Newsletters

By   Michael Cohn August 08, 2024

The Internal Revenue Service is paying out more claims for the Employee Retention Credit program, even as it gives the claims greater scrutiny, and is moving the moratorium on processing new claims from Sept. 14, 2023 to Jan. 31, 2024.

The IRS is continuing to issue denials of improper ERC claims, while intensifying its audits and pursuing civil and criminal investigations of potential fraud and abuse. The findings of an IRS review, announced in June, confirmed concerns raised by tax professionals and others that the rate of improper ERC claims in the current inventory was extremely high.

By   Michael Cohn August 08, 2024

The Internal Revenue Service is paying out more claims for the Employee Retention Credit program, even as it gives the claims greater scrutiny, and is moving the moratorium on processing new claims from Sept. 14, 2023 to Jan. 31, 2024.

The IRS is continuing to issue denials of improper ERC claims, while intensifying its audits and pursuing civil and criminal investigations of potential fraud and abuse. The findings of an IRS review, announced in June, confirmed concerns raised by tax professionals and others that the rate of improper ERC claims in the current inventory was extremely high.

In recent weeks, the IRS has sent out 28,000 disallowance letters to businesses whose claims showed a high risk of being incorrect. The agency estimates these disallowances will prevent up to $5 billion in improper payments. Thousands of audits are underway, and 460 criminal cases have been initiated. The IRS has also identified 50,000 valid ERC claims and is quickly moving them into the pipeline for payment processing in the weeks ahead. These payments are part of a so-called low-risk group of claims.

Given the complexity of the ERC and to reduce the risk of improper payments, the IRS emphasized it is moving methodically and deliberately on both the disallowances and additional payments to balance the needs of businesses with legitimate claims against the promoter-fueled wave of improper claims that came into the agency. 

"The Employee Retention Credit is one of the most complex tax provisions ever administered by the IRS," said IRS Commissioner Danny Werfel during a press call Thursday. "It's technically detailed and resource-intensive, and our challenges grew exponentially with the flood of promoter claims that came pouring in well after the pandemic ended. Our teams have been working hard to navigate this complex landscape. We've been focused on balancing our efforts to protect taxpayers from improper claims while also working to speed more payments to qualifying businesses. It has been a time-consuming process to separate valid claims from invalid ones. By no means has this been a simple situation."

He noted these are not simple 1040 forms that can be quickly reviewed and paid out by the IRS.

"These claims span multiple tax law changes, multiple calendar year quarters and have differing payment amounts," said Werfel. "These have to be worked individually, claim by claim, and they all come in on paper, adding even further to the complexity of sorting valid claims from invalid ones. During the past year, we maintained a slow, judicious cadence of both ERC approvals and disapprovals, but we are now taking important steps forward to intensify our pace and begin reducing the overall inventory of pending ERC claims. Today, we are moving forward with our long-held plans to continue to deny claims when they appear improper, and also moving to pay out more legitimate claims. We're doing this by moving a substantial group of claims into both categories."

He pointed out that the ERC was created by Congress to help businesses weather the pandemic. "But then aggressive promoters moved in," said Werfel. "Last year, promoters intensified their marketing, bombarding the airwaves with ads and aggressive marketing. You couldn't turn on the TV or radio without coming across an ERC ad. These promoters urged people to file what they called risk-free claims with the IRS for the ERC. At the same time, they charged a hefty percentage on the potential payouts. The program turned into a gold rush for promoters. These promoters and the taxpayers they pulled in swamped the IRS with incoming applications, clogging our processing centers and harming small businesses filing legitimate claims. Tax professionals sounded the alarm bells to me and others on this, sharing that the marketers were pulling in taxpayers that clearly didn't qualify under the intricate program rules."

To counter this torrent of activity, last fall he announced the IRS was putting in place a moratorium on processing new ERC claims filed after Sept. 14, 2023.

"The moratorium has been without a doubt a success," said Werfel. "It slowed the number of claims coming in, and the marketing on TV and radio dropped dramatically. It gave us time to focus on our compliance work, and importantly, it gave us time to analyze the massive inventory of ERC claims that came in. The moratorium has now been in place for almost a year."

During this period, the IRS learned valuable information that will help guide the program down the tracks in the months ahead. 

Faster pace

"Going forward, we will proceed at a faster pace on both approvals and denials than before. But it will remain a measured and responsible pace that won't go off the rails, protecting both taxpayers and revenue," said Werfel. "As we move ahead, we're going to continue protecting taxpayers from improper claims. In the last few weeks, we've had about 28,000 letters go out, disallowing claims up to potentially $5 billion."

However, the IRS has also heard concerns from some tax professionals that it may be disallowing legitimate ERC claims. 

"With these recent disallowance letters going out, the IRS is aware of concerns raised by tax professionals about potential errors," said Werfel. "While the IRS is still evaluating the results of this first significant wave of disallowances in 2024, our early indications show these errors appear to be isolated. The concerns flagged, which we are currently looking into, impact less than 10% of the disallowance letters sent. We are closely watching this, and it's important to keep in mind, there was a wide range of businesses and claims that came in due to the heavy marketing. It's a big sea of claims from a diverse set of taxpayers. Even then, it's not surprising, given the complexity of this credit, that there are some questions. That's why we're not rushing to push out large volumes of these denials immediately. This is uncharted territory for the IRS, and we are navigating the landscape carefully."

He pledged to continue to work with tax professionals. "As part of this, the IRS will stay in contact with the tax community," said Werfel. "We will monitor the situation involving disallowances and make any adjustments to minimize burden on businesses and their representatives. Where we need to, the IRS will adjust its processes and filters for determining an invalid claim following each wave of disallowances."

He noted that in cases where claims can be proven to have been improperly denied, the agency will work with taxpayers to get it right. The IRS is also reminding businesses that when they receive a denial of an ERC claim, they have options available to file an administrative appeal with the IRS independent Office of Appeals.  

"At the same time, we are announcing today that we're sending 50,000 more claims out into processing for payment in the next few weeks," said Werfel. "These claims will total up to $5 billion. This means more low-risk ERC claims will be paid out quickly. There are a couple of steps for the payments to go through. We have moved these claims into the processing pipeline, and after that, they will go into the payment process. The IRS projects the first of this group of payments will begin in September, with additional payments going out in subsequent weeks. As the IRS begins to process additional claims, the agency reminds businesses that they may receive payments for some valid tax periods, generally quarters, while the IRS continues to review other periods for eligibility."

Moratorium update

Werfel also provided an update on the processing moratorium on new ERC claims. Previously, the agency was not processing claims filed after Sept. 14, 2023. As the agency moves forward, it will now start judiciously processing claims filed between Sept. 14, 2023, and Jan. 31, 2024, the same date for the cutoff of ERC claims in the Tax Relief for American Families and Workers Act, which failed to pass in the Senate last week. As with the rest of the ERC inventory, work will focus on the highest- and lowest-risk claims. This means there will be instances where the agency will start taking actions on claims submitted in this time period when the agency has seen a sound basis to pay or to deny a refund claim.

"Of course, we will also be working older claims during this period as well," Werfel added. "For any of these claims, whether the older ones or the ones covered by the new moratorium date, here's what we will do: When we identify a claim as low risk, we will be taking steps to pay it, and when we see a high-risk claim, we will deny it. We will have more to say on ERC in the coming weeks. The IRS also continues to urge employers with pending ERC claims or ones with questions about previously approved claims to review eligibility requirements to make sure they meet the specific criteria."

The IRS recently added five new warning sign indicators about potentially improper claims, to add to seven other common red flags the agency previously highlighted. 

"Businesses with claims that show these red flags should review eligibility requirements and talk to a trusted tax professional about their claim," said Werfel. "For businesses with concerns about pending claims, the IRS encourages them to consider the ERC claim withdrawal program. This allows them to remove a pending ERC claim, one the IRS has not processed yet they would. They can withdraw the claim and pay no interest or penalty."

Werfel also provided an update on the processing moratorium on new ERC claims. Previously, the agency was not processing claims filed after Sept. 14, 2023. As the agency moves forward, it will now start judiciously processing claims filed between Sept. 14, 2023, and Jan. 31, 2024, the same date for the cutoff of ERC claims in the Tax Relief for American Families and Workers Act, which failed to pass in the Senate last week. As with the rest of the ERC inventory, work will focus on the highest- and lowest-risk claims. This means there will be instances where the agency will start taking actions on claims submitted in this time period when the agency has seen a sound basis to pay or to deny a refund claim.

