Scherer & Bradford

S-corporation Audit Risk Reasonable Salary Requirements

2025-05-28T09:33:56Z

Dear Client, There is a potential audit risk that S-Corporations face regarding the compensation of their owners. As you may know, S-Corporations are pass-through entities that do not pay corporate income tax, but rather pass their profits and losses to their shareholders, who report them on their individual tax returns. One of the benefits of being an S-Corporation owner is that you can avoid paying self-employment taxes (Social Security and Medicare taxes) on the portion of your income that is distributed as dividends, rather than wages. However, this also creates an incentive for some owners to underreport their wages and overreport their dividends, which can attract the attention of the IRS. The IRS requires that S-Corporation owners who perform services for their businesses pay themselves a reasonable salary for their work, and report it as W-2 income subject to employment taxes. The IRS can reclassify dividends as wages if it determines that the owner’s compensation is unreasonably low compared to the profits of the business. This can result in additional taxes, penalties, and interest for the owner and the S-Corporation. The IRS has various methods to identify and select S-Corporations for audit, such as matching K-1s with W-2s, using thresholds and criteria based on income and losses, and analyzing various deductions and credits claimed by the business. According to a recent report by the Treasury Inspector General for Tax Administration (TIGTA), the IRS is not doing enough to enforce compliance with the reasonable compensation requirement for S-Corporation owners. TIGTA found that many S-Corporations with high profits and low or no wages were not selected for audit, and that even when they were audited, the issue of owner compensation was often not evaluated by the IRS agents. TIGTA recommended that the IRS improve its audit selection and examination procedures to address this issue more effectively. As your legal advisors, we want to help you avoid any potential audit risk and ensure that you comply with the tax laws regarding your S-Corporation. We can assist you in determining a reasonable salary for yourself based on various factors, such as your duties and responsibilities, your qualifications and experience, the nature and size of your business, the market conditions and industry standards, and the compensation paid by comparable businesses. We can also help you document your compensation decision and support it with evidence in case of an IRS inquiry. We hope this letter has been informative and helpful to you. If you have any questions or concerns about this issue, please do not hesitate to contact us.

The New Corporate Transparency Act And Reporting Requirements Effective January 1, 2024

2025-05-28T09:34:02Z

Dear Client: This alert is to inform you about a new federal law that affects most small businesses in the US. The law is called the Corporate Transparency Act (CTA) and it requires certain companies to report information about their beneficial owners to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).

What is the CTA and why was it enacted?

The CTA was passed by Congress in 2021 and takes effect on January 1, 2024. The purpose of the CTA is to prevent the misuse of anonymous shell companies for money laundering, tax evasion, terrorism financing, and other illicit activities. The CTA aims to enhance the transparency and accountability of the U.S. corporate system by creating a secure and confidential database of beneficial owners of reporting companies.

What is a reporting company and who is a beneficial owner?

A reporting company is any corporation, limited liability company, or similar entity that is registered or formed in the U.S. or that operates in the U.S. by filing an application to do business or obtaining a license. There are some exceptions for certain types of entities, such as publicly traded companies, banks, insurance companies, charities, trusts and others. A beneficial owner is an individual who directly or indirectly owns or controls at least 25% of the equity interests of a reporting company or who exercises substantial control over a reporting company. A beneficial owner does not include a nominee, intermediary, custodian, agent, or employee who acts on behalf of another person.

What information do reporting companies have to provide to FinCEN?

Each reporting company that is not exempt must identify in its initial beneficial ownership report each of its beneficial owners and provide five pieces of personally identifiable information about each of those beneficial owners. This information includes: - Full legal name - Date of birth - Current residential or business address - Unique identifying number from an acceptable identification document (such as a passport or driver’s license) - FinCEN identifier (a unique number assigned by FinCEN to each beneficial owner) In addition, the initial beneficial ownership report must disclose the reporting company’s full legal name, any trade name or doing business as name, a complete current address, the state or jurisdictions of the reporting company’s formation, and the reporting company’s taxpayer identification number (TIN) or, where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of that jurisdiction.

How and when do reporting companies have to submit their reports to FinCEN?

Reporting companies must submit their initial beneficial ownership reports to FinCEN electronically through a secure online portal that is available on FinCEN’s website beginning in January 2024. The deadline for submitting the initial reports depends on when the reporting company was formed or registered:

For reporting companies that were formed or registered before January 1, 2024, the deadline is January 1, 2025.
For reporting companies that are formed or registered on or after January 1, 2024, the deadline is within 30 days of formation or registration. However, for reporting companies that are formed or registered on or after January 1, 2024 but before January 1, 2025, the deadline has been extended to 90 days to allow new entities additional time to understand the new reporting requirements.

