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 – three strikes and you’re 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.
“This seems like an overly burdensome requirement to quietly clarify in the middle of filing season.” – 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 again—at least not until the taxpayer receives a notice looking for the “missing” 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 “Occam’s 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.
They were effective in getting a bi-partisan group of nearly 200 members of Congress to send a letter to the US Treasury Secretary requesting the IRS implement the following:
Halt automated collections from now until at least 90 days after April 18, 2022;
Delay the collection process for filers until any active and pending penalty abatement requests have been processed;
Streamline the reasonable cause penalty abatement process for taxpayers impacted by the COVID-19 pandemic without the need for written correspondence;
Provide targeted tax penalty relief for taxpayers who paid at least 70 percent of the tax due for the 2020 and 2021 tax year; and
Expedite processing of amended returns and provide TAS and congressional caseworkers with timely responses.”
The IRS identified the suspended letters and notices as:
CP80, notice of an unfiled tax return. The IRS sends this when it has credited payments or other credits to the taxpayer’s account but has not received a tax return for the tax period.
CP59, unfiled tax return, first notice. The IRS sends this when it has no record of a prior-year return’s having been filed. The Spanish-language version, CP759, is included.
CP516, unfiled tax return, second notice. This is a request for information on a delinquent return for which there is no record of filing. The Spanish-language version, CP616, is included.
CP518, final notice — return delinquency. The Spanish-language version, CP618, is included.
CP501, balance due, first notice. This letter is a reminder of an outstanding balance on the taxpayer’s accounts.
CP503, balance due, second notice.
CP504 balance due, third and final notice. This also is a notice of intent to levy.
2802C, withholding compliance letter. This letter notifies taxpayers whom the IRS has identified as having underwithheld taxes from their wages, with instructions on correcting their withholding amount.
CP259, business return delinquency. The IRS has no record of a prior-year return’s having been filed. The Spanish-language version, CP959, is included.
CP518, final notice of a business return delinquency. The Spanish-language version, CP618, is included.
Per the Journal of Accountancy: “How long the letters and notices will be suspended or at what point the backlog can be considered sufficiently cleared to resume them remains unclear. The news release Feb. 9 said the IRS “will continue to assess the inventory of prior year returns to determine the appropriate time” to start sending them again. And there has been no mention of relieving taxpayers from their obligation to file returns or pay taxes that are the subject of the letters and notices, if those returns and taxes are indeed unfiled and unpaid.”
While this is a welcome step, it falls seriously short of what is needed.
A key takeaway: “What we’re trying to do with these recommendations is to lessen the need to reach out to the IRS. In theory, if we’re having to call the IRS less then the IRS will be able to get to people who have other types of problems and get those problems resolved.”
In testimony before the House Ways and Means Committee on Tuesday, National Taxpayer Advocate Erin Collins noted that as of late December, the IRS had a backlog of 6 million unprocessed individual returns and 2.3 million unprocessed amended individual returns. In addition, more than 2 million Forms 941, Employer’s Quarterly Federal Tax Return, and its amended version remained unprocessed. Many of the latter included claims of the employer retention credit emergency pandemic relief provision.
But all this isn’t enough — they need to hear actual stories from real taxpayers about what you’ve gone through. If you had a challenge with the IRS in the past couple years, and especially if you have an ongoing issue, please contact your Senators and Representatives to tell your personal story. This generally moves them to action, and what we need now is continued and increased pressure on the IRS to make short-term immediate changes that will affect the here-and-now of this tax season.
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!
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. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
JOINT READINESS SUMMIT: This Friday, February 4 from 9:00AM to 4:00PM
Join the City of Chicago, Cook County, and State of Illinois leaders as well as other experts to learn about what it takes to be “ready” to apply for grants and contracts funded by American Rescue Plan Act (ARPA) and other economic recovery funding streams.
This event will take place via Zoom and will be simultaneously streamed on YouTube. Meeting information will be sent via email prior to the event. ASL interpretation and closed captioning will be provided.
Learn about the Chicago Recovery Plan — the City’s plan to amplify once-in-a-generation federal funding to create an equity-based investment strategy to catalyze a sustainable economic recovery from the COVID-19 pandemic. The funding under the Chicago Recovery Plan, which includes funding from the American Rescue Plan Act and over $600 million in local bond funds, is allocated alongside all other available resources in the City budget to maximize this opportunity over the next 3-5 year funding period. The initiatives and strategic priorities that make up the Chicago Recovery Plan were a result of several stages of community engagement and input during the 2022 budget development process. The list of current funding opportunities can be found here: Funding Opportunities (chicago.gov)
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.
