Accounting & Assurance Archives

Advantages of keeping your business separate from its real estate

Accounting & Assurance|January 2, 2025

Does your business require real estate for its operations? Or do you hold property titled under your business’s name? It might be worth reconsidering this strategy. With long-term tax, liability and estate planning advantages, separating real estate ownership from the business may be a wise choice.

How taxes affect a sale

Businesses that are formed as C corporations treat real estate assets as they do equipment, inventory and other business assets. Any expenses related to owning the assets appear as ordinary expenses on their income statements and are generally tax deductible in the year they’re incurred.

However, when the business sells the real estate, the profits are taxed twice — at the corporate level and at the owner’s individual level when a distribution is made. Double taxation is avoidable, though. If ownership of the real estate is transferred to a pass-through entity instead, the profit upon sale will be taxed only at the individual level.

Safeguarding assets

Separating your business ownership from its real estate also provides an effective way to protect the real estate from creditors and other claimants. For example, if your business is sued and found liable, a plaintiff may go after all of its assets, including real estate held in its name. But plaintiffs can’t touch property owned by another entity.

The strategy also can pay off if your business is forced to file for bankruptcy. Creditors generally can’t recover real estate owned separately unless it’s been pledged as collateral for credit taken out by the business.

Estate planning implications

Separating real estate from a business may give you some estate planning options, too. For example, if the company is a family business but all members of the next generation aren’t interested in actively participating, separating property gives you an extra asset to distribute. You could bequest the business to one member and the real estate to another.

Handling the transaction

If you’re interested in this strategy, the business can transfer ownership of the real estate and then the transferee can lease it back to the company. Who should own the real estate? One option: The business owner can purchase the real estate from the business and hold title in his or her name. One concern though, is that it’s not only the property that’ll transfer to the owner but also any liabilities related to it.

In addition, any liability related to the property itself may inadvertently put the business at risk. If, for example, a client suffers an injury on the property and a lawsuit ensues, the property owner’s other assets (including the interest in the business) could be in jeopardy.

An alternative is to transfer the property to a separate legal entity formed to hold the title, typically a limited liability company (LLC) or limited liability partnership (LLP). With a pass-through structure, any expenses related to the real estate will flow through to your individual tax return and offset the rental income.

An LLC is more commonly used to transfer real estate. It’s simple to set up and requires only one member. LLPs require at least two partners and aren’t permitted in every state. Some states restrict them to certain types of businesses and impose other restrictions.

Tread carefully

It isn’t always advisable to separate the ownership of a business from its real estate. If it’s a valuable move, the right approach will depend on your individual circumstances. Contact us to help determine the best way to minimize your transfer costs and capital gains taxes while maximizing other potential benefits.

Cash or accrual accounting: What’s best for tax purposes?

Accounting & Assurance|October 3, 2024

Your businesses may have a choice between using the cash or accrual method of accounting for tax purposes. The cash method often provides significant tax benefits for those that qualify. However, some businesses may be better off using the accrual method. Therefore, you need to evaluate the tax accounting method for your business to ensure that it’s the most beneficial approach.

The current situation

“Small businesses,” as defined by the tax code, are generally eligible to use either cash or accrual accounting for tax purposes. (Some businesses may also be eligible to use various hybrid approaches.) Before the Tax Cuts and Jobs Act (TCJA) took effect, the gross receipts threshold for classification as a small business varied from $1 million to $10 million depending on how a business was structured, its industry and whether inventory was a material income-producing factor.

The TCJA simplified the definition of a small business by establishing a single gross receipts threshold. It also increased the threshold to $25 million (adjusted for inflation), expanding the benefits of small business status to many more companies. For 2024, a small business is one whose average annual gross receipts for the three-year period ending before the 2024 tax year are $30 million or less (up from $29 million in 2023).

In addition to eligibility for the cash method of accounting, small businesses enjoy simplified inventory accounting, exemption from the uniform capitalization rules and the business interest deduction limit, and several other tax advantages. Be aware that some businesses are eligible for cash accounting even if their gross receipts are above the threshold, including S corporations, partnerships without any C corporation partners, farming businesses and certain personal service corporations. Also, tax shelters are ineligible for the cash method, regardless of size.

Potential advantages

For most businesses, the cash method provides significant tax advantages. Because cash-basis businesses recognize income when it’s received and deduct expenses when they’re paid, they have greater control over the timing of income and deductions. For example, they can defer income by delaying invoices until the following tax year or shift deductions into the current year by accelerating the payment of expenses.

