Business Taxes

Claiming R&D Credits Just Got More Complex

by

Research and development (R&D) tax credits have long been regarded as a critical support tool for U.S. small businesses and their innovation efforts, allowing them to deduct the cost of qualified research and innovation from their organization’s taxable income.

But under new guidance from the IRS, they might not be so easy to claim when submitting an amended return.

Companies must now provide the following information to qualify for R&D credits under these circumstances:

  • Total qualified employee wage expenses, contract research expenses and supply costs
  • All business components that support the factual foundation for the credit
  • All research activities performed by business constituents
  • List of individuals who performed each research activity
  • Information each individual looked to discover

This new documentation is in addition to the previous requirements, which include:

  • Payroll information for any employees involved in R&D
  • General ledger reports listing any R&D-related expenses
  • Timekeeping records for anything related to R&D
  • Copies of contracts and invoices paid to any third-party that conducted research
  • Marketing materials, blueprints, etc. and any other documentation that presents the process and the effects of the research

So what does this mean for small businesses?

A tougher road to qualification

For small and medium-sized businesses, these credits are a form of vital capital to propel growth and increase their competitiveness. But the challenge lies in having the resources to organize, compile and submit the necessary documentation. Missing just one piece of information could result in an invalid claim.

The IRS hopes these new requirements will help weed out businesses that aren’t eligible for the credit. All businesses, however, will be granted 45 days to complete a credit refund claim during this one-year transition period. Going forward, we may see these changes apply to all R&D credits — not just on amended returns.

 Claiming what is rightfully yours

Don’t miss out on an opportunity to collect valuable funds for your small business. Contact Magone & Company today at (973) 301-2300 for guidance and support regarding this matter

Payroll Taxes Increase, But Tax Credit Relief May be Coming

by

New Jersey business owners face a projected $200 million increase in unemployment insurance (UI) taxes scheduled to take effect in July.

However, a bill now being considered by the New Jersey Assembly Appropriations Committee would help minimize the impact on the state’s small businesses in the form of tax credits.

Assemblyman Roy Freiman, D-District 16, says while the UI tax increases may have a negative impact, it will be countered by the positive tax credits. Small businesses would be able to use the credits to offset their corporation business taxes and their gross income taxes.

If enacted, Senate Bill 2378 would adopt the U.S. Small Business Administration’s (SBA) parameters for a small business. According to the SBA, size standards are mainly based on yearly business receipts or an average number of employees. The SBA also indicates that its definition of “small” varies by industry.

Tax credits provided by the bill would be available for calendar years beginning in 2023 and the following year. Credits would be based on expected increases to unemployment insurance taxes in fiscal years 2023 and 2024.

The bill would also allow the tax credits to carry forward for seven years, and they are non-refundable.

If a small business uses government funds, including grants or subsidies, to minimize its contribution to UI, the business would be prohibited from using the tax credits.

Goal is lower UI taxes

Senate Bill 2378 has the long-range goal of reducing employer UI taxes. The bill’s sponsors are asking for the establishment of a supplemental unemployment compensation fund and $375 million to go along with it.

According to the bill, the fund would be used to pay off federal loans made to NJ’s UI fund. Once the loans are paid-in-full, sponsors say that will also eliminate federal charges for the debt, allowing the fund to regenerate quickly. With the reserves in the UI fund, sponsors hope that will lead the way for reductions in UI taxes for employers.

Opponents of the bill say the $375 million could be better spent elsewhere. They argue the current state of the economy doesn’t allow for diverting resources that could be used by people who are still out of work.

Finally, the bill calls for the Department of Labor and Workforce Development to notify individual employers, 30 days in advance, of any changes to their UI tax rates.

The bill is now before the New Jersey Assembly Appropriations Committee for consideration. We’ll keep you posted.

Don’t miss the credit if it applies to you

How will the new tax credit impact your payroll? Don’t miss a beat – the CPAs at Magone & Company have years of experience assisting businesses and individuals with our strategic Tax Planning Services. Give us a call today at (973) 301-2300 to learn more.

Executive Pay and Fringe Benefits: Is Your Compensation Plan Triggering an Audit?

by

Executive compensation has evolved dramatically in recent years, in terms of creativity, complexity and dollar value. For example, stock options, deferred compensation, fringe benefits and other “non-cash” alternative forms of payment are becoming increasingly popular at business types of all sizes, making up a larger portion of executives’ overall compensation packages.

But creativity isn’t fooling Uncle Sam. The IRS is well aware that executives often receive extraordinary (and potentially taxable) fringe benefits that are not provided to other employees.  And executive perks that are not properly reported can land both you and your company in hot water.

