Illinois Fair Tax red and green choice signs

Illinois Fair Tax Bill | A Few Thoughts

Illinoisans are being asked to vote on a “Fair Tax” in November. Most of the information being provided is focused on taxing higher-income individuals while opponents are worried that the Illinois Fair Tax Bill opens the door for higher taxes for all.

While this is a valid concern, I think we need to ask more questions. What will the estimated $3.6 billion to be raised from the additional tax be used for? When you and I go to the bank to ask for more money, the lender wants to know how the funds will be used.

While we are not “lending” Illinois money, we certainly have a vested interest in how the money will be spent. 

How will funds be spent?

The largest liability the state has is underfunded pension liability. The deficit is over $137 billion, yet the Fair Tax proposal requires less than 10% of revenue to pay down this liability. Where will the other 90% be spent?

This will be toward current programs and any new programs our legislators deem necessary. 

Does this mean our elected officials think there is no waste that can be eliminated or savings found in our state? Illinois has over six thousand separate taxing units, the most in the nation.

The Chicago region has more than 1,226 local governments. The New York metro area has fewer than 200. Can’t there be savings in the combination or elimination of some of these agencies? Where is the 5, 10 or 15-year plan for Illinois? We live from year to year.

The answer is always more taxes. As I have written before the state receives more than $50 million monthly in new marijuana taxes. Only 10% is earmarked for debt reduction. 

Is it any surprise that any tax increase is seen with scorn, even when the increase may be justified?

If Illinois shows the bond rating companies they are serious about addressing debt and the pension under-funding borrowing interest rates could be lowered. This means less money for interest payments and more funds for state programs that need the money. 

Illinois taxpayers deserve to know how additional tax money will be spent. So far neither side has addressed this issue. Tell voters how the money will be spent and then we can make an informed decision. 

For more information, contact David Mills, CPA, LLC.

Piles of cash represented by $100 US bills

File Cash Transaction Reports For Your Business

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.

Cash 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 of the 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 BSAEFilingHelp@fincen.gov.

At David Mills, CPA, LLC, we’re small business tax experts. Contact us with any questions or for assistance.

Computer and packing boxes at a start-up business

Launching A Business? How To Treat Start-Up Expenses On Your Tax Return

While the COVID-19 crisis has devastated many existing businesses, the pandemic has also created opportunities for entrepreneurs to start-up new businesses.

Computer and packing boxes at a start-up business
The way you handle initial start-up expenses can make a difference in your tax bill.

For example, some businesses are being launched online to provide products and services to people staying at home.

Entrepreneurs often don’t know that many expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

How Expenses Must Be Handled

If you’re starting or planning a new enterprise, keep these key points in mind:

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.

Under the Internal Revenue Code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t get you very far today!

And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.

No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins.

Generally, that means the year when the business has all the pieces in place to begin earning revenue.

To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as:

  • Did the taxpayer undertake the activity intending to earn a profit?
  • Was the taxpayer regularly and actively involved?
  • Did the activity actually begin?

Expenses that qualify In general, start-up expenses include all amounts you spend to:

Investigate the creation or acquisition of a business

  • Create a business
  • Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began.

One example is money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the expenditure must be related to creating a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Thinking ahead If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the elections described above. Recordkeeping is critical.

At David Mills, CPA, LLC we’re here to help answer your business start-up questions and to offer advice. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.

COVID Charitable CARES Contributions graphic

Business Charitable Contribution Rules Have Changed Under CARES Act

In light of the novel coronavirus (COVID-19) pandemic, many businesses are interested in donating to charity. In order to incentivize charitable giving, the Coronavirus Aid, Relief and Economic Security (CARES) Act made some liberalizations to the rules governing charitable deductions.

The Limit on Charitable Deductions for Corporations has Increased 

Before the CARES Act, the total charitable deduction that a corporation could generally claim for the year couldn’t exceed 10% of corporate taxable income (as determined with several modifications for these purposes).

Contributions in excess of the 10% limit are carried forward and may be used during the next five years (subject to the 10%-of-taxable-income limitation each year).

