It’s 2021, and Wheeler is starting the year off strong with multiple employee Promotions! After the challenges faced in 2020, we want to honor these individuals for their growth and contribution to our incredible team.
Join us in CONGRATULATING:
Dylan Ward – Promotion to Tax Manager
Evan Benevento – Promotion to Tax Manager
Anh Diep – Promotion to Senior Accountant
Jenna Schuman – Promotion to Administrative Supervisor
Thank you all for your dedication to excellence and service!
by Matt Wheeler, CPA
It is clear to many that COVID-19 has caused us to redefine where and how we work. While many of the trends toward remote work were in place prior to this year, the pandemic has massively accelerated them. There have been many positives as workers and employers everywhere see benefits in decreased commute times, increased flexibility, reduced costs, and so on. On the other hand, new problems await the unwary.
SOUTH DAKOTA V. WAYFAIR, INC.
The state tax landscape has always been confusing and convoluted. Over the years, states have naturally become more aggressive in expanding their tax base and adapting to changes in how goods and serviced are produced, delivered, and consumed. But in 2018, the Supreme Court decided South Dakota v. Wayfair, Inc., ushering in a new era of state tax changes impacting businesses in all 50 states. The Wayfair case substantially broadened the reach of states and now necessitates that companies analyze and determine whether they have nexus—a connection or link to—any given state and whether this connection is sufficient to cause the company to be liable for sales, use, payroll, income, or franchise taxes in that state or locality.
DEFINING NEXUS
For years, Public Law 86-272 was the gold standard for state tax nexus and exposure. Companies were generally not subject to taxation by a given state unless there was substantial, often physical, nexus to a state via a business establishment or employees. As the nature of how goods and services are delivered has changed over the years, and with the meteoric rise in internet-based sales and transactions, many states have now adopted economic nexus thresholds based on the Wayfair case. These states now assert that a business’ nexus or connection to that state is based on the level of economic activity, via sales of tangible property or provision of services, in that state. Physical presence is no longer required.
COVID ERA COMPLICATIONS
These trends have existed since 2018, but COVID has now ushered in new wrinkles and accelerated many of these changes. Employees have dispersed across the nation and an employer that was formerly limited to a single office in a single state may now have employees scattered across two, three, four, or more different states. This diaspora of employees has significant state tax consequences, not only to the employees themselves, but also the business. Payroll tax, benefits, sales and use taxes, and income and franchise taxes may all be impacted by these moves. Owners of pass-through entities may find themselves now being forced to file and pay tax in multiple jurisdictions. Businesses may be required to register to do business in various states, and failure to do so may result in contractual and legal problems when they discover their “right” to do business has been revoked for failure to properly register and file the various annual returns and reports required. Additionally, companies may find themselves in the unenviable position of owing sales or use taxes on sales made to customers where no sales or use tax was originally collected as is required, affecting profit margins substantially.
DUE DILIGENCE
As with any business problem, the first step is to gather facts and assess the potential extent of exposure. This is even more important for business owners who intend to exit or sell their business in the next several years. Buyers in M&A transactions are increasingly requesting warranties and representations surrounding state tax compliance efforts, and this can become a significant part of the due diligence process in a transaction. Given the impact COVID-19 has had on the national and state economies, we expect states to continue aggressively targeting any potential revenue shortfalls to help repair massive budget deficits and expanding their tax base through policies such as taxation of services.
STRATEGY MATTERS
Despite these trends, all is not lost. Many states offer voluntary disclosure programs giving businesses a chance to “come clean” with limited lookback periods and substantially reduced, or eliminated, interest and penalty regimes. Developing a proper strategy on how to tackle these issues, including determining priority and timing, are essential to minimizing overall exposure and reducing the cost of compliance.
WE CAN HELP
Other than highly localized businesses, most businesses will encounter these issues at some point in their life cycle, or currently have unknown exposure because of the remote workforce issues discussed above. Our firm can assist you in analyzing and quantifying your state tax exposure, preparing and entering into voluntary disclosure agreements with states to get back into compliance, and developing a game plan for staying compliant moving forward. If you are interested in learning more about how your business may be impacted by these changes, or would like to learn more about some of the specific issues discussed in this article, you may reach us by using the contact form on our website or following us on social media.
