Verification Letters from the IRS

Getting a letter from the IRS today almost certainly comes with apprehension. First, in today’s age we must assess and determine if the correspondence is in fact legitimately from the IRS. And, if there is personally identifiable information contained in the letter there becomes an immediate cause for concern that, if this is not from the IRS, who or what organization has your information and how did they get it. Based on inquiries we have received from our clients, here we look at the legitimate communications that are being sent by the IRS and what needs to be done in response to these letters.

IRS Identity Theft Verification Service

In order to combat identity theft, the IRS has implemented an Identity Theft Verification Service. This service requires taxpayers to verify their identity before their tax return can be processed. Part of this service includes an outreach to taxpayers via mail to verify their identity.

IRS Communications

The IRS is mailing out one of the following letters if they are requiring a taxpayer to verify their identity before their tax return can be processed:

However, the IRS will not reach out in regard to identity verification via email or phone call. This subject initial communication by the IRS will only be handled via mail.

What you need to do

A taxpayer is able to verify their identity for Letters 4883C or 6330C via a phone call to the IRS as outlined in the letter. The remaining letters allow for verification of identity using one of two options: via phone call or the IRS website. Regardless of which option is taken, the following pieces of information will be necessary in order to verify the taxpayer’s identity:

  • A copy of the letter received
  • Tax return referenced in the letter
  • Prior year tax return
  • Supporting documentation for current and prior year tax returns

If a taxpayer decides to authorize another party to represent them before the IRS for the purpose of this identity verification, a power of attorney will need to be completed. Once the power of attorney is completed, the taxpayer and authorized party will both need to be on the line during the phone call with the IRS.

If Identity Can Not Be Verified

If the taxpayer cannot verify their identity over the phone or online, the taxpayer may be required to schedule an appointment with their local IRS office to verify their identity in person.

Completing Verification

Once verification is obtained, the IRS will continue to process the taxpayer’s return. It can take up to nine weeks for the tax return to be processed and for the taxpayer to receive their refund/overpayment credit.

Contact Us

If you have questions about the information outlined above, do not hesitate to contact us. For additional information call us at 630.954.1400 or click here to contact us.

Differences Between an Accountant and Bookkeeper

Accountant or bookkeeper?

This is a common question many Chicago business owners and managers ask when contemplating how to outsource part or all their accounting functions. While the two titles are often used interchangeably there are important differences that should be identified when it comes to the professional’s focus and specific tasks. Certainly, there can be overlapping responsibilities that contribute to the confusion, but the reality is there are significant and important differences.

One way to summarize the difference is the role of a bookkeeper is primarily focused on recordkeeping while accountants focus on compiling the data into actionable reports. The information in these reports is typically used by management, shareholders, suppliers, and creditors. Understanding the difference is important when evaluating the organization’s needs and identifying the most appropriate outsourced solution. To help clients, prospects, and others, Selden Fox has provided a summary of the key differences and similarities below. 

Bookkeeper

A bookkeeper’s primary job is record-keeping. It’s a role that is primarily transactional and informational. A bookkeeper manages and organizes daily transactions for accounts receivable, accounts payable, sales, payroll, and more, depending on the business.

A more granular view might include:

  • Pays bills and vendors
  • Enters sales transactions and produces invoices
  • Manages payroll
  • Reconciles monthly bank and credit card statements
  • Prepares basic financial statements (for record-keeping and informational purposes only)

There’s no certification or licensure requirement, but bookkeepers can obtain credentials to demonstrate proficiency in areas like QuickBooks, or they can seek accreditation through the American Institute of Professional Bookkeepers or the National Association of Certified Public Bookkeepers.

A qualified and able bookkeeper frees up the business owner’s time and keeps the books organized. It’s an important role. Where a bookkeeper’s responsibility generally stops is where an accountant’s work really gets going.

Accountant

An accountant can also maintain updated books and records; however, this role takes the financial information several steps further. Common areas of responsibility include:

  • Summarizing financial activity in period-end reports
  • Adjusting entries as needed
  • Overseeing the general ledger
  • Conducting period-end reports
  • Preparing tax returns and/or financial statements for use by official government and regulatory bodies and other stakeholders
  • Interpreting and analyzing financial data
  • Filing applicable forms, such as grants or government relief programs

Accountants use the information in reports to generate forward-looking cash flow forecasts, projections, and key performance indicators (KPIs). They look at the big picture to make recommendations for business opportunities to save money, scale up, minimize taxes, improve efficiencies, maintain compliance, and more.

