Taxes

How to reduce the impact of the 3.8% net investment income tax
How to reduce the impact of the 3.8% net investment income tax 1275 750 smolinlupinco

For high-income taxpayers, there’s already a regular tax rate of 35% or 37%. In addition to this, they might be required to pay a 3.8% net investment income tax (NIIT) on top of regular income tax. Luckily, there are a few ways you may be able to reduce the impact of the NIIT.

Who are the affected taxpayers?

The NIIT applies to you only if your modified adjusted gross income (MAGI) is greater than:

  • $250,000 for married taxpayers filing jointly and surviving spouses
  • $200,000 for unmarried taxpayers and heads of household
  • $125,000 for married taxpayers filing separately

The total amount that is subject to the tax is the lesser of your net investment income or the amount by which your MAGI exceeds the threshold that applies to you.

Net investment income includes dividend, interest, royalty, annuity, and rental income—unless those items were acquired in the ordinary course of an active trade or business. Additionally, other gross income derived from a passive activity in a trade or business, as well as income from a business trading in financial instruments or commodities, are all subject to the NIIT. 

Which items are exempt?

There are various forms of income that are exempt from the NIIT. For instance, tax-exempt interest and excluded gain from the sale of your main place of residence aren’t subject to the tax.

Distributions from qualified retirement plans are not subject to the NIIT either. Social Security benefits are also excluded. Wages and self-employment income are also not subject to the NIIT, although they may be subject to a different Medicare surtax. 

It’s essential to remember that the NIIT applies only if you possess net investment income and your MAGI exceeds the relevant thresholds mentioned above. With that said, you can still reduce your net investment income by implementing certain strategies. 

Shifting your investments 

If your income is substantial enough to trigger the NIIT, reallocating some income investments to tax-exempt bonds could lead to reduced exposure to the tax. Tax-exempt bonds reduce your MAGI and help you to avoid the NIIT.

As a result of the NIIT, dividend-paying stocks are more heavily taxed. The maximum income tax rate on qualified dividends is only 20%, but that rate increases to 23.8% with the NIIT.

Consequently, you might want to consider rebalancing your investment portfolio to prioritize growth stocks over dividend-paying stocks. While the capital gains from these investments will be included in the net investment income, there are two potential advantages:

  1. The tax will be deferred because the capital gains won’t be subject to the NIIT until the stocks are sold
  2. Capital gains can be offset by capital losses, which isn’t the case with dividends

Retirement plan distributions 

Since distributions from qualified retirement plans are exempt from the NIIT, high-income taxpayers who have some control over their circumstances (such as small business owners) might want to consider making greater use of qualified plans.

Have questions? Smolin can help

These are just a few of the strategies you may be able to employ to offset the NIIT. You may also be able to make moves related to passive activities, charitable donations, and rental income that might help you minimize the NIIT. 

If you’re subject to the tax and want to know how to offset its impact, contact the knowledgeable professionals at Smolin, and we’ll walk you through the process.

Questions You May Still Have After Filing Your Tax Return
Questions You May Still Have After Filing Your Tax Return 1275 750 smolinlupinco

Tax season is officially over, and if you’ve completed your 2022 tax return and sent it to the IRS, you might think you’re finished with taxes for another year. But you may still have some lingering questions about your return your return. Here are the answers to three frequently asked questions that come up for many people after they file a tax return.

When will I get my refund?

The IRS provides an online tool that can inform you of the status of your refund. Simply go to http://irs.gov and click the section marked “Get Your Refund Status.” You’ll be required to provide your Social Security number, filing status, and the exact amount of your 2022 refund.

Which tax records can I get rid of now?

It’s highly advisable to keep your tax records related to your return for as long as the IRS can audit your return or assess additional taxes. The standard statute of limitations is three years after you file your return. 

This means you can now technically throw away most of your records for tax returns for 2019 and earlier years. If you filed an extension for your 2019 return, be sure to hold on to your records until at least three years after the date you filed.

With that said, it’s important to note that the statute of limitations extends to six years for any taxpayer that understates their gross income by more than 25%. If this could be the case for you, you’ll need to hang on to certain tax-related records for longer.

