Employees and small business owners often have questions about what to do with an employee’s home – and what the tax consequences might be – when they move to a new job location. Here are some answers:

Employees

Most employers want to protect the employee from being relocated against financial loss on a “forced” sale of their home. Here are the most common ways to do that, and the tax consequences to the employee:

The employer reimburses the employee’s financial loss. Here, the employer has the home appraised and agrees to pay the employee the difference between the appraised fair market value and any lesser amount the employee gets on the sale. Such reimbursement would cover the employee’s costs of the sale.

Financial loss as described here is not the same as a tax loss. The financial loss is the home’s value less what the employee collects under “forced sale” conditions. In the current real estate market, the value is not always clearly determined. The relocating employee might think the home is worth more, based on earlier appraisals or comparative sales. A tax loss is the property’s tax basis (cost plus capital investments) less what’s collected on the sale.

If the employee has a gain on the sale (the amount collected on the sale exceeds the basis), the gain can be tax-exempt up to $250,000 ($500,000 on certain husband-wife sales). Tax-loss on the sale of one’s residence, however, is not deductible.

The employer’s reimbursement of the employee’s financial loss is taxable pay to the employee. Employers who want to shelter the employee from any tax burden on what is usually an employer-instigated relocation may “gross-up” the reimbursement to cover the tax. But gross-up can be costly. For example, a grossed-up income tax reimbursement for a $10,000 loss would be $15,385 for an employee in the 35% bracket – more where Social Security taxes or state taxes are also grossed-up.

Employer buys the home. Few employers directly buy and sell employees’ homes. But many do this indirectly, effectively becoming the homes’ owners, through relocation firms acting as the employers’ agents. Known as a Guaranteed Home Sale (formerly known as a Guaranteed Buy-Out or GBO), there is no tax on the employee when using either of these two options:

Option 1. The relocation firm as employer’s agent buys the home for its appraised fair market value and later resells it. The firm collects a fee from the employer, covering sales costs and any financial loss to the firm on resale. The IRS now says that this fee is not taxable to the employee. Also, the employee’s gain on the sale to the relocation firm qualifies for the tax exemption under the limits described above ($250,000 or $500,000).

Option 2. The relocation firm offers to buy the home for its appraised value, but the employee can choose to pursue a higher price through a broker they choose from a list provided by the relocation firm. If a higher offer is made, the relocation firm pays that price to the employee (whether or not the home is then sold to that bidder). Here again, the employee is not taxed on the firm’s fee, and the gain is tax-exempt under the above limits.

Either option works for the employee, letting him or her realize full value on the sale of the home (with possibly greater value through Option 2), without an element of taxable pay.

If the deal is structured so that the relocation firm facilitates a sale from the employee to a third-party buyer (rather than to the relocation firm), the employer’s payment of the relocation firm’s fee is taxable to the employee.

The Employer’s Side

Reimbursing the employee’s loss. This is fully deductible as a business expense, as would be any additional amount paid as a gross-up.

It’s fully deductible, but it may be more costly, before and after taxes, than buying the home for resale through the relocation firm.

Paying the relocation fee only, without buying the home, as in the “Caution” above, is also fully deductible, as would be any gross-up amount on that fee.

Buying the home. The change in the IRS rule was good news for employees, but it gave nothing to employers whose tax treatment wasn’t covered. The official IRS position is that employer costs (other than carrying costs such as mortgage interest, maintenance, and fees to a relocation management company) are deductible only as capital losses, which, for corporate employers, are deductible only against capital gains. Taxpayer advocates tend to argue that employer costs here are fully deductible ordinary costs of doing business.

Questions about Relocating?

If you’ve been offered a job that requires relocating to another state and wondering how it might affect your tax situation, don’t hesitate to call.

QuickBooks has a new set of tools that can help you deal with what is probably one of your most pressing problems: getting customers to pay. Here’s how to use this new feature:

Creating Your Groups

QuickBooks has added an entry in the Customers menu to take you to these new tools. Go to Customers | Payment Reminders | Manage Customer Groups. In the window that opens, click Create Customer Group. QuickBooks then walks you through a three-step wizard. First, you enter a Name for your group in the first field of the Group details window. We’ll call ours “California High Balance.” If you’d like you can add a Description. Click Next.