Thereafter, reporting companies must update their beneficial ownership information within one year of any change in the information previously reported to FinCEN.

What are the penalties for non-compliance with the CTA?

The CTA imposes civil and criminal penalties for failing to report or update beneficial ownership information, or for providing false or fraudulent information. The penalties include: A civil penalty of up to $500 per day for each day that the violation continues. A criminal penalty of up to $10,000 and/or imprisonment for up to two years.

How will FinCEN protect the confidentiality and security of the beneficial ownership information?

FinCEN will store the beneficial ownership information in a confidential and secure database that will not be accessible to the public. FinCEN will only release the information upon: - A request from certain federal or state agencies engaged in national security, intelligence or law enforcement activity - Certain types of requests from a federal agency on behalf of foreign authorities - A request by a financial institution “subject to customer due diligence requirements” - A request by a federal regulator FinCEN will also maintain records of each request for and disclosure of beneficial ownership information and will conduct audits to ensure compliance with the CTA.

What should you do next?

Please contact us to determine if your business qualifies as a reporting company subject to the reporting rules, and if you would like our assistance filing your initial report(s). Please let us know if you have any questions or concerns about the CTA or the reporting process.

2023 IRS Cryptocurrency Reporting Requirements

2025-05-28T09:34:07Z

Under the broker information reporting rules, brokers must report transactions in securities to both the IRS and the investor. These transactions must be reported on Form 1099-B. Legislation enacted in 2021 extends these broker information reporting rules to cryptocurrency exchanges, custodians, or platforms (e.g., Coinbase, Gemini, or Binance), and to digital assets such as cryptocurrency (e.g., Bitcoin, Ether, or Dogecoin).

In addition to extending the above information reporting requirement to cryptocurrency, the legislation also extends existing cash reporting rules (for cash payments of $10,000 or more) to cryptocurrency, so that businesses that accept payments of $10,000 or more in cryptocurrency will have to report that to the IRS (on IRS Form 8300).

The new reporting rules apply to transactions that take place in 2023 and later years.

Existing broker reporting rules. Under current rules, if you have a stock brokerage account, then whenever you sell stock or other securities, you receive a Form 1099-B at the end of the year. On that form, your broker reports details of transactions, such as sale proceeds, relevant dates, your tax basis for the sale, and the character of gains or losses.

Furthermore, under the "broker-to-broker" reporting rules, if securities are transferred from one broker to another broker, then the old broker must furnish a statement with relevant information, such as tax basis, to the new broker.

New reporting for digital assets (most cryptocurrencies, and potentially some non-fungible tokens (NFTs)). The 2021 legislation expanded the definition of "brokers" who must furnish Forms 1099-B to include businesses that are responsible for regularly providing any service accomplishing transfers of digital assets on behalf of another person (for example, cryptocurrency exchanges). Thus, any platform on which you can buy and sell cryptocurrency will have to report digital asset transactions to the IRS and to you at the end of each year.

The cryptocurrency exchanges/platforms will have to gather information from customers, so that they can properly issue Forms 1099-B at the end of each tax year. Specifically, cryptocurrency exchanges will have to get the customer's name, address, and phone number, the gross proceeds from the sale of digital assets, and capital gains or losses and whether these were short-term (held for one year or less) or long-term (held for more than one year).

Note that it's not yet known whether exchanges/platforms will have to file Form 1099-B itself (modified to include digital assets) or some other, new IRS form.

Digital assets defined. For these reporting requirements, a "digital asset" is any digital representation of value recorded on a cryptographically secured distributed ledger or any similar technology. The IRS is allowed to modify this definition.

As it stands, the definition will capture most cryptocurrencies, and could potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork.

Cash transaction reporting on Form 8300 will apply to cryptocurrency. Under a set of rules separate from the broker reporting rules, when a business receives $10,000 or more in cash in a transaction, that business must report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300. For this cash reporting requirement, businesses will have to treat digital assets like cash.

IRS's Form 8300 requires the reporting of the identifying information of the individual from whom the cash was received-including address, occupation, and taxpayer identification number-as well as other information. The current-law rules that apply to cash usually apply to in-person payments in actual cash. It may be difficult for businesses seeking to comply with the post-2022 reporting rules for more than $10,000 in cryptocurrency to collect the information that must be reported on Form 8300.

What you should know. If you use a cryptocurrency exchange or platform, and it has not already collected a Form W-9 from you (seeking your taxpayer identification number), expect it to do so.

