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An increasing number of people have engaged in the “gig” or sharing economy over the past few years. In fact, 16% of Americans have earned money through online gig platforms at some time according to the Pew Research Center’s August 2021 survey. This gig work includes providing car rides, performing household tasks, walking dogs, shopping for groceries, making deliveries from a restaurant or store, and running errands.

If you perform one of these jobs, there are tax consequences you should be aware of. Generally speaking, income you receive from an online platform offering goods and services is taxable, even if you earn this income from a side job and even if you aren’t provided with an income statement reporting the amount of your earnings.

What is a gig worker?

A gig worker is an independent contractor who conducts their job through an online platform such as Airbnb, Lyft, Uber, Angi, Doordash, or Instacart. Gig workers aren’t eligible for the benefits associated with traditional employment, including employer-sponsored health insurance. 

Gig workers are also exempt from minimum wage requirements and other federal legal protections and aren’t included in states’ unemployment insurance systems. In addition, they’re also responsible for their own training, taxes, and retirement savings. 

Gig workers’ tax obligations

If you participate in the gig economy, you’ll want to consider the following:

• Since your income isn’t subject to withholding, you may need to make quarterly estimated tax payments. The typical deadlines for estimated tax payments are April 15, June 15, September 15, and January 15 of the following year. Deadlines that fall on a Saturday or Sunday are extended to the next business day.
• The online platform you work for should provide you with a Form 1099-NEC, Form 1099-K, Nonemployee Compensation, or other income statement.
• If you have business expenses, you may be able to deduct some or all of these expenses on your tax return, subject to the normal tax limitations and rules. If you use your own car to provide rides, for example, you may be able to deduct depreciation for wear and tear on the vehicle. However, it’s worth noting that the rules for deducting expenses can be complex if you’re renting a room in a home you own.

Keeping thorough records

It’s important to keep complete and accurate records of your income and expenses, since you may be audited by the IRS or a state or local tax authority. If you participate in the gig economy and you have further questions about your tax obligations or what deductions you can claim, contact us. We can help you avoid expensive surprises when you file your next tax return.

If you’re looking to sell commercial or investment real estate that’s significantly appreciated, you may be able to defer the tax on the gain using a Section 1031 “like-kind” exchange. 

In a like-kind exchange, real property held for investment or for productive use in your trade or business (relinquished property) is exchanged for like-kind investment, trade, or business real property (replacement property). Like-kind exchanges may be an especially attractive option right now as real estate prices have risen, resulting in higher tax bills.

Like-kind is broadly defined for these purposes, meaning that most real property is considered to be like-kind with most other real property. However, neither of the properties involved in a like-kind exchange can be real property held primarily for sale.

Basic tax rules

The Tax Cuts and Jobs Act introduced an important change for like-kind exchanges: exchanges of personal property—including equipment and certain personal property building components—that are completed after December 31, 2017 are no longer eligible for tax-deferred Section 1031 treatment. 

Contact us if you’re unsure whether your property is eligible for like-kind treatment—we’ll be happy to discuss the matter with you.

If the exchange does qualify, however, the following is a quick guide to the tax implications. 

If the exchange is purely asset-for-asset (with no cash or additional property included), you don’t need to recognize any gain from the exchange, and the replacement property will take the same “basis” (your cost for tax purposes) as the relinquished property. However, you will still need to report the exchange on Form 8824, “Like-Kind Exchanges,” even if you don’t need to recognize gain.

In many cases, the two properties won’t be of equal value, so either cash or another property—known as the “boot”—will be included in the deal. If your exchange involves a boot, you’ll need to recognize your gain, but only up to the amount of the boot received, and your basis for the like-kind replacement property will be equal to the basis of the relinquished property, increased by the amount of any gain recognized but reduced by the amount of boot you received.

A quick illustration

Say, for example, that you make a like-kind exchange of a business property with a basis of $100,000 for a business property valued at $120,000, in addition to $15,000 in cash. 

In this case, your realized gain would be $35,000 since you received $135,000 in value for an asset with a $100,000 basis. However, you would only need to recognize $15,000 (the amount of the cash “boot” you received) of your gain, since you received that value as part of a like-kind exchange. 