"Of course, we will also be working older claims during this period as well," Werfel added. "For any of these claims, whether the older ones or the ones covered by the new moratorium date, here's what we will do: When we identify a claim as low risk, we will be taking steps to pay it, and when we see a high-risk claim, we will deny it. We will have more to say on ERC in the coming weeks. The IRS also continues to urge employers with pending ERC claims or ones with questions about previously approved claims to review eligibility requirements to make sure they meet the specific criteria."

The IRS recently added five new warning sign indicators about potentially improper claims, to add to seven other common red flags the agency previously highlighted. 

"Businesses with claims that show these red flags should review eligibility requirements and talk to a trusted tax professional about their claim," said Werfel. "For businesses with concerns about pending claims, the IRS encourages them to consider the ERC claim withdrawal program. This allows them to remove a pending ERC claim, one the IRS has not processed yet they would. They can withdraw the claim and pay no interest or penalty."

By Roger Russell August 07, 2024

The Senate's failure to approve a measure passed earlier this year by the House has delayed, for now, a solution to the quandary faced by many small and midsized companies that are severely hampered by the absence of the ability to currently deduct research & development expenses. 

"We're seeing more news about foreign giants like Huawei that are accelerating innovation despite U.S. sanctions. This latest blow on R&D amortization could make companies vastly reduce their research budgets right at a time when the U.S. needs increased innovation to remain competitive on the world stage," said former Congressman Rick Lazio, senior vice president at business consultancy Alliantgroup.

By   Roger Russell August 07, 2024

The Senate's failure to approve a measure passed earlier this year by the House has delayed, for now, a solution to the quandary faced by many small and midsized companies that are severely hampered by the absence of the ability to currently deduct research & development expenses. 

"We're seeing more news about foreign giants like Huawei that are accelerating innovation despite U.S. sanctions. This latest blow on R&D amortization could make companies vastly reduce their research budgets right at a time when the U.S. needs increased innovation to remain competitive on the world stage," said former Congressman Rick Lazio, senior vice president at business consultancy Alliantgroup.

Historically, Code Section 174 allowed businesses to expense current-year costs related to R&D. In the run up to the Tax Cuts and Jobs Act, tax writers were looking for an offset so they could make the corporate tax rate lower, Lazio explained: "They settled on this relatively obscure provision that no one envisioned surviving. They thought it would allow them to get the bill through and could be changed immediately afterward. It was just a short-term fix, but elections happen, politics happen, and the rest is history. When it was adopted in 2016, it was delayed for two years to give them a chance to repeal, but elections complicated the politics and over time, when the Democrats regained power their perception was that since it happened under the Republicans' watch — 'You broke it, you fix it.' 

Among the issues that hampered passage of the bill were differences between Republicans and Democrats over credits to benefit working families and people who were not working, with Republicans believing they would win back a majority in the November elections and be in a stronger position to negotiate a more favorable tax bill, including dealing with expiring provisions of the TCJA.

"This is what caused the bill to not be passed in the Senate up to this point," said Lazio. "The House went through a similar process, but some of the most conservative Republicans and most progressive Democrats passed it overwhelmingly earlier this year. When it went to the Senate, Republicans insisted on amending or eliminating some of the changes Democrats were proposing to the Child Tax Credit as a condition. Republicans didn't feel they could compromise, so when it came up for a vote it fell short of the 60 it needed to block a filibuster."

The tragedy is that the absence of the ability to currently expense R&D costs places extreme hardships on small and midsized businesses, according to Lazio. 

"Many saw their tax liability grow by a factor of four or five times, and in some cases more than that," he said. "It affects some of the most innovative businesses in the country, creating a disincentive on them continuing to innovate. The large tech companies have multibillion-dollar balance sheets and can finance the larger tax liability, but small businesses have none of those things and are the ones that in some cases are suspending R&D. In many cases they are holding up hiring and, in some cases, folding the business altogether."

"For example, we have clients that are engineering firms whose whole basic culture is constant innovation," he continued. "They will use last year's plans off the shelf, because they don't want to trigger the new provisions that will require amortization over six years as opposed to the current deduction. It's a huge hardship."

One client, SX Industries, had a 74% tax increase in 2022, and is considering stopping their military development projects since they can no longer afford the increase. Another client, Agile Six Applications, had a total tax liability that more than doubled; rather than a total tax bill of $2.2 million, they will be expected to pay $5.05 million. 

The company builds "digital experiences" for a number of government agencies such as the Veterans Administration. "We don't have the option to stop innovating," said Robert Rasmussen, founder and CEO. "Our only option now is to borrow money and try to survive. It's a unique situation aggravated by our growth rate. Profit-wise we're making money, but if we continue to grow at that rate, we'll just grow out of business."

"Half of our business model is in delivering more user-friendly services to citizens (e.g., veterans accessing benefits), the other half of it is how we deliver those services," said Rasmussen. "This is called 'objective-based contracting,' where we do not get paid unless objectives are met. So unlike most federal contracts, we share this risk (as to whether our technical solutions fix the problem), and therefore we have leveraged the R&D credits more than traditional contractors."

"The systemic problem is that we end up paying taxes on 30.6% ($15.3 million) net income (calculated based on innovation expenses), while only earning 13.6% ($6.8 million)," he explained. "This example from 2023–2024 will look worse. As we grow, our organic real net income has shrunken already in 2024, but our tax liability has increased. We may have negative real net income (cost of expansion) complicated by a real increase in taxable income (cost of innovation in our deliveries)."

He concluded: "All of this leaves us in an unsustainable situation, with a negative cash flow situation with no cash to support future growth, and a growing liability with future growth as the cash flow problem grows with our growth." 

"The irony is that American businesses are falling further behind international competitors in new areas such as AI and chip technology," said Lazio. "In fact, the policymakers have created a perverse disincentive by allowing this provision that was never intended to be permanent to affect small and medium businesses. The history of innovation is that big players acquire companies that have developed the technology they need. They innovate by buying smaller companies that have developed it. If smaller companies are disincentivized or discouraged, then American businesses won't have access to their technology and they become vulnerable to international competitors where the governments have encouraged R&D."

Is there at least the possibility of a fix before smaller companies are forced to leave the playing field? "We hope so, but we're looking at a timing problem," said Lazio. "It won't be until the summer or fall of 2025, before a bill the size of the TCJA comes up, and that's an eternity away for businesses. Many won't survive that long."

By Tobias Salinger August 07, 2024

The IRS has quashed any remaining hope that it would alter its new guidelines for inherited individual retirement accounts, ending the "stretch" strategy for most beneficiaries.

With its finding in rules issued last month that tax revenue-raising provisions of the 2019 Secure Act require so-called noneligible beneficiaries who have inherited IRAs in 2020 or later to transfer all the assets into their income within a decade, the IRS told financial advisors and their clients that there would be no more delays in implementation or a shift in the final statutes. That means beneficiaries must begin taking required minimum distributions next year — if they haven't already started. But experts agree that it's likely past time to initiate that process.

"Everyone thought there was a mistake. The longer we waited for the final regulations, the more the industry seemed to be thinking, 'OK, they're actually going to hold us to this,'" Heather Zack, the director of high net worth solutions with Waltham, Massachusetts-based wealth management firm Commonwealth Financial Network, said in an interview.

By Tobias Salinger August 07, 2024

The IRS has quashed any remaining hope that it would alter its new guidelines for inherited individual retirement accounts, ending the "stretch" strategy for most beneficiaries.

With its finding in rules issued last month that tax revenue-raising provisions of the 2019 Secure Act require so-called noneligible beneficiaries who have inherited IRAs in 2020 or later to transfer all the assets into their income within a decade, the IRS told financial advisors and their clients that there would be no more delays in implementation or a shift in the final statutes. That means beneficiaries must begin taking required minimum distributions next year — if they haven't already started. But experts agree that it's likely past time to initiate that process.

