File cash transaction reports for your business — on paper or electronically
Does your business receive large amounts of cash or cash
equivalents? You may be required to submit forms to the IRS to report these
transactions.
Filing requirements
Each person engaged in a trade or business who, in the course of
operating, receives more than $10,000 in cash in one transaction, or in two or
more related transactions, must file Form 8300. Any transactions conducted in a
24-hour period are considered related transactions. Transactions are also
considered related even if they occur over a period of more than 24 hours if
the recipient knows, or has reason to know, that each transaction is one of a
series of connected transactions.
To complete a Form 8300, you will need personal information
about the person making the cash payment, including a Social Security or
taxpayer identification number.
You should keep a copy of each Form 8300 for five years from the
date you file it, according to the IRS.
Reasons for the reporting
Although many cash transactions are legitimate, the IRS explains
that “information reported on (Form 8300) can help stop those who evade taxes,
profit from the drug trade, engage in terrorist financing and conduct other
criminal activities. The government can often trace money from these illegal
activities through the payments reported on Form 8300 and other cash reporting
forms.”
What’s considered “cash”
For Form 8300 reporting, cash includes U.S. currency and coins,
as well as foreign money. It also includes cash equivalents such as cashier’s
checks (sometimes called bank checks), bank drafts, traveler’s checks and money
orders.
Money orders and cashier’s checks under $10,000, when used in
combination with other forms of cash for a single transaction that exceeds
$10,000, are defined as cash for Form 8300 reporting purposes.
Note: Under a separate reporting requirement, banks and other
financial institutions report cash purchases of cashier’s checks, treasurer’s
checks and/or bank checks, bank drafts, traveler’s checks and money orders with
a face value of more than $10,000 by filing currency transaction reports.
E-filing and batch filing
Businesses required to file reports of large cash transactions
on Form 8300 should know that in addition to filing on paper, e-filing is an
option. The form is due 15 days after a transaction and there’s no charge for
the e-file option. Businesses that file electronically get an automatic
acknowledgment of receipt when they file.
The IRS also reminds businesses that they can “batch file” their
reports, which is especially helpful to those required to file many forms.
Setting up an account
To file Form 8300 electronically, a business must set up an
account with FinCEN’s BSA E-Filing System. For more information, interested
businesses can also call the BSA E-Filing Help Desk at 866-346-9478 (Monday
through Friday from 8 am to 6 pm EST) or email them at [email protected]. Contact us
with any questions or for assistance.
© 2020
Strengthen your supply chain with constant risk awareness
When the COVID-19 crisis exploded in March, among the many
concerns was the state of the nation’s supply chains. Business owners are no
strangers to such worry. It’s long been known that, if too much of a company’s
supply chain is concentrated (that is, dependent) on one thing, that business
is in danger. The pandemic has only complicated matters.
To guard against this risk, you’ve got to maintain a constant
awareness of the state of your supply chain and be prepared to adjust as
necessary and feasible.
Products or services
The term “concentration” can be applied to both customers and
suppliers. Generally, concentration risks become significant when a business
relies on a customer or supplier for 10% or more of its revenue or materials,
or on several customers or suppliers located in the same geographic region.
Concentration related to your specific products or services is
something to keep a close eye on. If your company’s most profitable product or
service line depends on a few key customers, you’re essentially at their mercy.
If just one or two decide to make budget cuts or switch to a competitor, it
could significantly lower your revenues.
Similarly, if a major supplier suddenly increases prices or becomes
lax in quality control, your profit margin could narrow considerably. This is
especially problematic if your number of alternative suppliers is limited.
To cope, do your research. Regularly look into what suppliers
might best serve your business and whether new ones have emerged that might
allow you to offset your dependence on one or two providers. Technology can be
of great help in this effort — for example, monitor trusted news sources
online, follow social media accounts of experts and use artificial intelligence
to target the best deals.