Your basis in the new replacement property will be your original basis in the relinquished property ($100,000), plus $15,000 for your recognized gain, minus $15,000 for the boot you received. As such, your basis will be $100,000. It’s worth noting that in a like-kind exchange, your recognized gain will never be more than your actual or “realized” gain.

If you exchange a property that’s subject to debt, the amount of the debt you’re relieved from by exchanging the property is treated as boot, since taking over your debt is considered to be equivalent to giving you a cash payment. In cases where both the relinquished and the replacement property are subject to debt, you’ll only be treated as receiving boot to the extent that you receive a “net debt relief” (the amount of debt you’re relieved from exceeds the debt you take on).

An attractive option for tax deferral

A like-kind exchange can be an excellent way to defer taxes while also disposing of investment, trade, or business real property. If you have additional questions about like-kind exchanges or need to discuss the tax implications further, contact us.

Carefully structuring capital gains and losses may allow you to save taxes as the end of the year approaches.

If you have any losses on investments this year, you may have certain opportunities to offset gains with losses. For instance, if you lost money on some stock this year but you have other stock that’s appreciated, you might consider selling the appreciated assets before December 31 if you think the assets’ value has peaked.

Short-term capital losses offset short-term capital gains before offsetting long-term capital gains—by the same token, long-term capital losses will offset long-term capital gains before offsetting short-term capital gains. In computing your adjusted gross income (AGI), up to $3,000 (or $1,500 if you’re married filing separately) of total capital losses in excess of total capital gains may be used as a deduction against your ordinary income.

On ordinary income and short-term capital gains, you’re subject to federal tax at a rate as high as 37%. However, most long-term capital gains on investments are treated more favorably—depending on your taxable income (inclusive of the gains), they’re taxed at rates that range from zero to 20%. There’s also an additional 3.8% net investment income tax on net gain and certain other investment income for high-income taxpayers.

Because of this, it’s best to avoid offsetting long-term capital gains with long-term capital losses. Instead, it’s more valuable to use long-term capital losses to offset short-term capital gains or up to $3,000 of ordinary income per year. This means that you’d need to avoid taking long-term capital losses in the same year as your long-term capital gains.

However, investment factors must be considered in addition to tax factors. If there’s a significant risk that an investment’s value will decline before you can sell it, you won’t want to defer recognizing gain until the following year. You also won’t want to risk increasing your loss on an investment by deferring a sale until the next year if you expect the investment to decline in value.

Instead, you’ll want to take steps to prevent long-term capital losses from offsetting long-term capital gains, but only to the extent that taking the losses in a different year than the gains makes sense within a good investment strategy.

If you expect to realize net capital losses next year that are in excess of the $3,000 ceiling but you haven’t yet realized net capital losses for 2021, you may want to consider accelerating some of the excess losses into this year—these losses will then offset current gains and up to $3,000 will be deductible against ordinary income in 2021.

It may be worth recognizing paper losses or gains on stocks this year for the reasons mentioned above. However, this stock may also be an investment that’s worth holding in the long term, and you aren’t allowed to sell stock to establish a tax loss, then buy it back the next day. Under the “wash sale” rule, a loss cannot be recognized if substantially identical securities are bought and sold within a 61-day period ranging from 30 days before the date of sale to 30 days after.

However, it may still be possible to realize a tax loss if you:

• Buy more of the same stock, then sell the original after waiting at least 31 days. In this case, you risk downward price movement in the interim.
• Sell the original holding, then buy the same securities after at least 31 days. In this case, you risk upward price movement in the interim.
• Sell an original holding of mutual fund shares, then buy shares in another fund that has a similar investment strategy.
• Sell the original holding but buy similar securities in other companies in the same industry. This will rely on the prospects of the industry instead of the prospects of the particular stock.

You can save tax by carefully handling capital gains and losses. If you need more information about these strategies, contact us.

Successful businesses that rely on frequent travel may benefit from buying a corporate aircraft, but aircraft ownership comes with a number of tax and non-tax implications. Here are a few of the basic tax rules that may apply.

Aircraft used only for business

When a company buys a plane for business use only, it can deduct the aircraft’s entire cost in the year the plane is placed into service unless one of the following circumstances applies:

• The taxpayer has elected out of 100% bonus depreciation but hasn’t elected to apply Sec. 179 expensing
• Neither the 100% bonus depreciation rules nor the Section 179 small business expensing rules are applicable (this is rare)

If a deduction isn’t available, the aircraft’s depreciation schedule is:

• 20% of the cost for the first year
• 32% for the second year
• 19.2% for the third year 
• 11.52% for the fourth year
• 11.52% for the fifth year
• 5.76% for the sixth year

However, it’s worth noting that for property placed in service after 2022, the bonus depreciation rate is scheduled to be phased down.

