Accounting & Tax Updates - Hot Topics for Business Owners Heading Into Q4 2023
Attention Ledgerly Newsletter Subscribers,
We hope this update finds you well. As we enter the fourth quarter of 2023, we are pleased to bring you the latest insights on topics prevalent in tax planning prior to year-end. Below we dive into the Employee Retention Tax Credit (ERTC), as well as the ever-developing regulations over both Digital Assets and Peer-to-Peer Payment Platforms, and how these all impact your business.
Employee Retention Tax Credit and IRS Processing Pause
Overview
The ERTC has been a valuable lifeline for many businesses during the ongoing pandemic. This credit was introduced as part of the CARES Act in March 2020 and has since undergone various amendments and extensions. As of Q4 2023, the ERTC remains an important financial tool for businesses looking to recover and stabilize their operations.
Tax Implications
ERTC Eligibility Criteria
To qualify for the ERTC, businesses must meet specific eligibility criteria, including:
Business Size: Generally, businesses with fewer than 500 employees in 2019 may be eligible. There are exceptions for businesses significantly affected by government orders related to COVID-19.
Partial Suspension or Significant Decline in Gross Receipts: Eligible businesses must have experienced either a partial suspension of operations due to government orders or a significant decline in gross receipts when compared to the same quarter in 2019.
Qualified Wages: The ERTC is calculated based on qualified wages paid to employees during the eligible periods.
Credit Amount
The credit amount can be substantial, up to 70% of qualified wages paid per employee, with a maximum credit of $7,000 per employee per quarter [1].
Accounting Implications
Recordkeeping
Proper documentation is crucial when claiming the ERTC. Maintain records of eligible employees, qualified wages, and supporting documentation to substantiate your claim. Accurate recordkeeping is essential to avoid potential audit issues [2].
IRS Form 941
ERTC claims are reported on IRS Form 941, Employer's Quarterly Federal Tax Return. Ensure that you accurately complete this form to claim the credit for eligible quarters [3].
IRS Processing Pause Due to Fraudulent Activity
The IRS has recently implemented a temporary pause on processing ERTC claims due to concerns over fraudulent activity [4]. This pause is part of the IRS's ongoing efforts to prevent improper payments and safeguard the integrity of the ERTC program.
During this pause, the IRS will conduct additional reviews and verifications to identify and address fraudulent claims. While this may cause delays in processing legitimate ERTC claims, it is a necessary step to protect the program from abuse.
Although there is a pause, businesses can still apply for the ERTC to get inline for their deserved piece of the pie.
Warning from the IRS
The IRS has issued a warning about aggressive promotion and misleading information related to the ERTC. Businesses are urged to watch out for red flags that may indicate improper ERTC claims. You can read more about this warning in the IRS article titled "Red Flags for Employee Retention Credit Claims" [5].
Guidance
To navigate the complexities of the ERTC and ensure compliance with IRS regulations, consider the following guidance:
Stay Informed: Keep up-to-date with the latest ERTC guidance and updates from the IRS and other relevant authorities. Consult with tax professionals to understand how changes may impact your business.
Review Eligibility: Periodically review your eligibility for the ERTC, especially if your business circumstances have changed since the initial application. Changes in business size, revenue, or government orders can affect eligibility.
Document Thoroughly: Maintain detailed records of all ERTC-related transactions and supporting documents. This will help you respond to any IRS inquiries and ensure accurate reporting.
Engage Professional Assistance: Consider working with a qualified tax professional or accounting firm with expertise in ERTC compliance. They can provide valuable guidance, help with accurate reporting, and assist with any IRS audits or inquiries.
Regulation of Digital Assets and Peer-to-Peer Payment Platforms
Overview
Digital assets and different online payment platforms have come onto the scene in recent years. While it was relatively new, the IRS did not have any formal regulations in place to capture income generated by individuals and businesses alike in these realms. However, the IRS has begun to catch up and has passed some key legislation that will be prominent when it comes to reporting your income for FY ‘23.
Tax Implications
Digital Assets
Required Reporting: Per the IRS, for any transaction that involves a digital asset (some of the more common ones: cryptocurrency, stablecoins, and non-fungible tokens or “NFTs”), it is typically necessary to be included on an individual (or business’s) tax return [6].