For example, keep your actual tax returns indefinitely, so you can prove to the IRS that you filed legitimate returns. There’s no statute of limitations for an audit if you didn’t file a return or filed a fraudulent return.

When dealing with retirement accounts, keep the records associated with them until you’ve emptied the account and reported your final withdrawal on your tax return, plus three (or six) years. Make sure to keep records related to real estate or investments for as long as you own the asset, plus a minimum of three years after you’ve sold it and reported the sale on your tax return.

Can I still collect a refund for a tax credit or deduction if I overlooked claiming it?

Generally speaking, you can file an amended tax return and claim a refund within three years of the date you filed your original return or within two years of the date you paid the tax, whichever is later.

You should know that there are a few opportunities in which you have more time to file an amended return. For instance, the statute of limitations for bad debts is a bit longer than the standard three-year time limit for most items on your tax return. You can typically amend your tax return for the year that the debt became worthless.

Still have questions? Smolin is available to help all year long

If you still have questions about keeping your tax records, receiving your refund, or filing an amended return, contact the professionals at Smolin, and we’ll provide you with the accurate information and ensure you receive the best results possible.

If You Inherit Property, You Can Benefit From a “Stepped-Up Basis”
If You Inherit Property, You Can Benefit From a “Stepped-Up Basis” 1275 750 smolinlupinco

One of the most common questions for people planning their estates or inheriting assets is: What is the “cost” (or “basis”) a person gets in property that is inherited from someone else? This vital area is often overlooked when families start planning for the future.

According to the fair market value basis rules (otherwise known as the “step-up” and “step-down” rules), an heir can receive a basis in inherited assets equal to their date-of-death value. For example, if your uncle bought shares in an oil stock in 1942 for $500 and the stock was worth $5 million at the time of his death, the basis would be stepped up to $5 million for your uncle’s heirs, which means that the gain on the stock would escape income taxation forever.

Fair market value basis rules apply to any inherited property that can be included in the gross estate of the deceased individual, whether or not a federal estate tax return was filed. The rules apply even to property inherited from foreign individuals not subject to U.S. estate tax. 

Fair market value basis rules also apply to the inherited portion of the property jointly owned by the inheriting taxpayer and the deceased, but not to the portion of the jointly held property that the inheriting taxpayer owned prior to their inheritance. They don’t apply to reinvestments of estate assets on the part of fiduciaries. 

Lifetime gifting

It’s important to understand the fair market value basis rules so that you can avoid paying more tax than you’re legally required to.

For example, in the previous scenario, if your uncle instead decided to make a gift of the stock during his lifetime (rather than passing it down to his heirs when he died), the “step-up” in basis (from $500 to $5 million) would be lost.

Property acquired as a gift that has increased in value is subject to the “carryover” basis rules. This means that the person who received the gift takes the same basis the donor had in it ($500 in this example), plus a portion of any gift tax the donor pays on the gift. 

If someone dies owning property that has declined in value, a “step-down” occurs. In this case, the basis is lowered to the date-of-death value. Sound financial planning can help avoid this loss of basis, and it’s important to note that giving away the property before death won’t preserve the basis. 

Why is that? Because when a property that has gone down in value is given as a gift, the person who receives the gift must use the date of gift value as the basis for determining their loss on a later sale. An excellent strategy for handling a property that has declined in value is for the owner to sell it before death so they may enjoy the tax benefits of the loss. 

Have questions? Smolin can help

We’ve covered the basic rules here, but other rules and limits may apply. For example, in certain cases, a deceased person’s executor may be able to make an alternate valuation election, and gifts made just before a person died may be included in the gross estate for tax purposes. 

If you’re wondering how you can benefit from a “stepped-up basis” or need guidance with planning your estate, contact the knowledgeable professionals at Smolin. We’re ready to guide you through complicated tax laws to ensure you miss out on possible savings for your estate or inheritance.