In contrast, accrual-basis businesses recognize income when it’s earned and deduct expenses when they’re incurred, without regard to the timing of cash receipts or payments. That means they have little flexibility to time the recognition of income or expenses for income tax purposes.

The cash method also provides cash flow benefits. Because income is taxed in the year it’s received, it helps ensure that a business has the funds it needs to pay its tax bill.

For some businesses, however, the accrual method may be preferable. For instance, if a company’s accrued income tends to be lower than its accrued expenses, the accrual method may result in lower tax liability than the cash method. Other potential advantages of using the accrual method include the abilities to deduct year-end bonuses paid within the first 2½ months of the following tax year and to defer taxes on certain advance payments.

Issues when switching methods

Even if your business would enjoy a tax advantage by switching from the accrual method to the cash method, or vice versa, it’s important to consider the administrative costs involved in making the change. For example, if your business prepares its financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP), it’s required to use the accrual method for financial reporting purposes.

Does that mean you can’t use the cash method for tax purposes? No, but it would require the business to maintain two sets of books. Changing accounting methods for tax purposes may also require IRS approval. Contact us to learn more about each method.

EIDL Program Retooled for Still-Struggling Small Businesses

Tax Prep, Planning & Strategy|October 14, 2021

For many small businesses, the grand reopening is still on hold. The rapid spread of the Delta variant of COVID-19 has mired a variety of companies in diminished revenue and serious staffing shortages. In response, the Small Business Administration (SBA) has retooled its Economic Injury Disaster Loan (EIDL) program to offer targeted relief to eligible employers.

A Brief History

The EIDL program was in place well before 2020. However, the federal government has ramped up the initiative’s visibility while trying to help small businesses during the pandemic.

With the entire country essentially declared a disaster area, the CARES Act established an enhanced EIDL program for small businesses affected by COVID-19. It offered lower interest rates, longer repayment terms and a streamlined application process.

The American Rescue Plan Act upped the ante, offering eligible companies targeted EIDL advances that are excluded from the gross income of the person who receives the funds. The law stipulates that no deduction or basis increase will be denied, and no tax attribute will be reduced, because of this gross income exclusion.

Latest EIDL Enhancements

The SBA’s most recent enhancements to the EIDL program offer “a lifeline to millions of small businesses who are still being impacted by the pandemic,” according to SBA Administrator Isabella Casillas Guzman. (Eligible employers include not only small businesses, but also qualifying nonprofits and agricultural companies in all U.S. states and territories.)

First and foremost, the loan cap has increased from $500,000 to $2 million. Eligible small businesses can use these funds for almost any operating expense, including payroll and equipment purchases. Funds can also be applied for certain debt payments. Specifically, the SBA has expanded the allowable use of EIDL funds to prepay commercial debt and pay down federal business debt.

In addition, the agency has implemented a new deferred payment period under which borrowers can wait until two years after loan origination to begin repaying their COVID-related EIDLs.

EIDL Application Details

If you believe your small business could qualify and benefit from these newly enhanced EIDLs, first identify how much money you need and how soon you need it. The SBA is offering a 30-day “exclusivity window” to approve and disburse loans of $500,000 or less. Approval and disbursement of loans of more than $500,000 will begin after this 30-day period.

The agency has also rolled out a streamlined application process that establishes “more simplified affiliation requirements” modeled after those of the Restaurant Revitalization Fund. The deadline for applications remains December 31, 2021. As is the case with any government loan, it’s better to apply earlier rather than later in case funds run out.

Help with the Process

For further details about the new and improved COVID-related EIDL program, go to sba.gov. And don’t hesitate to contact us. We can help you determine whether your small business qualifies for one of these loans and, if so, assist with completing the application process.

As always, please do not hesitate to call our offices for additional information and to speak to your representative about how this could affect your situation.

Want to Find Out what IRS Auditors know about your Business Industry?

Accounting & Assurance|September 14, 2021

In order to prepare for a business audit, an IRS examiner generally does research about the specific industry and issues on the taxpayer’s return. Examiners may use IRS “Audit Techniques Guides (ATGs).” A little-known secret is that these guides are available to the public on the IRS website. In other words, your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.

Many ATGs target specific industries or businesses, such as construction, aerospace, art galleries, architecture and veterinary medicine. Others address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.

Unique Issues

IRS auditors need to examine different types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand various industries or issues, the accounting methods commonly used, how income is received, and areas where taxpayers might not be in compliance.