"Everyone thought there was a mistake. The longer we waited for the final regulations, the more the industry seemed to be thinking, 'OK, they're actually going to hold us to this,'" Heather Zack, the director of high net worth solutions with Waltham, Massachusetts-based wealth management firm Commonwealth Financial Network, said in an interview.

That said, the rules point to "a strategy that most advisors were taking already" in seeking to "equalize distributions over 10 years" rather than setting up a "tax bomb" by taking them all at once, she noted. "I don't think there were many advisors who were telling their clients, 'Let's wait and take out everything in year 10.'"

The rules' implications to retirement planning with "a tax component" merit a conversation with clients who inherited an IRA in any of the past four years, said Matthew Cleary, a financial planner with Wakefield, Massachusetts-based 401(k) and wealth firm Sentinel Group.

"We want to bring that up absolutely, because it may be a situation where you do want to have more of a schedule to minimize the tax burden of taking it out in one year," Cleary said in an interview. "There are a couple of exceptions to that rule, but for the most part the stretch IRA is dead."

Caveats to the new 10-year requirement apply to eligible designated beneficiaries — a group that includes the spouse of the deceased IRA owner, heirs who are chronically ill or disabled, and heirs younger than the late retirement saver by only a decade or less, Zack and Cleary noted. Another carve-out from the mandatory distributions applies to heirs who are 20 years old or younger, who can still use the stretch strategy until they are 21, according to a blog post by Sarah Brenner, director of retirement planning for IRA advice firm Ed Slott & Company. At that age, the new rules state that the beneficiary must launch their distributions and empty the accounts into their own income within the 10-year window.

In addition, the rules maintained the "controversial" provision that most beneficiaries are subject to the 10-year guideline — even if the account owner died on or after the beginning period for the holder's own required minimum distributions, Brenner wrote in another blog.

"This rule requires annual RMDs to continue once they have started," she wrote. "Many believed this rule went away with the Secure Act, but apparently the IRS thought differently. Due to all the confusion its interpretation caused, the IRS waived RMDs during the 10-year period for beneficiaries for the years 2021, 2022, 2023, and 2024. In the newly released final regulations, the IRS is doubling down on its position that these annual RMDs are required. They must be taken starting in 2025. However, the IRS will not impose penalties for annual RMDs that were not taken for years before 2025."

In its announcement, the IRS specifically discussed the concerns around that interpretation.

"Treasury and IRS reviewed comments suggesting that a beneficiary of an individual who has started required annual distributions should not be required to continue those annual distributions if the remaining account balance is fully distributed within 10 years of the individual's death as required by the Secure Act," the agency said in its July 18 press release. "However, Treasury and IRS determined that the final regulations should retain the provision in the proposed regulations requiring such a beneficiary to continue receiving annual payments."

As part of his characteristically detailed social thread examining the tax impact of a newly released rule, Buckingham Strategic Wealth Chief Planning Officer and Kitces.com blog Lead Financial Planning Nerd Jeffrey Levine reported that finding as the answer to "the No. 1 question advisors have asked for 2+ years now," adding, "Sorry, I don't make the rules, I just report them!!!" The industry had been eagerly anticipating the guidelines, he said.

"I honestly can't remember a time when advisors, tax pros and 'mom and pop' investors more eagerly awaited news from the IRS," Levine said. "But more than 4.5 years after Secure was passed, we now have some definitive answers to key Q's."

IRA owners seeking to avoid a tax hit on their beneficiaries could convert traditional accounts to Roth ones, which usually won't carry any more duties tied to the added income, Cleary noted.

"They would still be subject to the 10-year rule, but then they don't necessarily have the tax issue," he said. "It's an idea for the right person who's able to pay those taxes up front."

While there are "not a ton" of strategies that advisors can take to reduce the impact of the distributions on their income once they start taking them, separate charitable donations and maximizing other deductions could mitigate part of the burden, Zack said. 

Since inherited IRAs are "something that every advisor deals with," the rules have created "this whole maze of different beneficiary withdrawal requirements" based on the year of the account owner's death and the age, spousal and health status of the heir, she noted. And the final rule clarified that the 10-year distribution span started with IRA owners who died in 2020 — regardless of the fact that the IRS pushed back the required distribution four years in a row.

"It's just made the landscape a lot more complicated for advisors and clients now than it used to be," Zack said. "That is definitely of concern for some folks. That clock has been running this entire time."

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published a Small Entity Compliance Guide to assist the small business community in complying with the beneficial ownership information (BOI) reporting rule.  Starting in 2024, many entities created in or registered to do business in the United States are required to report information about their beneficial owners—the individuals who ultimately own or control a company—to FinCEN.  The Guide is intended to help businesses determine if they are required to report their beneficial ownership information to FinCEN.  

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published a Small Entity Compliance Guide to assist the small business community in complying with the beneficial ownership information (BOI) reporting rule. Starting in 2024, many entities created in or registered to do business in the United States are required to report information about their beneficial owners—the individuals who ultimately own or control a company—to FinCEN. The Guide is intended to help businesses determine if they are required to report their beneficial ownership information to FinCEN.

“This guide is the latest in our ongoing efforts to educate the public about these important new requirements,” said Andrea Gacki, Director of FinCEN. “We are committed to making this process as simple as possible, particularly for small businesses.”

“This is also a critical step towards implementing the Corporate Transparency Act, which will help the Treasury Department and FinCEN expose bad actors abusing the U.S. financial system by hiding their identity behind opaque corporate structures,” said Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian Nelson.

The Guide is now available on FinCEN’s beneficial ownership information reporting webpage.

Among other things, the Guide:

• Describes each of the BOI reporting rule’s provisions in simple, easy-to-read language;
• Answers key questions; and
• Provides interactive checklists, infographics, and other tools to assist businesses in complying with the BOI reporting rule.

The requirements became effective on January 1, 2024, and companies are now able to report beneficial ownership information to FinCEN at this time. Small businesses can continue to monitor FinCEN’s website for more information.

To our business clients.

WITHHOLDING FROM EMPLOYEES' PAYCHECKS:

1a. Social Security - The employee portion of this tax remains at 6.2% with a wage limit of $168,600. The employer’s portion of Social Security for 2024 also remains at 6.2%, on wages up to $168,600.  

1b. Medicare - The employee and employer each pay 1.45% and there is no cap on the amount of payroll which will be subject to this total tax of 2.9%. Because of the unlimited ceiling on Medicare, there is no maximum tax deduction. 

Generally, payroll deposits will include 15.3% of wages (6.2% times 2, plus 1.45% times 2) on wages up to $168,600, and 2.9% of all wages thereafter. However, there is an additional Medicare withholding of 0.9% on employees earning over $200,000, or $250,000 if married filing joint. So the employee’s normal Medicare tax rate of 1.45%, will rise to 2.35% on their earnings over $200,000 or $250,000 depending on filing status, but the employer still pays only the 1.45% rate.

2. The rate for self-employment persons will be 15.3% on wages up to $168,600. The Medicare tax of 2.9% continues on amounts over $168,600. Self-employed people earning over $200,000 and those earning over a combined $250,000 on a joint return will also face the additional .9% Medicare tax. Because the Medicare tax applies to all earnings, there is no maximum self-employment tax. (There is a deduction allowed for self-employed persons for both self-employment tax and income tax computations).

3. Federal and State Income Tax - The amount of withholding will change for both Federal and State effective January 1, 2024.  Please see the updated federal Employer’s Tax Guide Publication 15 (Circular E) on the Internal Revenue Service website at: https://www.irs.gov/pub/irs-pdf/p15.pdf and the California Employment Development Department’s Publication DE 44 at: https://edd.ca.gov/siteassets/files/pdf_pub_ctr/de44.pdf.

4. State Disability Insurance - The rate will change to 1.1 %, and there is no longer a cap on the amount of payroll which will be subject to this tax.

EMPLOYER TAXES PAID QUARTERLY:

1. Federal Unemployment Tax - The 2024 federal unemployment tax rate is .6% on the first $7,000.
2. State Unemployment Insurance and Employment Training Tax - The wage limit will remain at $7,000. Rates are set individually for employers. You will receive a notice of your 2024 rate in the mail or it can be accessed in your EDD e-Services for Business account. Please send a copy of any notice you receive to your payroll report preparer.
   