Cryptocurrency exchanges and platforms, in addition to collecting information from their customers, will need to begin tracking the holding period and the buy and sell prices of the digital assets in customer’s accounts.

Be aware that the transactions subject to the new reporting rules will include not only the selling of cryptocurrencies for fiat currencies (government-issued currency such as the U.S. dollar), but also exchanges of cryptocurrencies for other cryptocurrencies.

Finally, it's good to keep in mind that the cryptocurrency exchanges or platforms will probably not have all the information they need to meet their reporting requirements under the new rules. This may make the first year of reporting for digital assets challenging for investors, as well as exchanges and platforms.

Deducting Business Travel Expenses

2025-05-28T09:34:11Z

Like a lot of tax rules, the rules regarding business travel expense deductions can be confusing. This article discusses some things clients should know about deducting these expenses. When are business travel expenses deductible? Business travel expenses can be deducted when an individual must travel away from their tax home or main place of work for business reasons. An individual is traveling away from their tax home if they are away for more than an ordinary workday and they need to sleep to meet the demands of their work while away. What is a tax home? Generally, an individual’s tax home is their regular place of business or post of duty – not their personal residence. The term “tax home” can include the entire city or general area where the individual’s work or business is located. If the individual has more than one regular place of business, their tax home is their main place of business or work. An individual’s main place of business or work is determined by:

The total time the employee ordinarily spends in each place,
The level of business activity in each place, and
How much money the employee earns at each place.

Note. An individual can’t deduct the cost of traveling between their main place of business or work and their residence. However, they can deduct the cost of traveling between business locations. Temporary work assignments. An individual may be given a work assignment or job away from their main place of work. If that assignment is temporary, the individual’s tax home doesn’t change, and the individual is away from home for the entire period of the assignment. Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for one year or less. Note. An employer can deduct an employee’s travel expenses if the employer paid or incurred those expenses during an employee’s temporary work assignment and the employee’s work assignment doesn’t last for more than one year. Indefinite work assignment. If an employee is given an indefinite work assignment at a different location then the worker’s tax home changes to the new work location. In this situation, the employer can’t deduct the employee’s expenses as business travel expenses while they are working at the new location because the employee isn’t at traveling away from his tax home. A work assignment or job in a single location is indefinite if it is realistically expected to last for more than one year (whether or not it actually lasts for more than one year). Note. Individuals with indefinite work assignments must include in income any amounts they receive from their employer for living expenses. What travel expenses are deductible. To be deductible, business travel expenses must be ordinary and necessary expenses for traveling away from home for a business, profession, or job. An ordinary expense is one that is common and accepted in the individual’s trade or business. A necessary expense is one that is helpful or appropriate for the business. Lavish, extravagant, or personal expenses are not ordinary or necessary. Note. An expense doesn’t have to be required to be considered necessary. Examples of deductible business travel expenses include:

Travel by airplane, train, bus or car between the individual’s home and business destination,
Fares for taxis or other types of transportation between an airport or train station and a hotel, or from a hotel or to a work location,
Shipping baggage and sample or display material between regular and temporary work locations,
Using a personal car for business travel,
Lodging and meals while away,
Dry cleaning and laundry while away, and
Tips paid for services related to any of these expenses.
Other similar ordinary and necessary expenses related to the business travel.

Conventions, seminars and meetings. Generally, business travel expenses for conventions, seminars and meetings are deductible if attendance at the event benefits the business. Note. Expenses to go to conventions for investment, political, social, or other purposes unrelated to the individual’s trade or business are not deductible. However, expenses for attending conventions, seminars and meetings that are held outside the North American area (NAA) are usually not deductible unless:

The meeting is directly related to the active conduct of the individual’s trade or business, and
It is reasonable to hold the meeting outside the NAA.

Keeping records. The business traveler should keep well-organized records that substantiate the amount, time, place and business purpose of their travel expenses. A business traveler must substantiate the cost of each separate expense for travel, lodging and meals. Incidental expenses may be totaled in reasonable categories, such as taxis, fees, and tips. Besides keeping receipts, canceled checks, credit card statements, bank statements (for debit card purchases) and other documents, an individual traveling for business should keeping a diary, log or a calendar noting the dates and times of any business travel, as well as the business reason for that travel.

American Rescue Plan Act of 2021 (ARPA)

2025-05-28T09:34:15Z

The American Rescue Plan Act of 2021 (ARPA), signed by President Biden on March 11, 2021, is the latest major legislation that provides economic relief and stimulus, both tax and non-tax, during the Covid-19 pandemic. Below are brief summaries of the key aspects of the tax provisions in ARPA.