Geography
A second type of concentration risk is geographic. When gauging
it, assess whether many of your customers or suppliers are in one geographic
region. Operating near supply chain partners offers advantages such as lower
transportation costs and faster delivery. Conversely, overseas locales may
enable you to cut labor and raw materials expenses.
But there are also risks associated with geographic centricity.
Local weather conditions, tax rate hikes and regulatory changes can have a
substantial impact. As we’ve unfortunately encountered this year, the severity
of COVID-19 in different regions of the country is affecting the operational
ability and capacity of suppliers in those areas.
These same threats apply when dealing with global partners, with
the added complexity of greater physical distances and longer shipping times.
Geopolitical uncertainty and exchange rate volatility may also negatively
affect overseas suppliers.
Challenges and opportunities
Business owners — particularly those who run smaller companies —
have always faced daunting challenges in maintaining strong supply chains. The
pandemic has added a new and difficult dimension. Our firm can help you assess
your supply chain and identify opportunities for cost-effective improvements.
© 2020
Are scholarships tax-free or taxable?
COVID-19 is changing the landscape for many schools this fall.
But many children and young adults are going back, even if it’s just for online
learning, and some parents will be facing tuition bills. If your child has been
awarded a scholarship, that’s cause for celebration! But be aware that there
may be tax implications.
Scholarships (and fellowships) are generally tax-free for
students at elementary, middle and high schools, as well as those attending
college, graduate school or accredited vocational schools. It doesn’t matter if
the scholarship makes a direct payment to the individual or reduces tuition.
Tuition and related expenses
However, for a scholarship to be tax-free, certain conditions
must be satisfied. A scholarship is tax-free only to the extent it’s used to
pay for:
- Tuition and fees required to attend the school and
- Fees, books, supplies and equipment required of all
students in a particular course.
For example, if a computer is recommended but not required,
buying one wouldn’t qualify. Other expenses that don’t qualify include the cost
of room and board, travel, research and clerical help.
To the extent a scholarship award isn’t used for qualifying
items, it’s taxable. The recipient is responsible for establishing how much of
an award is used for tuition and eligible expenses. Maintain records (such as
copies of bills, receipts and cancelled checks) that reflect the use of the
scholarship money.
Award can’t be payment for services
Subject to limited exceptions, a scholarship isn’t tax-free if the
payments are linked to services that your child performs as a condition for
receiving the award, even if the services are required of all degree
candidates. Therefore, a stipend your child receives for required teaching,
research or other services is taxable, even if the child uses the money for
tuition or related expenses.
What if you, or a family member, is an employee of an education
institution that provides reduced or free tuition? A reduction in tuition
provided to you, your spouse or your dependents by the school at which you work
isn’t included in your income and isn’t subject to tax.
Returns and recordkeeping
If a scholarship is tax-free and your child has no other income,
the award doesn’t have to be reported on a tax return. However, any portion of
an award that’s taxable as payment for services is treated as wages. Estimated
tax payments may have to be made if the payor doesn’t withhold enough tax. Your
child should receive a Form W-2 showing the amount of these “wages” and the
amount of tax withheld, and any portion of the award that’s taxable must be
reported, even if no Form W-2 is received.
These are just the basic rules. Other rules and limitations may
apply. For example, if your child’s scholarship is taxable, it may limit other
higher education tax benefits to which you or your child are entitled. As we
approach the new school year, best wishes for your child’s success in school.
And please contact us if you wish to discuss these or other tax matters
further.
© 2020
Why do partners sometimes report more income on tax returns than they receive in cash?
If you’re a partner in a business, you may have come across a
situation that gave you pause. In a given year, you may be taxed on more
partnership income than was distributed to you from the partnership in which
you’re a partner.
Why is this? The answer lies in the way partnerships and
partners are taxed. Unlike regular corporations, partnerships aren’t subject to
income tax. Instead, each partner is taxed on the partnership’s earnings —
whether or not they’re distributed. Similarly, if a partnership has a loss, the
loss is passed through to the partners. (However, various rules may prevent a
partner from currently using his share of a partnership’s loss to offset other
income.)