What changed? Under the CARES Act, the limitation on charitable deductions for corporations (generally 10% of modified taxable income) doesn’t apply to qualifying contributions made in 2020.

Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of taxable income (modified). No connection between the contributions and COVID-19 activities is required.

The Deduction Limit on Food Inventory has Increased

At a time when many people are unemployed, your business may want to contribute food inventory to qualified charities.

In general, a business is entitled to a charitable tax deduction for making a qualified contribution of “apparently wholesome food” to an organization that uses it for the care of the ill, the needy, or infants.

“Apparently wholesome food” is defined as food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations, even though it may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.

Before the CARES Act, the aggregate amount of such food contributions that could be taken into account for the tax year generally couldn’t exceed 15% of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which the contributions were made. This was computed without regard to the charitable deduction for food inventory contributions.

What changed? Under the CARES Act, for contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations.

For other business taxpayers, it increases from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

CARES Act Questions

Be aware that in addition to these changes affecting businesses, the CARES Act also made changes to the charitable deduction rules for individuals.

Contact David Mills, CPA, LLC if you have questions about making charitable donations and securing a tax break for them. We can explain the rules and compute the maximum deduction for your generosity. 

PPP Loan written in letter blocks

Received a PPP Loan? Forgiven Expenses Aren’t Deductible

The IRS has issued guidance clarifying that certain deductions aren’t allowed if a business has received a Paycheck Protection Program (PPP) loan.

Specifically, an expense isn’t deductible if both:

PPP Basics

The CARES Act allows a recipient of a PPP loan to use the proceeds to pay payroll costs, certain employee healthcare benefits, mortgage interest, rent, utilities, and interest on other existing debt obligations.

A recipient of a covered loan can receive forgiveness of the loan in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the loan’s origination date:

  1. Payroll costs,
  2. Interest on any covered mortgage obligation,
  3. Payment on any covered rent, and
  4. Covered utility payments.

The law provides that any forgiven loan amount “shall be excluded from gross income.”

Deductible Expenses

So the question arises: If you pay for the above expenses with PPP funds, can you then deduct the expenses on your tax return?

The tax code generally provides for a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.

Covered rent obligations, covered utility payments, and payroll costs consisting of wages and benefits paid to employees comprise typical trade or business expenses for which a deduction generally is appropriate.

The tax code also provides a deduction for certain interest paid or accrued during the taxable year on indebtedness, including interest paid or incurred on a mortgage obligation of a trade or business.

No Double Tax Benefit

In IRS Notice 2020-32, the IRS clarifies that no deduction is allowed for an expense that is otherwise deductible if payment of the expense results in forgiveness of a covered loan pursuant to the CARES Act and the income associated with the forgiveness is excluded from gross income under the law.

The Notice states that “this treatment prevents a double tax benefit.” Two members of Congress say they’re opposed to the IRS stand on this issue. Senate Finance Committee Chair Chuck Grassley (R-IA) and his counterpart in the House, Ways and Means Committee Chair Richard E. Neal (D-MA), oppose the tax treatment.

Neal said it doesn’t follow congressional intent and that he’ll seek legislation to make certain expenses deductible.

For more tax advice or information, contact the experts at David Mills CPA, LLC.

Business man sitting at a computer thinking about 2020 taxes

Thinking About Taxes? Things to Consider in 2020

At the moment, tax rates are at historic lows. We have record deficits and are looking to add more. Where do you think tax rates will be at in 1 year? 3 years? 5 years or more? Here are a few things to consider when thinking about taxes in 2020.

While everyone’s situation is different, we believe this is a serious consideration in tax planning for many individuals.

Is this a good time to convert funds from a traditional IRA to a Roth IRA?

Most IRA fund balances are at a low point and many taxpayers may see lower income in 2020. This may be a good time to convert some or all your funds to a Roth IRA.

You can manage the tax brackets. For example, an estimate of income can be prepared to find out how much more income you can have to stay in the same tax bracket. This way you can effectively manage your tax burden.

