Entrepreneurs have plenty of ideas and vision, but they don’t always have the capital that’s needed to make their dreams a reality. Small and medium-sized businesses that want to grow beyond what they’re able to accomplish with their own resources often seek funding from investors who want to both support their goals and realize a profit while doing so. Funding is a process that evolves with the company itself, starting with a seed round and then moving forward. Whether you’re looking for funding or you’re a potential investor who wants the rewards that come from supporting entrepreneurs through developmental funding, you need a firm understanding of what Series A, B, and C funding are and the differences between each round. Let’s take a closer look. One of the most important aspects of every funding round is the analysis that’s performed to assess its value. As a business grows and gains in reputation and market share, its needs change, and so does the amount of money it seeks and the type of investors it will attract. Seed Funding Where initial money tends to come from the entrepreneurs themselves as well as their family, friends, and others, this “pre-seed” financing is usually less of an investment than a show of support. It’s not until a company’s valuation is between $3 million and $6 million that it seeks “seed funding” that is exchanged for equity in the company. Seed funding’s name is apt, as it evokes a sense of nourishing and nurturing something that is in its earliest stage of growth – beyond the idea stage but still at the point where it is gathering momentum and attracting attention. Whether the monies raised from seed funding are as little as $10,000 or as much as $2 million, they are used to help a company make its first foray into real growth. What it’s used for depends upon the type of business and what the founders need to achieve their goals. Monies may be used for research and development or marketing or for hiring new staff, moving into a larger facility, or establishing a manufacturing plant. Its source may continue to be those close to the entrepreneur but is also open to outsiders including venture capital companies, incubators, and angel investors. Series A Funding If Seed Funding supports companies that have just gone from an idea to actuality, Series A Funding provides the cash to companies that have established roots but need to grow and expand their profits. These organizations are generally valued at about $23 million and have or are creating a robust business plan for success, and the funding that they raise usually comes from savvy investors and venture capital firms who recognize and reward businesses with the potential to earn real money. As more high-tech industries have come to market, average Series A funding totals have increased, with 2020’s average reaching $15.6 million, significantly higher than the typical range of between $2 million and $15 million. Series B Funding Once a company has gone well past the development stage and has reached valuations between approximately $30 and $60 million they are ready to scale up and invest in bringing on more people, more advertising, and more technology to advance their development goals. The funds needed generally hover around the $33 million mark, and come from venture capital firms. Series C Funding When well-established, successful companies want to raise money for acquisitions or mergers, to expand their reach, or for new product development, they often turn to Series C funding. These opportunities represent far less risk and are very appealing for investors, who understand that betting on a company that has proven itself can result in a significant return on the capital that they provide. Though each of these stages and rounds have the goal of raising funds in exchange for equity in the company, investors need to recognize that each has its own level of risk and reward. The opportunity to be part of a company’s growth is exciting, but careful analysis is required. For assistance in understanding how investing in an entrepreneurial endeavor can help you, contact us today.
Monthly Archives: December 2021
Video tips: How to Prepare for Your 2021 Tax Return
Preparing for your tax return beforehand can help avoid mistakes and reduce delays in receiving a tax refund. Watch this video for simple steps that you can take to be ready for your tax return in 2022.
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How One Small Company Found Its Opening and Disrupted an Entire Industry in the Process
If you had to make a list of some of the fastest-growing industries in the United States, activewear would undoubtedly be on it. It’s a field that is made up of a few different categories: athletic clothing, swimwear, yoga items and footwear, to name a few. According to one recent study, the industry was worth about $354 million in 2020. By as soon as 2026, that number is expected to grow by an impressive 25%. Yes, some of this can be attributed to the impact of the COVID-19 pandemic. People suddenly found themselves stuck in their homes and were looking for any opportunity to get outdoors; physical fitness was just as good as any. But there’s also been an increasing trend over the last decade of people taking more accountability in terms of their health and well-being, and an entire industry has benefited during the process. It’s also an incredibly competitive marketplace, with new organizations cropping up all the time. At this point, you’d think that there wasn’t room for new companies and that every possible niche had already been exploited. You’d think that, but you’d be wrong. Enter: Vuori Flashing back to 2015, entrepreneur Joe Kudla decided to create a new company based on a significant gap that he saw in the activewear industry. Roughly 10 years prior, he was experiencing significant back pain, and after trying a variety of different methods for relief, he ended up turning to yoga to ease his pain. The issues themselves stemmed from a lifetime of playing everything from football to lacrosse. Even after his problems were resolved, he still found that he loved yoga on a conceptual level. Around the same time, he watched other activewear companies like Lululemon become enormously successful, but there was a catch. Almost all of these brands catered mainly to women, as that is