An accountant typically has an accounting degree. They need not be licensed; however, advance certification can be obtained. The highest accounting credential is the CPA, or certified public accountant. In areas of advanced business complexity, a CPA is best positioned to advise on the financial and tax impact of certain business decisions. 

Which one should a business hire?

Whether an organization needs a bookkeeper and/or an accountant greatly depends on the circumstances. Here are a few factors to consider.

Growth Stage

If the company is just starting out and doesn’t have immediate plans for growth, then a bookkeeper may function just fine. A bookkeeper will help small business owners manage the business rather than the numbers as well as keep the records accurate from the start. On the flip side, if rapid or sustained growth is in the works, an accountant would be better positioned to support the company’s evolving accounting and reporting needs. A bookkeeper is essential to keep the business organized, but an accountant will know how to interpret the data to help with strategic decision-making.

Type of Work

Executives need to consider the type of work that will be performed. Is it keeping records organized or is it preparing financial statements for a bank or other lender to review? How will the data be used, and by whom? If it’s for internal record-keeping, a bookkeeper should satisfy the need. If the data will be used externally and will need to be analyzed, an accountant is likely the better choice.

Type of Industry

The business sector matters, too. Some industries have more complex financial needs than others, for example, government, healthcare, and higher education. Even in high-volume industries like retail or hospitality, a bookkeeper may keep track of daily records, but an accountant can advise on strategic opportunities.

Timing: When to Outsource

For start-up businesses and organizations, the best time to hire an outsourced financial professional is at the very beginning. Accurate and thorough record-keeping can keep a business on track as it progresses and grows. When business needs begin to outpace a bookkeeper, then an accountant can seamlessly step in and offer strategic guidance. 

The two roles may even work together. An in-house bookkeeper maintains regular financial and payroll records, and then hands them off to an accountant, who would:

  • Look for opportunities to reduce taxes and taxable income
  • File quarterly and annual tax returns
  • Compile audited financial statements
  • Handle any IRS or regulatory inquiries

In addition to the above considerations, if the business itself is complex and needs extra support, an accountant may be an excellent choice. Situations like different revenue streams, a large inventory, various compliance requirements, and several employees (or employees who live and work in different geographic areas) can lend themselves to hiring an accountant, even if the business itself isn’t in an aggressive growth stage.

While hiring an accountant may be a more significant investment you should in turn be adding a level of knowledge, training, and financial support that is also at a much higher level – especially with a CPA. A bookkeeper is well-suited for managing daily transactions and the regular financial record-keeping for the company. When it’s time to grow or the financial complexities have outpaced the role of a bookkeeper, hiring an outsourced accountant can provide immense value and return on investment.

Contact Us

The good news for Chicago businesses is there are several options available, often customizable, to meet specific financial reporting and compliance needs. Whether the solution is an outsourced bookkeeper or accountant, entirely depends on circumstances. If you have questions about the information outlined above or need assistance with outsourcing, Selden Fox can help. For additional information call 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Study Finds Auto Dealership Satisfaction On New High

Even without the pandemic, the automotive industry was primed for disruption. Electric vehicles, ridesharing, and automation were already changing automotive production and consumer purchasing habits. Since 2020, travel was halted, factories and Chicago dealerships were either shut down or substantially short-staffed, and now ongoing supply chain issues are dampening industry revival. Despite wide-ranging and intense challenges, dealerships have clearly found ways to pivot as evidenced by the results of the 12th Annual Car Buyer Journey Study, conducted by Cox Automotive. According to the Study, dealership experience was very high with 78% of new vehicle buyers indicating a high level of satisfaction. It also found that higher digital engagement boosted customer confidence in price and overall satisfaction. To help clients, prospects, and others, Selden Fox has provided a summary of the key survey findings below.

About the Survey

The Car Buyer Journey (CBJ) Study is an online consumer survey measuring car buyer satisfaction and the dealership experience. It’s an industry-wide barometer for automotive stakeholders. Led by Cox Automotive, the study is widely regarded as a leading indicator of industry health. The 2021 CBJ Study is based on an online survey of 2,976 U.S. consumers who bought or leased a new or used vehicle between September 2020 and August 2021.

