Speaking with Mark was a truly gratifying experience — he was kind, organized, interested, and sincere, and asked great questions. As a sneak preview of a few good ones:
How did you end up being interested in Music from an education standpoint, and how did you end up moving towards accounting?
At what point did you decide to further your education with the Masters in Financial Analysis and why that particular major? Was it difficult to return to school?
How has your practice evolved over the years? I see you use the DBA The Dancing Accountant. Was that always the case, or did that come later? Is it related to a niche, or more about branding?
You’ve been listed on the 50 Top Women in Accounting list. Congratulations! How does that make you feel? Is it acknowledgement of hard work, even more responsibility, honor…?
What does the future look like for you if it goes exactly how you would like it to go? When you look back on your career & life, what will you want to be able to say you accomplished?
If you could go back in time and give your younger self just one piece of critical advice, what would that be?
We spoke for over half-an-hour and I felt like we could have gone on for days… his conversational style was comfortable and disarming. I enjoyed sharing personal stories, talking about the great folks I’ve studied and worked with, about how hard it was to go back to school while working, how much I love helping small businesses in my neighborhood, how much I hate saying “no”, how a client came up with my business name… and so on. Give it a listen — and raise a glass to our amazing team while you’re at it!
I would love to be remembered as someone who helped keep our communities vibrant by helping small businesses succeed. Thatâs the whole point of any of this, and my staff is a group of women who feel the same way. Our work really has meaning. ~Nancy McClelland, CPA
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
The annual scheduled increase in Chicagoâs minimum wage goes into effect on Friday, July 1, 2022. The Chicago minimum wage is tiered for large businesses with 21 or more employees, and small businesses with 4-20 employees. Since reaching $15 per hour in 2021, the minimum wage for larger employees increases annually according to the Consumer Price Index or 2.5%, whichever is lower. The minimum wage for small businesses continues to increase towards $15 per hour by 2023.
As of July 1, 2022, the Chicago minimum wage will be:
$15.40 for employers with 21 or more employees (including all domestic workers, regardless of the number employed)
$14.50 for employers with 4-20 employees
The minimum wage for tipped employees will be $9.24 for employers with 21 or more employees, and $8.70 for employers with 4-20 employees (employers must make up the difference between any tips received and the applicable minimum wage for non-tipped workers.)
Anyone age 24 or younger employed by, or engaged in employment coordinated by, a nonprofit organization or government agency will see a minimum wage increase to $12.00.
Employers that maintain a business facility within the City of Chicago or are required to obtain a business license to operate in the City are required to pay their employees at least the Chicago minimum wage. Additionally, any employee that works two hours or more in the City within a two-week period must also receive at least the Chicago minimum wage.
Chicago BACP recently presented a free hour-long webinar called “Employer Responsibilities Under Chicagoâs Minimum Wage Ordinance”, available here.
Employers in “covered industries ” (see below) to post work schedules with at least 14 daysâ notice, an increase from the previous 10 daysâ notice.
Employees will need to earn less than $29.35 per hour or $56,381.85 per year to gain protection under the Fair Workweek Ordinance.
Covered industries include building services, healthcare, hotel, manufacturing, restaurant, retail, or warehouse services.
Chicago businesses are required to post the Minimum Wage Notice and Fair Workweek Notice at their business. The notices will be available to workers and business owners in English, Spanish, Polish, Simplified Chinese, Tagalog, and Korean by July 1, 2022. Employers that violate the minimum wage ordinance can be fined $500 to $1,000 per day for each offense.
Chicago BACP recently presented a free hour-long webinar called “Employer Responsibilities Under Chicagoâs Fair Workweek Ordinance”, available here.
Sexual Harassment Law Updates
As of July 1, 2022, all employers in the city of Chicago must have a written policy on sexual harassment. Additionally, employers are required to display a public notice advising of the prohibition on sexual harassment where employees can see it, and there are increased training requirements. A model policy, written notice, and training templates are available by visiting Chicago.gov/SexualHarassment.
Recent updates to the law include:
Adding sexual misconduct to the definition. Sexual misconduct is defined as any behavior of a sexual nature which also involves coercion, abuse of authority, or misuse of an individualâs employment position.
Requiring all employers to have a written policy on sexual harassment. The written policy must be available in the employee’s primary language within the first calendar week of starting employment.
