Learning Center for Tax and Financial Insights

When President Joseph R. Biden announced his $1.8 trillion American Families Plan to a joint session of Congress, most of the attention went to his jobs plan, the new benefits he was proposing for children and families, and the proposed increase of the top income tax rate to 39.6 percent. There was less reporting on suggestions about tax preparation, tax audits, and sharing of bank account information, but these changes would have profound effects. The president’s proposed changes to the tax codes were significant. In addition to increasing the tax rate for those at the top of the income ladder, those households with income over $1 million would also lose their lower capital gains rate. Those inheriting assets with capital gains over $1 million (or $2.5 million for couples when combined with existing real estate exemptions) would no longer be able to use a step up in basis to soften the tax blow. And hedge fund and private equity firm managers would find their carried interest tax break on the chopping block. All of these losses for the wealthy are balanced by funding for universal pre-K education, childcare, college education, nutrition programs, and paid leave, among other benefits for families: the plan would also make the expansion of the Child Tax Credit, the Child and Dependent Care Tax Credit, the Earned Income Tax Credit, the Premium Tax Credit permanent. In addition to these changes, it is notable that the American Families Plan also lays out significant changes within the Treasury itself, including expanded funding for tax audits, expansion of IRS authority over paid tax preparers, and a requirement that relevant bank account information be shared more readily by banks. The oversight of tax preparers has long been a wish list item for many Democratic leaders – in fact, a program known as the Registered Tax Return Preparer program was first rolled out by the IRS under the Obama administration to require that tax preparers register and submit to testing and continuing education requirements. The program was invalidated in 2013 after a group of independent tax preparers filed a lawsuit to stop it. The case, Loving v. IRS, was decided by a federal judge who ruled that the IRS’ program lacked statutory authority. Lawmakers, including Senate Finance Committee Chairman Roy Wyden, D-Oregon, have been pursuing legislative action to achieve the oversight goal ever since. A fact sheet released by the Biden administration in support of the IRS oversight spells out the goals of the changes. “Tax returns prepared by certain types of preparers have high error rates. These preparers charge taxpayers large fees while exposing them to costly audits. As preparers play a crucial role in tax administration and will be key to helping many taxpayers claim the newly expanded credits, IRS oversight of tax preparers is needed. The president is calling on Congress to pass bipartisan legislation that will give the IRS that authority.” The Biden White House is not alone in its concerns about unregulated tax preparers. A news release from the Treasury emphasized the need for oversight. “Taxpayers often make use of unregulated tax preparers who lack the ability to provide accurate tax assistance. These preparers submit more tax returns than all other preparers combined, and they make costly mistakes that subject their customers to painful audits, sometimes even intentionally defrauding taxpayers for their own benefit. The president’s plan calls for giving the IRS the legal authority to implement safeguards in the tax preparation industry. It also includes stiffer penalties for unscrupulous preparers who fail to identify themselves on tax returns and defraud taxpayers (so called ‘ghost preparers’).” A bigger auditing budget is part of the plan While the public may get behind the idea of regulating tax preparers, they may be less enthusiastic about the American Rescue Plan’s proposal of an increased budget for conducting taxpayer audits. But the Treasury has said that tax evasion has led to a tax revenue shortfall of roughly $1 trillion. In the same news release, the Treasury said, “Altogether, the proposal directs roughly $80 billion to the IRS over a decade to fund an array of priorities — including overhauling technology to improve enforcement efforts, which is more effectively implemented with the assurance of a consistent funding stream. This investment will also facilitate the IRS hiring and training auditors to focus on complex investigations of large corporations, partnerships, and global high-wealth individuals. The president’s proposal directs that additional resources go toward enforcement against those with the highest incomes, rather than Americans with actual income of less than $400,000.” Tax evasion takes many forms, and the plan hopes to address it both through increased auditing capabilities and by introducing a requirement that account flows of high-income individuals be reported by banks. According to the administration’s fact sheet, “The president’s proposal ... would require financial institutions to report information on account flows so that earnings from investments and business activity are subject to reporting more like wages already are. Additional resources would focus on large corporations, businesses, and estates, and higher-income individuals. Altogether, this plan would raise $700 billion over 10 years.” The reason there is a need for this type of additional reporting was explained this way by the Treasury:

Franchise investment can be a wonderful opportunity, but it also involves a completely unfamiliar set of rules when it comes to your taxes. Whether you are considering becoming a franchisee or are already involved, it’s important that you have the support of a knowledgeable tax planner to help ensure you understand your tax obligations and are preparing accordingly. Here are just a few of the things that you need to keep in mind: Franchisees Pay Self-Employment Taxes Even though you take direction from the franchise on marketing materials, training methods, employee rules and suppliers, you still are in charge of the business in ways that the IRS defines as being self-employed. You make your own schedule and establish your own community and business relationships, so the government puts you in the same category as a sole proprietor. That means you need to report your earnings on a Schedule C, just like single-member LLCs and sole proprietors do, and you need to pay the additional 15.3% tax that self-employed people are assessed. Though this may feel excessive, if you were somebody’s employee they would be taking out payroll taxes on your behalf to cover Social Security and Medicare for your future. That is what the additional taxation is for. Unfortunately, as a franchisee you will have to pay that amount regardless of whether your income ended up in your pocket as take-home pay. Just as is the case for participants in a partnership, it doesn’t matter whether profits are reinvested in the organization or paid out as distributions, they still count as self-employment income and are taxed as such. Keeping this liability in mind is an important part of your financial planning that an experienced tax professional can ensure you have prepared for properly. Are You an Active or Passive Participant? One of the advantages of being a franchisee is that you can be either an active or passive participant. Making the decision about whether you are hands-on or simply purchasing the business and handing off day-to-day operational responsibilities to a partner has important tax ramifications. Establishing whether your earnings are passive or active will be one of the first tasks on your tax professional’s list, and they will do this by asking questions like the ones below, which are geared to learning exactly what you do, and to what extent. When did you buy this business and how have you interacted with it since then? Franchisees that have materially participated in the business in five of the previous ten years can be determined to be active participants, regardless of their answers to the other test questions they will be asked. Over the course of the past year, how many years did you actively participate in the business? If your answer is more than 500 hours, the IRS can consider you a material participant rather than a passive one. How does your participation level in the business compare with others who are involved? If you worked at least 100 hours on the business and no less than anybody else, then you can be considered an active participant. These are just a few of the IRS’s material participation tests, and it’s an important determination because of the way that passive losses are handled. If you are identified as passively involved, then any losses you realize as a franchisee can only be offset by other passive income. The losses can be carried forward if you don’t have enough income to offset them, but you will never be able to take the deduction of passive losses against wages, active business earnings, or other ordinary income.

Keeping track of your business expenses for tax filing can be a huge pain. Here are some tricks on how to keep good records of your business transactions and avoid running into problems with the IRS. .embed-container { position: relative; padding-bottom: 56.25%; height: 0; overflow: hidden; max-width: 100%; } .embed-container iframe, .embed-container object, .embed-container embed { position: absolute; top: 0; left: 0; width: 100%; height: 100%; }

June 15 - Employer’s Monthly Deposit Due If you are an employer and the monthly deposit rules apply, June 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for May 2021. This is also the due date for the non-payroll withholding deposit for May 2021 if the monthly deposit rule applies.

June 1 - Final Due Date for IRA Trustees to Issue Form 5498 Final due date for IRA trustees to issue Form 5498, providing IRA owners with the fair market value (FMV) of their IRA accounts as of December 31, 2020. The FMV of an IRA on the last day of the prior year (Dec 31, 2020) is used to determine the required minimum distribution (RMD) that must be taken from the IRA if you are age 72 or older during 2021. Note: the CARES Act waived 2020 RMDs.June 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during May, you are required to report them to your employer on IRS Form 4070 no later than June 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed. June 15 - Estimated Tax Payment Due This is the last day to timely make your second quarter estimated tax installment payment for the 2021 tax year. Our tax system is a “pay-as-you-earn” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-earn” requirement. These include: Payroll withholding for employees; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the “de minimis amount”), no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%. Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception. However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

If you’re a small business owner or an aspiring entrepreneur, mergers and acquisitions probably sound like something that happens at an entirely different operational level from the one where you live and work. But if you’ve put the time into creating a business plan and invested hours in the health and welfare of your business, then it’s more than worth your while to learn the basics – it may even be the difference between your business’ success and its failure. The reason for this is simple. No matter what size your business, there are situations surrounding you that can impact profitability. Competition may arise, trends and consumer preferences shift, technology changes – all can lead to the need to merge, buy, or sell a business. Getting familiar with the terms and what types of scenarios may give rise to them is a smart step. The Terminology The first thing you need to understand is that mergers and acquisitions are terms that can cover many different types of events involving businesses large and small, local or international, with their commonality being that the purpose of all of them is to change a business organization in order to improve its operations, its relevance, and its revenues. The more you know about the different merger and acquisition options available, the better equipped you will be to make important decisions that will impact your ability to act in the best interest of the company you’ve already put so much of yourself into. What is a Merger? When two (or more) companies decide to merge, it means that they are joining their organizations together to take advantage of each of their strengths and minimize each of their weaknesses. A merger does not create an entirely new entity. In most cases the merging businesses start out as roughly the same size. Market share expands for all involved while the cost of operations diminishes, and in many cases the merging companies are able to use their combined strength and goodwill to diminish the strength of businesses both have viewed as their competition. For a merger to take place, each involved company needs the approval of its shareholders and board of directors. What is an Acquisition? Where a merger combines two or more companies to create a new one, in an acquisition one company buys the other and absorbs it into its operations. The acquiring business is generally the one that is more profitable, and it continues to operate as it originally did, but with the additional control of the company that it has purchased. If the entire company is purchased, then the acquired company stops existing, while if only a portion of the company is purchased, the remainder will be unaffected. What is Consolidation? A consolidation is similar to a merger, but instead of the merged entities becoming part of an existing entity, the combination of assets, inventory, skills and customer base create an entirely new entity where organizations that had previously competed against one another become a single collaborative organization. When Should You Consider a Merger or Acquisition? You may never need to consider a merger and/or acquisition for your business, but if you encounter any of the following types of situations, it may be something that worth entertaining.