Separate entity
While a partnership isn’t subject to income tax, it’s treated as
a separate entity for purposes of determining its income, gains, losses,
deductions and credits. This makes it possible to pass through to partners
their share of these items.
A partnership must file an information return, which is IRS Form
1065. On Schedule K of Form 1065, the partnership separately identifies
income, deductions, credits and other items. This is so that each partner can
properly treat items that are subject to limits or other rules that could
affect their correct treatment at the partner’s level. Examples of such items
include capital gains and losses, interest expense on investment debts and
charitable contributions. Each partner gets a Schedule K-1 showing his or her
share of partnership items.
Basis and distribution rules ensure that partners aren’t taxed
twice. A partner’s initial basis in his partnership interest (the determination
of which varies depending on how the interest was acquired) is increased by his
share of partnership taxable income. When that income is paid out to partners
in cash, they aren’t taxed on the cash if they have sufficient basis. Instead,
partners just reduce their basis by the amount of the distribution. If a cash
distribution exceeds a partner’s basis, then the excess is taxed to the partner
as a gain, which often is a capital gain.
Here’s an example
Two individuals each contribute $10,000 to form a partnership.
The partnership has $80,000 of taxable income in the first year, during which
it makes no cash distributions to the two partners. Each of them reports
$40,000 of taxable income from the partnership as shown on their K-1s. Each has
a starting basis of $10,000, which is increased by $40,000 to $50,000. In the
second year, the partnership breaks even (has zero taxable income) and
distributes $40,000 to each of the two partners. The cash distributed to them
is received tax-free. Each of them, however, must reduce the basis in his
partnership interest from $50,000 to $10,000.
Other rules and limitations
The example and details above are an overview and, therefore,
don’t cover all the rules. For example, many other events require basis
adjustments and there are a host of special rules covering noncash
distributions, distributions of securities, liquidating distributions and other
matters.
© 2020
Reopening concepts: What business owners should consider
A widely circulated article about the COVID-19 pandemic, written
by author Tomas Pueyo in March, described efforts to cope with the crisis as
“the hammer and the dance.” The hammer was the abrupt shutdown of most
businesses and institutions; the dance is the slow reopening of them —
figuratively tiptoeing out to see whether day-to-day life can return to some semblance
of normality without a dangerous uptick in infections.
Many business owners are now engaged in the dance. “Reopening” a
company, even if it was never completely closed, involves grappling with a
variety of concepts. This is a new kind of strategic planning that will test
your patience and savvy but may also lead to a safer, leaner and
better-informed business.
When to move forward
The first question, of course, is when. That is, what are the
circumstances and criteria that will determine when you can safely reopen or
further reopen your business. Most experts agree that you should base this
decision on scientific data and official guidance from agencies such as the
U.S. Department of Health and Human Services and Centers for Disease Control
and Prevention (CDC).
But don’t stop there. Although the pandemic is, by definition, a
worldwide issue, the specific situation on the ground in your locality should
drive your decision-making. Keep tabs on state, county and municipal news,
rules and guidance. Plug into your industry’s experts as well. Establish
strategies for expanding operations or, if necessary, contracting them, based
on the latest information.
Testing and working safely
Running a company in today’s environment entails refocusing on
people. If employees are unsafe, your business will likely suffer at some point
soon. Every company that must or chooses to have workers on-site (as opposed to
working remotely) needs to consider the concept of COVID-19 testing.
Employers are generally allowed to test employees, but there are
dangers in violating privacy laws or inadvertently exposing the company to
discrimination claims. The CDC has said that routine testing will likely pass
muster “if these goals are consistent with employer-based occupational medical
surveillance programs” and “have a reasonable likelihood of benefitting
workers.” Consult your attorney, however, before implementing any testing
initiative.
There’s also the matter of working safely. If you haven’t
already, look closely at the layout of your offices or facilities to determine
the feasibility of social distancing. Re-evaluate sanitation procedures and
ventilation infrastructure, too. You may need to invest, or continue investing,
in additional personal protective equipment and items such as plastic screens
to separate workers from customers or each other. It might also be necessary or
advisable to procure or upgrade the technology that enables employees to work
remotely.