Increasing the statute of limitations from 300 to 365 days.
Create flexibility to notify a respondent up to 30 days from the time of complaint (compared to 10 days currently), to mitigate any retaliation such as denial of a reasonable accommodation request.
Requiring additional annual training for all employees including the one hour of prevention training aligned with State requirements and one hour of bystander intervention. Supervisors and managers are required to have an additional one hour of training.
Increasing the penalty for individuals or businesses that participate in discriminatory practices in the workplace including sexual harassment. The penalty is increasing from $500 – $1,000 per violation to $5,000 – $10,000.
It seems not all small business owners are aware of the responsibility to provide Chicago workers paid sick leave. It applies to any business or individual that employs at least one âemployeeâ and has a facility within Chicagoâs city limits (though Cook County now has a similar requirement). The term âemployeeâ covers anyone who works at least 80 hours within a 120-day period (20 hours a month). â For hourly employees, paid sick leave accrues at one-hour for every 40 hours worked. Salaried-exempt employees are presumed to have worked 40 hours/week. â Employees are capped at accruing a total of 40 hours of sick leave each year, unless the employer opts to set a higher limit. â Employers must permit employees to carry over half of their accrued leave, to a maximum of 20 hours of unused sick leave each year (40 for employers with 50 or more employees). â Employers are not required to pay out any accrued but unused sick leave upon employment termination.
Even the least expensive version of Gusto Payroll allows for a sick pay plan, and it’s not hard to set up and track (see instructions here).
Reminder that if you sign up and run Gusto using my link, you’ll get a free trial period… and after running your first payroll you’ll receive a $100 Visa gift card! My clients instead will receive a 15% discount for the life of the plan.
And a final point: all Chicago worker protections are enforced by the BACP Office of Labor Standards (OLS). The OLS is dedicated to promoting and enforcing Chicagoâs labor laws, including Minimum Wage, Paid Sick Leave, Fair Workweek, and Wage Theft Ordinance. The BACP OLS webpage offers informational materials on Chicagoâs Labor Standards Laws.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
“Really great interview. I appreciated how the highlights were amplified. Nancy is smart and real. Blake does a great job allowing the interviewee talk and share her knowledge. Well done!” -YouTube viewer comment
I was honored to be interviewed recently by the one-and-only Blake Oliver for Relay‘s “Gearing Up” series, where every two weeks, he talks to a real accountant or bookkeeper about ONE challenge in their firm â and how to solve it.
In this episode, we discuss how to build a team with whom you love to work (kudos to Bookkeeping Buds for helping me make that happen).
As our firm grew, I realized that building The Dancing Accountant in a traditional way was re-creating working conditions that our team and I didnât love — it was immensely important to me that above all, we enjoy working with each other.
But first I had to convince myself I had something to offer — and decided to focus on what I knew employees wanted: meaningful work.
In the latest episode of Gearing Up with our host Blake Oliver, I open up about the a-ha moment that led to our building an entirely different kind of remote firm. In the episode, you’ll learn: Why Nancy is known as The Dancing Accountant Nancyâs favorite tool in her tech stack Three things employees want from work The non-traditional structure of Nancyâs team
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
Yesterday I attended an excellent webinar on how two different small business owners transitioned ownership to their employees — one using an ESOP and one using a Worker Co-op structure.
As a CPA and consultant to many small business owners, I often am asked about succession planning and exit strategies, and my experience in cooperative taxation often leads me to recommend a transition to employee ownership. So I was glad for the opportunity to learn from the experiences of these folks who are in the thick of it.
And just in case they might be helpful as an outline or while following along with the recording, the notes I took during the session are below.
Thanks again to Courtney, Steve, the panelists, and UWCC for this excellent resource!
Three main EE ownership structures —
ESOPs, most common, about 70% – better for larger busineses
Worker co-ops, less common but fast-growing
EE Ownership Trust, more common in Britain
Half of privately-held businesses are owned by boomers — who will be retiring soon (the “silver tsunami”).