Use the Rehabilitation Tax Credit to Your Advantage When Altering or Adding to Business Space
Use the Rehabilitation Tax Credit to Your Advantage When Altering or Adding to Business Space 1275 750 smolinlupinco

If your business occupies a large space and needs to expand or move to a new space in the future, it’s important to keep the rehabilitation tax credit in mind. If you appreciate the charm of historic buildings, this is especially true.

The federal rehabilitation tax credit is designed to encourage the preservation of historic properties and neighborhoods by private sector entities. It is administered by the IRS and the National Park Service. 

This tax credit is equal to 20% of the qualified rehabilitation expenditures (QREs) for a qualified rehabilitated building that’s also a certified historic structure. A qualified rehabilitated building is a depreciable building that has been placed in service before rehabilitation has begun, is still in service after that rehabilitation, and is used for either business or the production of income (not held primarily for sale).

In addition to these rules, the building must be “substantially rehabilitated,” which typically requires that QREs for rehab are greater than $5,000 or the adjusted basis of the existing building.

A QRE is any amount that is chargeable to capital and has been incurred in connection with rehabilitation or reconstruction of an eligible building. QREs must be for an existing property, do not apply to land, and cannot include building acquisition or enlargement costs. 

The 20% credit is allocated ratably to each year in the five-year period beginning in the tax year in which the building was placed into service. The credit allowed in each year of the five-year period is 4% (20% divided by 5) of the QREs in regard to the building. This credit is allowed against both alternative minimum tax and regular federal income tax.

The Tax Cuts and Jobs Act, signed at the end of 2017, added some changes to the credit. Specifically, the law:

  • Requires taxpayers to take the 20% credit ratably over five years instead of in the year they placed the building into service
  • Eliminated the 10% rehabilitation credit for pre-1936 buildings

An experienced business accountant can explain the rehabilitation tax credit in-depth and assist you in discovering any other federal tax benefits available for the space you’re considering. For example, certain tax benefits may be available depending on your preference for how a building’s energy needs will be met and where the property is located. There may also be state or local tax and non-tax subsidies available for certain locations.

The professionals at Smolin Lupin do this and more, for example, collaborating with clients and construction professionals to determine whether a particular building can be the subject of a rehabilitation that’s both practical to use and tax-credit-compliant. 

If you find a building you wish to rehabilitate, we can help you monitor project costs and substantiate the compliance of the project in accordance with the requirements of the rehabilitation credit and any additional tax benefits for which you’re eligible.

Tax Rules for Donating Artwork to Charity
Tax Rules for Donating Artwork to Charity 1275 750 smolinlupinco

If you’re an art collector, you may be curious about the tax breaks that come with donating a work of art to charity. You should be aware that many different tax rules come into play when making these kinds of contributions.

Basic rules

A deduction for a donation of art can be reduced if the charity you donated to uses the art for a purpose or function that’s unrelated to the reason for its qualification as a tax-exempt organization. The reduction will be equal to the amount of capital gain you would have received if you sold the property instead of donating it.

Example: You bought a sculpture six years ago for $10,000, and it’s now worth $20,000. You contribute it to a charitable foundation. Your deduction is limited to $10,000 because the foundation’s use of the sculpture is unrelated to its charitable function, and you would have had a $10,000 long-term capital gain if you had sold it.

But what if you donated the sculpture to an art museum? In this instance, your deduction would be $20,000.

Substantiation requirements

There are substantiation rules that apply when you donate a work of art to charity. First, if you claim a deduction of less than $250, you’re required to obtain and keep a receipt from the charity, and you must keep records for any item you contributed.

If you claim a deduction of at least $250, but not more than $500, you’re required to obtain an acknowledgment of your contribution from the group you donated it to. The acknowledgment must state whether the organization gave you any goods or services in exchange for your donation and include a description with a good-faith estimate of the value. 

If you claim a deduction of more than $500, but less than $5,000, you’ll need to maintain records that include information about how and when you obtained the artwork and its cost basis in addition to getting an acknowledgment. You are also required to complete an IRS form and attach it to your tax return.