By using a specific ATG, an auditor may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the business is located.

Updates and Revisions

Some guides were written several years ago and others are relatively new. There is not a guide for every industry. Here are some of the guide titles that have been revised or added this year:

Retail Industry (March 2021),
Construction Industry (April 2021),
Nonqualified Deferred Compensation (June 2021), and
Real Estate Property Foreclosure and Cancellation of Debt (August 2021).

Although ATGs were created to help IRS examiners uncover common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. For a complete list of ATGs, visit the IRS website here: http://bit.ly/2rh7umD

As always, please do not hesitate to call our offices for additional information and to speak to your representative about how this could affect your situation.

Is your Business Underusing its Accounting Software?

Accounting & Assurance|August 26, 2021

Someone might have once told you that human beings use only 10% of our brains. The implication is that we have vast, untapped stores of cerebral power waiting to be discovered. In truth, this is a myth widely debunked by neurologists.

What you may be underusing, as a business owner, is your accounting software. Much like the operating systems on our smartphones and computers, today’s accounting solutions contain a multitude of functions that are easy to overlook once someone gets used to doing things a certain way.

By taking a closer look at your accounting software, or perhaps upgrading to a new solution, you may be able to improve the efficiency of your accounting function and discover ways to better manage your company’s finances.

Revisit Software Training

The seeds of accounting software underuse are often planted during the training process, assuming there’s any training at all. Sometimes, particularly in a small business, the owner buys accounting software, hands it over to the bookkeeper or office manager, and assumes the problem will take care of itself.

Consider engaging a consultant to review your accounting software’s basic functions with staff and teach them time-saving tricks and advanced features. This is even more important to do if you’re making major upgrades or implementing a new solution.

When accounting personnel are up to speed on the software, they can more easily and readily generate useful reports and provide accurate financial information to you and your management team at any time — not just monthly or quarterly.

Commit to Continuous Improvement

Accounting solutions that aren’t monitored can gradually become vulnerable to inefficiency and even manipulation. Encourage employees to be on the lookout for labor-intensive steps that could be automated and steps that don’t add value or are redundant. Ask your users to also note any unusual transactions or procedures; you never know how or when you might uncover fraud.

At the same time, ensure managers responsible for your company’s financial oversight are reviewing critical documents for inefficiencies, anomalies and errors. These include monthly bank statements, financial statements and accounting schedules.

The ultimate goal should be continuous improvement to not only your accounting software use, but also your financial reporting.

Don’t Wait until it’s Too Late

Many business owners don’t realize they have accounting issues until they lose a big customer over errant billing or suddenly run into a cash flow crisis. Pay your software the attention it deserves, and it will likely repay you many times over in useful, actionable data. We can help you assess the efficacy of your accounting software use and suggest ideas for improvement.

As always, please do not hesitate to call our offices for additional information and to speak to your representative about how this could affect your situation.

IRS Issues ERC Guidance as Congress Mulls Early Termination

NEWS|August 13, 2021

The IRS has published new guidance on the Employee Retention Credit (ERC). The credit was created in March 2020 to encourage employers to keep their workforces intact during the COVID-19 pandemic. Notice 2021-49 addresses various issues, particularly those related to the extension of the credit through 2021 by the American Rescue Plan Act (ARPA).

The guidance comes as Congress weighs ending the ERC early to help offset the costs of the pending infrastructure bill. As of now, the credit is worth as much as $28,000 per employee for 2021, or $7,000 per quarter.

ERC essentials

The CARES Act generally made the ERC available to employers whose:

Operations were fully or partially suspended due to a COVID-19-related government shutdown order, or
Gross receipts dropped more than 50% compared to the same quarter in the previous year (until gross receipts exceed 80% of gross receipts in the earlier quarter).

The credit originally equaled 50% of “qualified wages” — including health care benefits — up to $10,000 per eligible employee from March 13, 2020, through December 31, 2020. As a result, the maximum benefit for 2020 was $5,000 per employee.

And initially, businesses couldn’t benefit from both the ERC and the popular Paycheck Protection Program (PPP). Most opted for the PPP, which, among other advantages, put money into their pockets more quickly than the credit.

In December 2020, the Consolidated Appropriations Act (CAA) provided that employers that receive PPP loans still qualify for the ERC for qualified wages not paid with forgiven PPP loans. It also extended the credit through June 30, 2021.