New Consumer Insights

All things considered, the automotive industry did well in 2021. Car sales would have been higher were it not for lack of inventory and high prices. Despite these issues leading to a drop in overall car shopping experience, satisfaction with the dealerships was at its highest point. That means dealers took the lessons from 2020 to heart. They revolutionized the car buying experience and moved it online. Almost 80 percent of new and used car buyers reported high levels of satisfaction with the dealer that handled the transaction. Digital-first car buyers remained the most satisfied with the whole experience, price, and had greater trust in the process.

Even though consumers weren’t happy about the prices and lack of incentives compared to 2020, they did report high satisfaction and engagement with the dealership finance teams. Many buyers applied for financing online, which saved time in the physical dealership and streamlined the process.

In addition to low inventory and high prices, there is no hiding that the chip shortage impacted the car buying process. And the shortage could last into 2023. That’s causing some major car manufacturers, like Toyota, to build far fewer vehicles. One report suggested that in 2021, almost 8 million fewer vehicles were produced. Other manufacturers, like General Motors and Nissan, are changing certain features to accommodate the lack of a semiconductor chip.

Buyers experienced the downstream effect of all that: limited vehicle selection, higher than expected prices, going above their initial budget, and experience with more dealer-incentive transactions, like trade-ins, financing, or early lease returns.

Like 2020, consumers are spending less time shopping for vehicles than in the past. Both new and used buyers decreased the amount of time they spent on researching and shopping online, probably due to the low inventory and limited product availability; if they saw a good deal and knew what they wanted, they didn’t waste any more time.

When it comes to online research, 75 percent of the websites that consumers visit are third-party sites. That means dealers should continue to leverage the digital experience and make the car buying process as easy and transparent as possible.

What’s Ahead for Automotive Dealerships

Going into 2022, Chicago dealerships can expect a continuation of motivated, informed buyers. Inventory will continue to be low, and dealerships may not be able to negotiate on price as much as they could pre-pandemic. 

To counter those effects, focus on ways to foster trust and loyalty. That means going all-in on digital and leveraging third-party sites and partnerships where possible. Communicate with prospective and current buyers about the auto shortage, and help educate them on available makes, models, features, and pricing.

Contact Us

In 2022, it will be important for your Chicago dealership to stay focused on the customer experience and satisfaction. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

The IRS Backlog…Not Seeing End in Sight

As reported by numerous media outlets (The Hill, NPR, The Washington Post, CBS News, The New York Times), the IRS backlog is staggering. This is of course not good news at the start of the tax filing season, but it also means previous years’ returns that have been back logged for months may also continue to get pushed further on the calendar as well.

The statistic repeated in several of these news reports is nearly 24 million individual and business tax returns requiring at least one action have yet to be processed by the IRS. Here is how The Washington Post broke down that total: “As of Jan. 28, the tally of outstanding individual and business returns requiring what the IRS calls “manual processing” — an operation where an employee must take at least one action rather than relying on an automated system to move the case — came to 23.7 million, the taxpayer advocate data shows. The number includes 9.7 million paper returns awaiting processing; 4.1 million that were suspended because of errors with stimulus payments, pandemic relief or other issues; 4.1 million amended returns; and 5.8 million pieces of correspondence awaiting action between the agency and taxpayers to resolve issues before the returns are completed.”

The IRS points to staffing shortage among several other issues at fault for the backlog. One example from The New York Times, “Treasury officials noted that in the first half of 2021, fewer than 15,000 employees were available to handle more than 240 million calls — one person for every 16,000 calls.”

What does all this mean for taxpayers?

Patience is a virtue as they say. Electronically filed returns will likely be processed the quickest but expect refunds to take longer again this year. And if you paper file or there are errors on your return don’t count on those refunds any time soon. One article indicated the IRS is taking at least 10 months to process paper-filed returns for the 2020 tax year.

Contact us

If you have general questions about the information outlined above, do not hesitate to contact us. Please note, unfortunately, we are unable to provide estimated timing on receiving refunds or responses from the IRS. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

The Value of Financial Guidance for Startup Companies

The United States has the most startup companies in the world by a large margin, and COVID-19 has not dampened these business prospects. In fact, startups were established at a rate of more than 20% after the pandemic started. Since more than 69% of startups originally commenced operations as a home-based businesses the impact of forced business closures certainly made it easier to launch new enterprises. Despite these encouraging numbers the harsh reality is that maintaining business operations beyond a few years is one of the most common challenges startup founders face.

