Category: Uncategorized
2023 1099-K Threshold Reporting
The IRS has announced they are delaying lower 1099-K reporting for another year, but not for credit card transactions.
The IRS will treat 2023 as an additional transition year for implementation of the American Rescue Plan Act’s lower 1099-K reporting threshold, but only for third-party network transactions, such as Venmo, PayPal, Apple Pay, online marketplaces, etc.
The IRS will not regard 2023 as a transition year for payment card transactions, which are transactions where a customer pays with a credit card, such as Visa, Mastercard, or American Express.
This means that taxpayers who receive payments through third-party network transactions should not receive Form 1099-K for the 2023 taxable year, unless the aggregate payments received through a single third-party network exceeded $20,000 and the total number of transactions exceeded 200 for the year.
However, taxpayers should expect to receive Form 1099-K for the 2023 taxable year for credit card transactions if the aggregate payments received through a single credit card company exceeded $600, regardless of the number of transactions.
In the IRS’s press release announcing the 1099-K reporting delay, it stated that at a later date it intends to announce a filing threshold for third-party network transactions for 2024 of $5,000.
Contact us with any questions or concerns!
CTA – Frequently Asked Questions
Corporate Transparency Act – Frequently Asked Questions
These Frequently Asked Questions are explanatory only and do not supplement or modify any obligations imposed by statute or regulation. Please refer to K&R Strategic Partners website and previous CTA Blog posts for more information. K&R Strategic Partners recognized early on the immediate impact and importance of CTA compliance for our clients. We have worked tirelessly to create a process that is both transparent and meets the CTA’s requirements for proper compliance in a timely manner. Through our ongoing education and guidance, K&R is confident we are best suited to assisting you and your companies in the compliance process now and in the future under the Corporate Transparency Act.
1. What is the CTA (Corporate Transparency Act)?
The Corporate Transparency Act (CTA) is intended to provide law enforcement with beneficial ownership information for the purpose of detecting, preventing, and punishing terrorism, money laundering and other misconduct through business entities. This report will require information about the Business Entity, information for each of the Beneficial Owners of the company (any individual who has substantial direct or indirect control of the reporting company or who owns at least 25% of the ownership interests) as well as Company Applicants (the person or people filing on behalf of the entity).
2.Who is FinCEN?
FinCEN is a bureau of the U.S. Department of the Treasury. The Director of FinCEN is appointed by the Secretary of the Treasury and reports to the Treasury Under Secretary for Terrorism and Financial Intelligence. FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.
FinCEN carries out its mission by receiving and maintaining financial transactions data; analyzing and disseminating that data for law enforcement purposes; and building global cooperation with counterpart organizations in other countries and with international bodies.
3. What is beneficial ownership information?
Beneficial ownership information refers to identifying information about the individuals who directly or indirectly own (percentage) or control (title) a company.
4. Why do companies have to report beneficial ownership information to the U.S Department of the Treasury?
In 2021, Congress passed the Corporate Transparency Act on a bipartisan basis. This law creates a new beneficial ownership information reporting requirement as part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.
5. Who is a beneficial owner of a reporting company?
A beneficial owner is an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests.
6. What is K&R’s process in assisting in CTA compliance for my business(s)?
K&R interviews all potential reporting companies and Beneficial Owners to determine if they meet the threshold per CTA of a reporting company and of a BO/controlling interest member.
Once identified K&R will collect and review information about beneficial owners and reporting companies for completion and accuracy.
K&R will obtain and file all necessary documents and reports per CTA compliance to meet mandatory deadlines set forth by the CTA.
7. Does K&R Strategic Partners charge a fee for CTA compliance reporting?
Yes, filing timely and proper BIO report to FinCEN could take as little as 90 minutes for a simple structure BOI report and 650 minutes for a complex structure BOI report filing. To obtain all necessary information and documents from clients and then working with FinCEN for proper filing K&R Strategic Partners fees can range from $450.00 to $2,000. K&R average fees will be between $450.00 and $750.00.
