Member of Russell Bedford International, a global network of independent professional service firms.
Member of Russell Bedford International, a global network of independent professional service firms.
You have heard from us about the benefits of the Employee Retention Credit (ERC). And you have probably received solicitations from third parties on the credit or even seen and heard commercials on the television and radio. The ERC is definitely a hot topic, given the advertised claims of billions of dollars returned to employers.
The Internal Revenue Service (IRS) has heard the chatter as well and is aggressively cracking down on so-called “ERC mills” – promoters of the credit making very misleading claims about the benefits.
The IRS has stepped up audit and criminal investigation work involving these claims. In fact, criminal charges have begun to be filed against the promotors of fraudulent claims. Businesses, tax-exempt organizations and others considering applying for this credit need to carefully review the official requirements for this limited program before applying. Those who improperly claim the credit face follow-up action from the IRS. Additionally, if the credit is overstated, the credit – plus penalty and interest – will need to be repaid.
“The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others,” said IRS Commissioner Danny Werfel. “Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit.”
The IRS notes the following warning signs of aggressive ERC marketing:
Cray Kaiser continues to be at the forefront of understanding whether you qualify for the ERC. If you would like us to review your situation to determine credit eligibility, please call our office today at (630) 953-4900 or connect with us here.
In Cray Kaiser’s Employee Spotlight series, we highlight a member of the CK team. We couldn’t be prouder of the team we’ve grown and we’re excited for you to get to know them. This month we’re shining our spotlight on Tatyana Jackson.
Tatyana is one of CK’s Accounting Service Specialist/Staff Accountants. Her days are spent calculating monthly transactions on clients’ books. She also performs year-end accounting and tax compilations. During tax season, Tatyana has a hand in preparing business and individual tax returns.
Prior to joining CK, Tatyana was part of a very small accounting company located in Little Rock, Arkansas where her role was similar to the role she holds now at CK. A unique fact about Tatyana is that she immigrated to the United States from Russia in 2016. She spent nearly 7 years living in Arkansas where she received a bachelor’s degree in accounting from the University of Arkansas at Little Rock. Tatyana also holds a master’s degree in education.
Tatyana joined the CK team in July of 2022 and was immediately drawn to the rich culture CK provides. She was also impressed by the strong female presence within CK. When asked which of CK’s core values mean the most and why, Tatyana answered, “Education means the most. I believe in lifetime learning and appreciate that CK provides that to its employees.” Tatyana enjoys working in the accounting department because she has the opportunity to learn from the best– her team everyday. “All CK team members are helpful and always willing to jump in and teach when needed,” says Tatyana.
When asked about her favorite CK group outing, Tatyana answered, “Our bowling event right before tax season was a lot of fun! I enjoy bowling and it was great to have outing prior to the busy season to give us all a boost in energy.”
“The Golden Mean in everything.”
Right now, the #1 place I would love to visit is the Grand Teton National Park in Wyoming. As for an overseas destination, I would love to visit London, UK.
“Ozark” on Netflix!
Master and Margarita by Mikhail Bulgakov.
Many of us have just put our 2022 taxes in the rearview mirror, but it’s still not too early to start planning for 2023. A little thinking ahead now can help you avoid unpleasant year-end surprises with your tax bill. In 2020, the IRS introduced a new format for the W-4 withholding certificate, which is the form you use to tell your employer how much to take out of your paycheck towards your income tax. Because the new W-4 works a bit differently than the old one, this has caused confusion, and many people find that their payroll withholding now falls short of covering their tax liability at the end of the year. Some taxpayers who were used to always breaking even or getting refunds when they filed their returns now find that they owe money.
The nature of this new W-4 requires a little additional planning, and to help with this, the IRS has introduced a withholding calculator to help you estimate what you should be withholding each pay period. Just input your earnings and withholding for the year so far and estimate some of your deductions and credits. Then you’ll get a general idea of whether your withholding will be enough for the year.