In the Select fields window, you’ll set the filters for the group. If you’d rather open your complete list of customers and choose the ones you want manually, you can skip this step. For our example, we’ll define a group by choosing:

• One or more Fields. We want to narrow the group down to California customers. Click the down arrow in the Field box and select State.
• An Operator. Here, you’d select Equals.
• A Value. QuickBooks will display a list of states. Click the box in front of CA. If you’d like to include more states, you can do so. When you’re done, click Add. You’ll see your Selected fields in the box below.

Figure 1: You can set the parameters for your group by selecting multiple fields, operators, and values.

We want to narrow the list down to customers in California who have open balances of more than $500. So you’d select Open Balance for the Field, Greater Than for the Operator, and 500 for the Value. Then click Add again to move your filter into the Selected fields box.

You can keep adding filters to narrow down your list even more if you’d like. When you’re done, click Next. The View/select customers window opens displaying the results of your search in a table whose columns include Name, Overdue balance, and Avg days to pay. There’s a checkmark in the box in front of Automatically add new or remove existing customers based on fields and values selected in this group.

If you leave the box checked, QuickBooks will move customers into the group as their open balances top $500 and out when they catch up on their payments. Uncheck the box, and you’ll have to add and remove customers manually, which would take vigilance and a lot of extra work. If you’re satisfied with the list, click Finish, then OK. The Manage groups window now contains an entry for your new group.

Entries here are earmarked with icons indicating whether they are manually or automatically updated. You can also click links in the Actions column to edit or delete a group or send an email to it. If you select the last option, a window will open containing your list of customers (you can unselect any of them) and a composition box for your email.

Sending Payment Reminders

To start working with Payment Reminders, open the Customers menu and click Payment Reminders | Schedule Payment Reminders. Click Let’s get started. From the next window, you can send either invoices or statements. Click New schedule next to Invoice and enter a name in the box that opens. Lat’s call ours 15 days past due since we want to create reminders for customers who are more than 15 days past due.

This should go to all customers who fit the criteria, so click in the drop down list that follows Send reminder to. Call the new group All customers in the window that opens. Click Next, then Nextagain to display your entire list of customers. Click Finish, then OK. Back on the Schedule payment reminders screen, click + Add Reminder. This overlapping window will open:

Figure 2: You can see and edit what your reminder will say and what fields will be replaced with real data.

Enter 15 after Send this reminder and select after from the drop-down list. QuickBooks supplies a sample email that you can edit if you’d like. Real data will, of course, replace the text in brackets. You can delete any of these and add more by clicking Insert Field in the lower right corner. Be very careful if you modify the bracketed fields. Brackets should surround the exact text that comes from the QuickBooks options supplied.

When you’re satisfied with your email, you can Check spelling. Then click OK. You’ll be back at the Payment reminders screen where you can save your reminder or add another.

QuickBooks will now prompt you to send reminders when they’re due. You can track them in your customers’ invoice histories and your sent mail folder. When the time comes, open the Customersmenu and select Payment Reminders | Review & Send Payment Reminders. QuickBooks will display a list of reminders that need to be dispatched. Make sure all of the reminders you want to send have a checkmark in the box next to them and click Send Now.

While there’s nothing difficult about using these new QuickBooks tools, you should be very careful with them. You don’t want to annoy customers by sending payment reminders unless they are really warranted, and you also don’t want to let late payments languish. Should you choose to use them, contact the office to speak with a QuickBooks professional who will be happy to walk you through the process to prevent errors. As always, please call if you have any questions about QuickBooks or want to learn how to make optimal use of it in your business.