In an already unprecedented year, the IRS is taking an unprecedented approach toward managing taxpayer expectations, and with good reason: with tax season officially beginning this coming January 24th, the IRS is dealing with a severe lack of staffing — facing workforce headcounts at 1970s levels — and a backlog of tax returns from the past two years. They say to expect frustration this tax season.
The IRS has been dealing with budget shortages for many years now, and Covid forced their mailrooms to close down for months at a time, creating a massive backlog from which they have not yet recovered. Add to that the unbelievable number of new demands placed upon the agency: three rounds of stimulus payments, Employee Retention Credits for both 2020 and 2021, and demands for guidance in an unbelievable number of groundbreaking areas of code… it is certainly understandable that they would not be able to meet taxpayer needs.
So what can taxpayers do to avoid additional problems? Filing electronically with direct deposit, and avoiding a paper tax return — at almost any cost — is more important than ever this year. Additionally, those who received an Economic Impact Payment or an advance Child Tax Credit last year should be especially careful to order an IRS transcript ahead-of-time to confirm these amounts before filing a return. (We are requiring all clients to submit both federal and state transcripts this year, in their own interest.)
Also, keep in mind that by law, the IRS cannot issue a refund involving the Earned Income Tax Credit or Additional Child Tax Credit before mid-February, though eligible people may file their returns beginning on January 24. The law provides this additional time to help the IRS stop fraudulent refunds from being issued.
Due to the Emancipation Day holiday falling on Friday, April 15th, the filing deadline to submit 2021 tax returns or an extension to file is Monday, April 18, 2022. Taxpayers requesting an extension will have until Monday, Oct. 17, 2022, to file (but not an extension to pay; make sure to pay an estimate of tax with your extension).
The American Institute of CPA’s VP of Tax, Ed Karl, has repeatedly shared in AICPA Town Halls and articles that the IRS Commissioner himself testified that during busy season the IRS gets 1500 calls per second — this translates into their only being able to answer 2% of calls. “No, that is not a typo.” The AICPA strongly supports penalty relief measures that are fair, reasonable and practical, and would mitigate the negative effect of the coronavirus on taxpayers and require less contact with the IRS. Such an approach would alleviate the daily struggles that taxpayers, their advisers and the IRS face. Specifically, the AICPA urges Treasury and the IRS to:
Stop compliance actions until the IRS is prepared to devote the necessary resources for a proper and timely resolution of erroneous notices, missing refunds and other matters. At a minimum, stop automatic collections at least for 90 days after the filing deadline.
Align requests for account holds with the time it takes the IRS to process any penalty abatement requests.
Provide taxpayers with targeted relief from underpayment of estimated tax penalty and the late payment penalty.
Offer a COVID-19 reasonable cause relief, similar to the procedures of first-time abatement and generally facilitate the easier adoption of reasonable cause relief.
In the meantime, here are several important dates from Tax Practice Advisor that taxpayers should keep in mind for this year’s filing season:
January 14: IRS Free File opens. Taxpayers can begin filing returns through IRS Free File partners; tax returns will be transmitted to the IRS starting January 24. Many tax software companies also are accepting tax filings in advance.
January 18: Due date for tax year 2021 fourth-quarter estimated tax payments.
January 24: IRS begins 2022 tax season. Individual 2021 tax returns begin being accepted and processing begins.
January 28: Earned Income Tax Credit Awareness Day to raise awareness of valuable tax credits available to many people – including the option to use prior-year income to qualify.
April 18: Due date to file 2021 tax return or request extension and pay tax owed.
April 19: Due date to file 2021 tax return or request extension and pay tax owed for those who live in MA or ME due to Patriots’ Day holiday.
October 17: Due date to file for those requesting an extension on their 2021 tax returns.
Best of luck — and please remember to be kind and patient with your tax preparer and agency representatives. We’re all human beings struggling with an imperfect system during a difficult time.
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 step-by-step instructions I painstakingly wrote up earlier this year for making business replacement income tax estimated and extension payments are now out-of-date, because IDOR revamped their MyTaxIllinois website in September (grrrrr). So here are the basic instructions (screenshots are coming soon, but this will have to do for now):
— Log into the business’s My Tax IL account — On the ‘Summary’ tab, look for the ‘Business Income Tax’ section — Click on the link for ‘View more account options’
There are two ways to do it from here; the first is: — In the ‘Account Options’ section, click the link for ‘Make An Estimated Payment’ — Select the period you want to pay (which is 12/31/2021 for tax year 2021 — choose a later period if paying estimated taxes for 2022) — Click the first ‘Add Payment’ hyperlink in the Payment Schedule table for each payment you would like to schedule. — If your payment information is saved in MyTax Illinois, then in the ‘Choose’ tab you can select the dropdown under ‘Payment Channel’ — Otherwise, select ‘New’ and enter your company bank info. — In either case, on the right where it says ‘Payment’, you can change the payment’s debit date and enter the amount. — Click Submit, and re-enter your password for security purposes
Alternatively: — In the ‘Periods and Submissions’ section, click the link for ‘View Account Periods’ — Click the 12/31/2021 link so that your payment is applied to tax year 2021 (or a later period if paying 2022 estimated quarterly taxes) — In the upper right corner of this page, click the ‘Make A Payment’ link — Select the ‘Bank Account Debit’ link — Click the IL-1120-ST Payment link (ST denotes a “Small Business” payment) — Enter the amount you want to pay in the Amount and Confirm Amount fields — Click Submit, and re-enter your password for security purposes
Congrats, you did it!