If the claimed value of the property you donated is more than $5,000, you must have an appraisal of the property in addition to the acknowledgment. Your appraisal must be completed by a qualified appraiser no more than 60 days before the date of the contribution and meet other requirements. You must include information about these donations on the IRS form you send with your tax return. 

If the total of your deduction is more than $20,000, you must attach a copy of the signed appraisal, and the IRS may require you to include a photograph. If the item has been appraised at $50,000 or more, you can request that the IRS issue a “Statement of Value,” which can be used to substantiate the value of your donation.

Percentage limitations

Additionally, your tax deduction may be limited to 20%, 30%, 50%, or 60% of your contribution base, which is typically your adjusted gross income. Percentages vary depending on the year in which the contribution is made, the type of organization, and whether the deduction was required to be reduced based on the unrelated use rule described above. The amount not deductible because of a ceiling may be deductible in the next year under carryover rules.

Partial interest gifts 

Sometimes donors make gifts of partial interests in artwork. For instance, a donor may contribute a 50% interest in a piece of artwork to a museum, with the agreement that the museum will exhibit it for six months of the year, and the donor will retain possession of it for the following six months. There are special requirements that apply to these donation agreements.

Make sure you get the most from your donations with Smolin

If you’re unsure of how to claim deductions for artwork you may have donated this tax year, or if you have further questions about how these deductions work, contact us for more information. 

Paperwork You Can Get Rid of After Filing Your 2022 Tax Return
Paperwork You Can Get Rid of After Filing Your 2022 Tax Return 1275 750 smolinlupinco

Once you have completed your 2022 tax return, you may be curious about what tax documents you can toss in the recycling bin and how long you should keep other important documentation. You might be required to produce these records if the IRS decides to audit your return or needs to assess tax.

It’s a smart move to keep all of your actual returns on hand indefinitely, but what about other supporting documents like canceled checks and receipts? Except in cases of fraud or a substantial understatement of income, the IRS can only assess your taxes within three years after you initially filed your return or three years after the return was due. 

For example, if you filed a 2019 tax return by its due date of April 15, 2020, the IRS has until April 15, 2023, to assess a tax deficiency. If you file late, however, the IRS has three years from the date you filed.

This period, however, can be extended to six years if more than 25% of your gross income is omitted from your tax return. Additionally, if no return is filed, the IRS can assess your taxes at any time. If the IRS claims you never filed a return for a specific year, a copy of your return will help you to prove that you did so.

Property-related records

The tax consequences of a transaction that takes place this year may depend on events that took place years ago. For example, if you purchased a new home in 2007, made capital improvements in 2014, and sold it this year, you would need to determine the tax consequences of the sale. 

To do this, you must know your basis in the home (your original cost), plus later capital improvements. If you’re audited, you may be required to provide records related to the original purchase in 2007 and the capital improvements in 2014 to prove what your basis is. This means you should keep those records for at least six years after filing your return for the year of sale.

Keep all your records related to home purchases and improvements, even if you expect your gain to be covered by a home-sale exclusion, which can be up to $500,000 for joint tax return filers. You’ll still need to prove the amount of your basis if the IRS inquires. Plus, there’s no telling what your home will be worth when you sell it, and there’s no guarantee that the home-sale exclusion will still be available to taxpayers at a later date.

Other considerations apply to property that’s likely to be bought and sold—think stock shares in a mutual fund or other investments. It’s important to note that if you reinvest dividends to buy additional shares, each reinvestment is a separate purchase.

Separation or divorce

In the event of a separation or divorce, make sure you have access to tax records related to you that are kept by your ex-partner. Better yet, make copies of these records so that you don’t have any difficulties accessing them. It’s important to keep copies of all joint returns filed and supporting documents because both spouses are liable for tax on a joint return, and a deficiency may be asserted against either spouse. 

Other important documents include: 

  • Agreements or decrees over custody of children. 
  • Agreements over who is entitled to claim children as dependents. 

Loss or destruction of records

To ensure that your records are protected against fire, theft, or other disasters, it’s worth considering keeping papers in a safe deposit box or another safe place outside of your home. Additionally, consider keeping copies of documents in an easily accessible location so that you can quickly secure them in case of an emergency.  