Under the IRS’s watchful eye

If your organization does get audited, here’s what you might expect as the IRS examines your executive compensation and fringe benefits:

  • Assessment of corporate executives and officers to identify the highly compensated employees and determine who is responsible for approving and processing their payments.
  • Review of meeting minutes concerning executive compensation. In this case, auditors are looking for decisions and instructions about the treatment of fringe benefits.
  • Inspection of employment contracts and severance agreements to identify salaries and benefits.
  • Examination of loan agreements between the corporation and executives and officers. 
  • Evaluation of monthly expense reports submitted by executives.
  • A search of accounts payable records for the names, titles and Social Security numbers of executives to establish if payments made to them were included on their Forms W-2 or 1099.
  • Examination of any documents filed with the Securities and Exchange Commission, such as Form 10-K, to identify compensation issues.
  • Scrutinizing of payroll codes or other accounting codes which might be used for executive expenses to detect payments which may be taxable.
  • Analysis of certain items on tax returns to see if fringe benefits have been claimed.

Getting ahead of an audit

When it comes to executive compensation, getting the details right and staying in compliance can be a daunting task. Reach out to the CPAs at Magone & Company to ensure your company’s executive compensation plans are in line with IRS regulations.

Hiring Your Spouse in Your Small Business: 6 Tax Reasons to Say “I Do”

by

Many businesses are having trouble recruiting and retaining qualified workers. According to a recent report conducted by the Society for Human Resource Management (SHRM), nearly 90% of employers reported difficulty filling open positions; 73% have seen a decrease in applications for hard-to-fill positions, and only 6% expect labor shortages to diminish any time soon.

If your small business is understaffed with no strong prospects in sight, have you considered hiring your spouse?

If he or she is already familiar with the job, hiring your spouse as an official employee can have many benefits — including various tax-savings opportunities. Here are six ways hiring a spouse may help chip in to lower your taxes.

1. Retirement savings. If certain requirements are met, an employer can deduct contributions made to a qualified retirement plan on behalf of its employees, including your spouse.

For example, if your company has a 401(k) plan in place, your spouse can elect to defer up to $20,500 ($27,000 if age 50 or older) for the year, in addition to any matching contributions by the company. This is a great way for your spouse to save for retirement independently.

2. Business travel expenses. Normally, you can’t deduct travel expenses attributable to a spouse when he or she accompanies you on a business trip. It’s considered a nondeductible personal expense.

But the tax outcome changes if your spouse is a bona fide employee of the company and travels with you for business reasons. As a result, your company may be able to write off your spouse’s business-related travel expenses, such as airfare or other transportation, lodging and 50% of the cost of meals. Plus, the benefit is tax-free to your spouse. The same basic rules apply if your spouse goes on a business trip alone.

3. Health insurance premiums. If you’re currently paying to cover your spouse under the company’s health insurance plan, you may be able to shift more of the cost to the company if your spouse is an employee.

The company can deduct all the health insurance premiums it pays on behalf of your spouse — just like it can for other employees. Similarly, you can deduct 100% of the cost if you operate a self-employed business.

4. Additional health-related breaks. If you operate a C corporation or you’re self-employed, a Health Reimbursement Arrangement (HRA) for your employees can offer even more tax savings if your spouse participates. If certain requirements are met, the company may reimburse your spouse for out-of-pocket medical expenses and health insurance premiums, while the costs are deductible by the company. This is a win-win situation.

Likewise, if your spouse is covered by a qualified high-deductible health plan, he or she can contribute pretax income to an employer-sponsored Health Savings Account (HSA) or make deductible contributions above the line to the HSA. Your business can also contribute to your spouse’s HSA. Alternatively, your spouse can redirect pretax income to an employer-sponsored Flexible Spending Account (FSA).

5. Vehicles. Although you may derive tax benefits for your vehicle’s business use, your spouse’s expenses are purely personal and nondeductible. But as an employee, he or she may be entitled to business deductions under a complex set of rules, including limits on so-called “luxury car” write-offs.

6. Group-term life insurance. An owner’s spouse is entitled to the same group-term life insurance coverage as other company employees (typically, equal to three or four times the individual’s salary).

Under long-standing tax rules, the first $50,000 of employer-paid group-term life insurance coverage is tax-free to the employee. Plus, any additional coverage is taxable at relatively low rates. Thus, having your spouse work for the company provides more insurance protection for your family.

A match made in heaven?

Before you hire your spouse, meet with a professional tax advisor to discuss whether this strategy would be beneficial for your business and your tax circumstances. The CPAs at Magone & Company can help you make the most tax-efficient decisions. Give us a call today at (973) 301-2300 to learn more.

 The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your business or tax situation.

Collecting Income from Online Payment Apps? $600 is the New Reporting Threshold

by

If you use P2P (Peer-to-Peer) payment apps, such as Venmo, Square Cash or PayPal, you may be surprised early next year when you find an IRS 1099-K form in your mailbox.