Potential Legislation: There are proposed regulations that would require brokers to provide a new Form 1099-DA to simplify digital asset tax calculations for taxpayers [6]. This would potentially eliminate the need for complicated calculations or expensive tax preparation services. Further, it would ensure equal tax reporting treatment for all asset types
The proposal states the first year brokers would be required to report data on digital asset activity would be 2026, for activity that occurred in 2025 [6]
If you’d like to learn more about this proposal, check out the proposal Here
Peer-To-Peer (P2P) Payment Platforms
Reporting Income Threshold: Per the American Rescue Plan Act of 2021, beginning in 2023, the IRS requires a platform to send Form 1099-K to any individual who receives more than $600 on a P2P payment platform (PayPal, Venmo, CashApp, Zelle, etc.). This is a far cry from the $20,000 (and 200 transactions) threshold utilized in 2022 [7].
Specific to Business Payments: The IRS has applied this threshold to business payments that are sent on such platforms. This highlights the importance for individuals using these payment avenues to ensure they have a separate account for their business, so as to avoid intermingling business and personal funds. If an individual flows business amounts through their personal account, they are responsible for both identifying how much was for business and reporting that as income on their tax return at the end of the year
Accounting Implications
Recordkeeping
Detailed bookkeeping is more important now than ever. With the dynamic landscape of digital currencies and e-commerce in general, more business activity is captured online and easier to trace the digital footprint. With the IRS continually striving to impose regulations to ensure taxpayers are reporting all of their income, individuals and business owners alike need to have a firm grasp of their finances. The keys to do that is keeping detailed records and separating any and all personal funds from business activity.
For example, we have seen clients go as far as creating separate general ledger accounts for each digital asset (ie: Bitcoin held in coinbase) to track their cost basis, unrealized gains and losses, and realized gains and losses. Although brokers are doing a better job of tracking these items, it is always better to be more detailed around this topic where a level of uncertainty and skepticism lies. Having Ledgerly in your corner to assist you and your business provides you more time to focus on investing in more digital assets.
1099-K
As mentioned previously, the criteria to be issued a 1099-K was tightened. Highlighted above, the threshold for P2P payments is significantly lower than the prior year. If I was a betting man, I would say a lot of headaches for taxpayers filing 2023 returns will stem from separating personal and business activity from these platforms. It will be up to the taxpayer to determine if the amount reported on their 1099-K is accurately reflective of solely business activity [8].
1099-DA
The issuance of this form will help taxpayers easily determine if they owe taxes related to their digital assets. The form will allow them to dodge complex calculations and avoid dishing out extra cash for tax prep services specific to digital assets (which could be costly, depending on the amount of activity they have) [6].
Guidance
Similar to mitigating the complexities of the ERTC, to firmly grasp digital assets and P2P payment platforms, a taxpayer should consider the following steps to maintain compliance with the iRS:
Maintain Detailed Records: Keep thorough records of all digital asset and P2P transactions throughout the year. Specific to P2P platforms, this includes payments received and sent using platforms like Venmo, PayPal, CashApp, etc. Further, you should record transaction dates, amounts, and the purpose of each transaction. Having a well-organized record will make it easier to report accurately when it's time to file taxes.
Review Payment Statements: Take advantage of the time you have now in Q4! Review all of your P2P payment statements through 9/30. These statements often provide a summary of your transaction history, which can serve as a valuable reference. Look for any discrepancies between your records and the statements, and ensure that all transactions are accounted for.
Use Cryptocurrency Tax Software: Consider using cryptocurrency tax software or tools designed to track and calculate your tax obligations accurately. These platforms can help automate the process and ensure you don't miss any taxable events. Import your transaction data into the software, and it will generate the necessary reports and calculations for your tax return.
Use Tax Preparation Software or Consult a Professional: Consider using tax preparation software or consulting with a tax professional who can assist in reporting digital asset and P2P income accurately. Many tax software programs have features that help you input income from various sources. They can guide you through the reporting process and ensure compliance with tax regulations.
Conclusion
Our team at Ledgerly is here to assist you with any questions or concerns related to the ERTC, digital asset tax compliance, and P2P accounting matters. Please feel free to reach out to us for guidance and support and reference the IRS FAQs on the ERTC and digital assets Here and Here respectively.
We wish you continued success in your business endeavors and look forward to serving your financial needs.
References:
[1] IRS: Employee Retention Credit - Overview [2] IRS: Employee Retention Credit - Frequently Asked Questions [3] IRS: Form 941, Employer's Quarterly Federal Tax Return [4] IRS News Release: IRS Pauses Processing of Some ERTC Claims for Review [5] IRS Article: Red Flags for Employee Retention Credit Claims [6] IRS: Definition of Digital Assets [7] Turbotax: PayPal and Venmo Taxes: What You Need to Know About P2P Platforms [8] IRS: Understanding Your Form 1099-K
Written by Mike Abrahamian, CPA and Andrew D'Amico, CPA