Provisions Affecting Individuals

Recovery rebate credits (stimulus checks). ARPA provides a third round of nontaxable stimulus checks directly payable to individuals. The payments are structured as refundable tax credits against 2021 taxes but will paid in 2021 (not 2022). The maximum payments are $1,400 per eligible individual ($2,800 for married joint filers) and $1,400 for each dependent (which, unlike the first two stimulus payments, includes older children and adult dependents). The payment phases out proportionally between $75,000 and $80,000 AGI for single filers, $112,500 and $120,000 for head of household filers, and $150,000 and $160,000 for married joint filers. Rules for identification, for payments made notwithstanding no filing of 2019 and 2020 returns, and for limitations on offsets apply. Eligibility is based on information from 2020 income tax returns (or 2019 returns, if 2020 returns haven't been filed when the advanced credit is initially issued). For households whose payment was based on 2019 income data, and who would be eligible to receive a larger payment based on 2020 data, IRS is directed to issue a supplementary payment. Child tax credit. For 2021

Qualifying children include 17-year-olds,
The credit is increased to $3,000 per child ($3,600 for children under six years of age), but the increase is subject to modified AGI phase out rules (and the existing modified AGI phase out rules for eligibility for any credit at all continue to apply),
The credit is refundable, and
IRS will make periodic advance payments totaling 50% of its estimate of the credit in the last half of 2021.

Earned income tax credit (EITC).

For 2021 the credit is increased for taxpayers with no qualifying children and age restrictions for those taxpayers are relaxed;
After 2020 taxpayers that have a qualifying child but can't meet the identification requirements for the qualifying child are nevertheless allowed the credit;
Taxpayers may use the greater of their 2019 or 2021 earned income in calculating the credit for 2021;
After 2020, the amount of investment income that a taxpayer can have and still earn the credit is increased; and
After 2020 there is broadening of the existing exception to the credit's joint filing requirement under which separated married people eligible to file jointly are allowed the credit even if they don't file jointly.

Child and dependent care credit. For 2021

The credit is refundable;
The amount of qualifying expenses taken into account for the credit is increased from $3,000 to $8,000 if there's one qualifying care recipient and from $6,000 to $16,000 if there are two or more;
The maximum percentage of qualifying expenses for which credit is allowed is increased to 50% from 35%; and
Phase-down rules, based on AGI, are changed.

The increased dependent care assistance program exclusion amount (see below) under Code Sec. 129 will also affect the child and dependent care credit, as the amount of expenses taken into account for the credit is reduced by the amount excludable from the taxpayer's income under Code Sec. 129. Dependent care assistance programs. For 2021, the amount excludible under a dependent care assistance program is increased to $10,500 (or $7,500 for a married taxpayer filing a separate return). Retroactive plan amendments are allowed to facilitate the increase. Health care premium assistance credit. For 2021 and 2022, the credit will be available for a larger percentage of insurance premiums, and individuals whose income is greater than 400% of the poverty line will be eligible for (rather than barred from) the credit. For 2020, individuals who were provided advances of the credit under the Patient Protection and Affordable Care Act in excess of the credits to which they are entitled aren't obligated to pay back the excess. And, notwithstanding any other rules, individuals who receive unemployment compensation during 2021 are eligible for the credit (and under rules that increase the amount of the credit). Income exclusion for unemployment benefits. For 2020, taxpayers with modified AGI less than $150,000 can exclude from gross income $10,200 of their unemployment benefit. The exclusion is available to each spouse if a joint return is filed. For taxpayers who already filed 2020 returns and did not exclude unemployment benefits, IRS said that taxpayers shouldn't file an amended return and that additional guidance will be provided. Student loan forgiveness. Beginning in 2021 and continuing through 2025, the forgiveness of many types of loans for post-high school education won't result in income inclusion for the forgiven amounts.

Provisions Affecting Businesses

Payroll tax credits. The paid sick leave and family leave credits are extended to apply to wages paid through September 30, 2021 (instead of March 31, 2021). There are also changes to these credits, including:

One major change is that during the two-quarter extension period the credits are applied against the employer Medicare portion of payroll taxes instead of the OASDI (Social Security) portion. The Medicare taxes taken into account are those for all employees, not just employees to whom qualifying leave wages are paid. But the credits continue to be refundable (and, thus, allowed in excess of the Medicare taxes) and advance refundable (they can be applied against any employment taxes, including income tax withholdings, for the quarter in which eligible leave wages are being paid, with any remaining credit refundable at the end of the quarter).
An additional major change is that the allowable credit can be increased by both by both the amount of the OASDI taxes paid and Medicare taxes paid with respect to eligible leave wages, instead of just the Medicare taxes.
Rules are provided that coordinate the leave credits with second draw Payroll Protection Program loans and certain government grants.
The no-double benefit rule, which disallows claiming both
1. Either of the above credits and
2. The income tax credit for family or medical leave is expanded to include similar coordination with certain other income and payroll tax credits.
An employer is ineligible for the leave credits if, in providing paid leave, the employer discriminates in favor of highly compensated or full-time employees or on the basis of employment tenure.
IRS is allowed an extended limitation-on-assessment period for deficiencies due to claiming either of the leave credits.
ARPA allows employers who voluntarily provide 80 hours of emergency paid sick leave and 12 weeks of emergency family leave beginning after March 31, 2021 to claim the leave credits, thereby resetting the leave bank regardless of whether the employee used leave previously or has exhausted leave.
The employee retention credit is extended to apply to wages paid before January 1, 2022 (instead of July 1, 2021). The result is that as a general rule (but see below) there is allowed a maximum per employee credit for 2021 of $28,000 ($10,000 of wages taken into account per quarter multiplied by the credit rate of 70%).
Also, there are modifications to this credit. A major change is that for the last two calendar quarters of 2021 there is allowed a maximum $50,000 credit per quarter to certain small start-up businesses (and under relaxed eligibility rules). This change makes a limited credit available to some businesses that couldn't qualify for the credit at all because they can't meet either the full/partial suspension or 20% drop-in-gross-receipts requirements. And, during those two quarters certain distressed businesses will be able to treat all wages as eligible (up to the $10,000 per quarter limit), enabling employers with more than 500 employees, who can ordinarily treat only wages paid to laid-off workers as eligible, to treat any wages as eligible.
Another of the major changes is that the change to applying the credit to Medicare taxes (discussed above for the paid sick and family leave credits) also applies (along with the continuing refundability and, for employers with no more than 500 employees, advance refundability of the credit).
Under related rules, the relieved amounts aren't included in the income of the individuals and there is imposed by the Internal Revenue Code a penalty on individuals that fail to report the end of their eligibility.

Self-employment sick and family leave credits. These credits, which are creditable against the income tax, have been extended to apply to eligible days through September 30, 2021 (instead of March 31, 2021). A major change is that both credits treat as reasons for eligible leave the obtaining of or recovering from Covid-19 immunization. And, for the family leave credit, reasons for eligible leave are expanded to include all qualifying reasons for taking sick leave. Another major change is that in determining whether the 10-day per tax year limit for the sick leave credit is complied with, only days after December 31, 2021, are taken into account (thus restarting the count and often increasing the cumulative number of eligible days). And, a major change to the family leave credit is that the maximum number of eligible days per tax year is increased from 50 to 60, again with only days after March 31, 2021 taken into account (resetting the count and often increasing the cumulative number of eligible days). Excess business losses. In a revenue raiser, the disallowance of excess business losses is extended to run through 2026 instead of 2025. Deduction disallowance for over $1 million employee remuneration . In another revenue raiser, for tax years beginning after calendar year 2026, the $1 million annual cap on the deductibility of remuneration paid to certain categories of employees of publicly held corporations is expanded to include as a new category the five highest compensated employees not included in other categories. Tax treatment of certain non-tax relief. ARPA provides favorable tax consequences for targeted Economic Injury Disaster Loan (EIDL) advances made by the SBA under the Economic Aid to Hard-hit Small Businesses, Non-Profits and Venues Act. The advances aren't included in income and the income exclusion doesn't result in deduction disallowances, denial of basis increases or reduction of other tax attributes. The same treatment applies to SBA Restaurant Revitalization Grants. Pension plans. ARPA relaxes some funding standards and other IRC or ERISA rules for multiple employer pension plans. For single employer plans, IRC or ERISA rules are relaxed for amortizing funding shortfalls and the pension funding stabilization percentages are changed. Also changed are the special rules that apply to community newspaper plans. Reporting by third party settlement organizations. ARPA tightens the de minimis exception to tax reporting by third party settlement organizations (TPSOs, e.g., PayPal) by excluding from reporting only transactions that don't exceed $600 (and eliminating the 200-transaction threshold). ARPA also clarified that TPSO reporting obligations are limited to transactions involving goods and services. Foreign tax. In a revenue raising provision, IRC section 864(f), which provided a one-time election under which, effectively, corporate groups could allocate some interest expense from foreign to domestic corporations and reduce the effect of limits on the foreign tax credit, is repealed. The repeal is retroactive to the election's effective date (i.e., for tax years beginning after Dec. 31, 2020). We are available at your convenience to discuss in more detail any of the ARPA changes and how they apply to you.