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Tag: tax credits

What the ERC Pause Means for Small Business Owners

Posted on September 26, 2023 - 2:52 pm by

When properly claimed, the Employee Retention Credit (ERC) is a refundable tax credit designed for businesses and tax-exempt organizations that continued to pay their employees while experiencing workforce disruptions due to the COVID-19 pandemic. Unfortunately, the intricate filing process associated with this credit inadvertently created an opportunity for corrupt specialty firms to prey on small business owners, making deceptive claims about eligibility. 

With the rise in fraudulent ERC claims, the IRS announced an immediate halt to processing new claims through at least the end of the year. IRS Commissioner Danny Werfel states, “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in.”

Depending on your filing situation, we’re going to cover what to expect and what you should do next as a small business owner. 

What if I have already filed an ERC claim?

If you have already filed an ERC claim, the IRS will continue to process your claim, but at a greatly reduced speed. The IRS will be reviewing more than 600,000 claims, so expect processing times to be 180 days (about 6 months) or longer. The IRS may even ask for more information, so be prepared to receive this request. 

If you believe that your claim is fraudulent, the IRS is working on offering a withdrawal option for those who have filed an ERC claim but have not yet had it processed. As cited by the IRS, “This option, which can be used by taxpayers whose claim hasn’t yet been paid, will allow the taxpayers, many of them small businesses who were misled by promoters, to avoid possible repayment issues and paying promoters contingency fees.” However, if you have willfully filed a fraudulent claim, withdrawing it does not exempt you from potential criminal investigation. 

In the event that your ERC claim has already been processed and you have received an improper ERC payment, you are required to pay it back with possible penalties and interest. Per the IRS, they are “developing new initiatives to help businesses who found themselves victims of aggressive promoters. This includes a settlement program for repayments for those who received an improper ERC payment.” Remember, this program is not finalized, but the IRS plans to release more information in the fall. 

What if I am in the process of filing for the ERC?

The IRS encourages anyone being pressured by promoters to apply for the ERC “to immediately pause and review their situation while we (the IRS) look to add new protections and safeguards to stop bad claims from ever coming in.” Commissioner Werfel also states, “Businesses should seek out a trusted tax professional who actually understands the complex ERC rules.”

This would also be a good time to review the IRS list of red flags when it comes to aggressive ERC promoters as well as the IRS ERC eligibility checklist. 

What are my next steps?

Considering the complexity of the ERC, it’s never been more important to partner with a trusted tax professional. As small business owners ourselves, we know how scary this situation can be, but you don’t have to face it alone. At Padgett, we prioritize our relationships with our clients and are here to help you every step of the way. With over 50 years of collective experience and expertise in filing ERC claims, we’re prepared to answer any questions you may have regarding your ERC filing status. Connect with us today for reliable guidance and advice. 

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10 reasons your 2022 tax refund may be lower

Posted on March 9, 2023 - 7:23 pm by

Have you already filed your 2022 tax return? If so, you may have noticed that your refund is lower than it was in 2020 or 2021. As we return to the “new normal” after the COVID-19 pandemic, many tax credits and deductions from the last two years are no longer available in tax year 2022. This may be contributing to a smaller tax refund or a larger balance due.    

Here are some of the key differences to keep in mind.

For individuals:

  • Economic Impact Payments (EIP): Also known as stimulus checks, EIPs were not issued to taxpayers in 2022. You likely claimed a tax credit on your 2020 or 2021 tax return if you were eligible for a stimulus payment but didn’t receive it.   
  • Child tax Credits: For 2022, the credit is now worth $2,000 per child, down from $3,000 per child and $3,600 for children under age six in 2020 and 2021. This credit now ends when your child reaches age 16 rather than 17. This could further reduce the amount of credit you receive.  
  • Child and Dependent Care Assistance Credit: In 2021, this credit was refundable and taxpayers whose adjusted gross income (AGI) was less than $125,000 were eligible for the maximum credit of 50% of eligible expenses paid. In 2022, the maximum percentage dropped to 35%. The full credit is only available to taxpayers with AGI $15,000 or less. The credit is now nonrefundable, meaning it’s limited to the amount of tax you owe. 
  • Earned Income Tax Credit: This credit has reverted to pre-pandemic rates of 7.65% instead of the increased amount of 15.3% in the last two years. The eligibility ceiling has also decreased to $7,320.  
  • Charitable contributions for non-itemizers: In 2020 & 2021, a $300 per person deduction was available to taxpayers who made a qualified charitable donation and did not itemize. For 2022, only taxpayers who itemize can deduct charitable donations. 
  • Employer-Provided Child Care: This year, only $5,000 in employer provided childcare is excluded from your taxable income on the Cafeteria Plan. This is a decrease from the $10,500 that was excluded from income in previous years. This means more of your income is taxable in 2022, which could result in a lower tax refund. 
  • Healthcare Premium Tax Credit: This is another credit that has reverted to pre-pandemic rules. In the past few years, the credit expanded, allowing individuals on unemployment to qualify. However, in 2022, the eligibility is based on household income in comparison to the federal poverty limit. If you were eligible for the credit before, your eligibility may have changed. 

