Greencrest, Author at Whalen & Company, CPAs

Eyes on related parties

Greencrest on March 18, 2022

Business transactions with related parties — such as friends, relatives, parent companies, subsidiaries and affiliated entities — may sometimes happen at above- or below-market rates. This can be misleading to people who rely on your company’s financial statements, because undisclosed related-party transactions may skew the company’s true financial results.

The hunt for related parties

Given the potential for double-dealing with related parties, auditors spend significant time hunting for undisclosed related-party transactions. Examples of documents and data sources that can help uncover these transactions are:

A list of the company’s current related parties and associated transactions,
Minutes from board of directors’ meetings, particularly when the board discusses significant business transactions,
Disclosures from board members and senior executives regarding their ownership of other entities, participation on additional boards and previous employment history,
Bank statements, especially transactions involving intercompany wires, automated clearing house (ACH) transfers, and check payments, and
Press releases announcing significant business transactions with related parties.

Specifically, auditors look for contracts for goods or services that are priced at less (or more) favorable terms than those in similar arm’s-length transactions between unrelated third parties.

For example, a spinoff business might lease office space from its parent company at below-market rates. A manufacturer might buy goods at artificially high prices from its subsidiary in a low-tax country to reduce its taxable income in the United States. Or an auto dealership might pay the owner’s daughter an above-market salary and various perks that aren’t available to unrelated employees.

Audit procedures

Audit procedures designed to target related-party transactions include:

Testing how related-party transactions are identified and coded in the company’s enterprise resource planning (ERP) system,
Interviewing accounting personnel responsible for reporting related-party transactions in the company’s financial statements, and
Analyzing presentation of related-party transactions in financial statements.

Accurate, complete reporting of these transactions requires robust internal controls. A company’s vendor approval process should provide guidelines to help accounting personnel determine whether a supplier qualifies as a related party and mark it accordingly in the ERP system. Without the right mechanisms in place, a company may inadvertently omit a disclosure about a related-party transaction.

Let’s talk about it

With related-party transactions, communication is key. Always tell your auditors about known related-party transactions and ask for help disclosing and reporting these transactions in a transparent manner that complies with U.S. Generally Accepted Accounting Principles.

When inheriting money, be aware of “income in respect of a decedent” issues

Greencrest on March 15, 2022

Once a relatively obscure concept, “income in respect of a decedent” (IRD) may create a surprising tax bill for those who inherit certain types of property, such as IRAs or other retirement plans. Fortunately, there may be ways to minimize or even eliminate the IRD tax bite.

Basic rules

For the most part, property you inherit isn’t included in your income for tax purposes. Items that are IRD, however, do have to be included in your income, although you may also be entitled to an IRD deduction on account of them.

What’s IRD? It is income that the decedent (the person from whom you inherit the property) would have taken into income on his or her final income tax return except that death interceded. One common IRD item is the decedent’s last paycheck, received after death. It would have normally been included in the decedent’s income on the final income tax return. However, since the decedent’s tax year closed as of the date of death, it wasn’t included. As an item of IRD, it’s taxed as income to whomever does receive it (the estate or another individual). Not just the final paycheck, but any compensation-related benefits paid after death, such as accrued vacation pay or voluntary employer benefit payments, will be IRD to the recipient.

Other common IRD items include pension benefits and amounts in a decedent’s individual retirement accounts (IRAs) at death as well as a decedent’s share of partnership income up to the date of death. If you receive these IRD items, they’re included in your income.

The IRD deduction

Although IRD must be included in the income of the recipient, a deduction may come along with it. The deduction is allowed (as an itemized deduction) to lessen the “double tax” impact that’s caused by having the IRD items subject to the decedent’s estate tax as well as the recipient’s income tax.