Make sure you’re ready for any tax issues with Smolin

If you want to find out which specific documents you should keep for any potential dealings with the IRS, contact us for more information. 

Understanding Deferred Taxes
Understanding Deferred Taxes 1275 750 smolinlupinco

Navigating deferred taxes can be a confusing process, and the accounting rules for reporting deferred taxes can sometimes seem arbitrary and nonsensical when viewed through the lens of real-world economics. Here’s a brief article to help simplify this complex subject.

What are deferred taxes?

Companies are required to pay income tax on taxable income as defined by the IRS. On their Generally Accepted Accounting Principles (GAAP) financial statements, however, companies record income tax expense based on accounting “pretax net income.” 

In any particular year, your taxable income (for federal income tax purposes) and pretax income (as reported on a GAAP income statement) may differ substantially. Depreciation expense is typically the reason for this temporary difference.

The IRS allows companies to use accelerated depreciation methods to lower taxes that are paid in the early years of an asset’s useful life. Many companies may also choose to claim Section 179 deductions and bonus depreciation for the year an asset is put into service. 

An alternative route that many companies take for GAAP reporting purposes is to use straight-line depreciation. At the beginning of an asset’s useful life, this typically causes taxable income to be dramatically lower than GAAP pretax income. That said, as the asset gets older, this temporary depreciation expense is reversed. 

Understanding differing depreciation methods

Using differing depreciation methods for tax and accounting purposes causes a company to report deferred tax liabilities. In simple terms, this means that by claiming higher depreciation expense for tax purposes than for accounting purposes, the company has momentarily reduced its tax bill but must make up the difference in later tax years. 

Deferred tax assets can come from other sources like operation loss carryforwards, tax credit carryforwards, and capital loss carryforwards.

How should deferred taxes be reported on financials?

When a company’s pretax and taxable incomes differ, it is required to record deferred taxes on its balance sheet. 

This can go one of two ways. If a company pays the IRS more tax than an income statement reflects, it records a deferred tax asset for the future benefit the company is entitled to receive. If the opposite occurs and the company pays less tax, it must record a deferred tax for the additional amount it will owe in the future.

Like other liabilities and assets, deferred taxes are classified as either current or long-term. 

No matter their classification, though, deferred taxes are recorded at their cash value (that is, with no consideration of the time value of money). Deferred taxes are also based on current income tax rates. The company can revise its balance sheet, in which case change flows through to the income statement if tax rates change.

Unlike deferred tax liabilities which are recorded at their full amount, deferred tax assets are offset by a valuation allowance that reflects the potential of an asset expiring before the company can utilize it. Determining the amount of deferred tax valuation allowance to log is at the discretion of management is highly subjective. It’s important to note that all changes to this allowance will flow through to the company’s income statement.

Today, or later on down the line?

For financial statement users, it’s critical not to lose sight of deferred taxes. A company with significant deferred tax assets may be able to reduce its tax bill in the future and save much-needed cash on hand by claiming deferred tax breaks. 

On the other hand, a company with considerable deferred tax liabilities will have already taken advantage of tax breaks and may need additional cash on hand to pay the IRS in future tax years.

Questions? Smolin can help 

Still unsure of how deferred taxes might affect your business? If you would like to discuss any of these issues or gain a better understanding of tax rules for businesses, our CPAs can help. Contact us to get started. 

Understanding the Tax Implications of Merger and Acquisition Transactions

Understanding the Tax Implications of Merger and Acquisition Transactions
Understanding the Tax Implications of Merger and Acquisition Transactions 1600 941 smolinlupinco

As a result of rising interest rates and a slowing economy, last year’s merger and acquisition (M&A) activity decreased significantly. According to S&P Global Market Intelligence, the total value of M&A transactions in North America was down 41.4% in 2022 (compared to 2021). 

But in 2023, some analysts anticipate increased M&A activity in some industries. If you’re thinking about selling or buying a business, it’s important that you understand the tax implications. 