Click here to access the IRS estimator.
When completing the estimator, it is recommended that you have your most recent paystub handy (including your spouse’s if married), as well as the previous year’s tax return. Most of the information the estimator asks for will come from your paystub. The calculator also allows you to go into as much detail as you like with credits and deductions. We typically suggest keeping it simple by using the numbers from your prior year’s return. If you used the standard deduction, go with that again. If you itemized, start with the prior year’s numbers and adjust to reflect anything major that might have changed. Unless you expect significant life events like marriage, a new baby, or a child beginning college, most people will get accurate results using numbers from the previous year.
The estimate from the calculator will give you a rough idea of whether the tax you are withholding through your W-2 will cover your tax bill at the end of the year. If the calculator shows you’re likely to owe, you can ask your employer to adjust the amount taken out of your check each pay period. The easiest way to do this is to take the estimated amount owed from the calculator and divide it by the number of pay periods left in the year. Then round that to an even number and ask your employer to withhold that additional amount from each paycheck. The person responsible for HR or payroll at your employer will normally be the one who can provide that form and make the adjustment for you.
It’s important to keep in mind that this is only an estimate. Many events can affect your final tax liability, like a bonus, a raise, a new job, or increased income earned outside of your W-2, like dividends or gig work. If your situation changes during the year, you can always revisit the calculator and adjust again. And of course, you can always connect with your Cray Kaiser advisor with any questions. Give us a call at (630) 953-4900 or connect with us here.
April 18th is behind us, but there are other important tax due dates to keep in mind during the remainder of 2023. Here is a list of them.
June 15, 2023
September 15, 2023
October 16, 2023
If you have questions about the upcoming deadlines, please call us at 630-953-4900 or contact us here. We are happy to help.
The issue of foreign tax reporting has been in flux for the last few years. For the 2021 tax year, the IRS hastily published regulations without warning, that made it onerous for many passthrough entities, and created more complexity and paperwork than many believe was necessary. These were the K-2 and K-3 schedules, which run about 20 pages per owner, and which many of you might have noticed when you received your 2021 K-1’s from S-Corps or Partnerships.
The goal of these schedules was to provide information on the portion of the income from the S-Corp or Partnership related to foreign activities. However, the implementation by the IRS was heavy-handed and made the process complex which added time and cost to the income tax preparation process.
For the current year, the IRS has bowed to pressure and has provided two exemptions that give relief to most passthrough entities with little or no foreign activity. While in theory, this is good news, the qualifications to utilize the exemption are complicated.
To qualify, passthrough entities must only have direct partners and shareholders who are U.S. citizens, resident aliens, or certain domestic estates and trusts, and any foreign activity is limited to less than $300 of foreign taxes paid or accrued. If these definitions are met, then an election can be made to exclude the K-2 and K-3 schedules.
This is where things get a little convoluted. Before the passthrough entity can file the return with this election, they must provide each owner a K-1 with a disclosure that K-3 will only be provided if the owner specifically requests it. The owner has up to one month before the return is filed to request a K-3. If this is the case, one owner can cause the S-Corp or Partnership to file the return with K-2 and K-3s, and the owner who requested the K-3 will receive it with their K-1. This can hold up filing the S-Corp and Partnership return to much later, causing all owners to file their individual returns later than desired.
Another exemption to the K-2 and K-3 filing requirements is if all owners qualify for the Form 1116 exemption. If so, the S-Corp or Partnership doesn’t have to file K-2 or K-3.
Form 1116 reports foreign income and foreign taxes paid on the individual income tax return. The exemption from filing this form is if an individual receives less than $600 ($300 for single filers). By doing so, the individual return is more simplified. However, it disallows any foreign taxes carried over to be utilized.