To calculate the IRD deduction, the decedent’s executor may have to be contacted for information. The deduction is determined as follows:

First, you must take the “net value” of all IRD items included in the decedent’s estate. The net value is the total value of the IRD items in the estate, reduced by any deductions in respect of the decedent. These are items which are the converse of IRD: items the decedent would have deducted on the final income tax return, but for death’s intervening.
Next you determine how much of the federal estate tax was due to this net IRD by calculating what the estate tax bill would have been without it. Your deduction is then the percentage of the tax that your portion of the IRD items represents.

In the following example, the top estate tax rate of 40% is used. Example: At Tom’s death, $50,000 of IRD items were included in his gross estate, $10,000 of which were paid to Alex. There were also $3,000 of deductions in respect of a decedent, for a net value of $47,000. Had the estate been $47,000 less, the estate tax bill would have been $18,800 less. Alex will include in income the $10,000 of IRD received. If Alex itemizes deductions, Alex may also deduct $3,760, which is 20% (10,000/50,000) of $18,800.

We can help

If you inherit property that could be considered IRD, consult with us for assistance in managing the tax consequences.

City of Columbus and Franklin County have joined to provide $8 million dollars to help small business through the pandemic – Here is how to apply.

Greencrest on March 14, 2022

That’s right! Columbus has announced that they will be allocating an additional $8 million to a grant program for small businesses. Grants from the Columbus-Franklin County Recovery Fund can range from $5,000 to $20,000 and are available for immediate access.

To be eligible for-profit small businesses must meet the following requirements:

Be located in the City of Columbus or Franklin County
Have 25 full-time employees or less
Have documentation showing the pandemic caused at least a 25% loss in sales.
Began operations prior to March 17, 2020
Are currently open and operating
Be owned by an owner that is at least 18 years or older

The intention of the grant is to help and prioritize businesses located in underserved communities that are minority-, women-, or veteran-owned. As Mayor Andrew J. Ginther said, “minority- and women-owned businesses were more likely to miss their chance or be passed over for Paycheck Protection Program loans from the federal government. By putting these entrepreneurs at the front line for local funding, we hope to support businesses disproportionately impacted by the pandemic.”

How are the grants allocated and how can they be used?

According to a City of Columbus press release: business owners can apply for one of three grants:

$5,000 recovery grant: For self-employed, single entity, sole proprietors and sole owner LLCs
$10,000 recovery grant: For small businesses with at least one full-time employee
$20,000 job restoration grants: For businesses with at least one full-time employee that lost employees due to the COVID-19 pandemic. Business who are selected for this grant will start by receiving an initial $10,000. They then are eligible for the additional $10,000 for hiring an additional full-time employee within two months and maintaining their payroll for four months after receiving initial grant funding.

Grants provided by this fund can be used to relieve financial hardships caused by a loss of sales, hire new personnel, train staff, or even fill previously lost positions.

Small business owners who are interested in applying can use this link to learn more and prepare their applications. The next grant application begins on April 11^th, 2022 at 9:00 am, and ends on April 25^th, 2022. The application pool closes early if they meet their maximum capacity of 500 applicants prior to the closing date.

Lost your job? Here are the tax aspects of an employee termination

Greencrest on March 9, 2022

Despite the robust job market, there are still some people losing their jobs. If you’re laid off or terminated from employment, taxes are probably the last thing on your mind. However, there are tax implications due to your changed personal and professional circumstances. Depending on your situation, the tax aspects can be complex and require you to make decisions that may affect your tax picture this year and for years to come.

Unemployment and severance pay

Unemployment compensation is taxable, as are payments for any accumulated vacation or sick time. Although severance pay is also taxable and subject to federal income tax withholding, some elements of a severance package may be specially treated. For example:

If you sell stock acquired by way of an incentive stock option (ISO), part or all of your gain may be taxed at lower long-term capital gain rates rather than at ordinary income tax rates, depending on whether you meet a special dual holding period.
If you received — or will receive — what’s commonly referred to as a “golden parachute payment,” you may be subject to an excise tax equal to 20% of the portion of the payment that’s treated as an “excess parachute payment” under very complex rules, along with the excess parachute payment also being subject to ordinary income tax.
The value of job placement assistance you receive from your former employer usually is tax-free. However, the assistance is taxable if you had a choice between receiving cash or outplacement help.