2024 FEDERAL PAYROLL DEPOSIT REQUIREMENTS: 

Federal Payroll Tax Deposits must follow the monthly or semi-weekly deposit method assigned to each employer by the IRS. The IRS will send a notice if your status changed from 2023; however, the employer is ultimately responsible for determining which deposit schedule actually applies. If you didn’t receive an IRS notice, you can make your own determination as shown below: 

1. An employer’s status as a monthly or semi-weekly depositor should be known before the beginning of each calendar year and is determined annually. This determination is based on the amount of employment taxes the employer reported on the four quarterly reports for the 12-month period from July 1, 2022 through June 30, 2023.
2. Employers who accumulated less than $2,500 of employment taxes during a quarter are only required to make a deposit at the end of the quarter. They can pay their payroll taxes with the quarterly form.
3. Employers who report $50,000 or less of employment taxes (taxes withheld from the employee plus the employer portion) during the 12-month period from July 1, 2022 through June 30, 2023, and all new employers, will be monthly depositors. The deposits will be due the 15th of the following month. NOTE: These deposits will have to be made electronically (see below).
4. Employers who reported more than $50,000 of employment taxes during the 12-month period from July 1, 2022 through June 30, 2023, will be semi-weekly depositors. The deposits will be required on or before either Wednesday or Friday, depending on the timing of the payroll. Semi-weekly depositors will still have at least three banking days after a payday to make the deposit. NOTE: These deposits will have to be made electronically (see below).
   
   Under the semi-weekly rule, the payroll taxes withheld plus the employer’s portion of the FICA/Medicare on payrolls which were paid on Wednesday, Thursday or Friday must be deposited by the following Wednesday. Payroll taxes, accumulated for a payroll period, which were paid on Saturday through Tuesday must be deposited by the following Friday. Remember, your deposit will be due either on a Wednesday or Friday. 
5. Employers who accumulate $100,000 of employment taxes during a monthly or semi-weekly period are required to deposit those taxes by the next banking day. Once you make a next-banking-day deposit, you automatically become a semi-weekly depositor for the remainder of that calendar year and the following calendar year.
   

FEDERAL ELECTRONIC DEPOSIT REQUIREMENTS FOR 2024: 

Employers must use the IRS’ EFTPS for making tax payments. There is an exception for employers with a deposit liability of less than $2,500 for a return period. These employers can remit employment taxes with their quarterly or annual return. 

If you are required to use EFTPS for your Federal tax deposits and fail to do so, you may be subject to a 10% penalty. For deposits made by EFTPS to be considered on time, you must initiate the transaction at least one business day before the date the deposit is due. If you are new to EFTPS you will need to allow seven (7) days to get your pin number and complete your account set-up. 

You may voluntarily participate in the Electronic Federal Tax Payment System even if you are not required to do so. 

To get more information or to enroll in EFTPS, call 1-800-555-4477, or visit the EFTPS web site at www.eftps.gov. 

EMPLOYER’S QUARTERLY FEDERAL TAX RETURN, FORM 941 

Each quarter’s wages subject to income tax, social security and/or Medicare taxes must be reported on Form 941. This form must be filed even if you have no taxes to report. Any employment taxes totaling less than $2,500 for the period and not previously deposited for the quarter can be paid with the report. 

Due dates for 2024 employment tax deposits are April 30, July 31, and October 31, 2024, and January 31, 2025, for the previous quarter. If all taxes have been deposited when due, and no tax is being paid with the return, an additional ten days is allowed to file the return. Late returns are subject to penalties on any unpaid tax due with the return. 

2024 STATE PAYROLL TAX DEPOSIT REQUIREMENTS:

These deposits are required to be paid electronically. The depositing requirements are described below: 

1. State deposit due dates are generally the same as federal deposit due dates.
2. Employers who are required to make federal monthly deposits and have accumulated $350 to $500 of undeposited state income tax withholding, are required to deposit all State Income Tax and State Disability Insurance withholding using the federal monthly deposit schedule.
3. Employers who deposit semi-weekly for federal purposes and have accumulated more than $500 of undeposited state income tax withholding are required to deposit all State Income Tax and State Disability Insurance withholding to the Employment Development Department using the federal semi-weekly deposit schedule.
4. Employers, who accumulate $100,000 of federal employment taxes, and more than $500 of state withholding taxes, must deposit all State Income Tax and State Disability Insurance withholding by the next banking day. Once you make a next banking day deposit, you automatically become a semi-weekly depositor for the remainder of that calendar year and the following calendar year.
5. If you accumulate more than $350 of state withholding taxes in a month or in the cumulative of two or more months, but are not required to make a federal monthly deposit, you are still required to deposit all State Income Tax and State Disability Insurance withheld by the 15th of the following month. Any withholding which is not required to be deposited based on the above will be due on April 30 , July 31, and October 31, 2024 or January 31, 2025 for the preceding quarter.
6. State Unemployment Insurance (SUI) and Employment Training Tax (ETT) must be deposited at least quarterly.

A penalty of 15% plus interest will be charged on late payroll tax payments. 

CALIFORNIA ELECTRONIC DEPOSIT REQUIREMENTS: 

e-Services for Business can be used to electronically submit all tax payments, wage reports and employment tax returns. Register at https:/www.edd.ca.gov/eServices or contact the Taxpayer Assistance Center at 1-888-745-3886. 

STATE WAGE AND WITHHOLDING REPORTS:

Employers file two quarterly reports, the DE 9 and DE 9C. These reports must be filed by April 30, July 31, and October 31, 2024, and January 31, 2025 for the previous quarter, even if you don’t have payroll during a quarter. A wage item penalty of $20.00 per employee will be charged for late or unreported employee wages. On these reports, be sure to include the full first name, not just the first initial.

The DE 9 and DE 9C forms must be filed on-line together using e-Services for Business. 

STATE REPORTING REQUIREMENTS FOR NEW OR RE-HIRED EMPLOYEES:

All employers are required to report the full name, social security number, home address and start-of-work date of each employee within twenty days of the start-of-work date. 

Form DE 34, Report of New Employees, is used to report new employees.  The information may be filed online through e-Services for Business (edd.ca.gov/eServices), faxed to the EDD at 1-916-319-4400, or mailed to:

Employment Development Department
Document Management Group, MIC 96
P.O. Box 997016
West Sacramento, CA 95799-7016 

The reporting of new employees is required for all newly hired employees, employees rehired or returning to work from a furlough, separation, leave of absence without pay, or termination.  If a returning employee was not formally terminated or removed from payroll records and is returning after less than sixty consecutive days, you don’t need to report the employee as a rehire. 

STATE REPORTING REQUIREMENTS FOR INDEPENDENT CONTRACTORS:

Businesses are required to report specific independent contractor information to the EDD if the following statements all apply:

• You will be required to file a 2024 Form 1099-NEC for the services performed by the independent contractor.
• You pay the independent contractor $600 or more OR enter into a contract for $600 or more.
• The independent contractor is an individual or sole proprietorship.

If all the above statements apply, you must report the independent contractor to the EDD within 20 days of paying/contracting for $600 or more in services. You are not required to report independent contractors that are corporations, general partnerships, limited liability partnerships, and limited liability companies. Form DE 542, Report of Independent Contractor(s), is used. The information may be filed online through e-Services for Business (edd.ca.gov/eServices), faxed to the EDD at 1-916-319-4410, or mailed to:

Employment Development Department
Document Management Group, MIC 96
P.O. Box 997350
Sacramento, CA  95899-7350 

*                      *                      *                      *                      *

While we’ll try to inform you of any additional changes made during 2024, please be vigilant yourself and also seek out information on changes from your payroll processors. 

If you need assistance in preparing your payroll checks or have other questions relating to these taxes, please call. 

STANDARD MILEAGE RATES FOR 2024

For 2024, the standard rate for business mileage will be 67 cents per mile. The previous rate was 65.5 cents per mile.

The standard rate for the use of a car when providing services to a charitable organization will remain at 14 cents per mile.

The 2024 standard mileage rate for the use of your car for medical expenses or deductible moving expenses will be 21 cents per mile. The previous rate was 22 cents per mile.