To help reduce the burden to taxpayers brought about by the coronavirus pandemic, the use of electronic or digital signatures on certain paper forms they normally cannot file electronically have been extended through December 31, 2021. Let’s take a look at what this means for taxpayers:

Types of acceptable electronic signatures

An electronic signature is a way to get approval on electronic documents. There are a number of ways to do this. Acceptable electronic signature methods include:

1. A typed name typed on a signature block
2. A scanned or digitized image of a handwritten signature that’s attached to an electronic record
3. A handwritten signature input onto an electronic signature pad
4. A handwritten signature, mark or command input on a display screen with a stylus device
5. A signature created by a third-party software

The type of technology a taxpayer must use to capture an electronic signature is not specified; the IRS will accept images of signatures (scanned or photographed) including common file types supported by Microsoft 365 such as tiff, jpg, jpeg, pdf, Microsoft Office suite or Zip.

E-signatures on certain paper-filed forms

Electronic or digital signatures are typically allowed on paper forms that cannot be filed using IRS e-file. Some of these forms are listed below. For a complete list, please call the office.

• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;
• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;
• Form 1120-C, U.S. Income Tax Return for Cooperative Associations;
• Form 1120-H, U.S. Income Tax Return for Homeowners Associations;
• Form 1120-L, U.S. Life Insurance Company Income Tax Return;
• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return;
• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;
• Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B);
• Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship;
• Form 1128, Application to Adopt, Change or Retain a Tax Year;
• Form 2678, Employer/Payer Appointment of Agent;
• Form 3115, Application for Change in Accounting Method;
• Form 4421, Declaration – Executor’s Commissions and Attorney’s Fees;
• Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes;
• Form 8038-G, Information Return for Tax-Exempt Governmental Bonds;
• Form 8038-GC; Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales;
• Form 8283, Noncash Charitable Contributions;
• Form 8802, Application for U.S. Residency Certification;
• Form 8832, Entity Classification Election;
• Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent.

Per diem rates have been updated for FY 2022 and are effective October 1, 2021. These allowances substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home and include lodging, meal, and incidental expenses, as well as meal and incidental expenses only.

Taxpayers are not required to use a method described in this revenue procedure. Instead, they may substantiate actual allowable expenses provided they maintain adequate records.

As a reminder, the TCJA suspended the miscellaneous itemized deduction that employees could take for non-reimbursed business expenses. Certain individuals such as the self-employed, Armed Forces reservists, and qualified performing artists that deduct unreimbursed expenses for travel away from home may still use per diem rates for meals and incidental expenses, or incidental expenses only.

Special meal and incidental expenses rates for taxpayers in the transportation industry are $69 for any location in the continental United States and $74 for any locality outside the continental U.S. The rate for the incidental-expenses-only deduction is $5 per day and applies to any travel locale inside or outside the continental United States.

Per diem rates and the list of high-cost localities for purposes of the high-low substantiation method are also updated. For travel to any high-cost locality, per diem rates are $296. The per diem rate is $202 for travel to any other locality within the continental U.S. The amount that is treated as paid for meals is $74 for travel to any high-cost locale and $64 for travel to any other locality within the continental U.S. Travel to areas on the list of high-cost localities have a federal per diem rate of $249 or more.

Please call the office if you have any questions about per diem rates.

The IRS sends millions of letters and notices to taxpayers for a variety of reasons. Many of these letters and notices can be dealt with without calling or visiting an IRS office. Here’s what you need to know about IRS notices and letters:

Reasons You Might Receive an IRS Notice or Letter

The IRS sends notices and letters for a number of reasons such as:

• You have a balance due.
• You are due a larger or smaller refund.
• We have a question about your tax return.
• We need to verify your identity.
• We need additional information.
• We changed your return.
• We need to notify you of delays in processing your return.

Each Notice or Letter Contains Valuable Information

It is very important that you read the IRS notice or letter carefully. If the IRS changed your tax return, compare the information provided in the notice or letter with the information in your original return.

Explaining the Reason for the Contact

The notice will explain why it was sent and will also give you instructions on how to handle the issue. If your notice or letter requires a response by a specific date, there are two main reasons you’ll want to comply:

• To minimize additional interest and penalty charges.
• To preserve your appeal rights if you don’t agree.

Usually No Reply Is Necessary

If you agree with the correction to your account, then usually no reply is necessary – unless a payment is due or the notice directs otherwise.