For businesses:

As a business owner, you may also face an increase in taxable income from your business activity. There are a few reasons for this, including: 

  • COVID-19 Employer Payroll Credits and loan forgiveness (including Employee Retention Credits, Paycheck Protection Program and Paid Sick and Family Leave Credits): During the pandemic, several credits, loans and benefit programs were available to businesses. In 2022, many of those pandemic relief efforts have expired.  
  • Business Interest Expense Limits: The calculation for the limitation has changed in 2022 and may result in less of a deduction for interest expense.  
  • Corporate charitable deduction limits: The charitable contribution limit has reverted to pre-pandemic rules. In 2022, corporations are limited to a charitable deduction of no more than 10% of their taxable income. This is down from the 25% limit imposed in 2020 and 2021.  

Are you unsure you’re getting your maximum tax refund or feeling surprised by your tax results? That may be a sign that your tax professional isn’t right for you. Padgett’s nationwide network of CPAs and EAs can help, so find a location near you today! 

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MFJ vs MFS: filing options for married taxpayers

Posted on February 16, 2023 - 7:07 pm by

If you’re married, you may not be aware of your tax filing options and assume that filing a return jointly with your spouse is the only choice available to you. In fact, married taxpayers can file separate returns. It’s tricky, though. There are specific situations where filing separately makes sense, and other times where it doesn’t. It’s important to choose the right method, because once you file jointly, you can’t amend your return to filing separately.    

There are no rules of thumb on when it makes sense for married taxpayers to file separately. Although in most cases, filing jointly will produce the most beneficial results, tax law has grown so complex that a great number of factors need to be considered. So what’s the real difference between the two options?   

Married Filing Jointly (MFJ)

Married filing jointly means that you and your spouse will file just one tax return, with income and deductions for both of you. The IRS usually encourages couples to file jointly. You’ll usually get a lower tax rate this way, and the IRS offers some tax breaks for joint returns. Some common benefits available to joint filers include:  

  • Earned Income Credit (EIC)
  • Dependent care credit 
  • Tuition credits
  • Child-care credits (unless you lived apart from July to December)
  • American Opportunity Credit
  • Lifetime Learning Credit for education expenses
  • Student interest loan deductions
  • More limited IRS contribution deduction
  • Lower limit on capital losses  

If you live in a community property state, such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, a joint return is also much more convenient, as it avoids some tricky tax rules on separate returns.   

Married Filing Separately (MFS)  

There are some cases where filing separately may be a better choice for married taxpayers. Filing separately means that you will each file your own tax return and keep your income and deductions separate from your spouse’s.    

You may want to file separate returns if it means some deductions become available. For example, the spouse with the lower income may be eligible for a medical expense deduction if their income is kept separate, but not if it’s combined. Keep in mind, your filing status selection on your federal return could impact your state income tax return. Before finalizing your decision, be sure to consider the impact to both your federal and state returns.  

There are a few reasons to file separately even if doing so means you collectively pay more tax or get less of a refund. One is when you and your spouse keep separate finances as a rule. Another is to avoid being liable for each other’s amounts due. When filing jointly, the IRS can come after either of you to collect the full amount. And remember, if you’re filing separately and need to extend, you’ll need to each file your own extension as well.

How to choose?

The best way for married taxpayers to know for sure which method of filing is the best fit is to prepare the return both ways and compare the results. This means you’d have to prepare three returns—the joint return, and two separate returns. But who has time for that?  

Happily, most tax professionals can use their software, along with their knowledge of tax law and how it applies to unique separate filing situations, to determine whether it’s likely that filing separately would be better from a tax due or refund perspective. If your preparer isn’t offering this service, you might be missing out!     

If you want to be sure you’re not leaving tax money on the table, turn to a tax professional to help you file. Padgett’s network of CPAs and EAs can help you determine which method of filing is the best fit so you don’t have to worry. Find a location near you today!  

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Recap: our top 10 tax tips of 2022

Posted on December 29, 2022 - 9:45 pm by

It’s hard to believe that 2022 is already coming to an end!  We’ve covered a lot of tax tips in the past year. Here’s a quick recap of some topics you may need to discuss with your tax advisor and some tips for how best to prepare for that discussion: 

  1. Make sure you check your mail for important tax documents that will be coming out soon, like W-2s and 1099s. Check out our checklist for an idea of what you need to keep on hand. 

  2. Are you self-employed? Ask your tax preparer about some deductions you may be eligible for, such as home office expenses, vehicle expenses, and qualifying food and drink expenses. 

