Oh really….another newsletter?
How interesting can accounting and tax updates really be?
Yes friends, that is right. We have another newsletter on our hands. My goal with this newsletter is to not only provide content for you but to inform you with stories from around the industry. Whether it be a new tax law update or information on how to help run your business better, I hope that this newsletter will be a valuable addition to your email inbox. Have any topics you’d like to hear more about? Email me and it could be in next month’s edition.
THIS MONTH’S
TOP STORIES
Tennessee Works Tax Act
The Tennessee General Assembly has approved roughly $400 million in tax cuts for individuals and businesses. Here are a few highlights of the new law.
Grocery sales tax holiday between August and October 2023 on food and food ingredients sold in grocery stores.
Companies offering paid family leave may be eligible for a tax credit against franchise and excise tax liability.
First $50,000 in net earnings will be exempt from excise tax.
First $500,000 of business property will be exempt from franchise tax.
Business tax filing threshold increased to $100,000 per jurisdiction.
To find out more information on the Tennessee Works Tax Act, please visit the website here.
ERC Audits Begin
The ERC (Employee Retention Credit) was a COVID-era tax credit which allowed businesses to receive a credit for wages paid to employees if their business met certain guidelines. Seemingly overnight, a tsunami of ERC shops popped up to help businesses claim these credits, and would charge based on a percentage of the credit claimed (usually around 20%).
The issue many tax professionals have been running into, is clients of ours who didn’t qualify based on the guidelines, are being told by these other non-accounting providers they do qualify, and getting the credit though them.
But now, due to that sweet sweet government funding, the IRS is finally beginning audits on ERC claims - and it isn’t pretty.
The IRS is taking a VERY black and white stance on whether guidelines are being followed - meaning long narratives and opinions, without the actual data required, are denying ERC claims.
This will end very badly for some businesses, who took the claim (some which are well over 7 figures), and are now required to pay it back in full, plus penalties and interest. Oh, and the 20% they paid their ERC provider? Good luck getting that back - ERC providers are already closing their doors so it could very well be the company that did the claim, no longer exists when the client is audited.
A Win for the People
Very bad things can happen when you get too far behind on your taxes - such as having your property seized and sold off by the government. Such was the case for Geraldine Tyler, a 94 year old widow and resident of Hennepin County in Minnesota.
Geraldine had over $15,000 of unpaid property taxes on her condo - and as a result, eventually had the property seized and sold by the government to cover the back-taxes owed. The condo ended up selling for $25,000 OVER the $15,000 tax bill due, which the county kept as allowed by Minnesota law.
Geraldine sued for these profits under the 5th Amendment (which states the government can’t take property without just compensation in return) and on May 25th, 2023, the US Supreme Court unanimously ruled in her favor. This ruling will now overturn laws in 12 other states and the District of Columbia who had similar laws allowing for “home-equity theft”.
Please Don’t Just “Hire Your Kids”
A tax strategy I see touted FAR too often on social media is hiring your kids. The logic is as follows - if you file as a Schedule C or Partnership, and hire your children, those wages are not subject to payroll taxes. Additionally, if the child’s wages are under the standard deduction, they will not owe federal taxes on that earned income. With that earned income, they can contribute to a Roth IRA and start saving for retirement.
But - many of these strategies often leave out the details, and as we know, that’s where the devil is. Below are some ways taxpayers try to utilize this strategy, and do so incorrectly:
Not following labor laws and having children work more hours than are legally allowed
Not paying them a fair-market wage for tasks being performed (i.e. a 10 year old would not realistically be making $100/hr)
Paying them for tasks NOT related to the business (i.e. chores around the house)
Not filing appropriate payroll forms with state and federal governments (quarterly and yearly reports, including a W-2)
If the rules ARE followed - such as a W-2 is issued, employment laws are abided by, a fair wage is paid for work being performed, the work is age appropriate, this is a legitimate tax strategy. But the key takeaway here is - you need to be able to provide appropriate documentation to support your position.
Flyfin, an app to help 1099 workers track deductions for taxes, posted this video on their Instagram page. The only problem is - it’s inaccurate tax information.
The ad features two individuals who live and work in their RV full-time, and claim they’re able to write off 40% of their RV expenses as a home-office deduction. The IRS has two main rules around deducting home office expenses - the space must be REGULARLY used as a home office (i.e. it’s your primary place of work) and it must be EXCLUSIVELY your home office (you can’t use the space for anything else).
Although they use their RV as their primary office, they don’t use it exclusively since they also live in it. Because the RV is such a small space, there is no way a reasonable argument could be made that 40% is used just for office work. At most, they might be able to deduct some areas of the RV they use for storage of work equipment, but it would be so minuscule it most likely would not even be worth tracking.
If they can’t use it for their home office - could they instead take advantage of auto deductions since they’re using it for work? My hot take is no - they can’t. The auto deduction can only be used when you’re traveling from work location to work location. We’ve already established that the RV is not a work location for them since they can’t take the home office deduction, so as they’re traveling, they literally aren’t leaving their home. Thus any traveling they’re doing for business is not a deduction.
The only way they could possibly unlock those deductions, would be only if their RV was not also their primary residence, and they could show documented support as to why they qualify either with the auto deduction or the travel deduction.
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