ESOP – Employee Stock Ownership Plan Employee financial control, not management control. How does it work? the company gets a loan (from bank or owners) to pay the owners (whatever percentage ownership is agreed upon; can happen in tranches) The owners get paid, and the company pays the loan off over time on behalf of the staff, and releases the stock to the employees Employees just “get” their shares as opposed to worker co-ops where each member has to buy in. Owner can remain CEO as long as necessary. The tax benefits of an ESOP can save about 20% of value in terms of the company price compared to selling to private equity. Vests in 20% increments annually until the employee is fully-vested. If someone departs, the company has five years to pay them off.
Worker Cooperative Employee-Owners have both financial and managerial control. One member, one vote. Must sell 100% ownership to the workers; no partial purchases like with an ESOP. Owner may become one of the many worker-owners in the new structure. Owner or bank can finance a loan to pay the owners off over 15 years or however long. John Abrams model – buy-in for each new owner is the price of a decent used car. :) So they are two different things: buy-in by each worker-owner, vs company-held loan to pay off the owner. Company can lend each owner some of the money to buy their share if that helps. What happens if someone leaves from Marty’s worker co-op: the company has five years to pay back $9k initial investment if necessary, but usually pay it off very quickly just to get it off the Balance Sheet if they have the cash to do it. Then the internal capital account gets paid out in a different way, on a schedule with other owners.
Inviting staff to have an ownership mentality and be a democratically-run organization is very valuable, especially in anticipation of transitioning to ownership — but different from actual EE ownership.
Recommended book: John Abrams, “The Company We Keep”.
Neat idea – buying a pie for new owners as a way to say “here’s your piece of the pie”.
Questions from Q&A: Are you using the terms “Exit Planning” and “Succession Planning” interchangeably, or do they have different meanings for you? How did you educate your employees on employee ownership? I am working with two businesses doing projects with students in my co-op business management course. An existing worker co-op has lots of legal questions how they can and/or must differentially treat workers as employees and workers as owners. Can you advise a good first landing on legal assistance to help get their questions answered or directed to those who should. I’m no lawyer and most that I work with are in the farmer co-op world. Thanks. What is your advice for business-owners where the owner is the key employee with specialized knowledge and credentials that is not easily replaced by other existing staff? In Marty’s buy in model, can that buy in level be paid to the co-op over time (installments) or is it all upfront (day 1). What happens to the equity in the business as an employee leaves, and how is that different between the 2 structures Could a consumer cooperative spin off, say, 30% for employees to become owners under either of these structures? What is the difference in governance control of workers as an ESOP vs a Worker Co-op? I expect there is a range of options. A follow up to the question about spinning off 30% of a consumer co-op, could the creation of the ESOP or worker co-op component be a vehicle for capitalizing the co-op for expansion or other purposes? Are worker equity shares in a worker co-op appreciable over time? Steve, you mentioned existing ESOPs or Coops bringing in another small biz as a merger/acquisition, perhaps sold by a founder with no buyer prospects. Can you talk more about this as another pathway for transitioning an existing biz to an employee-owned company? I appreciate the conversation about sharing the wealth, but one challenge I see as a CPA is that workers are always convinced that owners are “hoarding” the profits and that’s one of the motivations for becoming worker-owned. However, the company has to be healthy and profitable for this to happen! It’s not magic. If the company is struggling, the worker-owned version of the company will struggle, too. It’s not a magic bullet. I know there are food co-ops that are also worker co-ops. How could a consumer co-op facilitate their workers starting their own worker co-op inside the food co-op? Are there incentives, support, programs, etc. for someone looking to start a private business with a roadmap from the beginning to convert to an employee ownership model? If a small worker owned cooperative or ESOP is often structured as a partnership for tax purposes, does the cooperative structure only impact management? For Marty, how do the workers owner manage or address the tension between investment in the equipment needed for the business versus profits place into the internal capital account and subsequently distributed? Interested in any ideas or models for how workers in a consumer co-op might gain “more stake in the game,” feel a real sense of ownership and directly benefit from the growth and success of the business. What are unique challenges associated with performance management (horizon problem, shirking, freeriding, etc) at employee owned businesses? Do you use any tools/tech for reviews, ratings, etc? Can you highlight top 3 challenges of running an employee owned business that technology or tools can help solve? Is there any way to plan succession or manifest employee ownership when the company is merely a one or two person shop without younger family?
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
A short article in today’s Accounting Today newsletter (which I highly-recommend) included an extremely helpful snippet that I want to make sure to spread far-and-wide.