What do you need to know about Roth IRA contributions?

If your modified adjusted gross income in 2020 for married filing jointly is $196,000 or less you can contribute directly to a Roth IRA. Income at $206,000 cannot make a Roth contribution.

Our income exceeds the Roth limits, what can be done?

You can contribute to a traditional IRA. You can then convert to a Roth IRA. There are other limitations so be sure to discuss this with your financial adviser or make an appointment with us to discuss how this works and if a conversion will help you in retirement.

For 2020 there’s a new charitable deduction available

The IRS has a $300 cash (not non-cash such as a Goodwill donation) charitable deduction for 2020 which can be used whether you itemize or not.

Required Minimum Distributions

If you have not begun taking required minimum distributions (RMD’s) in 2020 you can wait until age 72 to start. The previous rules were at age 70 ½. Note that if you have already started your RMD’s you cannot skip them until age 72-you are bound by the previous rules.

There is a COVID-19 law that allows all taxpayers to waive their 2020 Required Minimum Distributions

There are other considerations for this so it is best to consult your financial adviser.

If you have questions, please talk to the experts at David Mills, CPA, LLC, today. We would be happy to help! Contact us today.

Independent Contractor wearing mask

Make Sure Independent Contractors Are Properly Classified

As a result of the coronavirus (COVID-19) crisis, your business may be using independent contractors to keep costs low. But you should be careful that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be an expensive mistake.

The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one.

If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax.

Often, a business must also provide the worker with the fringe benefits that it makes available to other employees. And there may be state tax obligations as well. These obligations don’t apply if a worker is an independent contractor.

In that case, the business simply sends the contractor a Form 1099-MISC for the year showing the amount paid (if the amount is $600 or more).

No Uniform Employee Definition

Who is an “employee?” Unfortunately, there’s no uniform definition of the term. The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing.

Otherwise, the individuals are generally independent contractors. But other factors are also taken into account. Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530.

In general, this protection applies only if an employer:

  • Filed all federal returns consistent with its treatment of a worker as a contractor
  • Treated all similarly situated workers as contractors
  • Had a “reasonable basis” for not treating the worker as an employee. For example, a “reasonable basis” exists if a significant segment of the employer’s industry traditionally treats similar workers as contractors.

Note: Section 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.

Asking For A Determination

Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee.

However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Businesses should consult with the staff at David Mills, CPA, LLC before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and inadvertently trigger an employment tax audit.

It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules. Be aware that workers who want an official determination of their status can also file Form SS-8.

Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities. If a worker files Form SS-8, the IRS will send a letter to the business. It identifies the worker and includes a blank Form SS-8.

The business is asked to complete and return the form to the IRS, which will render a classification decision.

Contact the small business experts at David Mills, CPA, LLC if you’d like to discuss how these complex rules apply to your business.

hand holding fanned out $100 bills

Key Things to Know About Your Stimulus Payment

To help you wade through all the information about the COVID-19 stimulus payment, also known as the Economic Impact Payment, we’re offering tips to a few key things you should know:

  • There’s a new scam around the stimulus payments. You may get a phone call or email saying they can get your Economic Impact Payment to you quicker by giving them your banking information and social security number. Never give this information to someone you don’t know. The IRS does NOT contact you for this information.
  • Did you have to pay the IRS when filing your tax return in 2018 or 2019 or have your refund applied to the next year? If so, the IRS does NOT have your banking information to direct deposit your stimulus payment. Go to this site for more information: https://www.irs.gov/coronavirus/non-filers-enter-payment-info-here
  • The stimulus payment is not taxable for the IRS and Illinois tax returns.
  • For anyone who does not get the correct amount of Economic Impact Payment there will be a reconciliation feature on the 2020 tax return (filed in 2021).
  • The $500 stimulus payment is for children under the age of 17. If your child turned 17 in either year they are ineligible for the payment.

For more information, contact the tax professionals at David Mills, CPA, LLC.