8. Does the Federal Government require that every Beneficial Owner or Substantial Control member have a FinCEN Identifier?
No, the federal government does not require a FinCEN Identifier. However, K&R does require that every Beneficial Owner or Substantial Control member has one to simplify the current process as well as any future changes that will need to be made with entities or the beneficial members themselves.
9. Does K&R Strategic Partners have anyone in house to assist with additional questions or to help me get started with K&R and my CTA compliance requirement?
Yes, we have a team ready for any additional questions. If you would like to employ K&R Strategic Partners in helping you with your CTA compliance requirement, please email Lee Jackson at [email protected].
We are here to help remove the burden of the Corporate Transparency Act from your shoulders. Speak to you soon!
CTA Update – FinCEN Identifier
To our wonderful clients:
You should have received an e-mail in September from us introducing the Corporate Transparency Act, or CTA. This act was put in place as a reporting requirement to stop money laundering, illicit activities and tax evasion. As such, very strict penalties are assessed for non-compliance (500$ a day up to $10,000 and up to 2 years in prison).
This is mandatory and we are taking this very seriously.
In the above-mentioned e-mail we promised more information and actionable items. The first actionable item will be to fill out the engagement letter that will be sent through your K&R Canopy Profile promptly.
The first CTA services engagement is for obtaining what is called a FinCEN Identifier. This is a unique number that the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) assigns to an individual or a reporting company. The FinCEN number is a prerequisite and a mandatory first step to K&R assisting you with this process.
Our goal is to ensure that you, your companies, and the beneficial members of your companies are compliant with this new requirement.
We are educated on the details of this act and are confident that we can assist you and your entities through this process.
Thank you for trusting us with your business tax and accounting needs.
We look forward to assisting you even further as your mentor through the CTA process.
To see a PDF version of this blog post, follow the link below:
A New Option for 529 Plan Owners
A 529 plan is a tax-advantaged savings plan designed to help pay for educational expenses. When a parent or grandparent opens a 529 plan, they ensure that their child has the financial support to reach their educational goals. With about 42% of Americans over age 25 holding a college degree, it may seem like a no-brainer to take advantage of the long-term tax savings of investing in a 529 plan.
But what can you do if the beneficiary of the plan ultimately decides to pursue goals that do NOT require additional education? Are the funds “stuck” in the 529 plan?
In the past, using withdrawals from a 529 plan for anything other than qualified educational expenses would result in taxes and usually penalties. Account owners could leave the funds in the account in case the beneficiary changed their mind in the long term. They could decide to change the beneficiary of the account to another person, such as a niece or nephew. However, that may not be a desirable option for many families.
The recently enacted SECURE 2.0 Act provides an additional option for moving funds from a 529 plan that is no longer needed. Starting in 2023, owners of certain 529 Plans can transfer the balance to a Roth IRA. A Roth IRA is a special individual retirement account (IRA) in which withdrawals are tax-free.
The conversion must comply with the following guidelines:
- 529 plan account must have been in effect for at least 15 years.
- The amount transferred into the Roth IRA may not exceed the total of the contributions made to the 529 plan during the past five years.
- The amount transferred into the Roth IRA each year is limited to the amount allowed for Roth IRA contributions that year. (In 2023, the IRA limit is $6,500, but we do not know the limit for 2024 as of the date of publication).
- The maximum amount of all transfers is limited to $35,000.
While 529 savings plans can be beneficial for many families, investors who ultimately decide that they will not use their balance for qualified educational expenses now have another option for using the funds without incurring harsh penalties. Because of the complex rules surrounding such a conversion, we also recommend speaking with a knowledgeable financial advisor. If we can assist you with a referral, call our office at 480-294-4967.