For those waiting on their 2020 tax return to be processed, enter $0 (zero dollars) for last yearâs AGI on the 2021 tax return.
For those who used a non-filer tool in 2021 to register for an advance Child Tax Credit or third Economic Impact Payment in 2021, enter $1 (one dollar) as the prior-year AGI.
All others should enter the prior yearâs AGI from last yearâs return. Tax preparation software that was used last year will auto-populate this field.
And my personal suggestion to add to this list — make sure to get a transcript before trying these, since there is some possibility that your tax return has already been processed and you are unaware of it, or that the answers you’re looking for will show up on a wage and income transcript (stimulus and child tax credit payments, as well as estimated tax payments, for example).
Hopefully these tips will help expedite your tax return filing and processing — but as the article points out, “significant backlogs, lack of adequate staffing, difficulty reaching tax authority agents by phone and pandemic-related IRS and state and local office closures” are making this tax season particularly challenging one for tax professionals and taxpayers.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
I often write and speak about my experiences as a co-op accountant, and how challenging it was to become an expert in the field with so few resources. Things have changed a lot since back then, with the National Society of Accountants for Co-ops (NSAC), National Cooperative Business Association (NCBA), and the Co-op Professionals Guild (CPG) all offering online education.
The NSAC line-up for the next few months is seriously powerhouse. For anyone in the field or looking to get into it, I strongly recommend a membership, which gets you into all of these webinars below at no extra charge. That said, if you only want to know the specifics of one topic or another, they are affordably priced at $56 each for non-members.
Note: I am not paid or given a discount to promote NSAC — I just think they’re great!
Behavioral Ethics March 9, 2022 | 11:00 AM EST FREE NSAC Members | $56 Non-Members CPE: 1 Credit Hour As we continue to be challenged by an increasingly complex business environment, it is important to develop ethical reasoning skills that allow us to put ethical decision-making into practice. In this session, attendees will discover how to identify ethical paradigms and learn how stakeholders are impacted by their ethical choices. Additionally, participants will explore real-life cases that will allow them to rehearse ethical practices. Be prepared for any ethical dilemma and register now! Click for more info.Â
Agricultural Economic Outlook April 5, 2022 | 11:00 AM EST FREE NSAC Members | $56 Non-Members CPE: 1 Credit Hour Want to know more about current and expected market conditions affecting agricultural co-ops? This CLN will address the core issues impacting the macroeconomy, agricultural commodity markets, and the agricultural economy with particular focus on the effects of COVID-19 and inflation. Attendees will get an outlook on the agricultural commodity markets; including corn, wheat, soybeans, rice, cotton, hay, cattle, hogs, and dairy, as well as the impact of rising production costs. Gain valuable insight into current market conditions by registering today! Click here for more info.
Financial Ratios for Agricultural Co-ops April 20, 2022 | 11:00 AM EST FREE NSAC Members | $56 Non-Members CPE: 1 Credit Hour Designed specifically for Agricultural Co-ops, this session will explore how to analyze company performance based on an evaluation of financial statements, and introduce ratios used in the financial analysis of cooperatively structured organizations. Learn what to look for when comparing a company to its peers and industry norms, and how to analyze company performance compared to strategic business objectives. Take advantage of this revealing CLN today! Click here for more info.
Financial Ratios for Electric Co-ops April 20, 2022 | 2:00 PM EST FREE NSAC Members | $56 Non-Members CPE: 1 Credit Hour Designed specifically for Electric Co-ops, this session will explore how to analyze company performance based on an evaluation of financial statements, and introduce ratios used in the financial analysis of cooperatively structured organizations. Learn what to look for when comparing a company to its peers and industry norms, and how to analyze company performance compared to strategic business objectives. Don’t miss out on this engaging session! Click here for more info.Â
Tax Update April 28, 2022 | 11:00 AM EST FREE NSAC Members | $56 Non-Members CPE: 1 Credit Hour This session will bring attendees the latest and up-to-date tax law changes and new tax return reporting items. Additionally, the CLN will explore any anticipated future tax law changes. Some of the topics that will be covered include: Meals and Entertainment, 163(j) Interest Expense Limitation, Net Operating Losses, R&D Tax Credit Update, and State Taxes Post Wayfair. Stay informed about the latest developments that are most likely to affect your organization with this 60-minute zoom! Click here for more info.