Respond as Requested

If you disagree with the correction the IRS made, it is still important to respond as requested. You should send a written explanation of why you disagree and include any documents and information you want the IRS to consider along with the bottom tear-off portion of the notice. Mail the information to the IRS address located in the upper left of the notice. Allow at least 30 days for a response.

Pay as Much as You Can

If you can’t pay the full amount you owe, you should pay as much as you can to try to avoid or reduce penalties incurred. You can pay online or apply for an Online Payment Agreement or Offer in Compromise. If you need help with either of these, please call the office.

Usually No Need to Visit an IRS Office

Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right of the notice. Have a copy of your tax return and the correspondence available when you call to help the IRS respond to your inquiry.

Keep a Copy of Notices and Letters

It’s important to keep a copy of all notices or letters with your tax records. You may need to reference these documents at a later date.

IRS Notices and Letters Are Sent by Mail

The IRS does not correspond by email about taxpayer accounts or tax returns. If you search the IRS website for your notice or letter and it doesn’t return a result – or you believe the notice or letter looks suspicious – contact the IRS at 800-829-1040 or report it on the Report Phishing page on IRS.gov. You can find the notice (CP) or letter (LTR) number on either the top or the bottom right-hand corner of your correspondence.

Contact Phone Number Is Provided

A contact phone number is provided on the top right-hand corner of the notice or letter. Typically, you only need to contact the IRS if you don’t agree with the information, have a balance due, or need to send additional information.

Questions or Concerns About IRS Notices?

As always, don’t hesitate to call if you have questions or concerns about IRS notices.

Can you point your company in the direction of financial success, step on the gas, and then sit back and wait to arrive at your destination? Probably not.

While you may wish it was that easy, the truth is that you can’t let your business run on autopilot and expect good results. Every business owner knows you need to make numerous adjustments along the way. So, how do you handle the array of questions facing you? One way is through cost accounting.

Cost Accounting Helps You Make Informed Decisions

Cost accounting reports and determines the various costs associated with running your business. With cost accounting, you track the cost of all your business functions – raw materials, labor, inventory, and overhead, among others.

Cost accounting differs from financial accounting because it’s only used internally, for decision making. Because financial accounting is employed to produce financial statements for external stakeholders, such as stockholders and the media, it must comply with generally accepted accounting principles (GAAP). Cost accounting does not.

Cost accounting allows you to understand the following:

Cost behavior. For example, will the costs increase or stay the same if production of your product goes up?

Appropriate prices for your goods or services. Once you understand cost behavior, you can tweak your pricing based on the current market.

Budgeting. You can’t create an effective budget if you don’t know the real costs of the line items.

Pay Attention to Fixed and Variable Costs

To monitor your company’s costs with this method, you need to pay attention to the two types of costs in any business: fixed and variable.

Fixed costs. Fixed costs do not fluctuate with changes in production or sales and include:

• rent
• insurance
• dues and subscriptions
• equipment leases
• payments on loans
• management salaries
• advertising

Variable costs. Variable costs do change with variations in production and sales. Variable costs include:

• raw materials
• hourly wages and commissions
• utilities
• inventory
• office supplies
• packaging, mailing, and shipping costs

Cost accounting is easier for smaller, less complicated businesses. The more complex your business model, the harder it becomes to assign proper values to all the facets of your company’s functioning.

Setting up a Cost Accounting System

If you’d like to understand the ins and outs of your business better and create sound guidance for internal decision making, consider setting up a cost accounting system. If you need assistance with this or any other matter related to ensuring the financial success of your business, don’t hesitate to call the office to schedule a consultation.

Understanding marginal and effective tax rates is important for tax planning purposes; however, many taxpayers don’t fully understand the differences. Let’s take a closer look:

Marginal Tax Rate

The United States has a progressive tax system. The more money you earn, the higher your tax rate is and the more taxes you pay to the IRS. In 2021, there are seven tax brackets ranging from 10% to 37%. If you earn $35,000 a year as a single filer, you are in the 12% tax bracket. If you make $520,000 a year as a single filer, you are in the 37% tax bracket. These brackets represent the percentage of taxes you pay based on your taxable income and are referred to as marginal tax rates. When someone says they are in the 35% tax bracket, this is typically what they are referring to – and this is where the confusion begins.