Sidewalk sign saying Sorry We're Closed Due to COVID-19

Relief From Not Making Employment Tax Deposits Due to COVID-19 Tax Credits

The IRS has issued guidance providing relief from failure to make employment tax deposits for employers that are entitled to the refundable tax credits provided under two laws passed in response to the coronavirus (COVID-19) pandemic.

The two laws are the Families First Coronavirus Response Act, which was signed on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, which was signed on March 27, 2020.

Employment tax penalty basics

The tax code imposes a penalty for any failure to deposit amounts as required on the date prescribed, unless such failure is due to reasonable cause rather than willful neglect.

An employer’s failure to deposit certain federal employment taxes, including deposits of withheld income taxes and taxes under the Federal Insurance Contributions Act (FICA) is generally subject to a penalty.

COVID-19 relief credits

Employers paying qualified sick leave wages and qualified family leave wages required by the Families First Act, as well as qualified health plan expenses allocable to qualified leave wages, are eligible for refundable tax credits under the Families First Act.

Specifically, provisions of the Families First Act provide a refundable tax credit against an employer’s share of the Social Security portion of FICA tax for each calendar quarter, in an amount equal to 100% of qualified leave wages paid by the employer (plus qualified health plan expenses with respect to that calendar quarter).

Additionally, under the CARES Act, certain employers are also allowed a refundable tax credit under the CARES Act of up to 50% of the qualified wages, including allocable qualified health expenses if they are experiencing:

  • A full or partial business suspension due to orders from governmental authorities due to COVID-19
  • A specified decline in business

This credit is limited to $10,000 per employee over all calendar quarters combined.

An employer paying qualified leave wages or qualified retention wages can seek an advance payment of the related tax credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Available relief

The Families First Act and the CARES Act waive the penalty for failure to deposit the employer share of Social Security tax in anticipation of the allowance of the refundable tax credits allowed under the two laws.

IRS Notice 2020-22 provides that an employer won’t be subject to a penalty for failing to deposit employment taxes related to qualified leave wages or qualified retention wages in a calendar quarter if certain requirements are met.

Contact David Mills, CPA, LLC for more information

Contact David Mills, CPA, LLC for more information about whether you can take advantage of this relief.

tax relief employee retention credit words on notepad

Learn About the CARES Act Employee Retention Tax Credit

The recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 pandemic.

The employee retention credit is available to employers, including nonprofit organizations, with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings.

The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.

FAQs

How is the credit calculated?

The credit is 50% of qualifying wages paid up to $10,000 in total. So the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000. Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit. Therefore, an employer may be able to claim it for qualified wages paid as early as March 13, 2020. Wages aren’t limited to cash payments, but also include part of the cost of employer-provided health care.

When is the operation of a business “partially suspended” for the purposes of the credit?

The operation of a business is partially suspended if a government authority imposes restrictions by limiting commerce, travel or group meetings due to COVID-19 so that the business still continues but operates below its normal capacity.
Example: A state governor issues an executive order closing all restaurants and similar establishments to reduce the spread of COVID-19. However, the order allows establishments to provide food or beverages through carry-out, drive-through or delivery.
This results in a partial suspension of businesses that provided sit-down service or other on-site eating facilities for customers prior to the executive order. 

Is an employer required to pay qualified wages to its employees?

No. The CARES Act doesn’t require employers to pay qualified wages.

Is a government employer or self-employed person eligible?

No. Government employers aren’t eligible for the employee retention credit. Self-employed individuals also aren’t eligible for the credit for self-employment services or earnings. 

Can an employer receive both the tax credits for the qualified leave wages under the Families First Coronavirus Response Act (FFCRA) and the employee retention credit under the CARES Act? 

Yes, but not for the same wages. The amount of qualified wages for which an employer can claim the employee retention credit doesn’t include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA. 

Can an eligible employer receive both the employee retention credit and a loan under the Paycheck Protection Program? 

No. An employer can’t receive the employee retention credit if it receives a Small Business Interruption Loan under the Paycheck Protection Program, which is authorized under the CARES Act. So an employer that receives a Paycheck Protection loan shouldn’t claim the employee retention credit.