In addition, the CAA raised the amount of the credit to 70% of qualified wages, beginning January 1, 2021, and boosted the limit on per-employee qualified wages from $10,000 per year to $10,000 per quarter — so employers could obtain a credit as high as $7,000 per quarter per employee.

The CAA also expanded eligibility by reducing the requisite year-over-year gross receipt reduction from 50% to only 20%. And it increased the threshold for determining whether a business is a “large employer,” and therefore subject to a more stringent standard when computing the qualified wage base, from 100 to 500 employees.

The ARPA extended the ERC through the end of 2021. It also made some changes that apply solely to the third and fourth quarters of 2021.

Guidance on ARPA changes

The majority of the IRS guidance deals with issues raised by the ARPA’s ERC-related provisions, including:

Applicable employment taxes.

Under the CARES Act, employers could claim the ERC only against Social Security taxes. The guidance states that, for the third and fourth quarters of 2021, employers are entitled to claim the credit against their share of Medicare taxes, with the excess refundable.

Maximum amount.

The maximum credit of $7,000 per employee per quarter for the first and second quarters of 2021 continues to apply to the third and fourth quarters. A separate limit applies to so-called “recovery startup businesses,” though.

Recovery startup businesses.

The ARPA expanded the pool of ERC-eligible employers to include those that:

Began operating after February 15, 2020, and
Have average annual gross receipts for the three previous tax years of less than or equal to $1 million.

These employers can claim the credit without suspended operations or reduced receipts, up to $50,000 total per quarter for the third and fourth quarters of 2021.

The guidance clarifies that a taxpayer hasn’t begun operating until it has begun functioning as a going concern and performing those activities for which it was organized. It also provides that the determination of whether a taxpayer is a recovery startup business is made separately for each quarter.

Qualified wages.

The ARPA directs extra relief to “severely financially distressed employers” with less than 10% of gross receipts for 2021 when compared to the same calendar quarter in 2019. These businesses may count as qualified wages any wages paid to an employee during any calendar quarter — regardless of employer size.

Note that the ARPA prohibits “double dipping.” Wages taken into account for several business tax credits (for example, the research, empowerment zone and work opportunity tax credits, as well as credits for COVID-related paid sick and family leave) can’t also be taken into account for purposes of the ERC.

Interplay with shuttered venue and restaurant revitalization grants.

According to the guidance, recipients of a Shuttered Venue Operator Grant or a Restaurant Revitalization Fund grant may not treat any amounts reported or otherwise taken into account as payroll costs for those programs as qualified wages for ERC purposes. Such employers must retain documentation that supports the ERCs they claim.

Miscellaneous issues

The guidance addresses several other lingering issues related to the ERC for 2020 and 2021. For example, it clarifies the definition of a “full-time employee.”

The notice explains that employers needn’t include full-time equivalents when calculating the average number of full-time employees for purposes of determining whether an employer is a large or small eligible employer. But, for purposes of identifying qualifying wages, an employee’s status is irrelevant, so wages paid to non-full-time workers may be treated as qualified wages (assuming all other applicable requirements are met).

The guidance also sheds further light on the:

Treatment of tips and the Section 45B credit,
Timing of qualified wage deduction disallowance,
Alternative quarter election for 2021,
Gross receipts safe harbor, and
Exclusion of wages paid to the majority owners of corporations.

The rules regarding the last item above, which attribute ownership to owners’ family members, could significantly reduce the amount of the ERC for family-owned corporations. A footnote in the guidance indicates that even the wages paid to minority owners might end up excluded from the ERC computation.

ERC’s future is uncertain

The U.S. Senate has passed infrastructure legislation that would eliminate the ERC for the fourth quarter of 2021. However, the House of Representatives is on recess until the fall, so the fate of the credit remains uncertain.

As always, please do not hesitate to call our offices for additional information regarding the latest ERC guidance and to speak to your representative about how this could affect your situation.

bFile System Ready for RELIEF Act Sales & Use Tax Credit

NEWS|May 19, 2021

Maryland Comptroller Peter Franchot announced on Tuesday, May 18^th that the State’s bFile system is now available for qualified business owners to claim a Sales and Use Tax Credit under the Relief Act of 2021.

If vendors report $6,000 or less in gross collected sales tax in that period, $3,000 will be the tax credit. If less than $3,000 of sales tax was collected, the credit will be the amount of sales tax collected, bringing the balance owed for that period to zero.

To be eligible for the credit, business owners must file timely returns and sales collections for March, April and May cannot exceed $6,000. The returns are typically filed in April, May, and June. However, the filing deadline for those months have been extended to July 15, 2021.