Matt Wheeler, CPA is the Managing Partner of Wheeler Accountants LLP, a full service accounting firm located in the heart of Silicon Valley. Matt works primarily with individuals on comprehensive tax strategies, specializing in equity compensation, serial entrepreneurs, venture capitalists and ultra high net worth individuals. He is also the co-host of the Avocado Toast Podcast – a Podcast targeting HENRYs (high earner not right yet) and millennials helping them make smart financial decisions.
While there have always been payment options available from the IRS to help taxpayers struggling to pay tax debts, the new IRS Taxpayer Relief Initiative was put into place to expand these options and offer relief during the pandemic. These revised COVID-related collection procedures will help taxpayers, especially those who have a record of filing their returns and paying their taxes on time.
These types of relief are not automatic. Taxpayers need to request payment relief by contacting the number on their balance due notice or responding in writing.
Highlights of the Taxpayer Relief Initiative
If you owe taxes to the IRS, don’t hesitate to contact the office about your options. Help is just a phone call away.
San Jose: (408) 252-1800
Watsonville: (831) 726-8500
As always, taxpayers should be aware of several key items involving credits, deductions, and refunds when filing their tax returns. Let’s take a look:
1. Recovery Rebate Credit/Economic Impact Payment. In January, the Treasury Department and the IRS began sending the second round of Economic Impact Payments (EIP2) to millions of Americans as part of the implementation of the Coronavirus Response and Relief Supplemental Appropriations Act. As with the first round of Economic Impact Payments (EIP1), taxpayers don’t need to take any action to receive these payments.
Taxpayers who didn’t receive an advance payment should review the eligibility criteria when they file their 2020 taxes because many people, including recent college graduates, may be eligible for a credit.
Taxpayers who received an Economic Impact Payment should have received Notice 1444, Your Economic Impact Payment, and should keep it with their 2020 tax records.
Individuals who received the full amount for both Economic Impact Payments do not need to complete information about the Recovery Rebate Credit on their 2020 Form 1040 or 1040-SR because they’ve already received the full amount of the Recovery Rebate Credit as advance payments.
Eligible individuals who did not receive an Economic Impact Payment – either the first or the second payment – can claim a Recovery Rebate Credit when filing their 2020 Form 1040 or 1040-SR this year. They may be eligible to claim the Recovery Rebate Credit on their tax year 2020 federal income tax return if:
2. Option to Use Prior Year Income Amounts. Also new this year is the option to use prior year income amounts (2019) when computing the Earned Income Tax Credit and the Additional Child Tax Credit.
3. Interest on Refunds is Taxable. Taxpayers who received a federal tax refund in 2020 may have been paid interest. Refund interest payments are taxable and must be reported on federal income tax returns. In January 2021, the IRS will send Form 1099-INT, Interest Income to anyone who received interest totaling $10 or more.
4. Charitable Deductions. In 2020, taxpayers who don’t itemize deductions may take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying organizations. Please note that this amount applies whether filing individual or joint returns. In 2021, this amount increases to $600 for joint filers ($300 for single filers).
5. Virtual Currency. If in 2020, you engaged in a transaction involving virtual currency, you will need to answer the question on page 1 of Form 1040 or 1040-SR. In 2019, this question was on Schedule 1.
6. Form 1099-NEC. Individuals may receive Form 1099-NEC, Nonemployee Compensation, rather than Form 1099-MISC, Miscellaneous Income, if they performed certain services for and received payments from a business in 2020.
Don’t hesitate to contact the office with any questions or concerns about these and other tax changes related to the pandemic.
San Jose: (408) 252-1800
Watsonville: (831) 726-8500
Are you wondering if there’s a hard and fast rule about what income is taxable and what income is not taxable? The quick answer is that all income is taxable unless the law specifically excludes it. But as you might have guessed, there’s more to it than that.
Taxable income includes any money you receive, such as wages, tips, and unemployment compensation. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.