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.
With one week left before year-end, it’s possible that you are among the folks who received an email (below) back in October but hasn’t yet reported to the SBA on the eligible expenses incurred so far. This blog post (with a 20-min video walking you through the whole process) is our suggestion of how to translate the info you already have in QuickBooks into a format that will easily conform to the Restaurant Revitalization Award Portal requirements.
Sample email from SBA regarding RRF year-end reporting.
Spoiler alert: the process takes more than 5 minutes. It can easily take an hour or more. The actual entering of data into the SBA RRF portal is the part that only takes 5 or so minutes.
Our recommendation is to download the free Restaurant Revitalization Fund Tracker from the American Institute of CPAs (AICPA) website (like their PPP Forgiveness Calculator, you do have to register for an account, but there’s no charge). However, instead of entering each individual transaction on the form (as it’s designed for you to do), our suggested shortcut is to take the information you already have in your QuickBooks file and enter each category as one line — then subtract all the non-RRF grants and assistance received, so that you’re not double-dipping.
The RRF period runs from February 15, 2020 — the very beginning of the pandemic — to March 11, 2023. The year-end reporting is just a progress report of what you’ve spent so far that is eligible for RRF program fund allocation. So we suggest you run a Profit & Loss for your company for the period of February 15, 2020 all the way through November 30, 2021 (or whatever your most recently reconciled month-end is), and use those numbers to report what has been spent so far. Then enter the non-RRF grant funds as negative numbers on the same Expense Tracker tab, so that they net against each other. The result will be the data you submit to the SBA at restaurants.sba.gov once you log in to your portal.
Step 1 – download the AICPA RRF Tracking Tool Step 2 – enter the name of your company in the Summary tab, cell A9 Step 3 – enter the RRF amount in the Expense Tracker tab, cell C6 Step 4 – run your Profit & Loss from 2/15/2020-11/20/2021 Step 5 – export to Excel and save to your RRF file folder Step 6 – on the Expense Tracker tab, enter summary amounts from the Profit & Loss for Payroll, Rent, Utilities, Food & Beverage, Maintenance, Supplies, Covered Supplier Costs, and Business Operations Expenses
Tip: for now, skip Mortgage Payments, Debt Service, Outdoor Seating Construction, and Depreciation, or ask your accountant for help with these, as they are usually on the Balance Sheet or in the Non-Operating Expense section of the Profit & Loss, and are therefore harder to DIY.
Tip: Business Operations Expenses are all operating expenses that are not already accounted for in one of the other categories.
Step 7 – IMPORTANT: enter all the non-RRF grants and financial assistance as negative amounts on the Expense Tracker tab — this is to prevent any double-dipping Step 8 – go to restaurants.sba.gov and log in Step 9 – enter your name, address, EIN, phone, and email (if this information is not already there) Step 10 – enter the amounts from the Summary tab — Note: you cannot enter more than the total RRF grant, so you may need to reduce one or more of the categories so that you don’t exceed the total. Step 11 – if you have allocated all the RRF funds, certify as such — you will not be required to repeat this progress report next year; if you have not allocated all the RRF funds, you will be able to “Save” but not “Submit”.
If you have not allocated all the funds yet, then follow this same process next year by December 31, 2022 — you can run the Profit & Loss from 12/1/2021-11/30/2022 at that point and follow the same approach. Most folks will have sufficient eligible expenses from 2/15/2020-11/30/2021 to “use up” the whole RRF grant, but after subtracting other grant income from expenses, may find that they still have a balance left over that they can allocate costs to when reporting at the end of 2022.