By Michael Cohn October 10, 2023

Even though the effective date of the new beneficial ownership rules under the Corporate Transparency Act is less than 90 days away, most businesses are either unaware of the reporting obligations they face or uncertain how they will comply.

A survey released Tuesday by Wolters Kluwer polled 669 U.S.-based companies, along with 328 law firms and accounting firms, about their general awareness of and readiness for complying with the CTA's new beneficial ownership rule. While the rule will apply to approximately half (51%) of the firms that participated in the survey, about three-quarters (74%) of those companies for which the CTA rule will be applicable indicated they only became aware of the rule by having taken the survey. Many respondents who are aware of the CTA were unsure (41%) whether the beneficial ownership rule, as implemented by FinCEN, would apply to them, despite their company's reporting status and revenue size.

By Michael Cohn October 10, 2023

Even though the effective date of the new beneficial ownership rules under the Corporate Transparency Act is less than 90 days away, most businesses are either unaware of the reporting obligations they face or uncertain how they will comply.

A survey released Tuesday by Wolters Kluwer polled 669 U.S.-based companies, along with 328 law firms and accounting firms, about their general awareness of and readiness for complying with the CTA's new beneficial ownership rule. While the rule will apply to approximately half (51%) of the firms that participated in the survey, about three-quarters (74%) of those companies for which the CTA rule will be applicable indicated they only became aware of the rule by having taken the survey. Many respondents who are aware of the CTA were unsure (41%) whether the beneficial ownership rule, as implemented by FinCEN, would apply to them, despite their company's reporting status and revenue size.

Starting Jan. 1, 2024, most U.S. corporations, limited liability companies and U.S. operations of foreign companies will be required to report information about their beneficial owners to the Treasury Department's Financial Crimes Enforcement Network, or FinCEN (see story). The requirements were part of the Corporate Transparency Act of 2021 in an effort to crack down on shell companies used for tax evasion and illicit trafficking, and the clock has been ticking on the approaching deadline. Now some are calling for a delay in the imminent requirements.

By   Michael Cohn October 10, 2023

The Internal Revenue Service and the Treasury Department released guidance on how buyers of electric vehicles can transfer their tax credits to automobile dealers and get advance payments that effectively lower the cost.

Under the Inflation Reduction Act of 2022, buyers of electric vehicles can opt to transfer their new clean vehicle credit of up to $7,500 and their previously owned clean vehicle credit of up to $4,000 to a car dealer starting Jan. 1, 2024. In effect, that will reduce the vehicle's purchase price by giving consumers an upfront down payment on their vehicle at the point of sale, as opposed to needing to wait to claim the credit on their tax return the following year. Only vehicles purchased under the consumer clean vehicle credits are eligible for the tax benefit. 

By   Michael Cohn October 10, 2023

The Internal Revenue Service and the Treasury Department released guidance on how buyers of electric vehicles can transfer their tax credits to automobile dealers and get advance payments that effectively lower the cost.

Under the Inflation Reduction Act of 2022, buyers of electric vehicles can opt to transfer their new clean vehicle credit of up to $7,500 and their previously owned clean vehicle credit of up to $4,000 to a car dealer starting Jan. 1, 2024. In effect, that will reduce the vehicle's purchase price by giving consumers an upfront down payment on their vehicle at the point of sale, as opposed to needing to wait to claim the credit on their tax return the following year. Only vehicles purchased under the consumer clean vehicle credits are eligible for the tax benefit. 

The guidance in Rev.  Proc. 2023-33 also provides information on registration requirements and how the mechanics of the tax credit transfer will work for car dealers. The guidance also includes proposed eligibility rules for the previously owned clean vehicle credit that aim to give consumers extra certainty about their ability to claim and to transfer the credit, proposing to clarify that eligible consumers can transfer the full value of the new or previously owned vehicle credit regardless of their individual tax liability. The IRS also posted a frequently asked questions page with information on the transfer of new and previously owned clean vehicle credits from the taxpayer to an eligible entity for vehicles placed in service after Dec. 31, 2023. Fact Sheet 2023-22 updates FAQs related to new, previously owned and qualified commercial clean vehicles.

"For the first time, the Inflation Reduction Act allows consumers to reduce the upfront cost of a clean vehicle, expanding consumer choices and helping car dealers expand their businesses," said Laurel Blatchford, chief implementation officer for the Inflation Reduction Act at the Treasury Department, in a statement Friday. "The IRS has focused on streamlining this process for car dealers as part of its commitment to improving service and helping taxpayers claim the credits they are eligible for."

Later this month, dealers will be able to register through a new website called IRS Energy Credits Online. For buyers to be eligible to claim or transfer a tax credit starting Jan. 1, 2024, the dealer they purchase their vehicle from must first register with Energy Credits Online. The registration is also a requirement for dealers to offer consumers clean energy tax credits for qualifying products like electric vehicles. Starting in January, registered dealers can submit their sales information to the IRS and receive payment for the transferred tax credits. Dealers will also use Energy Credits Online to submit "time of sale" reports, which will confirm vehicles' eligibility for a credit, whether or not the buyer chooses to transfer the credit to the dealer.

When a buyer opts to transfer the credit, registered dealers will reduce the purchase price of the vehicle or provide cash to the buyer. The amount provided must equal the full amount of the credit available for the eligible vehicle. When completing the sale, the dealer will electronically send information about the transfer, including a time of sale report, to receive an advance payment for the value of the credit. The IRS anticipates it will be able to issue advance payments within 72 hours. 

Tax audit problems

Separately, the Treasury Inspector General for Tax Administration released a report Tuesday on problems with the IRS's faulty audit selection process for the EV tax credit.

The Energy Improvement and Extension Act of 2008 originally created the Qualified Plug-In Electric Drive Motor Vehicle Credit, the report noted. The tax provision was later amended by the American Recovery and Reinvestment Act of 2009, and then modified and extended under the Inflation Reduction Act of 2022 and renamed the Clean Vehicle Credit. The credits of up to $7,500 help taxpayers offset the purchase of a qualifying plug-in electric drive motor vehicle. The Joint Committee on Taxation estimated the credits will cost $5 billion from fiscal years 2022 through 2026, TIGTA noted. 

In response to TIGTA's recommendations in a prior report, the IRS developed filters to identify returns with potentially erroneous Qualified Plug-In Electric Drive Motor Vehicle Credit claims. However, while the IRS has taken steps to address past recommendations, problems with the implementation of some of the filters have made the existing issues even worse. TIGTA's analysis found that 74% of the tax returns flagged by the filter to identify non-qualifying vehicle models flagged qualifying vehicle models in error, resulting in taxpayer burden and unproductive examinations.

In addition, due to issues with the filter, many claims for non-qualified vehicles were not examined. TIGTA identified 13,518 unexamined returns totaling approximately $63 million in credits potentially paid for unqualified vehicles. From 2019 through 2022, TIGTA identified 7,547 returns with credits totaling approximately $23 million that were over the allowable threshold but were not caught by IRS filters.

The inspector general made five recommendations in the report, urging the IRS to review the 13,518 claims for non-qualified vehicles identified by TIGTA for potential examination; to consider adding a manual review to the filter identifying non-qualifying vehicle models until future controls are in place; to expand the use of invalid VIN criteria as additional information in examination selection; to expand controls to identify partial credits; and to review the 7,547 claims that were over the allowed threshold for their vehicle model identified by TIGTA for potential examination. 

The IRS agreed with four of the five recommendations and plans to review the identified claims, expand invalid vehicle identification number criteria for tax year 2023, and update its business rules to incorporate the legislative changes from the IRA related to claims made over the allowable threshold amounts. However, the IRS disagreed with manually reviewing Qualified Plug-In Electric Drive Motor Vehicle Credit claims when the vehicle is a non-qualifying vehicle.

"The IRS relies heavily on available data to identify and select cases in the most efficient manner, and these IRA provisions will allow the IRS to obtain vehicle data to identify noncompliance," wrote Lia Colbert, commissioner of the IRS's Small Business/Self-Employed Division, in response to the report. "For example, these IRA provisions all provide that no credit shall be allowed or determined unless the taxpayer includes a vehicle identification number of their vehicle on their tax return."

She noted that Congress also specifically modified the Tax Code to say that omitting a correct VIN from the tax return would constitute a "mathematical or clerical error," allowing the IRS to address it under its math error authority.

Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. Current tax law cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better."

Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. Current tax law cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better."

Good used or better condition
The law does not define good or better condition. For guidance, you can look to the standards that many charities already have in place. Many charities will not accept your donations of clothing or household items unless they are in good or better condition.

Clothing cannot be torn, soiled or stained. It must be clean and wearable. Many charities will reject a shirt with a torn collar or a jacket with a large tear in a sleeve. As one charity spokesperson summed it up, "Don't donate anything you wouldn't want to wear yourself."

Household items include furniture, furnishings, electronics, appliances, and linens, and similar items. Food, paintings, antiques, art, jewelry and collectibles are not household items. Household items must be in working condition. For example, a DVD player that does not work is not in good used or better condition. You can still donate it (if the charity will accept it) but you cannot claim a tax deduction. Household items, particularly furnishings and linens, must be clean and useable.

The law authorizes the IRS to deny a deduction for the contribution of a clothing or household item that has minimal monetary value. At the top of this list you can expect to find socks and undergarments.

Fair market value
You generally can deduct the fair market value of your donation. Unless your donation is new - for example, a blouse that has never been worn - its fair market value is not what you paid for it. Just like when you drive a new car off the dealer's lot, a new item loses value once you wear or use it. Therefore, its value is less than what you paid for it.

If you're not sure about an item's value, a reputable charity can help you determine its fair market value. Our office can also help you value your donations of used clothing and household items.

Get a receipt
Generally, you must obtain a receipt for your gift. If obtaining a receipt is impracticable, for example, you drop off clothing at a self-service donation center, you must maintain reliable written information about the contribution, such as the type and value of the property.

Charitable contributions of property of $250 or more must be substantiated by obtaining a contemporaneous written acknowledgement from the charity including an estimate of the value of the items. If your deduction for noncash contributions is greater than $500, you must attach Form 8283 to your tax return. Special rules apply if you are claiming a deduction of more than $5,000.

Exception
In some cases, the rules about good used or better condition do not apply. The restrictions do not apply if a deduction of more than $500 is claimed for the single clothing or household item and the taxpayer includes an appraisal with his or her return.

If you have any questions about the charitable contribution rules for donations of clothing and household items, give our office a call.

The following information should serve to remind you of how to calculate the value of the personal use of business-owned cars for W-2 purposes and how to withhold taxes on it:

The following information should serve to remind you of how to calculate the value of the personal use of business-owned cars for W-2 purposes and how to withhold taxes on it:

1. For non-officer/shareholders:  If commuting is the only personal use of a business-owned car allowed by an employer, then the employer would need to include $3 a day in the employee's wages to recognize the value of the commute, plus 5.5 cents/mile for the fuel provided by the employer.

2. For officers and shareholders:  The personal use of a business-owned vehicle must be included in their W-2. The formula for computing the value of their personal use is as follows:
    

   1. Annual lease value based on the IRS table (see attached table) prorated for the number of months the vehicle was used from November 2023-October 2024.
   2. Times this value by the personal use percentage determined from mileage records maintained throughout the year which list business and personal miles driven.
   3. Then add the lesser of the actual cost, or 5.5 cents/mile, for gasoline provided by employer that was used for personal travel
   4. Next subtract any reimbursement that the employer receives from employee.
   5. The result is the value of the personal use of the business-owned vehicle to be included in employee's W-2 compensation.

                                                                            or                                      
                                                                 (A x B) + (C - D) = E

3. It is possible to avoid income tax withholding on the value of the personal use of an employer-provided vehicle. However, early action was required in order to avoid withholding income tax for 2024. The employer must have notified the employee in writing by January 31, 2024 or within 30 days after receiving the vehicle during the year, in order to avoid income tax withholding on this fringe benefit. If the employee is not notified of the withholding election by the specified dates, the employer must withhold income taxes on the value included in the W-2. For 2025, the employee must be notified in writing by January 31, 2025 or within 30 days of receiving the vehicle, in order to avoid 2025 withholding on this fringe benefit.

4. Even though an employer can avoid withholding income tax on the value of the personal use of a vehicle (as described in item 3 above), the Social Security tax (FICA), the Medicare tax, and State Disability Insurance (SDI) must be withheld on the value included in the W-2. However, there are some choices available on the timing of these withholdings. The employer is given the option of calculating and withholding these taxes on a pay period, quarterly, semi-annual, or annual basis. As stated previously, the annual period would run from November through October, which means that the employer could wait until the end of October to figure the taxes to be withheld. If the employee will reach the maximum Social Security wages for the year by that time, without considering the fringe benefit, only Medicare tax withholding would be necessary.

Please feel free to contact us if you need help in calculating the value of the personal usage of business owned cars, but remember it must be calculated in time to be included on the 2024 W-2 forms.

 Click here to view the Business Car Usage

With certain key exceptions, employers must pay nonunion, non-exempt employees (who are not working an alternative workweek schedule) at least time and one-half pay for: *Hours worked in excess of eight hours in one day, *Hours worked in excess of 40 hours in one workweek, and *The first eight hours worked on the seventh day of work in a given workweek.

In addition, employers must pay employees at least double time for any hours worked in excess of 12 hours in one day and hours worked in excess of eight hours on any seventh day of a workweek.

Under the new law compensatory time off in lieu of payment for hours worked by non-exempt employees in excess of the normal workday and workweek (as described above) is no longer permissible

Exceptions

Employees, who on July 1, 1999, were voluntarily working an alternate workweek schedule (adopted without an employee election), may continue to work that schedule, of not more than 10 hours work a day, and continue to be exempt from the overtime rules if the employer approves a written request by the employee to continue to work that schedule. In addition, employees may elect, by two-thirds vote, to work an alternative workweek of up to 10-hour work days within a 40-hour workweek without being subject to the overtime rules.

Personal Time Off

Employees may make up lost time due to a personal obligation by giving a signed, written request to an employer to make up the work. Please note however that, if an employer approves an employee's written request to make up work time that is lost as a result of a personal obligation, the hours of that makeup work time, if performed in the same workweek in which the time was lost, should not be counted toward computing the total number of hours worked in a day for purposes of the overtime pay requirements. The only exception would be in the case of an employee who works more than 11 hours in one day or 40 hours in one workweek.

All businesses are required to report independent contractors, to whom they will be issuing a 1099-MISC form, to the California Employment Development Department. The information provided will be forwarded to state and local child support agencies to help in their efforts to locate parents who are delinquent in their child support obligations.

The information must be reported to the EDD, using form DE 542 ("Report of Independent Contractors"), within twenty days of either entering a contract for $600 or more, or the date during the calendar year when total payments to the independent contractor reach $600. Form DE 542 requests the independent contractors' full name, social security number, address and the contract dates and amounts. You may obtain forms by calling the Employment Development Department at (916) 657-0529, accessing the EDD web site at www.edd.ca.gov, or contacting our office.

Only individuals working as independent contractors are to be reported. Thus, you don't need to report corporations or partnerships which you pay for services provided to your business. However, you must report all independent contractors you hire for $600 or more, regardless of whether the independent contractor lives or works in California or another state. You only need to report an independent contractor one time per each calendar year that you contract or pay the contractor $600 or more.

The completed DE 542 forms can be either mailed or faxed to the Employment Development Department. The mailing address is:Employment Development Department PO Box 997350 MIC 96 Sacramento, CA 95899-7350 And the fax number is: (916) 319-4410

The EDD may assess a $24 penalty for each failure to comply with the reporting requirements within the required time frame. Also, a penalty of $490 may be assessed for the failure to report the required information due to an agreement between you and the independent contractor to disregard the filing requirements.

California's state-run college saving program, Golden State Scholarshare Trust allows parents and others to put aside tax-deferred money for college.

Plan Features

Money that participants (parents, grandparents, businesses, etc.) contribute to the Scholarshare Trust will grow while in the participant's account and be tax free for federal and California purposes upon disbursement to the beneficiary's school of choice. The funds disbursed can cover room and board, as well as tuition fees, books, supplies and equipment required for enrollment or attendance at a "qualified institution" (defined below). The participant retains ownership of his/her deposits in the trust until disbursement, at which time ownership is transferred to the beneficiary (student). Interest earnings disbursed from the trust are not included in the beneficiary's gross income (while attending college).