The 6,000 lb. Gross Vehicle Weight Tax Deduction
In a previous blog post, we discussed how Section 179 of the tax code allows business owners to accelerate deductions for tangible business assets. Today we’ll explore one strategy for further maximizing tax efficiency by increasing the weight of vehicles used for business.
Under the IRS’s depreciation provisions, different rules apply between smaller vehicles such as sedans versus larger vehicles such as trucks and vans. Large vehicles, defined as vehicles that weigh between 6,000 and 14,000 lbs., are eligible for higher tax deductions in the first year that the vehicle is placed into service.
But even S-corporation owners who do not need a heavy-duty truck for their business can benefit from this deduction. If you drive a sport utility vehicle (SUV) that weighs less than the 6,000 lbs. threshold, you may be able to install a tow hitch to increase the weight of the vehicle sufficiently. Most dealers have this option available at purchase, and typically the few hundred dollars charged to install it is a much smaller investment than the thousands of dollars save by reducing your taxes. In 2022, SUVs with loaded vehicle weights over 6,000 lbs. (but less than 14,000 lbs.) can be 100% deducted using bonus depreciation.
The vehicle must also be used primarily (at least 50%) for qualified business use. It can be either new or used. However, the vehicle may not be used for transporting people or property for hire.
Finally, to claim the deduction for 2022, the vehicle must be placed into service by December 21, 2022.
To substantiate the deduction for heavy vehicles, we recommend that Arizona taxpayers update their registration with the Department of Motor Vehicles (DMV). According to Arizona statute:
“A person may increase the declared gross weight of a vehicle or vehicle combination after the original registration and during the registration year by reregistration of the vehicle or vehicle combination. The person shall pay a fee in addition to the gross weight fee prescribed in this article based on the difference between the fee due at the time of reregistration for the weight class in which the vehicle or vehicle combination was originally registered and the fee due at the time of reregistration for the increased weight class.”
That means that the cost of proving that your vehicle meets the IRS weight requirements should be only a small fee.
As a reminder, make sure that you are capturing all the expenses related to your business vehicle including the following:
- Registration fees and taxes
- Maintenance and repairs
- Auto insurance
- Fuel
Upgrades to increase the weight of an SUV used for business can have huge payoffs at tax time. If you have any questions about this or other business deductions, call our office at 520-353-4502.
Catch-Up Retirement Contributions
Experts recommend investing for retirement early and often. When life gets in the way, however, that ideal may not be achievable. The government has provisions in place to help employees over the age of 50 either get on track or augment already solid savings. The retirement account contribution limits for employees over 50 is larger than the standard contribution limits.
The “catch-up” provision was created in 2001 by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The act provided relief to investors who lost significant value in their retirement portfolios in the wake of the dot-com bubble. From the bubble’s peak in March of 2000, stocks had declined in value by 75% by October of 2002. The law also revised the life expectancy tables used for determining retirement ages.
In 2006, the Pension Protection Act made provisions for catch-up contributions permanent.
As of 2022, employees over 50 may contribute:
| Account Type | Additional Contribution | |
| IRA | $1,000 | on top of the standard $6,000 contribution limit |
| ROTH IRA | $1,000 | on top of the standard $6,000 contribution limit |
| 401(k) | $6,500 | on top of the standard $20,500 contribution limit |
| SIMPLE 401(k) | $3,000 | on top of the standard $14,000 contribution limit |
Note: These contribution limits are for employees only. Small business owners may be able to contribute more as employer contributions.
Call our office at 480-392-6801 if you would like to talk about your retirement options
1031 Exchanges
Introduction
If you purchased an investment property a few years ago, you were probably thrilled to see the skyrocketing prices in the Phoenix valley and across the country recently. For those that sold properties at top dollar, however, their excitement about their profits might have been dampened by the blow of a big tax bill.
Sec. 1031 Exchanges are a technique for deferring paying taxes on investment gains. To qualify, the investor must reinvest the proceeds into a similar (like kind) property as part of a qualifying like-kind exchange.
