisted the participant in claiming the ERC, the participant must provide the name, address, and phone number of the preparer or advisor as well as a description of services provided.

Under the new application form, a taxpayer can provide a power of attorney to allow another person to represent the taxpayer in making the VDP application.

Applications for ERC-VDP due by March 22, 2024, 11:59 pm local time. 

Taxpayers apply to participate in ERC-VDP by completing Form 15434, Application for ERC-VDP and submitting it via the IRS Document Upload Tool by March 22, 2024. Form 15434 must be signed by an authorized person under penalties of perjury. Taxpayers applying for ERC-VDP for a period ending in 2020 must include a completed and signed statute extension Form ERC-VDP SS-10.  Form 15434 will help calculate the payment required to participate in ERC-VDP. Paying the balance via Electronic Federal Tax Payment System (EFTPS) at the time of applying for ERC-VDP is encouraged and could speed up the resolution of the case. However, as discussed above, participants who are unable to pay the entire balance may be considered for an installment agreement.

The IRS FAQs state that ERC-VDP applications will be handled on a first come, first serve basis. The FAQs indicate that most cases should resolve quickly but also provide there is no way to estimate how long the process will take. Applicants can call the ERC-VDP hotline at 414-231-2222 and leave a voicemail to check on the status of their application or for assistance with the ERC-VDP process, including completing Form 15434.

If a taxpayer’s application is approved, the IRS will prepare a closing agreement under section 7121 of the Code and mail the closing agreement to the participant. Once a participant receives the ERC-VDP closing agreement package, they will be asked to review and return the signed agreement within 10 business days. Participants need to pay balances due prior to signing the agreement in order to receive all the benefits of the program. If the IRS denies a taxpayer’s application to participate in ERC-VDP, there is no method to review or appeal the denial. Further, a taxpayer’s participation in ERC-VDP does not preclude the IRS from later investigating any criminal conduct or provide any immunity from prosecution.

July 13, 2022 | by Atherton & Associates, LLP

For many teenagers, summer often means a time for family barbecues, swimming in the pool, and working a summer job. For many parents, this means dealing with the tax implications of their child’s income. In this article, we’ll provide an overview of what tax filings may be required for your working teenager.  

Do children need to file a tax return? 

Children who are dependents generally do not need to file a tax return unless they have earned income greater than the standard deduction, which is $12,950 for 2022. However, tax rules differ depending on their type of employment. Below we cover the tax considerations if your child is: 

• Employed by a third party, 
• Employed by your family business, 
• Self-employed, or
• A household employee.

Employee taxes

If your child works for someone else’s business, such as a restaurant or a local store, they should fill out a W-4. If they did not have a federal income tax liability in the previous year and expect to have no federal income tax liability in the current year, then your child may claim an exemption from federal income tax withholdings on the W-4. The standard deduction for 2022 is $12,950, so unless your child expects to earn more than the standard deduction, they can claim an exemption and shouldn’t have to file a tax return. If your child does not claim an exemption and their employer withholds federal income taxes, you will want to file a tax return and potentially receive a refund of the withholdings.

It’s important to note that just because a child may be exempt from federal income tax withholding doesn’t mean they aren’t subject to FICA taxes. Expect the employer to withhold Social Security and Medicare taxes, also known as FICA, from their paycheck.

Family business taxes

Hiring your child to work in the family business can provide payroll tax benefits. If your business is a sole proprietorship or an LLC and you employ your child (under age 18), the child’s wages may be exempt from FICA withholding. If your business is a partnership, you may be able to take advantage of the FICA exemption as long as the partners are the child’s parents (if you have a non-parent business partner, you will not qualify for this exemption). Additionally, payments to your child under 21 are not subject to federal unemployment (FUTA) taxes. 

Hiring your child will also help your family save on income taxes. Compensation paid to your child is tax-deductible, which reduces your taxable income and may reduce your self-employment taxes. Because of the standard deduction, your child will not have to pay federal income tax on some, if not all, of their earnings from your company. In this situation, your child must work for your business and be paid reasonable compensation for a legitimate job.

For example, you own a sole proprietorship, hire your child to work for the summer, and pay them $5,000. Their compensation reduces your taxable income by $5,000, and because their income is less than the standard deduction of $12,950 it is not subject to federal income taxes. You also do not have to contribute to FICA or FUTA as long as your child meets the age requirements. 

Self-employment taxes

Taxation can get slightly more complicated if your child performs independent work, like mowing lawns or tutoring. While the standard deduction still applies for federal income tax purposes, their income will be subject to self-employment tax.  

When employed by a typical company, the employer and employee each pay social security and medicare taxes (FICA) of 7.65%. However, if your child is self-employed, they will need to pay self-employment tax which includes the combination of the employer and employee portion of social security and medicare taxes totaling 15.3%.  

Your child will need to keep accurate records of their income and pay the 15.3% self-employment tax on all their profits over $400. The good news is that these taxes will go toward your child’s eventual social security and medicare benefits. 

Many self-employed individuals, including children, must also file and pay quarterly estimated taxes. In general, if your child expects to owe at least $1,000 in taxes for 2022, they may need to pay quarterly estimated taxes. However, they will not need to make estimated tax payments for the current year if:

1. They had no tax liability for the prior year.
2. Their prior tax year covered a 12-month period.
3. They were a U.S. citizen or resident for the whole year.

Form 1040-ES, Estimated Tax for Individuals, can help determine whether your child will need to pay quarterly estimated taxes and how much they will have to pay. 

Household employees

If your child is employed in a private residence performing domestic chores such as babysitting, cleaning or gardening, their work may trigger the IRS’s household employee rules (also called the “nanny tax”). A worker is deemed a household employee if the employer “controls not only the work they do but also how they do it.” However, individuals who provide services as independent contractors are not considered household employees. 

Household employees are exempt from FICA withholding if they are (a) the employer’s child under age 21 or (b) a child under age 18 at any time during the year. Their employer is also not required to withhold federal income tax paid to a household employee. 

Our office can assist

While paying taxes can be daunting, it’s a great learning opportunity for your child. This article provides just an overview of tax considerations for a child’s earnings and is not a substitute for speaking with one of our expert advisors. Please contact our office if you have questions or need assistance with your child’s taxes. We’d be happy to discuss your unique situation and how we may be of service.