Move forward cautiously
No one wanted to do this dance, but business owners must
continue moving forward as cautiously and prudently as possible. While you do
so, don’t overlook the opportunity to identify long-term strategies to run your
company more efficiently and profitably. We can help you make well-informed
decisions based on sound financial analyses and realistic projections.
© 2020
Take advantage of a “stepped-up basis” when you inherit property
If you’re planning your estate, or you’ve recently inherited
assets, you may be unsure of the “cost” (or “basis”) for tax purposes.
Fair market value rules
Under the fair market value basis rules (also known as the
“step-up and step-down” rules), an heir receives a basis in inherited property
equal to its date-of-death value. So, for example, if your grandfather bought
ABC Corp. stock in 1935 for $500 and it’s worth $5 million at his death, the
basis is stepped up to $5 million in the hands of your grandfather’s heirs —
and all of that gain escapes federal income tax forever.
The fair market value basis rules apply to inherited property
that’s includible in the deceased’s gross estate, and those rules also apply to
property inherited from foreign persons who aren’t subject to U.S. estate tax.
It doesn’t matter if a federal estate tax return is filed. The rules apply to
the inherited
portion of property owned by the inheriting taxpayer jointly with the deceased,
but not the portion of jointly held property that the inheriting taxpayer owned
before his or her inheritance. The fair market value basis rules also don’t
apply to reinvestments of estate assets by fiduciaries.
Step up, step down or carryover
It’s crucial for you to understand the fair market value basis
rules so that you don’t pay more tax than you’re legally required to.
For example, in the above example, if your grandfather decides
to make a gift of the stock during his lifetime (rather than passing it on when
he dies), the “step-up” in basis (from $500 to $5 million) would be lost.
Property that has gone up in value acquired by gift is subject to the
“carryover” basis rules. That means the person receiving the gift takes the
same basis the donor had in it (just $500), plus a portion of any gift tax the
donor pays on the gift.
A “step-down” occurs if someone dies owning property that has
declined in value. In that case, the basis is lowered to the date-of-death
value. Proper planning calls for seeking to avoid this loss of basis. Giving
the property away before death won’t preserve the basis. That’s because when
property that has gone down in value is the subject of a gift, the person
receiving the gift must take the date of gift value as his basis (for purposes
of determining his or her loss on a later sale). Therefore, a good strategy for
property that has declined in value is for the owner to sell it before death so
he or she can enjoy the tax benefits of the loss.
These are the basic rules. Other rules and limits may apply. For
example, in some cases, a deceased person’s executor may be able to make an
alternate valuation election. Contact us for tax assistance when estate
planning or after receiving an inheritance.
© 2020
Even if no money changes hands, bartering is a taxable transaction
During the COVID-19 pandemic, many small businesses are strapped
for cash. They may find it beneficial to barter for goods and services instead
of paying cash for them. If your business gets involved in bartering, remember
that the fair market value of goods that you receive in bartering is taxable
income. And if you exchange services with another business, the transaction
results in taxable income for both parties.
For example, if a computer consultant agrees to exchange
services with an advertising agency, both parties are taxed on the fair market
value of the services received. This is the amount they would normally charge
for the same services. If the parties agree to the value of the services in
advance, that will be considered the fair market value unless there is contrary
evidence.
In addition, if services are exchanged for property, income is
realized. For example, if a construction firm does work for a retail business
in exchange for unsold inventory, it will have income equal to the fair market
value of the inventory. Another example: If an architectural firm does work for
a corporation in exchange for shares of the corporation’s stock, it will have
income equal to the fair market value of the stock.
Joining a club
Many businesses join barter clubs that facilitate barter
exchanges. In general, these clubs use a system of “credit units” that are
awarded to members who provide goods and services. The credits can be redeemed
for goods and services from other members.