These “cost recovery” rules for aircraft are actually more favorable than those for business autos, since there are no annual caps placed on depreciation and there’s no cap on Sec. 179 expensing in the year the aircraft is placed into service.

Post-acquisition expenses for business-travel-only aircraft are treated the same way as post-acquisition expenditures for other equipment and machinery. This means that routine repair and maintenance expenses are immediately deductible, but any amount spent to restore or improve the aircraft must be capitalized and depreciated.

The main difference between the tax rules governing business-only aircraft and those governing most other equipment and machinery is that company aircraft require more rigorous recordkeeping in order to show that their uses and related expenses are directly tied to business purposes.

Aircraft for business and personal use

The depreciation results discussed above won’t be affected by personal travel if the value of the travel is reported and withheld upon as compensation income to a person who isn’t “related” to the corporation or at least a 5% owner. 

This means that using a corporate aircraft for personal travel won’t affect depreciation as long as the travel is by a non-share-holding employee and the value of the travel is compensation to them that is reported and withheld upon as such. However, if the person for whom the value of the travel is compensation income is a related person or at least a 5% shareholder, the depreciation results may be affected. Even in this case, there’s a generous “fail-safe” rule that a company can comply with in order to avoid affecting depreciation results.

If the value of the travel is compensation income and is reported and withheld upon as such, personal travel generally won’t affect the treatment of post-acquisition expenditures that are otherwise deductible. However, there is one limitation. The amount of the deduction for otherwise-deductible costs allocable to the personal travel can’t exceed the travel value if the person for whom the value of the travel is compensation income is:

• A person related to the corporation
• At least a 10% owner 
• A director
• An officer 

Final notes

As you can see, these rules aren’t especially restrictive, even your corporate aircraft is used for both business and personal travel. However, it is important to keep thorough records and to stay compliant with reporting and withholding requirements when an aircraft is used for personal travel. Other rules and limitations may also apply. If you would like to know more about the tax implications of buying a corporate aircraft, contact us.

There are a number of reasons why you may be provided with an award or settlement—including compensatory and punitive damage payments for discrimination, harassment, or personal injury. If so, some of the amount is subject to federal taxes and may also be taxed at the state level.

Hopefully, you won’t ever experience a personal injury that may lead to an award or settlement—but these basic rules can help you understand the tax implications if you or a loved one ever needs to.

Current tax law permits individuals to exclude damages received due to personal physical injury or physical sickness from their gross income—regardless of whether the compensation comes from a court-ordered award or an out-of-court settlement and whether it’s paid in a lump sum or paid in installments.

Emotional distress, punitive damages, and the ADEA

Emotional distress doesn’t qualify as a physical injury or physical sickness for the purposes of this exclusion. If you receive an award or settlement as compensation for emotional distress caused by harassment or discrimination, you’ll still need to include this amount in your gross income. However, if the consequences of this emotional distress cause you to require medical care or treatment, then you are allowed to exclude the amount of damages not exceeding those medical expenses from your gross income.

Punitive damages provided for personal injury claims can’t be excluded from gross income, even if the claim is for a physical injury. The only exception is for punitive damages awarded under some state wrongful death statutes that only provide for punitive damages.

Back pay and liquidated damages provided under the Age Discrimination in Employment Act (ADEA) aren’t considered by law to be paid in compensation for personal injuries and can’t be excluded from gross income.

Deducting attorney’s fees and court costs

Attorney’s fees can’t be deducted if you incur them in collecting a tax-free settlement or award for physical injury or sickness. However, in the case of actions involving a claim under the ADEA, attorney’s fees (both contingent and non-contingent) and court costs may be deducted from gross income to a limited extent to determine adjusted gross income. The specific amount of this above-the-line deduction is limited to the amount provided due to a judgment or settlement resulting from the ADEA claim that is includible in your gross income for the tax year, regardless of whether this amount is provided due to a suit or agreement and whether it is paid as a lump sum or in periodic payments.