In its simplest form, an exchange involves two persons trading one property for another. In practice, however, finding one person that wants the exact property that someone else would like to trade can be nearly impossible. Most 1031 Exchanges, therefore, go through a third-party broker. These brokers navigate investors through the difficult regulatory requirements governing like-kind exchanges. If investors do not follow these regulations completely, they may be held liable for taxes, penalties, and interest on their transactions.
Before we share more details on the ins and outs of 1031 Exchanges, we’ll address the most important DON’Ts:
- Taxpayers do NOT qualify for a deferral simply by selling and buying a similar investment.
- Taxpayers may NOT receive the proceeds of the sale. The funds must be held in escrow by a third party intermediary until they are used directly to purchase the new property.
- Investors are NOT limited to individuals. Any taxpaying entity can participate in a 1031 Exchange including partnerships, S-corps, C-corps, LLCs, and trusts.
Defining “Like-Kind”
To qualify for a 1031 Exchange, the property given up and received must be “like-kind.” But what exactly counts as like-kind has a fairly broad definition. First, the property must be used for trade or business. Personal property such as a primary residence or a vacation home do not qualify. Generally, the properties involved are both real estate, but they don’t have to be properties that lay people would consider similar. For example, a lot with a rental house could be exchanged for vacant land. One exception is that property within the United States is not considered like-kind to property outside of the United States.
Before the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, some exchanges included other property such as franchise licenses, aircraft, and equipment. However, under current tax law, ONLY real property as defined in Section 1031 qualifies.
The law also specifically excludes the following from being eligible for 1031 Exchanges:
- Inventory or stock in trade
- Stocks, bonds, or notes
- Other securities or debt
- Partnership interests
- Certificates of trust
Time Constraints
Aside from the requirements of like-kind properties, the other major constraint on using a 1031 Exchange is timeliness. From the date you sell the relinquished property, you have 45 days to identify potential replacement properties to purchase. Importantly, the identification must be in writing, signed by you, and delivered to a person involved in the exchange. Qualified persons can include the seller of the replacement property or the qualified intermediary. On the other hand, notice to your attorney, real estate agent, or accountant is NOT sufficient. The IRS allows investors to designate up to three replacement properties as potential investments at the 45-day mark.
The investor must complete the purchase of the replacement property either by 180 days after the sale of the exchanged property or the due date of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The due date for the tax return includes extensions. The replacement property received must be substantially the same as property identified within the 45-day limit described above.
Investment Strategies
While there are strict rules governing 1031 Exchanges, there is no limit on how frequently investors can utilize them. Savvy investors can integrate like-kind exchanges into their strategy for significant savings from tax deferment.
Deferring Depreciation Recapture
When an investment property that has been previously depreciated, like a rental property, is sold, the depreciation is recaptured which increases the taxable gain on the sale. Generally, a 1031 Exchange delays depreciation recapture by rolling over the cost basis from the relinquished property to the new one that replaces it. Essentially, the depreciation calculation continues as if you still owned the old property.
Importantly, the investor (or their accountant!) must carefully track their basis in the new property. Furthermore, it is important to remember that even though the gain is deferred, it is not forgiven. Tax will be paid on the gain when it is recognized upon the sale of the new property.
Reverse Exchange
In most 1031 Exchanges, one property is sold prior to the new property being purchased. However, investors also have the option to acquire the new property before the old property is sold. This is called a “reverse exchange.” This technique allows the investor to hold the old property longer when they predict that the market value will increase.
Estate Planning
The major downside of 1031 Exchanges is that when the tax deferral ends, the investor will likely owe a significant amount of taxes on the gain. However, careful estate planning can avoid this situation. If the investor continues to hold a property purchased through a 1031 Exchange until they pass away, their heirs will inherit the property not at the cost basis of the original property but at the stepped-up market rate of the new property. The heirs can sell the inherited property without paying taxes on the previously deferred gain. It is important to note that this estate planning is based on current tax rules governing step-up in cost basis and like all tax laws, could change in the future.
