Select Page

Entertainment Facility: Perk for You, Your Net Worth, and Your Employees

by | Mar 1, 2022 | Tax Planning

Imagine this: your Schedule C business buys a home at the beach, uses it solely as an entertainment facility for business, pays off the mortgage, and deducts all the expenses.

Now say, 10 years later, without any tax consequence to you, you start using the beach home as your own.

Is this possible? Yes. Are there some rules on this? Yes. Are the rules difficult? No.

Okay, so could you achieve the same result if you operate your business as a corporation? Yes, but the corporation needs to rent the property from you or reimburse you for the facility costs, including mortgage interest and depreciation—because you want the title to always be in your name, not the corporation’s name.

The beach home, ski cabin, or other entertainment facility must be primarily for the benefit of employees other than those who are officers, shareholders, or other owners of a 10 percent or greater interest in the business, or other highly compensated employees. In this situation, you create

  • 100 percent entertainment facility tax deductions for the employer (you or, if incorporated, your corporation), and
  • tax-free use by the employees.

The employee facility deduction is straightforward. It has three splendid benefits for the small-business owner:

  1. You deduct the facility as a business asset.
  2. Your employees get to use the facility tax-free.
  3. You own the property and can use it personally without tax consequences once you no longer need it for business use. (Note that when you sell, you will have a gain or loss on the sale and some possible recapture of depreciation.)

If you would like to have a tax-savings strategy developed, please email me directly at sp@merchbooks.com.

Owe Taxes for Misclassified Workers? Section 530 to the Rescue!

by | Feb 5, 2022 | Tax Planning

As a business owner, you are obligated to collect and remit payroll taxes for your employees. But you are not required to collect and remit payroll taxes for independent contractors.

That’s why it’s important to correctly classify workers as either employees or independent contractors.

But here’s the problem: the rules for correctly classifying workers as either employees or independent contractors are unclear and confusing.

And what happens if you misclassify a worker as an independent contractor? Then you can find yourself owing hundreds of thousands of dollars in back employment taxes, penalties, and interest.

But wait! If this happens to you, the safe harbor of Section 530 may provide relief.

The Section 530 safe harbor was passed by Congress as part of the Revenue Act of 1978 in response to complaints by business owners that the IRS was being too aggressive in reclassifying their workers as employees.

The possible good news for you is that the Section 530 safe harbor prevents the IRS from retroactively reclassifying your independent contractors as employees and subjecting you to federal employment taxes, penalties, and interest.

Reclassifications, if any, go forward only. You are not on the hook for any money as of the date of any reclassifications.

To qualify for the Section 530 safe harbor, you must meet all the following requirements:

  1. You must have filed all federal tax and information returns consistent with treating the individuals as independent contractors.
  2. You must show that you never treated the individuals in question, or other workers in substantially similar positions, as employees for federal employment tax purposes.
  3. You must show that you had a reasonable basis for classifying the individuals as independent contractors.

You can meet the reasonable basis requirement by showing that you relied on any one of a number of authorities, including judicial precedents or administrative rulings, a prior worker classification tax audit, or industry practice.

Your classifications of workers for federal purposes do not have to match your classifications for state law purposes.

If you would like to have a tax-savings strategy developed, please email me directly at sp@merchbooks.com.

Congress Closes the PayPal 1099-K Reporting Loophole

Congress Closes the PayPal 1099-K Reporting Loophole

by | Jan 5, 2022 | Tax Planning

Congress Closes the PayPal 1099-K Reporting Loophole

When Congress passed the American Rescue Plan Act in March, it made a little-noticed change in the tax reporting rules that will make it almost impossible for independent contractors and other businesses to hide their income from the IRS by receiving electronic payments.

The big change takes effect in 2022, but there’s much to know now.

Third-Party Information Reporting

The government knows this universal truth: taxpayers are much less likely to report all their income on their tax returns when the IRS has no way of independently verifying their income. That’s where third-party information reporting (such as 1099s) comes in.

The IRS has a series of 1099 forms that financial institutions, employers, and businesses use to report various types of payments. The countless 1099s are information returns in which the payor reports the amounts paid to the
recipients during the year.

The IRS matches these figures with the amount reported on the recipient’s tax returns to determine whether underreporting has occurred.

Most Famous 1099 Replaced

You likely know of Form 1099-MISC, which was in use for tax years before 2020. You generally used it to report your business’s payments to unincorporated independent contractors.
You no longer use Form 1099-MISC to report nonemployee compensation. Beginning with the 2020 tax year, you file Form 1099-NEC for such payments when your business pays $600 or more.

Statistics Prove the Case

Form 1099-MISC and the other 1099 information returns effectively combat underreporting of income.

Individual taxpayers fail to report about 55 percent of income from sources for which there is no information reporting. In contrast, only 5 percent of income listed on a 1099 goes unreported.

Loophole

Since 2011, you have been able to avoid Form 1099-MISC (and now 1099-NEC) if your business pays through a third-party settlement organization (TPSO) such as PayPal or Payable, by credit card, or by debit card.

With this strategy, you push the reporting requirements to the TPSO.

Credit Cards Are Different

Credit card companies and banks also must use Form 1099-K to report payments by credit cards or debit cards. But for that reporting, there is no “more than $20,000 and more than 200 transactions” threshold for such
reporting. 

A business that accepts credit cards receives a 1099-K that shows all the monies paid by the credit card company to the business. The 2011 creation of the 1099-K did away with a big chunk of the underground economy whose
members avoided paying their fair share of the taxes. 

Goodbye, 1099-K Loophole

Starting January 1, 2022, the American Rescue Plan Act kills the two-step “more than $20,000 and more than 200 transactions” threshold for TPSO filing of 1099-K and replaces it with the single “$600 or more” reporting
threshold.

You may be surprised by how this change will snag millions of taxpayers, including gig workers such as Uber, Lift, Instacart, and Grubhub drivers; eBay and Etsy sellers; and of course, contractors and others who were using the
loophole to their advantage.

Additional Clarification

Congress also amended the tax code to make clear that third-party network transactions requiring a 1099-K include only transactions for goods and services.

For example, a 1099-K need not be filed where an individual uses PayPal or a similar service to reimburse friends or relatives for expenses or to make charitable contributions. Nor does the TPSO need to send a 1099-K for
payments of royalties or rents.