  3. If you’re married, make sure you discuss your filing options with your spouse and your tax preparer, so that you can determine whether it’s better to file a joint return or separate ones. You’ll also need to make sure your information and withholding is up to date, if you were married recently.

  4. Own a vacation home, Airbnb or VRBO property? Be sure to discuss that rental income with your tax preparer to make sure you’re following the “mixed-use” property tax rules.

  5. Whether you won or lost, if you gambled this year, make sure to keep good records and bring your documents to your tax preparer. Gambling winnings are often taxable income, and you may receive a Form W-2G if you earned money. But if you didn’t, your losses could be tax deductible with proper documentation.

  6. If you’re expecting a large tax refund, it may be worth considering whether or not that’s actually a good thing. A large refund can be useful if those funds are handled responsibly. However, it may mean you’re withholding more than you should from your regular paycheck. You may want to reevaluate your withholding after tax time.

  7. Ask your tax preparer about your eligibility for certain education tax credits, if you or a dependent is enrolled at an eligible educational institution. Don’t forget to factor scholarships or student loans into your budget and find out what could be taxable—or deductible!

  8. If you have business travel coming up soon, make sure to talk to your tax advisor about how you could mix some leisure time in with your business travel and still get some tax deductions. 

  9. Considering purchasing an electric vehicle soon? There have been some changes to the Clean Vehicle Credit, so make sure to check the rules regarding your eligibility and discuss the details of the purchase with your tax professional. 

  10. Opting for non-cash employee gifts this holiday season is one way to help ensure the gift is considered a de minimis fringe benefit, rather than taxable income for your staff. You may also be eligible for some tax deductions on gift and party expenses, so as always, check with your tax preparer. 

The best thing you can do to save money on your taxes is to start working with a tax advisor early. Be sure to work with them throughout the year on your tax planning. A good tax advisor can help you identify opportunities to save money, but you have to make sure you have time to implement their suggestions before it’s too late.  

If you don’t have a tax professional yet, or yours isn’t a good fit, we can help. Padgett’s nationwide network of CPAs and EAs are ready to lend a hand. Find an office near you today! 

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Are you eligible for the Clean Vehicle Credit?

Posted on November 29, 2022 - 8:59 pm by

What you need to know about car buying after the Inflation Reduction Act

Although most of the media attention surrounding the passage of the Inflation Reduction Act on August 16 focused on the additional $80 billion in funding provided to the IRS, the Act also contained other pieces of important legislation. For example, the IRA included provisions to reduce the deficit, institute price limits on prescription medications and decrease carbon emissions.  

Part of the effort to decrease emissions involved revising a previous credit for purchasing electric vehicles, renaming it the Clean Vehicle Credit. The revision included (but was not limited to) changes in the types and cost of the vehicles, location of the manufacturers, and the calculation of the credit.      

With year-end discounts just around the corner, here’s what you need to know to be eligible for the credit if you’re considering purchasing an electric vehicle this year: 

When will the purchase take place? 

When you purchase or place the vehicle in service will determine whether you are subject to the old or new rules for qualifying for the credit.   

The Clean Vehicle Credit will phase in the new rules over time. For example, the requirement that vehicles must be manufactured in North America is already in effect for electric vehicles sold after August 15, 2022. Meanwhile, other changes like the elimination of the manufacturer limitations and new battery capacity rules will be in effect for vehicles purchased after January 1, 2023.   

Who was the manufacturer and how much does the vehicle cost? 

Under the old rules, there was an exclusion that prevented you from claiming the credit for vehicles manufactured by Tesla or General Motors.  

The new Clean Vehicle Credit will remove that limitation as of January 1, so if you’re interested in a GM or Tesla, you may want to wait to purchase. The Act does impose an MSRP limit of up to $55,000 for vehicles and $80,000 for vans, SUV’s and pickup trucks purchased after December 31, 2022. Keep that in mind if you are considering a Tesla or another higher-priced model. 

What is your income? 

Beginning in 2023, there’s a limit on your ability to claim the credit based on your modified adjusted gross income (MAGI). If your MAGI exceeds $300,000 for joint filers, $225,000 for heads of household, or $150,000 for all others, you aren’t eligible to claim the credit. For those whose income exceeds the limits, you would need to purchase and begin using the vehicle before year-end to qualify under the old rules.  

Which is better for you, the old rules or the new? 

The maximum credit is still $7,500 under either the old rules or the new post-Inflation Reduction Act rules, but the way to calculate them is different.  

Be sure to discuss the specifics of the credit and your vehicle purchase with your tax advisor to determine your eligibility under either the old or new rules and what you can do to maximize your available credit! If you don’t have a tax advisor yet, Padgett’s nationwide network of EAs and CPAs are here to help, so find a location near you today. 

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