Processing of Work Orders for Electric Co-ops May 5, 2022 | 2:00 PM EST FREE NSAC Members | $56 Non-Members CPE: 1 Credit Hour In this CLN, participants will review the accounting process for construction and retirement of utility plant from the work order stage to unitization. This will include the audit perspective of this process, along with industry trends and common mistakes to avoid. Sign up today for this exclusive guidebook to processing work orders! Click here for more info.
Navigating New FASB Guidance: Your 2022 Guide May 12, 2022 | 2:00 PM EST FREE NSAC Members | $56 Non-Members CPE: 1 Credit Hour Join us for an informative overview of new FASB standards that could impact your organization. This session will explore recent developments in the financial accounting standards relevant to cooperatives. Guest speakers Randy Throener and Amy Schreck will discuss the latest FASB guidance so attendees can successfully implement these recent amendments. Take advantage of this educational CLN! Click here for more info.
How Electricity and Demand Really Work & How it Impacts Rates May 19, 2022 | 11:00 AM EST FREE NSAC Members | $56 Non-Members CPE:1 Credit Hour As cooperatives consider moving from traditional to more innovative rate design structures, it is increasingly important to understand the different billing units required for each innovative design. Three-part, Four-part, Time-of-use, Critical peak, Super off-peak, and other innovative rate designs require an understanding of and access to a range of billing units. These include Non-coincident demands, Coincident demands, Time-based energy usage, KVar, and more. In this encore session from TFACC 2021, attendees will learn some of the billing units required for innovative rate designs, and explore some of the challenges involved in obtaining, using, and explaining them to members. Don’t miss out on this specialized presentation! Click here for more info.
This isn’t the first time I’ve posted about the useful resources offered by RCReports — but as it turns out, it’s been a while. Apparently I take it for granted that everyone knows about Reasonable Compensation requirements all too often, and then I regularly discover that it’s just not true.
Note: I am a loyal paid subscriber to RCReports, and receive no compensation or discounts for promoting their service or resources. I just think they’re great.
In any case, recently I was asked by a colleague to train her on the basics of Reasonable Compensation and walk through my process. I asked her to do these three pieces of homework first:
I know most non-accountants won’t bother with the 2-hour training session that walks through court cases and the history of Reasonable Compensation audits and challenges. And certainly folks who are not in the business of performing these calculations aren’t likely to bother with the 1-hour demo.
But anyone running their own corporation, and those considering electing S-corp status, will want to read about stress-testing. This is something you can do regardless of the calculation process, or how you got to the salary amount in the first place. A helpful excerpt (edited) from the article:
There are six main factors or tests (the IRS lists even more), but “applying just the first three will usually tell you whether a compensation is reasonable or not. In other words â three strikes and youâre out.”
1) Training and experience: Does $X/year seem like enough compensation for somebody who has this level of training and experience? 2) Duties and responsibilities: Does $X/year seem like enough compensation for someone with these duties and responsibilities? 3) Time and effort devoted to the business: Does $X/year seem like enough compensation for someone who worked this many hours/week?
There are different methods of determining Reasonable Compensation — yes, I’m referencing yet additional RCReports articles for details — the cost approach, market approach, and income approach. The Cost Approach generally works best for small businesses where the business owner provides multiple services for the business (wears many hats).
The key with all of these resources is to get shareholder-employees to take a closer look at their own salaries and make sure they are following IRS guidelines. Stress-testing is a great place to start, but for a more thorough approach to calculating Reasonable Compensation, I recommend contacting a CPA with background in this area who can walk you through an RC interview and help you support the amount you ultimately choose.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
Presentedby the Department of Business Affairs & Consumer Protection (BACP)
Sidewalk cafes provide restaurants an opportunity to expand their footprint to serve customers outside. This webinar will cover sidewalk cafe basics including sidewalk cafe operational conditions and requirements, as well as how to apply for a Sidewalk Cafe Permit, which is required to operate a sidewalk cafe in Chicago.
Also, check out this recording of BACP’s webinar, “How to Apply for a Sidewalk Sign Permit” on YouTube.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
This Journal of Accountancy article walks through the particular scenario where this relief — only for tax year 2021 — applies. They note that:
The relief announced Wednesday applies where:
In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates, or foreign trusts.