Under the American Rescue Plan, a new law requires P2P providers to send you and the IRS a 1099-K if the gross amount of your business income is more than $600.

Previous guidelines required P2P providers to only send 1099-Ks when you had 200 transactions and $20,000 or more in income.

This new law decreases the income threshold by more than $19,000 and lowers the transaction threshold from 200 to one transaction! So whether you’re accepting payments for personal or business income, many more taxpayers will be receiving the 1099-K in early 2023.

How it works

If you sell items online for extra cash and earn more than $600, you’ll be getting a 1099-K. If you occasionally rent a property that you own and charge more than $600, a 1099-K will be sent to you. Or if a client asks to remit payment through PayPal, $600 or more will trigger a 1099-K.

Each year, hundreds of billions of dollars flow through third party apps like Venmo, CashApp and SnapCash. This new, tougher tax law is designed to make it harder for individuals to fail to report income on lower-cost transactions.

Suggestions for good record-keeping

Here are some ideas to keep a close eye on the tax implications of your P2P transactions:

  • Confirm the numbers. Mistakes happen, so check 1099-Ks against your payment receipt records.
  • Report the information correctly on your tax return. Include the numbers from each 1099-K you receive and ensure you report all income from all types of payments received.
  • Maintain detailed records. This can help demonstrate support for your income and deductions.

Also keep in mind the 1099-K does not account for fees, chargebacks or other costs and refunded amounts. The gross amount is unadjusted and, according to the IRS, is not to be adjusted.

What if the amount on your 1099-K is wrong?

Contact your P2P provider to request a corrected form. The name of the P2P and a phone number will be located in the upper left corner on the form.

If you are unable to get a corrected 1099-K, the IRS will allow an explanation to be attached to your tax return, along with the corrected amount of your income on the return.

Remember, if you use Venmo and several other P2P providers to accept payments, you could receive 1099-Ks from all of them, depending on which ones meet the $600 threshold.

Reach out to the experts

For more information on protecting your side hustle or small business from unexpected tax liabilities, give us a call at (973) 301-2300 to see if a tax planning session may be right for you.

Could a State Tax Nexus Study Put Millions Back in Your Company’s Pocket?

by

The broad variations in state tax requirements — what’s taxable and what’s not, the threshold for collecting sales tax or paying income tax, how and where to register and file — make it difficult for companies doing business across multiple states to remain compliant with economic nexus rules.

You may be underpaying (in which case get ready for penalties) or worse, overpaying. It’s a costly problem either way — and although not a new issue, changing laws have put a different spin on nexus.

Before 2018, for example, a company was only required to collect a state’s sales and use tax if it had a physical presence in that state. The result? Millions in revenue lost by states as ecommerce started to gain traction.

A Supreme Court decision (South Dakota v. Wayfair, Inc.) reversed the physical presence requirement, required every business with $100,000 in sales or 200 transactions in the state to collect and remit South Dakota sales tax. Other states quickly followed the South Dakota precedent, causing businesses to have nexus in many more locations than before.

Companies doing business in multiple U.S. jurisdictions also need to be aware of a second type of economic nexus beyond sales tax. If your company’s gross sales in particular states exceed a certain threshold, those sales would be subject to the state’s income tax.

The value of a state tax nexus study
As the laws changed, Magone & Company quickly went to work conducting state tax nexus studies to protect our clients. Word spread, and we began to receive inquiries from companies worldwide for the same service. Here are two examples of the results:

Health & beauty products wholesaler
A European company established a wholly-owned subsidiary in New York state with offices in New York City. The parent company approached our firm to find ways to mitigate the subsidiary’s tax burden, despite being told by its tax advisor that the U.S. tax filings were correct and appropriate.

After a comprehensive review of existing state and city laws and the subsidiary’s tax and financial records, Magone & Company amended the company’s tax filings to secure a refund of nearly $1.4 million in income taxes paid. We continue to serve as the company’s tax advisor.

Vitamin products wholesaler
The NJ-based subsidiary of an Asian manufacturer requested our help filing U.S. tax returns for a prior year as well as the current year.When we obtained the tax and financial records of the company, our review uncovered numerous discrepancies in previous tax filings related to carryover computations. In addition to amending previously filed returns, we also recommended changing the reporting of sales for the current year.

The total tax savings resulting from the work performed by Magone & Company was approximately $1.3 million, and the company has now retained Magone & Company as its auditor and tax advisor.

Who can benefit from a tax nexus study?
U.S. companies that conduct business in multiple states, as well as U.S. subsidiaries of foreign entities, generally have the most to save by conducting a tax nexus study. For more information, please reach out to the Magone & Company team.