Getting the most favorable tax result

If you’re pursuing a lawsuit, settlement, or discrimination action, you’ll want to pursue the best tax result possible—but it’s worth noting that both tax factors and non-tax legal factors will determine the amount you can recover after tax. If you have further questions on the best way to proceed, consult with your attorney or contact us for additional tax guidance.

Auditors will usually ask you to provide similar documents each year, and anticipating an auditor’s document requests can make external audits less stressful and intrusive. 

For certain items, including bank reconciliations and fixed asset ledgers, auditors will accept copies or client-prepared schedules. Other items, such as invoices, leases, and bank statements, will need to be verified using the original source documents.

However, auditors do randomly select a sample of transactions to test your account balances, and this sample will change from year to year. These random selections keep bookkeepers honest by ensuring that not every element of the audit can be planned for.

Predicting audit questions

Auditors will usually ask about any line items that have changed materially, so comparing last year’s financial statements to the current ones can help your accounting personnel prepare for audit inquiries. For small businesses, a “materiality” rule of thumb might mean that inquiries are made about items that have changed by more than around 10% or $10,000.

For instance, a 20% increase in sales commissions or advertising fees might raise a red flag for auditors, especially if this increase wasn’t correlated with an increase in revenue. In this case, you may want to prepare to explain the increased costs and provide auditors with invoices or payroll records.

Auditors may also ask new or unexpected questions whenever there are new accounting rules scheduled to go into effect. 

In 2022, for example, private companies and nonprofits will need to implement new rules governing reporting for long-term lease contracts. If your company provides comparative financial statements, it’s a good idea to start gathering additional information about your leases now in order to prepare for additional disclosure requirements next year.

Minimize discrepancies with routine adjustments

At the end of audit fieldwork each year, auditors typically make adjusting journal entries to correct for accounting errors, omissions, and unrealistic estimates—ideally, your company’s management should learn from these adjustments. Internally prepared financial statements often require similar adjustments each year in order to comply with U.S. Generally Accepted Accounting Principles (GAAP).

For instance, auditors may need to ask clients to write off bad debts, record depreciation expense and accruals, or evaluate repair and supply accounts for capitalizable items. You may be able to save time and minimize discrepancies between your preliminary and final financial statements if you make routine adjustments prior to auditing season.

It’s also a good idea to ask your auditor about any complicated accounting rules or major transactions before they begin their fieldwork. For example, you might need clarification on how to classify a shareholder advance or how to account for a recent acquisition.

Start preparing now

The right preparation can help to ensure that audit fieldwork runs smoothly and your external audit won’t be time-consuming or disruptive. If you have questions or concerns as you prepare your preliminary year-end statements, contact us.

2021 is almost over, but there may still be time to reduce your tax liability. These three quick strategies may allow you to reduce your taxes before the end of the year.

Accelerate deductions or defer income

Some tax deductions, such as the mortgage interest deduction, are claimed for the year of payment. This means that if you make your January 2022 payment early this December, the interest portion can be deducted on your 2021 tax return, as long as your return is itemized.

You can also reduce your taxable income by deferring income into the new year. For example, if you’re expecting to receive a bonus at work but don’t want any more taxable income this year, you can ask your employer to delay paying the bonus until January. Self-employed workers can divert revenue to 2022 by delaying their invoices until late in December.

This approach is only suitable if you don’t expect to move to a higher tax bracket next year. Reducing your income may also allow you to reduce your qualified business income deduction for pass-through entities.

Make the maximum retirement contributions

One of the best ways to avoid a higher 2021 tax bill is to pay that money to your future self. If you have any retirement accounts, including traditional IRAs, 401(k)s, SEP plans, and deferred annuities, federal tax law encourages you to make the maximum allowable contributions for this year.

Generally speaking, you can contribute up to $19,500 to 401(k)s and $6,000 for traditional IRAs for 2021. If you’re self-employed, you can contribute up to 25% of your net income to a SEP IRA as long as the total doesn’t exceed $58,000.

Use investment losses to offset taxable gains

If you lost money on investments this year, there’s still a silver lining—these losses may allow you to offset taxable gains. 

If you had more investment losses than gains, you can usually apply as much as $3,000 of the excess loss to reduce your ordinary income. Selling underperforming investments before the year’s end can offset gains realized this year on a dollar-for-dollar basis. Any remaining losses will be carried forward to future tax years.