Health insurance

Also, be aware that under the COBRA rules, most employers that offer group health coverage must provide continuation coverage to most terminated employees and their families. While the cost of COBRA coverage may be expensive, the cost of any premium you pay for insurance that covers medical care is a medical expense, which is deductible if you itemize deductions and if your total medical expenses exceed 7.5% of your adjusted gross income.

If your ex-employer pays for some of your medical coverage for a period of time following termination, you won’t be taxed on the value of this benefit. And if you lost your job as a result of a foreign-trade-related circumstance, you may qualify for a refundable credit for 72.5% of your qualifying health insurance costs.

Retirement plans

Employees whose employment is terminated may also need tax planning help to determine the best option for amounts they’ve accumulated in retirement plans sponsored by former employers. For most, a tax-free rollover to an IRA is the best move, if the terms of the plan allow a pre-retirement payout.

If the distribution from the retirement plan includes employer securities in a lump sum, the distribution is taxed under the lump-sum rules except that “net unrealized appreciation” in the value of the stock isn’t taxed until the securities are sold or otherwise disposed of in a later transaction. If you’re under age 59½, and must make withdrawals from your company plan or IRA to supplement your income, there may be an additional 10% penalty tax to pay unless you qualify for an exception.

Further, any loans you’ve taken out from your employer’s retirement plan, such as a 401(k)-plan loan, may be required to be repaid immediately, or within a specified period. If they aren’t, they may be treated as if the loan is in default. If the balance of the loan isn’t repaid within the required period, it will typically be treated as a taxable deemed distribution.

The election to apply the research tax credit against payroll taxes

Greencrest on March 1, 2022

The credit for increasing research activities, often referred to as the research and development (R&D) credit, is a valuable tax break available to eligible businesses. Claiming the credit involves complex calculations, which we can take care of for you. But in addition to the credit itself, be aware that the credit also has two features that are especially favorable to small businesses:

Eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability.
The credit can be used by certain even smaller startup businesses against the employer’s Social Security payroll tax liability.

Let’s take a look at the second feature. Subject to limits, you can elect to apply all or some of any research tax credit that you earn against your payroll taxes instead of your income tax. This payroll tax election may influence you to undertake or increase your research activities. On the other hand, if you’re engaged in — or are planning to undertake — research activities without regard to tax consequences, be aware that you could receive some tax relief.

Why the election is important

Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Thus, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, any wage-paying business, even a new one, has payroll tax liabilities. Therefore, the payroll tax election is an opportunity to get immediate use out of the research credits that you earn. Because every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that’s a big help in the start-up phase of a business — the time when help is most needed.

Eligible businesses

To qualify for the election a taxpayer must:

Have gross receipts for the election year of less than $5 million and
Be no more than five years past the period for which it had no receipts (the start-up period).

In making these determinations, the only gross receipts that an individual taxpayer takes into account are from the individual’s businesses. An individual’s salary, investment income or other income aren’t taken into account. Also, note that an entity or individual can’t make the election for more than six years in a row.

Limits on the election

The research credit for which the taxpayer makes the payroll tax election can be applied only against the Social Security portion of FICA taxes. It can’t be used to lower the employer’s lability for the “Medicare” portion of FICA taxes or any FICA taxes that the employer withholds and remits to the government on behalf of employees.

The amount of research credit for which the election can be made can’t annually exceed $250,000. Note, too, that an individual or C corporation can make the election only for those research credits which, in the absence of an election, would have to be carried forward. In other words, a C corporation can’t make the election for the research credit that the taxpayer can use to reduce current or past income tax liabilities.

The above are just the basics of the payroll tax election. Keep in mind that identifying and substantiating expenses eligible for the research credit itself is a complex area. Contact us about whether you can benefit from the payroll tax election and the research tax credit.

Author: Greencrest

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