Selling a small to medium-sized business is a complex venture, and many business owners are not aware of the tax consequences.

If you’re thinking about selling your business the first step is to consult a competent tax professional. You will need to make sure your financials in order, obtain an accurate business valuation to determine how much your business is worth (and what the listing price might be) and develop a tax planning strategy to minimize capital gains and other taxes to maximize your profits from the sale.

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If your child is a student with a summer job, your child’s income over the summer is considered taxable income. Here’s what they should know:

Form W-4. When anyone gets a new job, they need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Employers use this form to calculate how much federal income tax to withhold from the new employee’s pay. The Withholding Calculator on IRS.gov helps taxpayers fill out this form.

Wages. While students may earn too little from their summer job to owe income tax, employers usually must still withhold Social Security and Medicare taxes from their pay. Generally, they will receive that money back as a refund if they file a federal and state tax return next spring.

Tips. If your child is working as a waiter or a camp counselor, they may receive tips as part of their summer income. Tip income is taxable and is, therefore, subject to federal income tax as well. They should keep a daily log to report tips accurately and must report cash tips to their employer for any month that totals $20 or more.

Income from Odd Jobs. Many students take on odd jobs such as babysitting or mowing lawns over the summer to make extra cash. If this is your child’s situation, you should keep in mind that earnings are considered income from self-employment. If a student is self-employed, Social Security and Medicare taxes may still be due and are generally paid by the student.

Self-employment Tax. If your child has net earnings of $400 or more from self-employment (see above), they also have to pay self-employment tax. Anyone with church employee income of $108.28 or more must also pay self-employment tax. This tax pays for benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed just as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages.

Reserve Officers’ Training Corps (ROTC) Pay: If your child participates in advanced training as an ROTC student and receives a subsistence allowance for food and lodging, it is generally not taxable. For example, active duty pay, pay received during a summer advanced camp, is taxable, however.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

The first monthly payment of the expanded and newly-advanceable Child Tax Credit (CTC) from the American Rescue Plan will be made on July 15. Roughly 39 million households – nearly 90 percent of children in the United States – are slated to begin receiving monthly payments without any further action required.

The increased CTC payments will be made on the 15th of each month unless the 15th falls on a weekend or holiday. Families who receive the credit by direct deposit can plan their budgets around receipt of the benefit. Eligible families will receive a payment of up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 and above.

The American Rescue Plan increased the maximum Child Tax Credit in 2021 to $3,600 for children under the age of 6 and to $3,000 per child for children between ages 6 and 17. The American Rescue Plan is projected to lift more than five million children out of poverty this year, cutting child poverty by more than half.

Households covering more than 65 million children will receive the monthly CTC payments through direct deposit, paper check, or debit cards, and IRS and Treasury are committed to maximizing the use of direct deposit to ensure fast and secure delivery. While most taxpayers will not be required to take any action to receive their payments, Treasury and the IRS will continue outreach efforts with partner organizations over the coming months to make more families aware of their eligibility.

Today’s announcement represents the latest collaboration between the IRS and Bureau of the Fiscal Service—and between Treasury and the White House American Rescue Plan Implementation Team—to ensure help quickly reaches Americans in need as they recover from the COVID-19 pandemic. Since March 12, the IRS has also distributed approximately 165 million Economic Impact Payments with a value of approximately $388 billion as a part of the American Rescue Plan.

Don’t hesitate to call if you need more information about this important benefit for families with children.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Taxpayers can start checking their tax refund status within 24 hours after receiving an e-filed return. The easiest and most convenient way to do this is by using the Where’s My Refund? Tool on the IRS website. The tool also provides a personalized refund date after the return is processed and a refund is approved.