There are dozens of reasons why some startups succeed while others simply fade away. This often includes access to capital, demand for products and services, and profitability among many others. Clearly understanding the market, competition, and customer demand are certainly important steps on the path to success. However, it is also important to spend time on budgeting, financial forecasting, exploring new sources of capital, and financial reporting. Without an accurate assessment of the company’s financial position, it is very difficult for a Chicago start up to succeed. For this reason, it is important to work with a CPA as early in the process as possible to ensure efforts are properly guided. To help clients, prospects, and others, Selden Fox has provided a summary of the key financial aspects that startups should be assessing as they embark on a new business.

The Value of Financial Guidance

Financial advisors are essential to startup success. Although it is a smart move to involve outside accounting and tax support at any stage in a business, bringing in CPAs and accountants as early in the planning stage as feasible has been shown to produce the best results – and avoid unpleasant outcomes.

According to former startup founders themselves, the top reason most startups fail is that they simply run out of cash. Whether it is due to lack of funding, inability to secure financing from a bank, or budget mismanagement, money can, not surprisingly be an obstacle to ultimate success. A great idea without a consistent profit isn’t enough. Banks and investors need to see financial statements, organized records, and a clear plan before they will grant funding. This usually isn’t possible to do alone.

Pricing and cost issues are another common hurdle preventing startups from succeeding. Without forecasting, analysis, and a clear understanding of how to scale, startups can find themselves with a successful product/service but no profitable way to keep it going.

There are other challenges that experienced CPAs and accountants can help startups avoid, like navigating regulatory compliance, establishing a well-thought-out business plan, and ensuring the business model makes sense and serves as a tool for the business to thrive. Additionally, the use of advanced data analysis, AI, and automation opens the door to further insights into market opportunities.

Most startups don’t have the financial resources to employ an internal accounting team. So, during the early stages, working with an outsourced provider on an as-needed basis allows the founder and executive team to leverage their time and resources where accounting support is most needed in a cost-effective manner.

Even for larger or high-growth startups with an internal team, still need help prepping the company for the next stage of growth. It can be hard to know what kind of support is needed – a general accountant, a CFO, a controller, or someone in between? Startups seeking investor funding will need strong financial reporting when seeking out valuations and funding. Investors will want to see continued and sustainable growth evidenced in the financial statements. An internal team needs guidance and support to make that goal a reality and ensure the financial reporting supports this growth. An experienced CPA can help advise on establishing these reports so the startup can be prepared for the rigorous due diligence that often accompanies these fundraising efforts.

How to Evaluate Outsourced Providers?

Startups should consider working with an outsourced firm that is familiar with the industry: the regulatory requirements, tax planning opportunities, and market landscape. The consultant should also have experience working with other startups in their industry or other industries. An understanding of the issues facing startup founders is key to anticipating their needs and helping them succeed.

The external advisor should be flexible enough to deal with a myriad of issues as they arise and be able to offer support wherever it’s needed. For example, more startups are hiring part-time, or fractional CFOs since the pandemic. Getting strategic insight on the management team during a transitional or pivotal stage in the startup’s development has been a crucial element to success.

And, whether a part-time CFO or an external advisor, the ability to offer an objective, outside perspective not tied to company profits is invaluable. This kind of advisory support often tends to be more analytical and less driven by personal goals, ambitions, or emotions. 

How Selden Fox Assists Startups

Selden Fox advisors can help startups at any stage of their development, from the initial planning and pre-planning stages to growth, scale, funding, and beyond. 

Planning/Pre-Planning

  • Advise on corporate structure and tax benefits
  • Guide the internal team on selecting the appropriate accounting and reporting software
  • Integrate various accounting platforms for business operations, such as invoicing systems, automation of accounts payable, and payroll system

Scale

  • Serve as an outsourced accounting department in a full- or part-time capacity in the following areas:
    • Process transactions
    • Post journal entries in the general ledger
    • Prepare monthly reconciliations and relevant periodic reports as required by management
  • Educate owners on various applicable tax reporting requirements
  • Examine the tax consequences of various transactions and advise on strategies to minimize tax liability
  • Prepare applicable tax returns

Growth

  • Prepare GAAP financial statements
  • Implement relevant internal controls
  • Advise on process standardization and improvement
  • Respond to investor and regulatory requests as needed
  • Help create cash flow forecasts and analysis
  • Ensure that existing systems and platforms are scalable and align with operational goals
Contact Us

Chicago startups will inevitably face challenges on their road to success. While some cannot be avoided, the assistance of an outsourced accountant can help to ensure the business can respond appropriately. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Benefit Plan Audit Compliance: What Changes to Expect with SAS 136

Chicago employers that undergo an annual audit of the retirement plan will soon see significant changes to the process. In fact, benefit plan audits are about to undergo the biggest change in more than 20 years thanks to modifications outlined in Statement on Auditing Standards (SAS 136), Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to Employee Retirement Income Security Act of 1974 (ERISA).