This exemption will likely be less often utilized because it requires every owner to disclose their intent and qualification for Form 1116 exemption to the S-Corp or Partnership. In addition, the time frame for notifying the S-Corp or Partnership is much shorter than the first exemption; owners were required to disclose their intention by February 15 of the current year for 2022 tax returns, a month before the S-Corp or Partnership’s unextended due date.
At CK, we are working with our clients directly to ensure that the exceptions to filing the K-2 and K-3 schedules are reviewed and disclosed appropriately. If you have questions about these exemptions and if they apply to your S-Corp, Partnership, or your individual return, please call Cray Kaiser today at 630-953-4900.
Effective for tax years starting in 2022, there is a policy change that will impact how research and development (R&D) is handled for U.S. tax purposes. Rather than being allowed to deduct those costs immediately, companies are now being told that they must spread those costs out over a period of at least five years.
Unsurprisingly, many companies are not thrilled with that change. It has the potential to hurt manufacturers in a number of different ways, all of which are worth exploring.
In a letter that was sent on November 4, 2022, no less than 178 CFOs – primarily those from some of the biggest names in United States manufacturing, like Ford Motor Company, Lockheed Martin, Boeing, and others – outlined why they believe that these aforementioned new rules would lead to what they call a “competitive disadvantage” for American companies. This would likely lead to job losses, harming their ability to innovate over the next decade.
Their point of view was simple: they were asking the current Congress to switch back to a system that allowed them to immediately deduct their costs regarding R&D as soon as the end of the year.
Until January 1, 2022, businesses could deduct 100% of all expenses directly attributed to R&D in the same year they were incurred. This is a major new expense – the tax liabilities of these companies are about to increase exponentially. This makes it more expensive to invest in advancements that will help innovate various sectors like manufacturing and in the growth of these companies.
One company that is particularly worried about the implications of this change is Miltec UV. However, company leadership believes that an exciting new opportunity is within reach. They have spent years developing new technology for lithium-ion batteries – otherwise known as the rechargeable batteries found in countless devices like your smartphones or tablets. This new technology could potentially be used for next-generation electric vehicles.
Miltec UV has poured at least 11 years of development into manufacturing the electrodes used in these batteries. They’ve spent countless amounts of money on prototyping. Various proof of concepts have been developed to indicate that these microbes can do what the company thinks they can. There has been testing. On top of it all, there is the cost of manufacturing the batteries. Officials agree that they are very close to the point where they can commercialize the batteries and begin to sell them, but with these new rule changes, they will have to pay more taxes than they previously thought they would.
For smaller businesses than Miltec UV, how do you know if you will be affected? The first clue is to look at your financial statements or recent tax return – do you have “R&D expenses”? Or have you claimed the R&D credit in the past? If either of these are true, you will likely be affected by the new law.
But you’ll need to do an even deeper dive. That’s because how R&D expenses are defined for credit purposes differs from expenses affected by the new law. The nuances of the differences are beyond the scope of this article, but needless to say that those companies with significant R&D would benefit from an R&D study to ensure that the least amount of costs are categorized as R&D.
Those companies will also need to look at where the development is performed. Believe it or not, the law is even worse for those with international development costs; these are written off over not a five-year period but a fifteen-year period. Either way, the “half-year” convention determines the write-off.
To summarize the write-off of R&D expenses:
Pre-2022: 100% write-off
2023 and forward – domestic R&D: 10% write-off in year one, 20% in years two through four, 10% in year five
2023 and forward – international R&D: 3.33% write-off in year one, 6.66% in years two through fourteen, 3.33% in year fifteen
Many businesses are hopeful that Congress will reverse these rules. But until then, large and small taxpayers need to address their R&D costs and the effect on 2022 tax liabilities. If you have questions about how these changes to the R&D tax policy will affect your business, please contact Cray Kaiser at (630) 953-4900.