Here are some types of income that are usually not taxable:
In addition, some types of income are not taxable except under certain conditions, including:
If you get tips from customers, that income is subject to taxes. Here’s what you should keep in mind:
1. Tips are taxable. You must pay federal income tax on any tips you receive. The value of noncash tips, such as tickets, passes or other items of value are also subject to income tax.
2. Include all tips on your income tax return. You must include the total of all tips you received during the year on your income tax return, such as tips received directly from customers, tips added to credit cards, and your share of tips received under a tip-splitting agreement with other employees.
3. Report tips to your employer. If you receive $20 or more in tips in any one month from any one job, you must report your tips for that month to your employer. The report should only include cash, check, debit, and credit card tips you receive. Your employer is required to withhold federal income, Social Security, and Medicare taxes on the reported tips. Do not report the value of any noncash tips to your employer.
4. Keep a daily log of tips. Use the Employee’s Daily Record of Tips and Report to Employer (IRS Publication 1244) to record your tips.
Bartering is the trading of one product or service for another. Small businesses sometimes barter to get products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services. Typically, there is no exchange of cash.
If you barter, the value of products or services from bartering is taxable income. Here are four facts about bartering that you should be aware of:
1. Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The exchange must give a copy of the form to members who barter and file a copy with the IRS.
2. Bartering income. Barter and trade dollars are the same as real dollars for tax purposes and must be reported on a tax return. Both parties must report as income the fair market value of the product or service they get.
3. Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes, or excise taxes on their bartering income.
4. Reporting rules. How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.
If you have any questions about taxable and nontaxable income, don’t hesitate to contact the office today.
San Jose: (408) 252-1800
Watsonville: (831) 726-8500
1. Standard Deduction for Seniors. If you and/or your spouse are 65 years old or older and do not itemize your deductions, you can take advantage of a higher standard deduction amount. There is an additional increase in the standard deduction if either you or your spouse is blind.
2. Credit for the Elderly or Disabled. If you and/or your spouse are either 65 years or older–or under age 65 years old and are permanently and totally disabled–you may be able to take the Credit for Elderly or Disabled. If you are under age 65, you must have your physician complete a statement certifying that you had a permanent and total disability on the date you retired. You must also have taxable disability income that meets certain requirements. The Credit is based on your age, filing status, and income.
You may only take the credit if you meet the following:
In 2020, your adjusted gross income (AGI) on Form 1040 (or Form 1040-SR) line 11 must be less than $17,500 ($20,000 if married filing jointly and only one spouse qualifies), $25,000 (married filing jointly and both qualify), or $12,500 (married filing separately and lived apart from your spouse for the entire year).
and
The nontaxable part of your Social Security or other nontaxable pensions, annuities, or disability income is less than $5,000 (single, head of household, or qualifying widow/er with dependent child); $5,000 (married filing jointly and only one spouse qualifies); $7,500 (married filing jointly and both qualify); or $3,750 (married filing separately and lived apart from your spouse the entire year).
3. Retirement Account Limits Increase. Once you reach age 50, you are eligible to contribute (and defer paying tax on) up to $26,000 in 2020 (and in 2021). The amount includes the additional $6,500 “catch up” contribution (2020 and 2021) for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan.
4. Early Withdrawal Penalty Eliminated. If you withdraw money from an IRA account before age 59 1/2, you generally must pay a 10 percent penalty (there are exceptions – call for details); however, once you reach age 59 1/2, there is no longer a penalty for early withdrawal. Furthermore, if you leave or are terminated from your job at age 55 or older (age 50 for public safety employees), you may withdraw money from a 401(k) without penalty. You will, however, still have to pay tax on the additional income.
5. Higher Income Tax Filing Threshold. Taxpayers who are 65 and older are allowed an income of $1,650 more ($2,600 married filing jointly) in 2020 before they need to file an income tax return. In other words, older taxpayers age 65 and older with income of $14,050 ($27,400 married filing jointly)in 2020 or less may not need to file a tax return.
Don’t hesitate to call if you have any questions about these and other tax deductions and credits available for older Americans.
San Jose: (408) 252-1800
Watsonville: (831) 726-8500
Whether you are starting a new job or reassessing your financial situation, a new year often means a fresh start. Why not get the new tax year off to a good start as well?