Driven by the high volume of plan deficiencies, including insufficient testing and improper documentation, SAS 136 most notably shifts more responsibility to plan sponsors and modifies the form and content of the audit report. Although these changes were originally set to be effective for applicable periods ending or after December 15, 2020, implementation was delayed for one year due to the pandemic. As the compliance deadline has arrived, it is essential for plan sponsors to understand the changes. To help clients, prospects, and others, Selden Fox has provided a summary of key details below.

Expanded Role of Management and Plan Sponsors

Management will need to put in writing several acknowledgments before the audit can begin. These are above and beyond what is already a prerequisite in AU-C 210, “Terms of Engagement,” which requires management to use an acceptable financial reporting framework, among other items.

SAS 136 takes these preconditions a step further. Management will also need to acknowledge in writing its responsibility to:

  • Maintain a current plan document, including amendments
  • Administer the plan
  • Determine plan transactions conform with plan provisions
  • Maintain participant records to determine the benefits due

The new SAS also requires a draft of the Form 5500 that is substantially complete to be provided to the auditor prior to dating the audit report. This has been common practice in most benefit plan audits, but the new SAS makes it a requirement.

If the Plan Sponsor elects to have a Section 103(a)(3)(C) audit, management must also acknowledge and understand its responsibility to determine:

  • The Section 103(a)(3)(C) audit is permissible
  • The investment information is prepared and certified by a qualified institution
  • The certification meets the requirements of CFR 2520.103-5
  • The certified investment information is appropriately measured, presented and disclosed

The Plan’s third-party service providers can help to answer some of these questions. The Plan Sponsor should maintain documentation of this assessment.

New Auditor’s Report Under SAS 136

Prior to SAS 136, many Plan Sponsors opted for a “limited scope audit”, in which a Disclaimer of Opinion was issued because auditing procedures were not performed over certified investment information. SAS 136 eliminates the “limited scope” audit but allows for an “ERISA Section 103(a)(3)(C) audit”. The new Section 103(a)(3)(C) audit allows for similar procedures to be performed over certified investment information, but this no longer results in a Disclaimer of Opinion. The new opinion will provide information on procedures performed both on certified and noncertified information and provide a new basis for opinion section. 

Communication With Management or Those Charged With Governance

If reportable findings are identified during the audit, the new SAS requires these must be documented in writing to those charged with governance. Reportable findings include:

  • An identified instance of noncompliance or suspected noncompliance with laws or regulations
  • Based on professional judgement, a finding that is significant and relevant to those charged with governance and their responsibility to oversee the financial reporting process
  • An indication of deficiencies in internal control that have not been communicated to management by other parties and based on professional judgement, require management’s attention

Exceptions to SAS 136

SAS 136 applies to audits of single employer, multiple employer, and multiemployer plans subject to ERISA, most commonly 401k and 403b plans. Plans that are not subject to ERISA should not make the changes required by this SAS. 

Contact Us

The benefit plan audit process will be significantly different for many Chicago companies in 2022. As a result, it is important to become familiar with the changes and new expectations placed upon management prior to audit commencement. If you have questions about the information outlined above or need assistance with your 2021 plan audit, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Cryptocurrency Tax and Reporting Requirements

Cryptocurrency tax rules can be confusing. The various types of cryptocurrencies (Bitcoin, Ethereum, etc.) often fall under a few different categories depending on interpretation. Property, ordinary income, securities, and collectibles each describe a type of cryptocurrency transaction, with its own tax and reporting consequences. Much needed clarity around these issues was provided when President Biden signed the Infrastructure Investment and Jobs Act into law. To help pay for the legislation, Congress set its sights on developing a uniform approach to cryptocurrency regulations. Many changes in the infrastructure bill will impact how cryptocurrency is taxed and regulated as soon as 2023. Understanding how transactions are taxed now, what needs to be reported, and what to look out for in the future can help Chicago businesses and investors stay ahead of changing rules. To help clients, prospects, and others, Selden Fox has provided a summary of the key detail below.