There are two ways to access the Where’s My Refund? Tool – visiting IRS.gov or downloading the IRS2Go app. To use the tool, taxpayers will need the following information:

• Their Social Security number or Individual Taxpayer Identification number
• Tax filing status
• The exact amount of the refund claimed on their tax return

The tool displays progress in three phases: when the return was received, when the refund was approved, and when the refund was sent. When the status changes to approved, this means the IRS is preparing to send the refund as a direct deposit to the taxpayer’s bank account or directly to the taxpayer in the mail, by check, to the address used on their tax return.

The IRS updates the Where’s My Refund? Tool once a day, usually overnight, so taxpayers don’t need to check the status more often than that. Calling the IRS won’t speed up a tax refund. The information available on Where’s My Refund? is the same information available to IRS telephone assistors.

Taxpayers should keep in mind that they need to allow time for their financial institution to post the refund to their account or for it to be delivered by mail. As always, please contact the office if you have any questions about tax refunds, tax returns, or any other tax matters. Help is just a phone call away.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

The American Rescue Plan Act (ARPA), passed in March 2021, increased the child tax credit benefit for the 2021 tax year and simultaneously directed the IRS to deliver half of the amount that families are eligible for in monthly checks beginning in July. The advanced payments are worth up to $300 per month per child under age 6, and up to $250 for each child ages 6 to 17.

Typically, the child tax credit is claimed when filing your annual tax return on form 1040. The Biden administration has made it a priority to deliver relief immediately to struggling families, and the advanced child tax credit payments have been touted by the administration to help reduce child poverty.

The maximum child tax credit amount is available to individuals with adjusted gross income of $75,000 or less and married couples with adjusted gross income of $150,000 or less. Credits phase out for incomes above those thresholds. The IRS will use older (2019 or 2020 if filed) income information to process the advanced payments. As with many advanced credit schemes, the final credit that a taxpayer or couple will be eligible for will depend on their actual 2021 income. Thus, many taxpayers may find themselves in the unenviable situation of being forced to repay some or all of the advanced credit when filing their 2021 income tax returns in 2022.

The IRS has developed an online portal for opting out of the advanced child tax credit. The tool can also be used for non-filers that are otherwise eligible for the advanced payments to apply.

To opt out you will need the following:

• Either IRS username for your IRS account or an ID.me account, which can be registered upon sign up or created with a Facebook, Google, or LinkedIn login
• A photo ID copy of your passport or driver’s license
• A camera phone capable of taking a picture to be verified against the photo ID
• Your Social Security Number

Additionally, please keep in mind that for married couples, each spouse will independently need to opt out of the advanced payment program.

For those taxpayers who are certain they will not be eligible for the full credits in 2021 or do not want to deal with a potential situation of owing back a significant portion of the credit when filing their 2021 return, the use of the opt out tool is strongly encouraged.

If you’re self-employed and use your car for business, you can deduct certain business-related car expenses. There are two options for claiming deductions:

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Many businesses hire part-time or full-time workers, especially in the summer. The IRS classifies these employees as seasonal workers, defined as an employee who performs labor or services on a seasonal basis (i.e., six months or less). Examples of this kind of work include retail workers employed exclusively during holiday seasons, sports events, or during the harvest or commercial fishing season. Part-time and seasonal employees are subject to the same tax withholding rules that apply to other employees.

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The IRS is automatically refunding money to eligible people who filed their tax returns reporting unemployment compensation before the recent changes made by the American Rescue Plan.

Background

Typically, when an individual receives unemployment compensation, it is taxable. However, under a recent law change (American Rescue Plan), taxpayers who earned less than $150,000 in modified adjusted gross income can exclude some unemployment compensation from their income, which means they don’t have to pay tax on some of it.

People who are married and filing joint returns can exclude up to $20,400 – up to $10,200 for each spouse who received unemployment compensation. All other eligible taxpayers can exclude up to $10,200 from their income.

This law change occurred after some people filed their 2020 taxes. Eligible taxpayers who filed and figured their 2020 tax based on the full amount of unemployment compensation will automatically receive a refund. The IRS expects to begin issuing these refunds in May.