Bartering is generally taxable in the year it occurs. But if you
participate in a barter club, you may be taxed on the value of credit units at
the time they’re added to your account, even if you don’t redeem them for
actual goods and services until a later year. For example, let’s say that you
earn 2,000 credit units one year, and that each unit is redeemable for $1 in
goods and services. In that year, you’ll have $2,000 of income. You won’t pay
additional tax if you redeem the units the next year, since you’ve already been
taxed once on that income.
If you join a barter club, you’ll be asked to provide your
Social Security number or employer identification number. You’ll also be asked
to certify that you aren’t subject to backup withholding. Unless you make this
certification, the club will withhold tax from your bartering income at a 24%
rate.
Forms to file
By January 31 of each year, a barter club will send participants
a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which
shows the value of cash, property, services and credits that you received from
exchanges during the previous year. This information will also be reported to
the IRS.
Many benefits
By bartering, you can trade away excess inventory or provide
services during slow times, all while hanging onto your cash. You may also find
yourself bartering when a customer doesn’t have the money on hand to complete a
transaction. As long as you’re aware of the federal and state tax consequences,
these transactions can benefit all parties. Contact us if you need assistance
or would like more information.
© 2020
Does your business have a unique selling proposition?
Many business owners — particularly those who own smaller
companies — spend so much time trying to eliminate weaknesses that they never
fully capitalize on their strengths. One way to do so is to identify and
explicate your unique selling proposition (USP).
Give it some thought
In a nutshell, a USP states why customers should buy your
product or service rather than a similar one offered by a competitor. A USP
might be rather obvious if you offer a type of state-of-the-art technology or
specialize in a certain kind of service that’s not widely available. Many
businesses, however, will need to dedicate some serious thought and discussion
to identifying their USP — and they may need to do so every year or two to
adapt to market changes.
Ask the right questions
Involve employees from every level of your company in
brainstorming sessions to develop your USP. During these meetings, consider the
answers to questions such as:
- What makes our products or services distinctive?
- What aspect of our business is most important to its
growth? - Which elements of what we do are the most difficult for
competitors to copy? - Why should customers buy from us instead of the
competition?
As you might have noticed, knowledge of your competitors is
critical to developing a strong USP. You can’t differentiate your business from
theirs unless you’re familiar with what competitors are selling, how they sell
their products or services, and how they support those sales in terms of
customer service. To this end, you may need to undertake some “competitive
intelligence” efforts to gather needed information.
Integrate it into the sales process
Your USP should be a powerful, concise statement that customers
and prospects will immediately understand and recognize as fulfilling their
wants or needs. Among the most commonly cited examples is package delivery
giant FedEx’s “When it absolutely, positively has to be there overnight.”
Although the company doesn’t use this slogan anymore, it remains a perfect
example of a USP that’s clear and memorable.
Of course, your USP must be more than just words. Once
established, it should serve as a sort of “mantra” for your sales team. That
is, after identifying your customers’ needs during the sales process, they
should use the USP (or an iteration of it) to explain to customers why your
product or service is the right choice. Just be careful not to overuse your USP in sales
and marketing materials, including on your website.
Now may be the time
Given the monumental changes that have occurred in the U.S.
economy and in many industries because of the COVID-19 pandemic, now may be an
imperative time to reconsider and relaunch your USP. We can help you evaluate
your sales numbers, as well as return on investment in marketing efforts, to
carefully craft the right approach.
© 2020
Conduct a “paycheck checkup” to make sure your withholding is adequate
Did you recently file your federal tax return and were surprised
to find you owed money? You might want to change your withholding so that this
doesn’t happen next year. You might even want to do that if you got a big
refund. Receiving a tax refund essentially means you’re giving the government
an interest-free loan.
Withholding changes
In 2018, the IRS updated the withholding tables that indicate
how much employers should hold back from their employees’ paychecks. In
general, the amount withheld was reduced. This was done to reflect changes
under the Tax Cuts and Jobs Act — including an increase in the standard
deduction, suspension of personal exemptions and changes in tax rates.