One way people can do this is by checking their federal income tax withholding using the Tax Withholding Estimator on IRS.gov. This online tool is useful because it helps employees avoid having too much or too little tax withheld from their wages. It also helps self-employed people make accurate estimated tax payments. Having too little withheld can result in an unexpected tax bill or even a penalty at tax time, while having too much withheld results in less money in your pocket.
Taxpayers can use the results from the Tax Withholding Estimator to determine if they should:
The Tax Withholding Estimator asks taxpayers to estimate:
The Tax Withholding Estimator does not ask for personally identifiable information, such as a name, Social Security number, address, and bank account numbers. Also, the IRS doesn’t save or record the information entered in the Estimator.
Before using the Estimator, taxpayers should gather their 2019 tax return, most recent pay stubs, and any income documents. These documents will help taxpayers estimate 2021 income and answer other questions asked during the process.
Most income is taxable, including unemployment compensation, refund interest, and income from the gig economy and virtual currencies. Therefore, taxpayers should also gather any documents from these types of earnings, such as W-2s, Forms 1099 from banks and other payers, and Form 1099-NEC. Forms 1095-A, Health Insurance Marketplace Statement may also be useful for those claiming the premium tax credit.
As a reminder, the Tax Withholding Estimator results will only be as accurate as the information entered by the taxpayer. People with more complex tax situations, including taxpayers who owe alternative minimum tax or certain other taxes, and people with long-term capital gains or qualified dividends, should consult a qualified tax professional.
San Jose: (408) 252-1800
Watsonville: (831) 726-8500
The Consolidated Appropriations Act of 2021 (Act) was signed into law on December 27, 2020 and has significant enhancements and improvements related to the Employee Retention Credit (ERC). ERC was established by the CARES Act on March 27, 2020. The ERC is designed to encourage employers (including nonprofits) to keep employees on payroll and continue providing health benefits during the pandemic. The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts.
Employers may use ERCs to offset federal payroll tax deposits.
2020 ERC
The Act makes the following retroactive changes to the ERC, which apply during the period March 13, 2020 through December 31, 2020:
2021 ERC (Extended to December 31, 2021)
In addition to the retroactive changes listed above, the following changes to the ERC apply from January 1 to December 31, 2021, which was extended from June 30, 2021 by the American Rescue Plan Act of 2021 (ARPA):
Increased Credit Amount
Expanded Eligibility
The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019.
Determination of Qualified Wages
Advance Payments
The Act may provide significant opportunities for your company. However, the interaction between the Act, the CARES Act and various Internal Revenue Code sections is complicated, so professional advice may be needed.
Wheeler Accountants is here to support businesses and nonprofits navigate the various credits and loans available in the latest round of stimulus to maximize all opportunities in these uncertain times.
The Consolidated Appropriations Act of 2021 (Act) was signed into law on December 27, 2020 and included $284 billion for a second round of the Paycheck Protection Program (PPP2). This will provide struggling businesses access to much needed cash to continue operations.
The new bill has made several key changes which make it easier to apply for and use a PPP loan.
Eligibility for a PPP2 Loan:
Loan Calculation:
Expansion of Eligible Expenses:
The initial PPP program allowed recipients to spend loan proceeds on payroll costs, rent, interest, and utilities.
PPP2 has expanded the eligible uses:
Streamlined Forgiveness:
There is a streamlined one-page application for forgiveness available for loans of $150,000 or less.
Wheeler Accountants is here to support businesses and nonprofits navigate the various credits and loans available in the latest round of stimulus to maximize all opportunities in these uncertain times.
Wheeler Accountants is proud to announce Jenna Schuman as this quarter’s star employee!
Jenna is an admin team old hand who wields leadership skills and a deep understanding of firm procedures to guide her colleagues through challenges. Early this year, she oversaw the timely delivery of hundreds of tax organizers despite COVID-19 imposed changes. She also carries an unwavering positive attitude and uses encouragement to keep spirits up during challenging times. Last year, Jenna coordinated the firm’s “post October 15th virtual celebration,” bringing everyone together for fun trivia and games – it was a huge hit! We value her expertise, resilience and commitment to the team.
Congratulations to Jenna!