It’s not too late

These are only a few of the ways you may be able to save money on your 2021 tax bill. If you have questions about minimizing your 2021 tax liability using these or other methods, contact us.

If you’re considering merging with or acquiring another business, CPA-prepared financial statements may offer useful insight into historical financial results. However, you may also want to think about using an independent quality of earnings (QOE) report. QOE reports look beyond the quantitative information included in the seller’s financial statements and can serve as another valuable tool in the due diligence process.

These reports can give you more detailed information on potential acquisition targets—and help you justify a discounted offer price if your target faces significant threats or risks. The results of a QOE report can also add credibility to the seller’s historical and prospective financial statements when included in an offer package, or help to justify a premium asking price for a business by highlighting its ability to leverage key strengths and emerging opportunities.

In-depth analysis with QOE reports

A QOE analysis can be performed on in-house financial statements as well as on statements compiled, reviewed, or audited by a CPA firm. QOE reports focus on how much cash flow companies are likely to generate for investors in the future, rather than compliance with U.S. Generally Accepted Accounting Principles (GAAP) and the companies’ historical results.

A QOE report may uncover any of the following issues:

• Excessive concentration of revenue with one customer
• Unusual revenue or expense items
• Insufficient loss reserves
• Deficient accounting policies and procedures
• Overly optimistic prospective financial statements
• Inaccurate period-end adjustments
• Transactions with undisclosed related parties

QOE reports usually analyze the revenue and expenses on a monthly basis in order to determine whether earnings are sustainable. A QOE report can also help to spot issues that might affect the company’s ability to operate as a going concern by identifying both internal and external risks and opportunities.

QOE vs. EBITDA

When pursuing M&A due diligence, many buyers focus on earnings before interest, taxes, depreciation and amortization (EBITDA) over the previous twelve months. Although it’s not a bad idea to use EBITDA as a starting point for assessing earnings quality, you may need to adjust for several items, including: 

• Above- or below-market owners’ compensation
• Nonrecurring items
• Discretionary expenses
• Differences between accounting methods used by the company and industry peers

QOE reports also typically include detailed ratio and trend analysis, which may allow you to identify unusual activity. You can then use additional procedures to determine whether these changes are positive or negative.

For instance, an increase in accounts receivable could result from a buildup of uncollectible accounts (a negative indicator) but may also be a result of revenue growth (a positive indicator). If it’s the latter, further analysis should be conducted on the gross margin on incremental revenue to establish that the new business is profitable—and that the revenue growth doesn’t result from a temporary change in market conditions or aggressive price cuts.

Customizing QOE reports

Since QOE reports aren’t bound by prescriptive guidance from the American Institute of Certified Public Accountants, their scope and format can be easily customized. If you have questions about how you can use an independent QOE report in mergers and acquisitions, contact us.

On November 15, President Biden signed The Infrastructure Investment and Jobs Act. Although the Act doesn’t include many tax provisions, it does make one important change to the Employee Retention Credit (ERC).

During the COVID-19 pandemic, many employers used the ERC, a valuable tax credit, to survive the economic downturn. However, the new legislation has now retroactively terminated the ERC before it was initially scheduled to end. Unless the employer qualifies as a “recovery startup business,” the ERC now applies only through September 30, 2021, instead of its initial end date of December 31, 2021.

As a result of the ERC sunsetting, some employers may face penalties if they retained payroll taxes in the belief that they would receive the credit. The American Institute of Certified Public Accountants (AICPA) has explained that these businesses will now need to pay back the payroll taxes they retained for any wages paid after September 30—and they may also be subject to a 10% penalty for failure to deposit payroll taxes withheld from employees. 

Because of this, the AICPA is requesting that Congress direct the IRS to waive payroll tax penalties due to the early termination of the ERC. The IRS is expected to offer further guidance for employers handling compliance issues caused by the ERC sunsetting.

If your business had planned on receiving the ERC based on payroll taxes after September 30 and retained payroll taxes, contact us for help. We can help you determine how and when those taxes should be repaid and address any other tax compliance concerns.

The ERC

The ERC was originally introduced as part of the CARES Act in March of 2020 with the aim of encouraging employers to retain employees during the COVID-19 pandemic. The tax credit was later modified and extended to apply to wages paid before January 1, 2022.