Converting Vacation Homes
As we discussed earlier, 1031 Exchanges apply to property used for business, not personal property. However, one possible strategy for using a like-kind exchange to defer gains on a vacation home is to convert the vacation home to a rental property before selling it. To establish the home as a rental property, most resources recommend renting it out for between six months to a year. Furthermore, the property is expected to generate rental income, and the venture should be conducted in a businesslike way. Business practices include maintaining accounting records, advertising the property on common rental platforms, and renting it to unrelated parties.
Conclusion
Investment strategies using 1031 Exchanges offer huge potential for savings through tax deferment. To utilize them effectively, investors should hire a third-party broker, meet the requirements for like-kind properties and timeliness, carefully track their tax basis and have a tax professional well versed in 1031 Exchanges. If a 1031 Exchange is something that you may want to pursue, please contact our office today at 480-392-6801.
Charges Filed in First Insider Trading Case Involving Crypto
In July of 2022, the Department of Justice charged three individuals in the first-ever insider trading case concerning cryptocurrency. This move reflects the US government’s increasingly aggressive commitment to regulating crypto.
What We Know
- 3 individuals charged with wire fraud conspiracy and wire fraud
- 1 of the individuals is a former employee at Coinbase
- Estimated $1.5 million in illegal gains
As a product manager at Coinbase, Ishan Wahi had sensitive knowledge of about the timing and content of upcoming listing announcements on the exchange platform. These announcements usually resulted in a dramatic increase in the value of the asset. Coinbase warned its employees against trading on confidential information or providing it to others. Between June of 2021 and April of 2022, Wahi fed insider information to his brother, Nikhil Wahi, and his friend, Sameer Ramani.
Based on the confidential information, these associates used Ethereum blockchain wallets to purchase at least 25 different crypto assets. After the assets were listed, the group generated gains of an estimated $1.5 million total.
The Role of Online Communities
The group’s illegal activities came to a halt in April of 2022. When a Twitter user active in the crypto online community tweeted about a massive purchase that occurred just prior to an asset listing, Coinbase was quick to reply that an investigation was already underway.
However, many users online were skeptical of the ability of regulators to keep up with fraud perpetrated in the cryptocurrency space.
This case points to fundamental questions about the cryptocurrency market. What was Coinbase’s responsibility for monitoring its employees’ use of confidential information? Does the Department of Justice have the same responsibility to monitor fraud involving crypto as they do financial securities? Do purchasers of crypto give up their rights to protection by trading in an unregulated asset?
Governments Struggle to Keep Up
The defining feature of cryptocurrencies is that they are not issued by a central authority. Theoretically, that renders them immune from government interference or manipulation. Nonetheless, governments are concerned about the opportunity for crimes like fraud and tax evasion made possible by crypto platforms.
In response, governments across the globe have responded with a patchwork of regulations. For example, the People’s Bank of China (PBOC) bans crypto exchanges from operating in the country. Furthermore, China placed a ban on bitcoin mining in May of 2021.
In the United States, regulators can’t even agree on a definition of the nebulous asset. The Securities and Exchange Commission (SEC) views cryptocurrency as a security, while the Commodity Futures Trading Commission (CFTC) treats it as a commodity, and the Department of Treasury calls it a currency. Crypto exchanges in the United States fall under the regulatory scope of the Bank Secrecy Act (BSA) and must register with the Financial Crimes Enforcement Network (FinCEN).
The charges brought against this insider trading ring demonstrates that governmental regulation is an inevitable part of the present and future of cryptocurrency.
Other Troubling Trends
The insider trading case is not the only recent blow dealt to the crypto market.