Read More Here.

As always, please do not hesitate to call our offices for additional information and to speak to your representative about how this could affect your situation.

American Rescue Plan: More Details on Tax Credits Available

NEWS|April 26, 2021

The IRS and Treasury Department announced today further details of tax credits available under the American Rescue Plan. These credits aim to help small businesses and include paid leave for employees receiving COVID-19 vaccinations.

The American Rescue Plans allows for small businesses to claim refundable tax credits that reimburse them for the cost of providing paid time off for employees receiving the vaccine, providing paid time off for anytime needed to recover for the vaccine and providing paid sick and family leave due to COVID-19.

News release IR-2021-90 details these credits here. You can also find even more in depth information on tax credits available to small employers on the fact sheet provided by the IRS.

As always, please do not hesitate to call our offices for additional information and to speak to your representative about how this could affect your situation.

digital sales tax | CPAs in Baltimore County | Weyrich, Cronin & Sorra

Maryland Sales and Use Tax on Digital Products

NEWS|March 18, 2021

The Maryland legislation recently overrode Governor Hogan’s veto of House bill 932. The bill expands the current 6% sales and use tax to include the sale of digital products. Maryland recently published Business Tax Tip #29 Sales of Digital Products and Digital Code which gives a nonexclusive lists of possible digital products such as but not limited to:

A sale, subscription or license to access content online
A sale, subscription or license to use a software application
Photographs, artwork, illustrations, graphics and similar products

The release points out that the sales and use tax does not apply to the sale of a non-taxable service performed electronically unless the service results in a digital product. To view the Comptroller’s release click here.

For more details on the recent change to the sales and use tax rules please do not hesitate to call our offices for additional information and to speak to your representative about how this could affect your situation.

A reminder that the Comptrollers Office Of Maryland recently extended the Sales and Use tax deadline for sales taking place in March, April, and May of 2021 to July 15, 2021.

Important Tax Provisions of the Consolidated Appropriations Act

Tax Prep, Planning & Strategy|December 28, 2020

The Consolidated Appropriations Act package signed by President Trump on December 27^th after being passed by Congress on December 21^st contains a number of important tax provisions designed to assist many individual and business taxpayers.

Individual Stimulus checks

Subject to income limitations, eligible taxpayers will receive payments of up to $600 for each adult and $600 for each dependent. Treasury Secretary Mnuchin expects the initial direct deposits to begin arriving in taxpayers’ accounts via direct deposit the following week.

PPP loans – Additional Funding and Clarity Regarding Deductibility of Related Expenses

Certain small businesses are eligible for a second round of PPP loans, with stricter rules to determine eligibility for need based funding. Eligibility to certain industries such as local newspapers, TV and radio broadcasters, churches and faith-based organizations has been expanded.

Additionally, Congress clarified the treatment of expenses related to PPP loans forgiven or reasonably expected to be forgiven. In Notice 2020-32, IRS previously issued that such expenses were not deductible. The Consolidated Appropriations Act clarified to state that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied” for such expenses. Congress has also made changes to simplify the forgiveness application.

Other tax changes

The employment tax credit related to an employer’s portion (6.2%) of FICA taxes has been extended for certain employers.

Certain energy tax credits have been temporarily extended.

Business meals (not entertainment expenses) have been temporarily increased to 100% deductible for 2021 and 2022.

The stimulus package also contained numerous other important provisions that we will continue to monitor as additional information is released.

Questions?

Please contact a member of the WCS Tax Department with any questions.

Advantages of keeping your business separate from its real estate

Cash or accrual accounting: What’s best for tax purposes?

EIDL Program Retooled for Still-Struggling Small Businesses

A Brief History

Latest EIDL Enhancements

EIDL Application Details

Help with the Process

Want to Find Out what IRS Auditors know about your Business Industry?

Unique Issues

Updates and Revisions

Is your Business Underusing its Accounting Software?

Revisit Software Training

Commit to Continuous Improvement

Don’t Wait until it’s Too Late

IRS Issues ERC Guidance as Congress Mulls Early Termination

ERC essentials

Guidance on ARPA changes

Miscellaneous issues

ERC’s future is uncertain

bFile System Ready for RELIEF Act Sales & Use Tax Credit

American Rescue Plan: More Details on Tax Credits Available

Maryland Sales and Use Tax on Digital Products

Important Tax Provisions of the Consolidated Appropriations Act

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