How Is Cryptocurrency Taxed?

Cryptocurrency, a form of virtual currency stored and secured on a blockchain, is treated as property for tax purposes. This means it is subject to capital gains and losses when exchanged for real currency. Like other property assets, cryptocurrency held for less than a year falls under short-term gains, which is then taxed at the ordinary rate. Cryptocurrency held for a year or longer falls under long-term capital gains, and is subject to either a 0%, 15%, or 20% tax, depending on the taxpayer’s income.

The amount of gain or loss is figured based on the basis. That is, the change in value from when the cryptocurrency was purchased or acquired to when it is exchanged or sold. In this way, cryptocurrency functions like securities and other tradable commodities. Taxpayers and investors must keep track of the basis on their own. They are still liable for any taxes even if they don’t receive a Form 1099.

Note that simply using cryptocurrency can trigger a tax liability. If a taxpayer uses cryptocurrency to buy something, they will owe taxes if the cryptocurrency value at the time of the purchase is more than what they acquired it for. In other words, if the taxpayer gets more value than what they initially put in, they will owe tax.

Cryptocurrency can also be used for other purposes, including but not limited to:

  • Goods and services
  • Wages
  • Charitable contributions
  • Purchasing digital assets (non-fungible tokens, or NFTs)

NFTs can be audio, video, graphics, or other digital files. Regarding taxation, buying or selling NFTs will trigger capital gains and can be treated as either property or collectibles. It is therefore important for taxpayers to monitor how long they’re holding cryptocurrency in a digital wallet. It may be worthwhile to hold onto an asset or hold off on a transaction until long-term capital gains would kick in. Timing, though one of the simplest strategies, can also be one of the most effective at managing tax consequences.

The good news is that certain cryptocurrency transactions are the same as with traditional currency. Charitable gifts and inherited assets are the same for tax purposes either way. 

Hard Forks and Airdrops

Another potential tax consequence of cryptocurrency can occur when a blockchain changes, or forks. Forks can be either hard or soft. Soft forks don’t create any new cryptocurrency. As a result, they do not need to be taxed nor reported.

Hard forks, on the other hand, can result in new cryptocurrency on the blockchain, which generates taxable income. For example, Bitcoin rewrites the blockchain to add more security and privacy. The hard fork that is created with this new and improved protocol also triggers an airdrop and produces new Bitcoin on a new ledger. An airdrop, according to the IRS, is “a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses.” Previous Bitcoin remain on the legacy ledger while new Bitcoin are generated on the new ledger. That is a taxable event, and the account holder would need to recognize the new Bitcoin as taxable income when the hard fork and airdrop occur. The new Bitcoin would then be taxed at the ordinary rate.

The tax liability is based on the difference in value from when the hard fork occurred to when the Bitcoin on the old ledger was purchased or acquired; again, the cost basis. If a hard fork doesn’t create new cryptocurrency, then the account holder will not owe taxes.

Pending Reporting Requirements for Cryptocurrency Exchanges

Moving forward, how cryptocurrency is taxed won’t substantially change. What we do have now is clarity, thanks to the details contained in the Infrastructure Investment and Jobs Act. Starting in 2023, all digital assets will be treated the same as other securities, like stocks, bonds, and other commodities. Digital currency exchanges, like Coinbase or Robinhood, will be treated as brokers. That means they will be responsible for issuing cryptocurrency account holders Form 1099-B, the same form that traditional brokers issue to their investors.

It is likely that account holders will see discrepancies in reported capital gains because exchanges won’t have access to information about how much a cryptocurrency unit was worth when it was acquired. Without the basis, they will only be able to report on the value at the time of a sale or transfer. Thus, account holders will need to get in the habit of more closely tracking and recording this information on their own.

If cryptocurrency exchanges fail to send required forms once the regulations are effective, they will be subject to fines of up to $250 per customer, up to a total of $3 million. And of course, individual taxpayers are on the hook for actual reported gains or losses.

On top of that, cryptocurrency investors will be required to report transfers of $10,000 and above. These transfers will be treated as cash for tax and reporting requirements. In those cases, Form 8300 would be used to record and report the transaction. This particular provision has exchanges concerned, because if businesses are required to report $10,000 transfers – say, if an individual buys a Tesla with Bitcoin – that could expose the account holder’s credentials to unknown third parties.