You have until March 11, 2023 to allocate all the funds (aka spend them on operating expenses, and until April 30, 2023 for final reporting. If it turns out you didn’t have enough eligible expenses from 2/15/20-11/30/21 using Profit & Loss Operating Expenses, then take some time to work with your accountant to determine if you have debt service, mortgage payments, capital expenses for outdoor seating, or depreciation that counts. You can report these in next year’s RRF Program Post-Award Report, along with next year’s Profit & Loss Operating Expenses. In all cases: make sure to subtract all other grant income from expenses so you are not double-dipping!
23-minute video walking you through the whole process — Merry Christmas!
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.
In a December 17th IAAI tax update webinar, the Illinois Department of Revenue (IDOR) walked through instructions for claiming a new “SALT” tax benefit signed into law in September, and in today’s AICPA Town Hall, the importance of making these payments before year-end was underscored. This new law is a workaround for individual taxpayers who are otherwise unable to benefit from a full deduction on state tax payments on pass-through income from their businesses.
As a result, we (along with probably thousands of other CPA firms) have made a list of our own pass-through clients (aka S-Corps and Partnerships) who might benefit from this increased deduction, and we’re scrambling to calculate estimates and reach out to them to recommend these payments be made by 12/31.
So, what the heck is SALT? And why have the deduction rules changed?
SALT stands for “state and local taxes”, and they are generally deducted by individual taxpayers on their annual 1040 tax return. Before 2018, taxpayers could deduct these taxes by itemizing them on Schedule A.
However, the Tax Cuts & Jobs Act limited this to $10,000. This cap was likely to be removed with the Build Back Better Act, but it appears that legislation will not be passed before year-end after all.
Many states, including Illinois, have passed legislation allowing these taxes to be paid at the business level, on behalf of the shareholders and partners. Since these companies “pass-through” their income to owners, they are known as Pass-Through Entities (PTEs). The PTE does not have a cap on this type of tax, so it reduces both federal and state income and also allows the full deduction.
Why are we all scrambling to do this before year-end?
Usually, estimated state tax payments are paid by the individual and are due 4/15, 6/15, 9/15 and 1/15, with any balance remaining payable by the following 4/15. The IL state law was not passed until after estimated tax deadlines for the first three quarters were already paid. And a December 20 article in Journal of Accountancy, as well as the aforementioned AICPA Town Hall from earlier today, suggest that the IRS guidance requires the business pay the tax by year-end, not by 1/15.
From The Journal of Accountancy: Crucially, a specified income tax payment is one the PTE “makes … during a taxable year” in computing its taxable income “for the taxable year in which the payment is made” (Notice 2020-75, Section 3.02(2)). Even though Sec. 164(a) provides that the SALT deduction is for the tax year in which taxes are “paid or accrued,” the more restrictive, literal application of the notice to taxes paid is the safer course, advocates say.
To get the largest tax benefit from the new law, businesses would want to pay in the entire state tax liability for the year by 12/31, even if the owners have already paid quarterly estimated taxes. In other words, take the company’s full taxable income for the year (which you won’t know before 12/31, but this is where estimates come in) times 4.95% (IL flat tax rate for individuals). The resulting overpayment would be refunded to the taxpayer upon filing their personal tax return.
Not all businesses will have the cash to do this, but to the extent it can be paid, it is certainly a smart tax-reduction move.
Okay, then how do we make the payments?
The step-by-step instructions I painstakingly wrote up earlier this year for making business replacement income tax estimated and extension payments are now out of date, because IDOR revamped their MyTaxIllinois website in September (grrrrr). So here are the basic instructions (a blog post with screenshots is coming soon, but this will have to do for now):
— Log into the business’s My Tax IL account — On the ‘Summary’ tab, look for the ‘Business Income Tax’ section — Click on the link for ‘View more account options’
There are two ways to do it from here; the first is: — In the ‘Account Options’ section, click the link for ‘Make An Estimated Payment’ — Select the period you want to pay, which is 12/31/2021 — Click the first ‘Add Payment’ hyperlink in the Payment Schedule table for each payment you would like to schedule. — If your payment information is saved in MyTax Illinois, then in the ‘Choose’ tab you can select the dropdown under ‘Payment Channel’ — Otherwise, select ‘New’ and enter your company bank info. — In either case, on the right where it says ‘Payment’, you can change the payment’s debit date and enter the amount. — Click Submit, and re-enter your password for security purposes
Alternatively: — In the ‘Periods and Submissions’ section, click the link for ‘View Account Periods’ — Click the 12/31/2021 link so that your payment is applied to tax year 2021 — In the upper right corner of this page, click the ‘Make A Payment’ link — Select the ‘Bank Account Debit’ link — Click the IL-1120-ST Payment link (ST denotes a “Small Business” payment) — Enter the amount you want to pay in the Amount and Confirm Amount fields — Click Submit, and re-enter your password for security purposes
Best of luck, and… Happy New Year!
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