This month, a federal jury convicted a man of fraud for marketing and selling fraudulent virtual currency. Between 2014 and 2017, the founder of My Big Coin defrauded investors by making misrepresentations about the assets. Randall Carter of New York claimed that Coins was a cryptocurrency backed by $300 million in gold, oil, and other valuable assets. He also falsely told investors that My Big Coin had a partnership with MasterCard. Carter defrauded investors an estimated $6 million which he spent on collectibles including artwork and jewelry.
In a move surprising to many, Tesla sold 75% of its Bitcoin holdings in July of 2022. The coins were valued at almost a billion dollars. Elon Musk cited concerns about COVID-19 lockdowns in China as the reason that Tesla moved to maximize its cash position. Still, the massive sale added uncertainty to the already volatile crypto market.
Conclusion
Regarding the charges brought against Ramani and the Wahi brothers, U.S. Attorney Damian Williams declared: “Fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street.”
As an accounting firm, we can’t provide investment advice or protect our clients from predatory investments. We do, however, take seriously our ability to share relevant information. Every year, we see more questions from clients about their obligations to report crypto income and their ability to deduct losses. As governmental agencies in the US and around the world strengthen the regulations around cryptocurrency, change is a certainty.
Additional Resources
DOJ Press Release: https://www.justice.gov/usao-sdny/pr/three-charged-first-ever-cryptocurrency-insider-trading-tipping-scheme
SEC Press Release: https://www.sec.gov/news/press-release/2022-127
IRS Heightens Scrutiny on P2P Payments
Person-to-Person Payments
Zelle… Venmo… Square… PayPal… Cash App…
Options for person-to-person payment services (P2Ps) have exploded over the last decade.
Venmo is known for its social aspect—an estimated 30% of transaction descriptions include emojis. However, don’t be surprised if you hairdresser requests payment through the app. On the other hand, Zelle is popular for being directly integrated with online banking and therefore offering faster processing than its competitors. Big-name banking institutions that partner with the service include giants such as Citigroup, Bank of America Corp, Chase, Morgan Stanley, and Wells Fargo. In 2017, its first year in operation, Zelle processed $75 million in transactions. In 2020, the company processed $307 billion.
As more and more of our economy moves through electronic channels, the IRS is turning its attention to capturing income that might otherwise go unreported. While transfers to repay friends, for example, do not have taxable implications, transfers used to pay for goods or services were always required to be reported as income by the seller. But now the onus for reporting income is shifting from almost entirely on the seller to the platforms that facilitate these transactions.
New IRS Requirements
Previously, the IRS required P2Ps to report transactions for goods and services sold that met or exceeded $20,000 and at least 200 transactions in a calendar year. Starting in 2022, that threshold is slashed to just $600. Anyone who receives at least $600 in payments for goods and services through a P2P can expect to receive a Form 1099-K by January 31, 2023.
Form 1099-K—given the straightforward name “Payment Card and Third-Party Network Transactions”—is a tax form used to report payments for goods and services transactions. Intermediaries like credit card processors and payment services are required to file them with the IRS and send copies to the payment recipient. In preparation for meeting these filing requirements, P2Ps are pushing their users to provide necessary information, like social security numbers or other tax identification numbers. For example, Venmo has placed a hold on users being able to transfer money out of their account until they provide their tax information. Users have spoken out about the hold, but the platform is less concerned with disgruntled users than the penalties that back up IRS requirements.
Importantly, start-ups that do not reach the $600 threshold to receive a 1099-K may still have income required to be reported. Unofficial statements should be provided on your online account, and they should always be provided to your tax preparer.
Heightened reporting requirements are the new normal for taxpayers and financial services firms alike, especially as our economy shifts away from cash payments. And electronic payments are only growing more complex. For example, Cash App allows users to make payments using Bitcoin which poses the additional complication of cryptocurrency exchange rates when calculating tax implications.
For entrepreneurs who may be receiving 1099-Ks for the first time, proactive tax planning is more essential than ever. The right accounting firm will not only meet the IRS’s compliance standards but also take advantage of credits, deductions, and taxation decisions to ensure the most beneficial outcome for their client.