What’s Next?

It’s likely the SEC will oversee regulatory enforcement. The Infrastructure Bill merely gave a blueprint for regulations; over the next two years, more guidance will follow clarifying these and other details. The new rules don’t take effect until January 1, 2023, which means the first 1099s won’t be issued until early 2024, unless exchanges decide to comply sooner.

Contact Us

The new regulations governing cryptocurrency reporting and taxation mean Chicago businesses and investors need to review their situation to determine how they will be impacted. Taxpayers still need to report certain cryptocurrency sales or transfers now; expect the IRS to crack down on underreporting. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Guidance for Terminated Employee Retention Tax Credit

As the name suggests, the Employee Retention Tax Credit (ERTC) was designed to provide a financial incentive to business owners that kept workers on the payroll during the COVID pandemic. When combined with the popular Paycheck Protection Program (PPP), it became an especially potent means of financial support. This is due in part to the various changes made to the ERTC over the last 18 months.

Unfortunately, businesses were greeted with bad news when the Infrastructure Investment and Jobs Act passed as it called for an early end to the ERTC. Rather than expiring on December 31, 2021, the ERTC is no longer available for wages paid after September 30, 2021. To help guide businesses, the IRS issued Notice 2021-65 which provides important information to consider moving forward. To help clients, prospects, and others, Selden Fox has provided a summary of the key details below.

Early Termination

Employers will recall that rules for the ERTC changed between 2020 and 2021. In 2020, the maximum amount of the credit was $5,000 per employee—50 percent of the first $10,000 in eligible wages, annually. In 2021, the credit was expanded considerably. Employers have had most of the year in which to claim up to $7,000 per employee—70 percent of the first $10,000 in eligible wages per quarter. It was supposed to generate as much as $28,000 per employee for the whole year with the added benefit of usability at the same time as forgiven PPP funds (provided those funds were not used for the same payroll). Now that the program has ended, the most that an employer can claim per employee is $21,000.

Many had been counting on the ERTC for the fourth quarter, too. As such, tax planning strategies may have had them withholding payroll tax deposits in advance of receiving the credit. Some employers may have even received an advance payment from the IRS before the program was cancelled. The information contained in the Notice provides important details for those in both scenarios. 

Early Payroll Withholding

In one potential scenario, employers may have withheld payroll tax deposits for the fourth quarter fully expecting to receive the ERTC. Up until this point, the IRS was waiving failure to deposit penalties if an employer expected to receive the credit based on either of the qualifying tests.

For the fourth quarter, there are three exceptions to the penalty for failing to deposit payroll taxes. They are:

  • If the employer’s decision to withhold payroll tax deposits was consistent with previous guidance.
  • If the employer deposits any amounts initially withheld by its deposit date for wages through December 31, 2021, and
  • If the employer reports any corresponding tax liability from the early termination on their employment tax return.

Any payroll tax deposits withheld after December 20, 2021, will be subject to fines and penalties. 

Advance ERTC Payments

Some employers had already requested advance payments of the ERTC based on projections. Since these requests would have been made before the infrastructure bill modified the ERTC program, employers had no way of knowing that the advance payments could not be claimed. In these situations, if an employer received an advance payment of the ERTC for the fourth quarter, that money either needs to be returned to the IRS or be repaid. If the check isn’t cashed yet, don’t cash it. If the employer already deposited the check, all the funds for the fourth quarter must be repaid.

The due date for repayment is when the employer would otherwise file its employment tax return. This deadline varies; a list of due dates is available here.

Exception to ERTC Early Termination

For most, the ability to claim the ERTC for the whole year has been cut short. The only exception to the early termination is the Startup Recovery Provision. It applies to new companies that began operations since February 2020 and have gross receipts under $1 million. Unlike previous versions of the ERTC, there is no gross receipts decline, or government-imposed shutdown qualifications. All employee wages qualify for purposes of claiming the credit, and it doesn’t matter how many employees work for the business. Unlike the other parts of the ERTC, the Recovery Startup eligible businesses can only claim the credit in the third and fourth quarters of 2021.

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Although there are no more quarters in which qualifying wages can be paid, local businesses can still retroactively claim the credit starting with the second quarter of 2020. For this reason, it is important to consult with a qualified tax advisor to assess your situation and identify if potential savings exist. If you have questions about the information outlined above or need assistance with an ERTC issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.