In tax year 2021, the domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated, or may reasonably be expected to generate foreign-source income (see Regs. Sec. 1.861-9(g)(3)).
In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders, nor did the partners or shareholders request, the information on the form or its attachments regarding:
Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
Line 20c, Form 1065, Schedules K and K-1 (controlled foreign corporations, passive foreign investment companies, 1120-F, Sec. 250, Sec. 864(c)(8), Sec. 721(c) partnerships, and Sec. 7874) (line 17d for Form 1120-S).
The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.
To learn more, I recommend this excellent Compass Tax Free 10-Minute Webinar update from 2/17/22 on the new FAQ relief for partnerships and S corporations with Thomas Gorczynski, EA USTCP, and Kevin J. Todd, EA, CPA.
(Our original blog post is below, for context and reference.)
K-2 Mountain (courtesy of Wikimedia Commons)
Yes, that photo is of K-2, the second-highest mountain on Earth, where apparently one person dies on the mountain for every four that reach the summit. (Didn’t expect that to show up in my search for a common-usage-right image of an IRS K-2 form.)
The good news is that — as frustrating and arduous as this new IRS K-2 and K-3 reporting requirement is — no one is likely to die while attempting to complete it, and therefore I think we should just all keep this extremely challenging K-2 mountain in mind before we get too frustrated about additional complexities in tax preparation.
In all seriousness, here’s the story: 1) The IRS, in an attempt to deter fraud, for 2021 began requiring all pass-through entities to disclose foreign transactions as part of the tax returns and the K-1 package to shareholders and partners. 2) Initially, the new schedules were only to be used by entities with international transactions to report. 3) In mid-January, the IRS issued revised instructions for the schedules that may require domestic partnerships and S corporations without any foreign source income or assets to prepare Schedules K-2 and K-3. 4) If even one of the partners or shareholders plans to or is required to report foreign tax credits on Form 1116, Foreign Tax Credit, the Partnership or S-Corp must prepare Schedules K-2 and K-3. 5) As a result, the complex and comprehensive “reporting requirement applies to a much larger percentage of pass-through-entity (PTE) returns than perhaps the IRS intended”, as Forbes pointed out.
âThis seems like an overly burdensome requirement to quietly clarify in the middle of filing season.â – Tom Gorczynski, EA
All is not lost. Yes, we’re talking about well-over 20 additional pages of tax forms — but it’s likely that you won’t have to fill them all out. An exception from filing Part II and Part III, Section 2, on Schedule K-3 may apply for a pass-through-entity that:
only has US-source income;
does not have income or deductions that the partners can source or allocate and apportion; and
only has limited partners owning less than 10% of the capital and profits of the partnership at all times during the tax year.
(Though the IRS clarified that a business with no foreign-source income must still file Part II (foreign tax credit limitation) and Part III (information for preparing Forms 1116 or 1118) on Schedules K-2 and K-3 if their partners have items of international tax relevance.)
From the NATP Blog: “For preparers who are handling the returns of both the partnership and the partner, the partner can choose alternatives to filing Form 1116 and triggering the Schedules K-2 and K-3 filing requirements if one of the following applies:
The partner neither paid nor accrued any foreign taxes and there was no foreign tax credit carryover for the tax year;
The foreign tax paid was under the $300 individual reporting threshold ($600 for married filing jointly) for Form 1116, or an election is made under Section 904(j) of the Tax Code to report the credit without the form;
Schedule A is used to report a deduction for foreign taxes (which also avoids the $10,000 SALT cap).
“Preparers who are not completing returns for the partner reporting foreign tax payments will need to ask the partners/shareholders directly for their information. If they fail to respond to the request, the preparer will at least have made a documented, good-faith effort to obtain the required information and should be eligible for the good-faith relief outlined in Notice 2021-39.”
Therefore, for preparers who have to file Schedules K-2 or K-3, there are three options. – One is to extend the returns, as e-filing is not available until after the current due date of both the S corporation and partnership returns. – Another option is to paper-file the return, which will cause delays in processing. – The third option (what we will likely do for those returns we cannot reasonably extend) is to prepare the K-2/K-3 forms and attach them to e-filed S-Corp and Partnership returns as a PDF. Generally the IRS is not great about referring to these attachments, and some tax software programs have problems delivering them; but at least it will show a good-faith attempt in the case of an audit.