Two approaches to M&A transactions

According to current tax law, M&A transactions can be structured in one of two ways: 

1. Stock/ownership interest

If the target business operates as a C- or S-corporation, a partnership, or an LLC that’s treated as a partnership for tax purposes, a buyer can directly purchase the seller’s ownership interest. 

The option to buy a stock of a C-corporation may become more appealing with the current 21% corporate federal income tax rate, as the corporation will pay less tax while generating more post-tax income. Additionally, any built-in gains from appreciated corporate assets will be taxed at lower rates when sold. 

Ownership interests in S-corporations, partnerships, and LLCs have also become more appealing due to the current individual federal tax rates; the passed-through income from these entities is also taxed at a lower rate on a buyer’s personal tax return. However, it’s important to note that these individual rate cuts will expire at the end of 2025. 

2. Assets

Another option is to purchase the business assets, which may be ideal when a buyer only wants specific assets or product lines. If the target business is a sole proprietorship (or single-member LLC treated as a sole proprietorship for tax purposes), purchasing business assets is the only option. 

Choosing the right option

The right approach to M&A transactions depends largely on the goals of those involved. 

What buyers want

Buyers often prefer to purchase assets rather than ownership interests. This is because, generally, a buyer’s primary goal is to generate enough cash flow from an acquired business to be able to pay any acquisition debt while also providing an acceptable ROI. As a result, buyers tend to be concerned about limiting exposure to unknown liabilities and minimizing post-transaction taxes. 

A buyer can step up—or increase—the tax basis of purchased assets to reflect the purchase cost. When certain assets (such as receivables and inventory) are sold or converted into cash, a stepped-up basis lowers taxable gains. It can also increase depreciation and amortization deductions for qualified assets. 

What sellers want

Sellers generally prefer stock sales for both tax and non-tax reasons. One objective is to minimize a sale’s tax bill, often achieved by selling business ownership interests (corporate stock or partnership or LLC interests) instead of business assets. 

When a stock or other ownership interest is sold, liabilities typically transfer to the buyer. Additionally, any gain on sale is often treated as lower-taxed long-term capital gain—assuming ownership interest has been held longer than one year. 

Buying or selling a business? Contact a financial professional.

Buying or selling a business is a significant transaction with far-reaching impacts. If you’re considering an M&A transaction, it’s important to seek assistance from a professional before finalizing a deal—because after the transaction is complete, it may be too late to get the best tax results. 
That’s where Smolin comes in. Contact us to speak to a knowledgeable tax advisor.

5-tax-saving-ways-to-pay-for-your-childs-college-education

5 Tax-Saving Ways to Pay for Your Child’s College Education
5 Tax-Saving Ways to Pay for Your Child’s College Education 1600 942 smolinlupinco

Do you have a child or grandchild currently attending college? Congratulations! 

To help cover the costs of post-secondary education, you may have saved up over the course of several years in a tax-favored account, such as a 529 plan. Once your child is enrolled in college, though, you may be able to claim a number of tax breaks. 

For example: 

1. Tuition tax credits

The American Opportunity Tax Credit (AOTC) can be taken up to $2,500 per student for the first four years of college. This includes a 100% credit for the first $2,000 and a 25% credit for the second $2,000 in tuition, fees, and books. This credit is 40% refundable up to $1,000, which means you can get a refund if the credit amount is higher than your tax liability. 

You can also take the Lifetime Learning Credit (LLC) of up to $2,000 per family for each additional year of post-secondary education, which includes a 20% credit for up to $10,000 in tuition and fees. 

That said, only one education tax credit can be claimed per eligible student per year. To claim the credit, the taxpayer must receive a Form 1098-T statement from the school. 

Note that both credits will be phased out for those with certain modified adjusted gross income (MAGI): 

  • Between $160,000 and $180,000 for married couples filing jointly
  • Between $80,000 and $90,000 for singles

2. Scholarships

If certain conditions are met, scholarships can be exempt from income tax. One of these conditions is that the scholarship cannot be compensation for services and must instead be used for tuition, fees, books, and supplies—not for room and board.

Remember that a tax-free scholarship will reduce the expenses considered when computing the AOTC and LLC. As a result, those credits may be reduced or eliminated. 