By now, you are familiar with the Tax Cuts and Jobs Act (TCJA) passed a few years ago and likely recall that it lowered regular corporate taxes to 21%. In response to the lower corporate tax rate, there was a provision to lower overall taxes on the individual level using the Qualified Business Income. This allowed S-corporations (flow-through entities) to benefit from lower business taxes without converting to a C-corporation.
However, there might be other considerations to converting your S-Corporation to a C-Corporation. You can voluntarily convert your S-Corporation to a C-Corporation almost any time, but once you do, there is a five-year hold where you cannot convert back.
There are a few scenarios in which it would make sense to convert from an S-Corporation to a C-Corporation:
Once most shareholders who own the business agree to conversion and sign the Statement of Consent, the process with the IRS is quite simple. Any CPA can prepare the proper forms for the IRS so that the Company can convert to a C-Corporation. However, you must note that the process must be done by March 15th of the year you want to convert. Otherwise, the conversion will occur during the tax year, which will cause you to have to prepare and file two short-period tax returns. You can elect to convert to a C-Corporation beginning January 1st of the following year, which would allow you to submit the application any time during the year before conversion.
The biggest downside of a C-Corporation is double taxation. The corporation pays the federal income tax on its profit, usually at 21%. Any qualified dividends paid to investors are taxed again at the individual level at rates between 15% – 23.8%. For S-Corporations, the flow-through income is taxed once at the individual owner’s level, ranging anywhere from 10% – 37%. Assuming there is sufficient undistributed corporate income, the S-corporation distribution to owners would not be taxed again.
The other point to consider is that once you apply to convert to a C Corporation, you have a limited time to distribute the undistributed S-corporation earnings to the shareholders (which is tax-free) before it’s considered a dividend (and taxed between 15% – 23.8% on the shareholders’ personal return).
Converting from an S-Corp to a C-Corp has its benefits, but there are also long-term implications that you need to be aware of. Therefore, before you start the process of changing your tax status, speak with a CPA to review any pitfalls that might occur based on your unique situation.
If you have questions about the conversion and if it’s a good fit for your business, please call Cray Kaiser at 630-953-4900.
In Cray Kaiser’s Employee Spotlight series, we highlight a member of the CK team. We couldn’t be prouder of the team we’ve grown and we’re excited for you to get to know them. This month we’re shining our spotlight on Sarah Gutierrez.
No day is the same for Sarah as one of CK’s Accounting and Tax Specialists. Her duties range from assisting with individual and business tax returns to helping the accounting department with monthly and quarterly compilations.
Prior to CK, Sarah graduated from Aurora University, located in the same area where she grew up. During her college career, Sarah interned at CK and found her love for public accounting.
When asked what piece of advice she would pass along to someone just getting started in the industry, Sarah answered, “Be patient, be kind, and be open to suggestions and feedback. The first two years are a learning experience but it will pay off in the end. Just trust the process!”
After interning at CK and gaining some experience in the industry, Sarah decided to return and join CK full time in August of 2022. The CK team and culture were a deciding factor in Sarah’s return. She feels most at home in the environment and surrounded by the CK team.
CK’s core values were also important in Sarah’s decision. “CK’s core value of ‘Education’ means the most to me because I believe in empowering myself, my team, and clients with the knowledge that I have and can pass along,” said Sarah.
I love to spend time with my family. Life is too short; I like to enjoy it with my loved ones. After tax season, I am looking forward to taking a vacation and being outside most afternoons.
You only live once.
I have a wonderful husband, Dominick. I have a 9-year-old daughter, Ellaina and a 3-year-old son, Emmett. I have two dogs, Petra and Petunia, and 2 guinea pigs, Mocha and Camila. Our life is chaotic, but I wouldn’t have it any other way.
St. Lucia and Spain are on my bucket list. My favorite vacation spot is Cancun, as it is where I got married and we try to go every year!
My favorite show is Schitt’s Creek. I identify with Mora. I have rewatched it 4 times!
Bad Bunny, Shakira, Taylor Swift, Adele… my music taste depends on how I am vibing that day, to be honest.