Qualified Institutions

Neither the beneficiary nor the participant will have to choose a college when opening a Scholarshare account. However, the type of college the beneficiary plans to attend will affect the maximum contribution allowed, i.e., community college, state university, private institution, etc. The student may use the funds to attend any qualified institution. A qualified institution is one that offers credit toward:

A bachelor's degree; An associate's degree; A graduate level or professional degree; and Another recognized post-secondary credential. Certain proprietary and post-secondary vocational schools are also eligible institutions.

At the time the beneficiary enrolls in college, the Scholarshare Program will transfer payments from the participant's Scholarshare account directly to the college to pay the beneficiary's qualified expenses.

Transferability

If the beneficiary dies or does not attend college, the contributor has the option of canceling the account or changing the beneficiary. Cancellation results in a refund equal to the then-current market value less a penalty of no less than 10 percent of the earnings. The penalty is waived in the event of the beneficiary's death.

Without cause and before the beneficiary's admission to college, the contributor may change the beneficiary designation to relatives of the original beneficiary or relatives of the beneficiary's spouse, including the contributor if the contributor is a relative of the original beneficiary or a relative of the original beneficiary's spouse.

Income Tax Issues

There are no income tax deductions to the contributor for placing funds into a Scholarshare program. Taxation is avoided on the earnings. Amounts paid for tuition will also be eligible for both the HOPE credit and Lifetime Learning credit, subject to the rules that regularly apply to each of those credits.

Gift Tax Issues

For gift tax purposes, deposits are completed gifts of present interests to the designated beneficiary and therefore qualify for the annual gift tax and generation-skipping transfer tax exclusion of $15,000 per year per donee as indexed. They do not qualify as excludable education expenses under the gift tax rules which allow education expenses to be paid in addition to the $15,000 annual exclusion. If the deposit exceeds the annual exclusion amount, the contributor may elect to take the balance into account ratably over a five-year period on their gift tax return.

The IRS has released the 2024-2025 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

The IRS has released the 2024-2025 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

1. the special transportation industry meal and incidental expenses (M&IE) rates,
2. the rate for the incidental expenses only deduction,
3. and the rates and list of high-cost localities for purposes of the high-low substantiation method.

Transportation Industry Special Per Diem Rates

The special M&IE rates for taxpayers in the transportation industry are:

• $80 for any locality of travel in the continental United States (CONUS), and
• $86 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate

The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method

For purposes of the high-low substantiation method, the 2024-2025 special per diem rates are:

• $319 for travel to any high-cost locality, and
• $225 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

• $86 for travel to any high-cost locality, and
• $74 for travel to any other locality within CONUS.

Instead of the meal and incidental expenses only substantiation method, taxpayers may use:

• $86 for travel to any high-cost locality, and
• $74 for travel to any other locality within CONUS.

Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1392. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

Notice 2023-68, I.R.B. 2023-41 is superseded.

Notice 2024-68

The U.S. Department of the Treasury announced it has recovered $172 million from 21,000 wealthy taxpayers who have not filed returns since 2017.

The U.S. Department of the Treasury announced it has recovered $172 million from 21,000 wealthy taxpayers who have not filed returns since 2017.

The Internal Revenue Service began pursuing 125,000 high-wealth, high-income taxpayers who have not filed taxes since 2017 in February 2024 based on Form W-2 and Form 1099 information showing these individuals received more than $400,000 in income but failed to file taxes.

"The IRS had not had the resources to pursue these wealthy non-filers," Treasury Secretary Janet Yellen said in prepared remarks for a speech in Austin, Texas. Now it does [with the supplemental funding provided by the Inflation Reduction Act], and we’re making significant progress. … This is just the first milestone, and we look forward to more progress ahead.

This builds on a separate initiative that began in the fall of 2023 that targeted about 1,600 high-wealth, high-income individuals who failed to pay a recognized debt, with the agency reporting that nearly 80 percent of those with a delinquent tax debt have made a payment and leading to more than $1.1 billion recovered, including $100 million since July 2024.

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service has made limited progress in developing a methodology that would help the agency meet the directive not to increase audit rates for those making less than $400,000 per year, the Treasury Inspector General for Tax Administration reported.

National Taxpayer Advocate Erin Collins is working to address deficiencies highlighted by the Treasury Inspector General for Tax Administration regarding the speed of service offered by the Taxpayer Advocate Service.

National Taxpayer Advocate Erin Collins is working to address deficiencies highlighted by the Treasury Inspector General for Tax Administration regarding the speed of service offered by the Taxpayer Advocate Service.

Collins noted in a September 19, 2024, blog post that TAS, as highlighted by the TIGTA audit, is “not starting to work cases and we are not returning telephone calls as quickly as we would like.”

She noted that while overall satisfaction with TAS is high, Collins is hearing "more complaints than I would like of unreturned phone calls, delays in providing updates, and delays in resolving cases." She identified three core challenges in case advocacy:

• The increasing number of cases;

• An increase in new hires that need proper training before they can effectively assist taxpayers; and

• A case management system that is more than two decades old that causes inefficiencies and delays.

Collins noted that there has been an 18 percent increase in cases in fiscal year 2024 and advocates have inventories of more than 100 cases at a time. According to the blog post, in each of FY 2022 and 2023, there were about 220,000 cases. TAS is on track to receive nearly 260,000 in FY 2024.

"Our case advocates are doing their best to advocate for you," Collins wrote in the blog. "But when we experience a year like this in which case receipts have jumped by 18 percent, something must give. Since we don’t turn away taxpayers who are eligible for our assistance, the tradeoff is that we’re taking longer to assign new cases to be worked, longer to return telephone calls, and sometimes longer to resolve cases even after we’ve begun to work them."

Collins added that while the employment ranks continue to rise, about 30 percent of the case advocates "have less than one year of experience, and about 50 percent have less than two years of experience," meaning "nearly one-third of our case advocate workforce is still receiving training and working limited caseloads or have no caseloads yet, and half are likely to require extra support for complex cases."

She said TAS is revieing its training protocols, including focusing new hires on high volume cases so "they can begin to work those cases more quickly, while continuing to receive comprehensive training that will enable them to become effective all-around advocates over time."

TAS is also deploying a new case management system next year that will better integrate with the Internal Revenue Service’s electronic data offerings.

"My commitment is to continue to be transparent about our progress as we work toward becoming a more effective and responsive organization, and I ask for your understanding and patience as our case advocates work to resolve your issues with the IRS," Collins said.

By Gregory Twachtman, Washington News Editor

The IRS has highlighted important tax guidelines for taxpayers who are involved in making contributions and receiving distributions from online crowdfunding. The crowdfunding website or its payment processor may be required to report distributions of money raised, if the amount distributed meets certain reporting thresholds, by filing Form 1099-K, Payment Card and Third Party Network Transactions, with the IRS.

The IRS has highlighted important tax guidelines for taxpayers who are involved in making contributions and receiving distributions from online crowdfunding. The crowdfunding website or its payment processor may be required to report distributions of money raised, if the amount distributed meets certain reporting thresholds, by filing Form 1099-K, Payment Card and Third Party Network Transactions, with the IRS.

The reporting thresholds for a crowdfunding website or payment processor to file and furnish Form 1099-K are:

• Calendar years 2023 and prior – Form 1099-K is required if the total of all payments distributed to a person exceeded $20,000 and resulted from more than 200 transactions; and
• Calendar year 2024 – The IRS announced a plan for the threshold to be reduced to $5,000 as a phase-in for the lower threshold provided under the ARPA.

Alternatively, if non-taxable distributions are reported on Form 1099-K and the recipient does not report the transaction on their tax return, the IRS may contact the recipient for more information.

If crowdfunding contributions are made as a result of the contributor’s detached and disinterested generosity, and without the contributors receiving or expecting to receive anything in return, the amounts may be gifts and therefore may not be includible in the gross income of those for whom the campaign was organized. Additionally, contributions to crowdfunding campaigns by an employer to, or for the benefit of, an employee are generally includible in the employee’s gross income. If a crowdfunding organizer solicits contributions on behalf of others, distributions of the money raised to the organizer may not be includible in the organizer’s gross income if the organizer further distributes the money raised to those for whom the crowdfunding campaign was organized. More information is available to help taxpayers determine what their tax obligations are in connection with their Form 1099-K at Understanding Your Form 1099-K.