What You Need to Do

There is no need to do anything. The IRS will determine the correct taxable amount of unemployment compensation. Any resulting overpayment of tax will be either refunded or applied to other taxes owed.

The recalculations will take place in two phases:

• First, taxpayers who are eligible to exclude up to $10,200.
• Second, those married filing jointly who are eligible to exclude up to $20,400, and others with more complex returns.

When to File an Amended Return

Taxpayers only need to file an amended return if the recalculations make them newly eligible for additional federal tax credits or deductions not already included on their original tax return. For example, the IRS can adjust returns for taxpayers who claimed the earned income tax credit and, because the exclusion changed their income level, may now be eligible for an increase in the EITC amount.

However, taxpayers would have to file an amended return if they did not originally claim the EITC or other credits but are now eligible to claim them following the change in the tax law. If they now qualify for these credits, they should consider filing an amended return to claim this money. These taxpayers may want to review their state tax returns as well.

Taxpayers who haven’t yet filed and choose to file electronically simply need to respond to the related questions when preparing their tax returns. For those who choose to file a paper return, instructions and an updated worksheet about the exclusion are also available.

Don’t hesitate to contact the office with questions. As always, help is just a phone call away:

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Some taxpayers who claim the 2020 Recovery Rebate Credit (RRC) on their 2020 tax returns are discovering that they may be getting a different amount than they expected. Let’s take a closer look at why this is happening.

The first and second Economic Impact Payments (EIP) were advance payments of the 2020 credit. Most eligible taxpayers already received the first and second payments and shouldn’t (and don’t need to) include this information on their 2020 tax return. However, those who didn’t receive a first or second EIP or received less than the full amounts may be eligible for the 2020 RRC. However, to claim the credit, they must file a 2020 tax return – even if they don’t usually file a tax return.

How the Rebate Recover Credit Works

When it processes a 2020 tax return claiming the credit, the IRS determines the eligibility and amount of the taxpayer’s credit based on the 2020 tax return information and the amounts of any EIP previously issued. If a taxpayer is eligible, the credit is reduced by the amount of any EIPs already issued to them.

• If there is a mistake with the credit amount (Line 30 of the 1040 or 1040-SR), the IRS will calculate the correct amount, make the correction and continue processing the return.
• If a correction is needed, there may be a slight delay in processing the return, and the IRS will send the taxpayer a letter or notice explaining any change.

Taxpayers who receive a notice saying the IRS changed the amount of their 2020 credit should read the notice and review their 2020 tax return. Taxpayers who disagree with the IRS calculation should review their letter as well as the questions and answers for what information they should have available when contacting the IRS.

Common reasons that the IRS corrected the credit are as follows:

• The individual was claimed as a dependent on another person’s 2020 tax return.
• The individual did not provide a Social Security number valid for employment.
• The qualifying child was age 17 or older on January 1, 2020.
• Math errors relating to calculating adjusted gross income and any EIPs already received.

Don’t hesitate to call if you have any questions about this topic:

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Beginning January 1, 2021, and extending through December 31, 2022, businesses can claim 100% of their food or beverage expenses paid to restaurants as long as the business owner (or an employee of the business) is present when food or beverages are provided, and the expense is not lavish or extravagant under the circumstances.

In most tax years, there is a 50% limit on the amount that businesses may deduct for food or beverages. The temporary exception was included in the Taxpayer Certainty and Disaster Relief Act of 2020, part of a series of tax laws intended to provide coronavirus-related relief.

Where can businesses get food and beverages and claim 100%?

Under the temporary provision, restaurants include businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption. However, restaurants do not include businesses that primarily sell pre-packaged goods, not for immediate consumption, such as grocery stores and convenience stores.

Additionally, an employer may not treat certain employer-operated eating facilities like restaurants, even if a third party operates these facilities under contract with the employer.

Questions?

For more information about this and other coronavirus-related tax relief for business owners, please contact the office today:

San Jose: (408) 252-1800

Watsonville: (831) 726-8500