Following the Covid pandemic, the government implemented many programs to provide much needed relief to employers. One of these included the Employer Retention Credit (ERC). This is a fully refundable tax credit that is available to both small and mid-sized businesses, even if you received the Paycheck Protection Program (PPP) Loan.
Businesses who are eligible can claim up to $5,000 in fully refundable tax credits for each employee in 2020 and up to a $7,000 credit PER quarter for each employee in 2021. Please note that the ERC is only applicable in quarters 1, 2 and 3 for 2021.
Although we are in 2023, it’s NOT too late to qualify and claim ERC retroactively! Businesses have up to three years to conduct a lookback to determine if they qualify and if wages paid March 13, 2020 through September 30, 2021 are eligible.
For 2020, businesses with 100 or less employees can qualify if they pass one of the two tests below:
OR
For 2021, businesses with 500 or less employees can qualify if they pass one of the two tests below:
OR
Per IRS Aggregation Rules under section 448(c)(2) and 52(a)(b) and provisions of section 2301(d) of the CARES Act, All members of an aggregated group are treated as a single employer. In other words, if multiple businesses are controlled by common ownership, all entities are deemed single employers for ERC eligibility purposes.
Once a business determines that they qualify, the next step is to calculate the ERC tax credits. Find CK’s helpful template to assist you in calculating your credits here.
Businesses that received the PPP, will need to run additional analysis to make sure that they have enough eligible wages to benefit from both the PPP loan forgiveness while maximizing the ERC. Any eligible wages used for PPP cannot be used to calculate ERC. No double dipping!
To claim the ERC, a business will need to amend its federal payroll tax form 941 for the quarter in which they are looking to claim the refundable credit. The IRS is only accepting paper filings and refunds are taking around 200 days to come in the mail via paper check, as the IRS is not funding any other way. This amendment does not impact previously filed W-2s.
Important to note, unlike PPP, the ERC income is taxable in the year that the credit is claimed and not received. We do highly recommend speaking with your CPA to determine tax implications and net benefits. For any additional information or assistance with ERC, please contact Cray Kaiser, your ERC specialists at (630) 953-4900.
In late December 2022, while most practitioners and their clients were busy with other things, Congress passed a giant omnibus budget bill. Buried within it was the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (“SECURE 2.0”), which contains many retirement changes and some other changes that practitioners and their clients need to be aware of. It provides new incentives for employers to offer their employees retirement plans and participate in and improve their retirement security. SECURE 2.0 helps employees and their beneficiaries, owner-employees, small businesses, and retirees and eases costs, administrative burdens, and penalties for inadvertent mistakes. It will also require most plans to be amended to comply with some of its provisions. The 2023 omnibus bill containing the following key provisions that benefit individuals was signed into law by President Biden on December 29, 2022.
Tax-free rollovers from 529 accounts to Roth IRAs. After 2023, SECURE 2.0 permits beneficiaries of 529 college savings accounts to make up to $35,000 of direct trustee-to-trustee rollovers from a 529 account to their Roth IRA without tax or penalty. The 529 account must have been open for more than 15 years, and the rollover is limited to the amount contributed to the 529 account (and its earnings) more than five years earlier. Rollovers are subject to the Roth IRA annual contribution limits but are not limited based on the taxpayer’s AGI.
Age increased for required distributions. Under SECURE 2.0, the age used to determine required distribution beginning dates for IRA owners, retired employer plan members, and active-employee 5%-owners increases in two stages from the current age of 72 to age 73 for those who turn age 72 after 2022, and to age 75 for those who will turn 74 in 2032.
Bigger catch-up contributions permitted. Starting in 2025, SECURE 2.0 increases the current elective deferral catch-up contribution limit for older employees from $7,500 for 2023 ($3,500 for SIMPLE plans) to the greater of $10,000 ($5,000 for SIMPLE plans), or 50% more than the regular catch-up amount in 2024 (2025 for SIMPLE plans) for individuals who attain ages 60-63. The dollar amounts are inflation-indexed after 2025.