3. Employer assistance

If your child’s college expenses are covered by your employer, that payment is considered a fringe benefit and is taxable to you as compensation. 

If it’s part of a scholarship program outside of the pattern of employment, however, it will be treated as a scholarship—assuming the scholarship requirements are met. 

4. Tax-exempt gifts

When someone gifts you money to cover your child’s college expenses, that person is generally subject to gift tax. For 2023, the gift tax exclusion threshold is $17,000 per recipient; married donors who give combined gifts may exclude gifts of up to $34,000. 

However, if someone—such as a grandparent—submits your child’s tuition payments directly to the educational institution, there is an unlimited gift tax exclusion. This applies only to direct tuition costs (as opposed to room and board, books, supplies, and more). 

5. Retirement account withdrawals

You can withdraw money from your IRA or Roth IRA account at any time without incurring the 10% early withdrawal penalty, as long as those withdrawals are used to pay for college costs. Note, however, that the distributions are subject to tax under the usual rules. 

You may also have the option to withdraw from or borrow against your employer retirement plan—but before doing so, ensure you fully understand any and all tax implications, including any potential penalties. 

Plan ahead with Smolin

Not all of the above-mentioned tax breaks can be used in the same year, and some may also impact qualification amounts for other tax breaks. 

Not sure which option is best for your situation? Our CPAs can help. Contact us if you would like to discuss any of these options, or other alternatives that may apply to your situation. 

too-good-to-be-true-be-wary-of-third-party-erc-mills

Too Good To Be True? Be Wary of Third-Party ERC Mills
Too Good To Be True? Be Wary of Third-Party ERC Mills 1600 941 smolinlupinco

During the height of the COVID-19 pandemic, the Employee Retention Credit (ERC) helped employees keep their staff members on payroll. While this tax credit is no longer available, eligible employers who have yet to claim it may be able to do so by filing amended payroll returns for 2020 and 2021. 

However, the IRS warns against third parties advising non-eligible employers to claim the ERC. 

ERC 101

The ERC is a refundable tax credit designed specifically for businesses that: 

  • Continued to pay employees while being closed due to the COVID-19 pandemic, or 
  • Had significant declines in gross receipts between March 13, 2020, and September 30, 2021 (or, for certain startup businesses, December 31, 2021) 

Eligible employers who did not claim the ERC on an original tax return may still be able to claim it on an amended return. 

Eligible businesses must have fully or partially suspended operations due to government orders limiting commerce, travel, or group meetings due to the pandemic during 2020 or the first three quarters of 2021. Those who qualified as a recovery startup business during the third or fourth quarters of 2021 may also be eligible. 

Note that for any quarter, eligible employers cannot claim the ERC on wages that were: 

  • Reported as payroll costs in obtaining Paycheck Protection Program (PPP) loan forgiveness 
  • Used to claim certain other tax credits 

The problem with third-party “ERC mills” 

Some third-party “ERC mills” are sending notices via email, postal mail, and voicemail—and even advertising on television—promising businesses that they can help them receive a refund, despite not knowing anything about the employers’ unique circumstances. 

When businesses respond, these third parties claim many improper write-offs relating to the tax credit, such as taxpayer eligibility and computation. These third parties often charge large fees, whether upfront or contingent on a refund, without informing taxpayers that wage deductions claimed on federal income tax returns must deduct the amount of the credit. 

Getting the facts straight

If a business filed an income tax return that deducted qualified wages prior to filing an employment tax return claiming the ERC, they should file an amended return correcting any overstated wage deductions. 

The IRS encourages businesses to be wary of advertisements and offerings that seem too good to be true. Regardless of the third parties involved, taxpayers are always held responsible for any information reported on their tax returns. By improperly claiming the ERC, you may be required to repay not only the credit, but also any penalty fees and interest.

Wondering if you can still claim the ERC? Contact a knowledgeable tax professional

If you’re an employer who didn’t previously claim the ERC and believe you may be eligible, Smolin’s tax advisors can help you determine how to proceed. Contact us today. 

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