The tables may have provided the correct amount of tax
withholding for some individuals, but they might have caused other taxpayers to
not have enough money withheld to pay their ultimate tax liabilities.
Review and possibly adjust
The IRS is advising taxpayers to review their tax situations for
this year and adjust withholding, if appropriate.
The tax agency has a withholding calculator to assist you in
conducting a paycheck checkup. The calculator reflects tax law changes in areas
such as available itemized deductions, the increased child credit, the new
dependent credit and the repeal of dependent exemptions. You can access the IRS
calculator here: https://bit.ly/2OqnUod.
Changes may be needed if…
There are some situations when you should check your
withholding. In addition to tax law changes, the IRS recommends that you
perform a checkup if you:
- Adjusted your withholding in 2019, especially in the
middle or later part of the year, - Owed additional tax when you filed your 2019 return,
- Received a refund that was smaller or larger than
expected, - Got married or divorced, had a child or adopted one,
- Purchased a home, or
- Had changes in income.
You can modify your withholding at any time during the year, or
even multiple times within a year. To do so, you simply submit a new Form W-4
to your employer. Changes typically go into effect several weeks after a new
Form W-4 is submitted. (For estimated tax payments, you can make adjustments
each time quarterly estimated payments are due. The next payments are due on
July 15 and September 15.)
Good time to plan ahead
There’s still time to remedy any shortfalls to minimize taxes
due for 2020, as well as any penalties and interest. Contact us if you have any
questions or need assistance. We can help you determine if you need to adjust
your withholding.
© 2020
Businesses: Get ready for the new Form 1099-NEC
There’s a new IRS form for business taxpayers that pay or
receive nonemployee compensation.
Beginning with tax year 2020, payers must complete Form
1099-NEC, Nonemployee Compensation, to report any payment of $600 or more to a
payee.
Why the new form?
Prior to 2020, Form 1099-MISC was filed to report payments
totaling at least $600 in a calendar year for services performed in a trade or
business by someone who isn’t treated as an employee. These payments are
referred to as nonemployee compensation (NEC) and the payment amount was
reported in box 7.
Form 1099-NEC was reintroduced to alleviate the confusion caused
by separate deadlines for Form 1099-MISC that report NEC in box 7 and all other
Form 1099-MISC for paper filers and electronic filers. The IRS announced in
July 2019 that, for 2020 and thereafter, it will reintroduce the previously
retired Form 1099-NEC, which was last used in the 1980s.
What businesses will file?
Payers of nonemployee compensation will now use Form 1099-NEC to
report those payments.
Generally, payers must file Form 1099-NEC by January 31.
For 2020 tax returns, the due date will be February 1, 2021, because
January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to
file Form 1099-NEC. However, an extension to file may be available under
certain hardship conditions.
Can a business get an extension?
Form 8809 is used to file for an extension for all types of
Forms 1099, as well as for other forms. The IRS recently released a draft of
Form 8809. The instructions note that there are no automatic extension requests
for Form 1099-NEC. Instead, the IRS will grant only one 30-day extension, and
only for certain reasons.
Requests must be submitted on paper. Line 7 lists reasons for
requesting an extension. The reasons that an extension to file a Form 1099-NEC
(and also a Form W-2, Wage and Tax Statement) will be granted are:
- The filer suffered a catastrophic event in a federally
declared disaster area that made the filer unable to resume operations or
made necessary records unavailable. - A filer’s operation was affected by the death, serious
illness or unavoidable absence of the individual responsible for filing
information returns. - The operation of the filer was affected by fire,
casualty or natural disaster. - The filer was “in the first year of establishment.”
- The filer didn’t receive data on a payee statement such
as Schedule K-1, Form 1042-S, or the statement of sick pay required under
IRS regulations in time to prepare an accurate information return.
Need help?
If you have questions about filing Form 1099-NEC or any tax
forms, contact us. We can assist you in staying in compliance with all rules.
© 2020