More penalty-free withdrawals permitted. SECURE 2.0 adds an exception after 2023 to the 10% pre age-59 1/2 penalty tax for one distribution per year of up to $1,000 used for emergency expenses to meet unforeseeable or immediate financial needs relating to personal or family emergencies. The taxpayer has the option to repay the distribution within three years. No other emergency distributions are permissible during the three-year period unless repayment occurs.
Similarly, plans may permit participants that self-certify as having experienced domestic abuse to withdraw the lesser of $10,000 indexed for inflation, or 50% of their account free from the 10% tax on early distributions. The participant has the opportunity to repay the withdrawn money from the retirement plan over three years and get a refund of income taxes on money that is repaid. Also, the additional 10% early distribution tax no longer applies to distributions to terminally ill individuals.
Beginning December 29, 2025, retirement plans may make penalty-free distributions of up to $2,500 per year for payment of premiums for high quality coverage under certain long term care insurance contracts.
Also, retroactive for disasters after January 25, 2021, penalty free distributions of up to $22,000 may be made from employer retirement plans or IRAs for affected individuals. Regular tax on the distributions is considered gross income over three years. Distributions can be repaid to a tax preferred retirement account. Additionally, amounts distributed prior to the disaster to purchase a home can be recontributed and an employer may provide for a larger amount to be borrowed from a plan by affected individuals and for additional time for repayment of plan loans owed by affected individuals.
SECURE 2.0 also contains an emergency savings provision that allows employers to offer non-highly compensated employees emergency savings accounts linked to individual account plans that automatically opt employees into these accounts at no more than 3% of their salary, capped at a maximum of $2,500. Employees can withdraw up to $1,000 once per year for personal or family emergencies without certain tax consequences.
Reduced penalty tax on failure to take RMDs. For tax years beginning after December 29, 2022, SECURE 2.0 reduces the penalty for failure to take required minimum distributions from qualified retirement plans, including IRAs or deferred compensation plans under Code Sec. 457(b) from the current 50% to 25% of the amount by which the distribution falls short of the required amount. It reduces the penalty to 10% if the failure to take the RMD is corrected in a timely manner.
Favorable surviving spouse election. For plan years after 2023, the surviving sole spousal designated beneficiary of an employee who dies before RMDs have begun under an employer qualified retirement plan may elect to be treated as if the surviving spouse were the employee for purposes of the required minimum distribution rules. If the election is made distributions need not begin until the employee would have had to start them.
This provision allows a designated spousal beneficiary to receive a similar distribution period for lifetime distributions under an employer plan as is permitted if the surviving spouse rolled the amount into an IRA.
The IRS will prescribe the time and manner of the election, which once made may not be revoked without the IRS’ consent.
Employer match for student loan payments. To assist employees who may not be able to save for retirement because they are overwhelmed with student debt and are missing out on available matching contributions for retirement plans, SECURE allows them to receive matching contributions by reason of their student loan repayments. For plan years after 2023, it allows employers to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA for “qualified student loan payments.”
Return of excess contributions. SECURE 2.0 specifies that earnings attributable to excess IRA contributions that are returned by the taxpayer’s tax return due date (including extensions) are exempt from the 10% early withdrawal tax. The taxpayer must not claim a deduction for the distributed excess contribution. This applies to any determination of or affecting liability for taxes, interest, or penalties made on or after December 29, 2022.
We know that this amount of information is overwhelming, but there is much here that may affect you or your business and induce or require you to change your retirement plan or how you handle your account and distributions. It’s a lot to consider. Be assured that we can help you with all of this. Please don’t hesitate to call Cray Kaiser at (630) 953-4900 if you would like to discuss how SECURE 2.0 may impact you or your business.
