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Many workers receive at least part of their compensation from sales-related commissions—and some companies even allow for unlimited commissions in order to attract and retain the best talent.

However, it’s an unfortunate fact that some employees abuse this system by falsifying sales or rates in order to receive higher compensation. Although the specific methods of fraud vary depending on the salesperson’s specific industry and role, it’s important for companies to take the possibility of commission fraud into account—and to take steps to prevent it.

Commission fraud: three common forms

Commission fraud usually takes one of the following three forms:

1. Invented sales

This form of fraud occurs when a retail employee generates a commission by entering a fake purchase at the point of sale (POS). In some cases, employees who are involved in selling business services may also create fraudulent sales contracts.

2. Overstated sales

Workers may also commit fraud by altering internal invoices or sales reports or by inflating sales captured through the company’s POS.

3. Inflated commission rates

A company’s commission records may also be changed to reflect a higher rate of pay. This form of fraud may be used by employees who have access to such records, but employees who don’t have access can also collude with someone who does—including accounting staffers—to alter compensation rates.

Employees may also pursue more sophisticated schemes by colluding with customers or other outside parties.

Using data to detect fraud

Regardless of which method an employee uses, commission fraud schemes create a data and document trail that companies can use to detect fraudulent activity. For instance, conducting a regular analysis of your company’s commission expenses relative to sales can help you discover commission fraud in progress. Once timing differences have been accounted for, there should be a close correlation between the volume of commission payments and your sales revenue.

You should also make regular inspections of the total commission paid to each of your employees. If you have employees whose commission levels are significantly higher than average, it’s a good idea to analyze their sales activity and the associated commission rates to verify that the records are consistent. You can also create commission sales benchmarks organized by employee type, location, and seniority. These benchmarks will make it easier for your company to identify fraud in subsequent periods. 

Another method for spotting commission fraud is to randomly sample sales associated with commissions to ensure that you have the relevant documentation for each payment. By disguising your calls as customer satisfaction checks, you can also contact individual customers in order to verify sales transactions.

Some commission schemes also rely on cooperation between multiple employees or between employees and customers—these fraud attempts usually leave a trail of email correspondence. Within the bounds of your company’s policies and procedures, you may be able to identify these forms of fraud by monitoring your employees’ email communications.

Additional fraud-prevention processes

Your business can also implement certain processes to prevent fraud before it occurs in the first place. All of the following may help your company stop commission fraud before it happens:

Formalizing commission fraud policies

In your employee handbook, clearly state the consequences—such as termination or criminal charges—of committing commission fraud. It’s also important to routinely emphasize the measures your company takes to detect commission fraud, such as regularly scrutinizing individual payments for evidence of malfeasance.

Minimizing the possibility of record tampering

Rotating the accounting staff assigned to record commission statements can help prevent your salespeople from accessing accounting records. Segregating all accounting duties will also make it more difficult for fraud schemes to come to fruition within your organization.

Setting achievable sales goals

While many employees commit fraud for personal gain, it’s not uncommon for employees to inflate or falsify sales in order to meet unrealistic sales targets. It’s a good idea to regularly ask your sales staff whether they’re able to meet objectives. You’ll also want to pay close attention when salespeople express frustration or choose to leave your company. If unrealistic sales targets are a common complainant, your company may need to adjust them.

Making fraud more difficult

Commission programs are a great way to boost your company’s bottom line while improving employee compensation and morale—but without the right policies in place, it can be all too easy for dishonest employees to take advantage of these systems. In order to make fraud as difficult as possible, your company may need to increase data analysis or reassess internal controls.

However, many companies find that they don’t have the knowledge or resources to implement these changes—and a CPA or forensic accounting specialist may be able to help. Contact us to get started.

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.

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.

The rules governing depreciation tax deductions for business automobiles are complicated, and vehicles that are classified as passenger autos—such as SUVs and many pickups—fall under special limitations that may result in full depreciation taking longer than expected.

Here is a quick guide to some of the rules governing tax depreciation and deductions for business vehicles.

Calculating deductions

If you use the standard mileage rate when calculating deductions (for 2021 this rate is 56 cents per business mile driven), you won’t need to worry about any separate depreciation calculations, as the rate includes a built-in depreciation allowance.

If you choose to calculate deductions for your passenger auto using the actual expense method, however, you will need to make a separate depreciation calculation for every tax year until your business vehicle is fully depreciated. 

Under this general rule, depreciation is calculated as follows over a six-year span: 

• 20% for year 1
• 32% for year 2
• 19.2% for year 3
• 11.52% for years 4 and 5
• 5.76% for year 6

The straight-line method—rather than the percentages listed above—must be used to calculate depreciation deductions if your vehicle is used 50% or less for business purposes.

Specified annual depreciation ceilings apply for passenger autos whose cost is greater than the applicable amount for the year the vehicle is placed in service. These depreciation ceilings may change annually and are indexed for inflation.

If a passenger auto that cost more than $59,000 is placed in service in 2021, the depreciation ceilings for the vehicle will be as follows: 

• $18,200 for year 1 if you choose to deduct $8,000 of first-year bonus depreciation 
• $16,400 for year 2
• $9,800 for year 3
• $5,860 until the vehicle is fully depreciated

If a passenger auto that cost more than $51,000 is placed in service in 2021, the depreciation ceilings for the vehicle will be as follows: 

• $10,200 for year 1 if you don’t choose to deduct $8,000 of first-year bonus depreciation
• $16,400 for year 2 
• $9,800 for year 3
• $5,860 until the vehicle is fully depreciated

These ceilings are reduced proportionately for any nonbusiness use of the vehicle, and the straight-line method will need to be used to calculate depreciation deductions for any vehicle that is used 50% or less for business purposes.

Depreciation rules for larger vehicles

Vans, SUVs, and pickups that are used over 50% for business and have a gross vehicle weight rating (GVWR) of over 6,000 pounds may be eligible for much more favorable depreciation rules since they’re classified as transportation equipment for depreciation purposes. Many SUVs and pickups are heavy enough to meet this specification—check the label on the inside edge of your vehicle’s driver-side door to find the vehicle’s GVWR rating.

Depreciation limits affect after-tax values

These depreciation limits are important to keep in mind because the tax savings from related depreciation deductions reduce the true cost of a business asset—thus changing the after-tax cost of your business vehicle. And due to time-value-of-money considerations, the value of the related tax savings is reduced to the extent depreciation deductions are reduced and therefore deferred to future years.

If you lease an expensive, business-owned passenger auto, different rules will apply. For more information, contact us.