Per Amber Gray-Fenner in Forbes, “These alternatives, while prudent, present some potentially serious unintended consequences:
The IRS may be inundated with PDF attachments that it is not prepared to process and review. PDF attachments are often separated from original returns never to be seen againâat least not until the taxpayer receives a notice looking for the âmissingâ information.
Many more PTE returns may be put on extension than would normally be the case.
Extended PTE returns mean extended 1040s, which is unsatisfactory to many taxpayers and tax professionals.”
In that same article, my colleague Fred Stein hopes “Occamâs Razor ‘kicks in and IRS realizes the unintended consequences this creates for many small businesses.’ If not, the additional work involved could cause PTE return preparation prices to increase by thirty to fifty percent.”
A summary from last week’s AICPA Town Hall:
We will be reaching out to all our S-Corp and Partnership clients to let them know about these new rules, and to ask that they obtain signed confirmation from each of their owners as to any personal requirement to file Form 1116 or another foreign-related tax form on the 1040 returns.
As you may have guessed, this unexpected new guidance will cause additional time, effort, and cost to all our small business S-Corps and Partnerships — almost none of whom actually have any foreign transaction exposure. After all the requests we’ve made of the IRS to reduce the tax preparation burden on small business owners and their CPAs, I wish I could say this is laughable.
In case that wasn’t enough for you, we’ve compiled a rich list of resources for your reading and watching enjoyment.
Compass Tax Resources: ⢠2/10/22 Free 15-Minute Webinar – discussion on the new requirements for partnerships and S corporations with Thomas Gorczynski, EA USTCP, and Kevin J. Todd, EA, CPA Compass Tax Resources: ⢠2/17/22 Free 10-Minute Webinar – update on the new FAQ relief for partnerships and S corporations with Thomas Gorczynski, EA USTCP, and Kevin J. Todd, EA, CPA
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
Last year we began requiring all clients to submit a copy of their IRS Account Transcript along with their Tax Organizer and other annual tax prep documentation.
The initial issue was that not everyone kept the Form 1444 notices regarding how much stimulus was received. Why would this matter? If a taxpayer did not receive the full amount, then they are entitled to recoup the difference on their annual tax return. (But don’t worry: if you received too much, you don’t have to pay it back — unless it was obtained fraudulently.) Not only does this issue remain for 2021, but the problem is exacerbated, because now we also have child tax credit payments to track — some folks received advances while others decided to opt out (and unlike stimulus payments, any excess child tax credit payments may have to be repaid).
In addition, we’ve also noticed quarterly estimated taxes are often reported incorrectly by clients — especially with additional complexities due to recent state legislation to get around federal limits on deducting state taxes.
We’ve come to the conclusion that the best solution to these concerns is to continue to ask clients to download their annual Account Transcript and provide it to us via secure upload. It’s free, reasonably easy, and reliable.
Instructions for obtaining the Account Transcript for folks who have already registered for an IRS online account follow — if you did this last year, you don’t need to follow all the steps in last year’s post about how to create an account. Just sign in to the system and you should be golden.
(Yes, the IRS will ask you to create a new ID.me account “as soon as possible” and you won’t be able to log in with your existing IRS username and password starting in summer 2022. But for now, no need to create a new account in the new system — the old one works just fine.)
You’ll need to select the reason you need a transcript.
In this case, you would select “Other”.
4. Leave the Customer File Number blank and click “Go”.
5. The screen will display all four types of transcript options and the available years.
6. Select “2021” under “Account Transcript” (the box in the lower-left).
Make sure you are selecting the right kind of transcript — in this case you want an Account Transcript. (Click here for information on what each of the types of transcripts are.)
And like magic, a pdf pops up in a new tab of your browser with a letter from the IRS — and if you scroll down to the bottom, there’s section detailing all the transactions you need.
At this point, print the file to pdf and save somewhere safe, along with the rest of your tax season documents.
What about state information?
To get a list of the estimated tax payments you’ve made to the state of Illinois, go to https://mytax.illinois.gov/?link=1040EPy and enter your SSN, Name, and the year (in this case 2021).
If you also made payments from a corporation or partnership, you’ll need to log into your MyTaxIllinois business account to get those.
Done! Let the tax return preparing begin!
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