The IRS has significantly improved its online tools, using funding from the Inflation Reduction Act (IRA), to facilitate taxpayers in accessing clean energy tax credits. These modernized tools are designed to streamline processes, improve compliance, and mitigate fraud. A key development is the IRS Energy Credits Online (ECO) platform, a free, secure, and user-friendly service available to businesses of all sizes. It allows taxpayers to register, submit necessary information, and file for clean energy tax credits without requiring any specialized software. The platform also features validation checks and real-time monitoring to detect potential fraud and enhance customer service.

The IRS has significantly improved its online tools, using funding from the Inflation Reduction Act (IRA), to facilitate taxpayers in accessing clean energy tax credits. These modernized tools are designed to streamline processes, improve compliance, and mitigate fraud. A key development is the IRS Energy Credits Online (ECO) platform, a free, secure, and user-friendly service available to businesses of all sizes. It allows taxpayers to register, submit necessary information, and file for clean energy tax credits without requiring any specialized software. The platform also features validation checks and real-time monitoring to detect potential fraud and enhance customer service.

In November 2023, the IRS announced a significant enhancement to the ECO platform. Qualified manufacturers could submit clean vehicle identification numbers (VINs), while sellers and dealers were enabled to file time-of-sale reports completely online. Additionally, the platform facilitates advance payments to sellers and dealers within 72 hours of the clean vehicle credit transfer, significantly reducing processing time and enhancing the overall user experience.

In December 2023, the IRS expanded the ECO platform’s capabilities to accommodate qualifying businesses, tax-exempt organizations, and entities such as state, local, and tribal governments. These entities can now take advantage of elective payments or transfer their clean energy credits through the ECO system. This feature allows taxpayers who may not have sufficient tax liabilities to offset to still benefit from the available tax credits under the IRA and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act.

The IRS’s move towards digital transformation also led to the creation of an online application portal for the Qualifying Advanced Energy Project Credit and Wind and Solar Low-Income Communities Bonus Credit programs in partnership with the Department of Energy. The portal, which launched in June 2023, simplifies the submission and review processes for clean energy projects, lowering barriers for taxpayers to participate in these incentives.

These advancements reflect the IRS’s commitment to modernizing taxpayer services, focusing on efficiency, and enhancing the overall user experience. Looking ahead, the IRS is poised to continue leveraging technology to further improve processes and support taxpayers in utilizing clean energy tax incentives.

Final regulations on consistent basis reporting have been issued under Code Secs. 1014 and 6035.

Final regulations on consistent basis reporting have been issued under Code Secs. 1014 and 6035.

Consistent Basis Requirement

The general rule is that a taxpayer's initial basis in certain property acquired from a decedent cannot exceed the property's final value for estate tax purposes or, if no final value has been determined, the basis is the property's reported value for federal estate tax purposes. The consistent basis requirement applies until the entire property is sold, exchanged, or otherwise disposed of in a recognition transaction for income tax purposes or the property becomes includible in another gross estate.

"Final value" is defined as: (1) the value reported on the federal estate tax return once the period of limitations on assessment has expired without that value being adjusted by the IRS; (2) the value determined by the IRS once that value can no longer be contested by the estate; (3) the value determined in an agreement binding on all parties; or (4) the value determined by a court once the court’s determination is final.

Property subject to the consistent basis requirement is property the inclusion of which in the gross estate increases the federal estate tax payable by the decedent’s estate. Property excepted from this requirement is identified in Reg. §1.1014-10(c)(2). The zero-basis rule applicable to unreported property described in the proposed regulations was not adopted. The consistent basis requirement is clarified to apply only to "included property."

Required Information Returns and Statements

An executor of an estate who is required to file an estate tax return under Code Sec. 6018, which is filed after July 31, 2015, is subject to the reporting requirements of Code Sec. 6035. Executors who file estate tax returns to make a generation-skipping transfer tax exemption or allocation, a portability election, or a protective election to avoid a penalty are not subject to the reporting requirements. An executor is required to file Form 8971 (the Information Return) and all required Statements. In general, the Information Return and Statements are due to the IRS and beneficiaries on or before the earlier of 30 days after the due date of the estate tax return or the date that is 30 days after the date on which the estate tax return is filed with the IRS. If a beneficiary acquires property after the due date of the estate tax return, the Statement must be furnished to the beneficiary by January 31 of the year following the acquisition of that property. Also, by January 31, the executor must attach a copy of the Statement to a supplement to the Information Return. An executor has the option of furnishing a Statement before the acquisition of property by a beneficiary.

Executors have a duty to supplement the Information Return or Statements upon the receipt, discovery, or acquisition of information that causes the information to be incorrect or incomplete. Reg. §1.6035-1(d)(2) provides a nonexhaustive list of changes that require supplemental reporting. The duty to supplement applies until the later of a beneficiary's acquisition of the property or the determination of the final value of the property under Reg. §1.1014-10(b)(1). With the exception of property identified for limited reporting in Reg. §1.6035-1(f), the property subject to reporting is included property and property the basis of which is determined, wholly or partially, by reference to the basis of the included property.

Penalties

Penalties may be imposed under Reg. §301.6721-1(h)(2)(xii) for filing an incorrect Information Return, and Reg. §301.6722-1(e)(2)(xxxv) for filing incorrect Statements. In addition, an accuracy-related penalty can be imposed under Reg. §1.6662-9 on the portion of the underpayment of tax relating to property subject to the consistent basis requirement that is attributable to an inconsistent basis.

Applicability Dates

Reg. §1.1014-10 applies to property described in Reg. §1.1014-10(c)(1) that is acquired from a decedent or by reason of the death of a decedent if the decedent's estate tax return is filed after September 17, 2024. Reg. §1.6035-1 applies to executors of the estate of a decedent who are required to file a federal estate tax return under Code Sec. 6018 if that return is filed after September 17, 2024, and to trustees receiving certain property included in the gross estate of such a decedent. Reg. §1.6662-9 applies to property described in Reg. §1.1014-10(c)(1) that is reported on an estate tax return required under Code Sec. 6018 if that return is filed after September 17, 2024.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Nearly one-third of all new vehicles (and up to 75% of all new luxury cars) are leased rather than purchased. But the decision to lease or buy must ultimately be made on an individual level, taking into consideration each person's facts and circumstances.

Buying

Advantages.

• You own the car at the end of the loan term.
• Lower insurance premiums.
• No mileage limitations.

Disadvantages.

• Higher upfront costs.
• Higher monthly payments.
• Buyer bears risk of future value decrease.

Leasing

Advantages.

• Lower upfront costs.
• Lower monthly payments.
• Lessor assumes risk of future value decrease.
• Greater purchasing power.
• Potential additional income tax benefits.
• Ease of disposition.

Disadvantages.

• You do not own the car at the end of the lease term, although you may have the option to purchase at that time.
• Higher insurance premiums.
• Potential early lease termination charges.
• Possible additional costs for abnormal wear & tear (determined by lessor).
• Extra charges for mileage in excess of mileage specified in your lease contract.

Before you make the decision whether to lease or buy your next vehicle, it makes sense to ask yourself the following questions:

How long do I plan to keep the vehicle? If you want to keep the car or truck longer than the term of the lease, you may be better off purchasing the vehicle as purchase contracts usually result in a lower overall cost of ownership.

How much am I going to drive the vehicle? If you are an outside salesperson and you drive 30,000 miles per year, any benefits you may have gained upfront by leasing will surely be lost in the end to excess mileage charges. Most lease contracts include mileage of between 12,000-15,000 per year - any miles driven in excess of the limit are subject to some pretty hefty charges.

How expensive of a vehicle do I want? If you can really only afford monthly payments on a Honda Civic but you've got your eye on a Lexus, you may want to consider leasing. Leasing usually results in lower upfront fees in the form of lower down payments and deferred sales tax, in addition to lower monthly payments. This combination can make it easier for you to get into the car of your dreams.

If you have any questions about the tax ramifications regarding buying vs. leasing an automobile or would like some additional information when making your decision, please contact the office.