For the third and fourth calendar quarters of 2021, eligible employers were allowed to claim the ERC against their share of Medicare taxes (1.45% rate) equal to 70% of the qualified wages paid per employee (this was subject to a limit of $10,000 of qualified wages per employee per calendar quarter).

A “recovery startup business” is an employer that is eligible to claim the ERC for the third and fourth quarters of 2021. Recovery startup businesses were defined under previous law as businesses that:

• Began operating after February 15, 2020
• Didn’t experience a significant decline in gross receipts and weren’t subject to a full or partial suspension under a government order (the eligibility requirement applicable to other employers)
• Had average annual gross receipts of under $1 million

.

However, recovery startup businesses are still subject to certain limitations. For 2021, the maximum total credit is $50,000 per quarter for a yearly maximum credit of $100,000.

ERC sunsetting

Under the new infrastructure law, the ERC has been retroactively terminated and now applies only to wages paid before October 1, 2021, unless the employer qualifies as a recovery startup business. Other employers will no longer be able to claim the credit for wages paid in the fourth quarter of 2021.

The new law also alters the way recovery startup businesses are defined. For the purposes of ERC eligibility for the fourth quarter of 2021, a recovery startup business is now defined as one that:

• Began operating after February 15, 2020
• Has average annual gross receipts of under $1 million 

There may also be other applicable changes for recovery startup businesses.

Next steps

If you were expecting to claim the ERC and have questions about how to proceed, contact us. We can explain your options and help you stay compliant and avoid penalties.

Managers, investors, and lenders often use performance dashboards, graphs, and other visual aids to make it easier to digest complex financial information. These tools can also be used by auditors during financial statement audits as a way to identify trends and anomalies that need to be looked into further.

Data visualization as an auditing tool

When it comes to verifying the accuracy and integrity of a company’s financial records, auditors have a number of tools and techniques at their disposal. One of these techniques is data visualization: the practice of using pictures to demonstrate the relationship between two accounts or show changes in a metric over time. Data visualization can help to improve the effectiveness—and efficiency—of your audit.

The charts and graphs auditors use to facilitate audit planning can be generated through dedicated data visualization software including Microsoft Excel. By using these tools, managers and executives can gain a better understanding of the testing and inquiry procedures used by auditors, in addition to gaining insight into potential opportunities and threats.

Four useful ways to incorporate visualization

Here are four ways an auditor might use data visualization to leverage data from your company:

Breaking down accounting department activity by employee

Pie charts and line graphs make it easier for auditors to analyze the timing, number, and value of the journal entries from each employee in your accounting department. Using this kind of analysis could reveal unfair work allocation in the department or show that an employee is involved in adjusting entries that fall outside their assigned responsibilities. With the help of these tools, managers can then improve internal controls, reassign work in the accounting department, or pursue an investigation of fraud.

Inspecting accounts prone to abuse or fraud

During an audit, certain high-risk accounts must be monitored closely for errors or evidence of fraud. Data visualization may help to better illustrate the timing and extent of refunds and discounts and show which employees were involved in each transaction—and this can uncover potential areas of concern that may need further analysis.

Analysing journal entries at the end of accounting periods

Data visualization tools such as timeline charts may give auditors a clearer understanding of monthly, quarterly, and yearly trends in your company’s activity. Auditors can use these tools to verify and analyze the magnitude and timing of your company’s journal entries prior to the end of an accounting period.

Comparing forecasted and actual performance

Bar charts and line graphs can help to confirm that your company is on track to meet your goals for the period by making it easier to compare your company’s actual performance to its budgets and forecasts. These data visualization tools may also expose significant deviations that auditors need to analyse further to determine if the cause is external (in the case of deteriorating market conditions or cost increases) or internal (in the case of fraud or inefficiency).

Depending on the results, management may need to use the findings of this analysis to revise budgets or take corrective measures.

A picture’s worth a thousand words

Data visualization lets your data speak. These tools can guide your auditors’ inquiries, risk assessment, and testing procedures, and allow them to better understand your company’s operations. During the audit process, data visualization can also help auditors highlight trends and anomalies and explain complex matters to management. Certain charts and graphs can even be attached to financial statement disclosures to make the data more clear for stakeholders. If you have further questions about using data visualization in your audit, contact us.