For many taxpayers, their income is the same as their earnings from wages; however, taxpayers should note that income from capital gains may be taxed differently. Short-term capital gains are generally taxed as ordinary income subject to the seven tax brackets mentioned above. Long-term capital gains, however, are taxed at 0%, 15%, and 20%.

Due to the way the tax code is set up and because marginal tax rates apply to each additional level of income above your tax bracket’s income limit, it is not as straightforward as it seems. If you earn $100,000 and are in the 24% tax bracket, it doesn’t mean that you pay a 24% tax on your earned income (0.24 x $100,000 = $24,000).

To illustrate how this works, let’s look at the following example for a single taxpayer earning $100,000 of annual income in 2021 (i.e., filing a tax return in April 2022). The amount of tax owed breaks down as follows:

• • 10% Bracket: ($9,950 – $0) x 10% = $995.50
  • 12% Bracket: ($40,525 – $9,950) x 12% = $3,669.00
  • 22% Bracket: ($86,375 – $40,525) x 22% = $10,087.00
  • 24% Bracket: ($100,000 – $86,375) x 24% = $3,270.00

Total tax = $18,021.50

In the example above, the marginal tax rate (tax bracket) on $100,000 of income is 24%, but the effective tax rate is closer to 18% ($18,021.50/$100,000) – without taking any deduction that reduce taxable income.

Effective Tax Rate

The effective tax rate is the actual amount of federal income taxes paid on a taxpayer’s taxable income and more accurately represents the amount of tax most people pay. The effective tax rate does not include state taxes and local taxes, FICA taxes, or self-employment tax.

Many taxpayers take advantage of tax credits and deductions that reduce taxable income, such as the standard deduction, tax-deductible contributions to a retirement or pension plan, health savings account, tax credits for dependent children, and charitable contributions.

Calculating your effective tax rate is relatively simple: Divide your total tax liability by your gross (before tax) annual income. For example, if you made $100,000 (single filer), took the standard deduction of $12,500 in 2021, reducing your income to $87,450, and paid $15,009.50 in tax, the effective tax rate is 15 percent even though you are in the “24%” tax bracket.

Questions?

If you feel like too much of your hard-earned money goes straight to the IRS instead of your bank account, please call the office to learn more about tax planning strategies that could save you money.

Many 401(k) plans allow taxpayers to make Roth contributions as long as the plan has a designated Roth account. Your plan may also allow you to transfer amounts to the designated Roth account in the plan or borrow money.

Check with your employer to find out if your 401(k), 403(b) or 457 governmental plan has a designated Roth account and whether it allows in-plan Roth rollovers or loans.

A designated Roth account allows you to:

• Make designated Roth contributions to the account; and
• if the plan permits, rollover certain amounts in your other plan accounts to the Roth account.

Pre-tax Deferrals vs. After-tax Contributions

Unlike pre-tax salary deferrals, which are not taxed when you contribute them to the plan, you have to pay taxes on any contribution you make to a designated Roth account. Any pre-tax salary deferrals and related earnings are taxable when you withdraw them from the plan.

Your gross income for the year in which you make designated Roth contributions will be higher than if you had made only pre-tax salary deferrals.

Roth contributions, however, are not taxed when you withdraw them from the plan. Earnings on Roth contributions are also not taxed when they are withdrawn from the plan if your withdrawal is a qualified distribution. A qualified distribution is a distribution that is made:

• At least 5 years after the first contribution to your Roth account; and
• After you are age 59 1/2 or on account of you being disabled, or to your beneficiary after your death.

Maximum Contribution Amounts

Roth IRA. In 2021, the maximum contribution to a regular Roth IRA account is $6,000 ($7,000 if age 50 or older). Furthermore, contributions are limited by tax filing status and adjusted gross income.

Designated Roth Account. In contrast, in 2021, the maximum contribution to a designated Roth account is $19,500 ($26,000 if age 50 or older), and contribution limits are not impacted by filing status or adjusted gross income.

Questions?

Depending on your particular tax situation, contributing to a designated Roth account could be a smart move. To learn more about whether you should take advantage of a designated Roth account, please call.