who was seen to be the primary audience. Some of them offered yoga clothing for men, but to him it always came off as an afterthought. With that simple realization, an idea was born. Joe Kudla got to work on the organization that would eventually become Vuori. It was inspired not only to give men similar options to those that had always been available to women, but also by where he lived in Southern California. The place where he was living at the time was a big beach community, and he wanted to bring a “surf-inspired DNA” into the world of performance clothing. Kudla had a hunch that he had identified a woefully underserved part of the activewear marketplace… and he was absolutely right. After a somewhat slow start in 2015, the company became profitable just two years later in 2017. Earlier in 2021, the company was able to raise $400 million from the Vision Fund, which valued the company at an incredible $4 billion at the same time. All this from someone who ultimately just wanted to be more comfortable while practicing yoga. Consistency Begets Results As stated, when Vuori originally launched in 2015, it got off to something of a slower start than Joe Kudla and his other team members were expecting. All the while, they doubled down on the original idea – soliciting as much feedback as possible from potential customers as to what they wanted and needed, while using that insight to fuel the direction of the company as much as possible. During that period, they learned something interesting; a lot of women were buying Vuori’s products that were aimed at men. They wanted something that was comfortable and sophisticated, and they didn’t much care how they got it. That realization, coupled with an emphasis on the Vuori message of positivity and healthiness, saw the company make just as big an impact with women as it did with men. Because of this, Vuori launched the female-driven side of its business in 2018. The response to both directions has been significant. Right around that same time, Vuori began partnering with various retail outlets to stock its clothing. One of the largest – REI – began an initial test run, stocking the company’s clothing in 30 of its stores. After an overwhelming success, Vuori was soon expanded to all of their locations. Nordstrom and Equinox soon followed suit. What was once a small business based in California soon became a company with national recognition and availability. As stated, Vuori recently received $400 million in funding, essentially to “execute on its growth strategy.” Joe Kudla, on the other hand, sees things a bit differently. Even given all the uncertainty going on in the world right now with just about every industry you can name having been disrupted, Kudla insists that Vuori doesn’t actually need the money it just raised. It’s doing perfectly fine on its own. In early 2020 as the pandemic was still beginning to take hold, Vuori had around 100 employees. Today, it has 450 employees. By as soon as 2024, Kudla anticipates that this number will have climbed to approximately 1,000. He indicated that the majority of the funds being raised were going to reward those people who became shareholders early – the people who could see the same vision that he could and who believed in the company from the time of its initial launch. Having said that, some money is planned to go back into the business. Kudla wants to invest in Vuori’s infrastructure and technology – strategic moves that will allow it to better serve its customers nationwide. He also wants to continue to develop a veritable “Murderer’s Row” of executive team members – something that will allow him to secure the future of the company he worked so hard to build from the ground up. All of this is very impressive, especially given the fact that the company was founded because one man wanted to be more comfortable doing yoga. It also underlines the value inherent in a good idea, regardless of where that idea may come from.
What Is Tax Basis and Why Is It So Important?
Article Highlights:
Definition of Tax Basis
Cost Basis
Adjusted Basis
Gift Basis
Inherited Basis
Record Keeping
For tax purposes, the term “basis” refers to the monetary value used to measure a gain or loss. For instance, if you purchase shares of a stock for $1,000, your basis in that stock is $1,000; if you then sell those shares for $3,000, the gain is calculated based on the difference between the sales price and the basis: $3,000 – $1,000 = $2,000. This is a simplified example, of course—under actual circumstances, purchase and sale costs are added to the basis of the stock—but it gives an introduction to the concept of tax basis. The basis of an asset is very important because it is used to calculate deductions for depreciation, casualties and depletion, as well as gains or losses on the disposition of that asset. The basis is not always equal to the original purchase cost. It is determined in different ways for purchases, gifts and inheritances. In addition, the basis is not a fixed value, as it can increase as a result of improvements or decrease as a result of credits claimed, business depreciation or casualty losses. This article explores how the basis is determined in various circumstances. Cost Basis – The cost basis (or unadjusted basis) is the amount originally paid for an item before any improvements and before any credits, business depreciation, expensing or adjustments as a result of a casualty loss. Adjusted Basis – The adjusted basis starts with the original cost basis (or gift or inherited basis), then incorporates the following adjustments:
increases for any improvements (not including repairs),
reductions for tax credits claimed based on the original cost or the cost of improvements,
reductions for any claimed business depreciation or expensing deductions, and
reductions for any claimed personal or business casualty-loss deductions.
Example: You purchased a home for $250,000, which is the cost basis. You added a room for $50,000 and a solar electric system for $25,000, then replaced the old windows with energy-efficient double-paned windows at a cost of $36,000. You claimed tax credits of $7,500 and $200, respectively, for the solar system and windows. The adjusted basis is thus $250,000 + $50,000 + $25,000 – $7,500 + $36,000 – $200 = $353,300. Your payments for repairs and repainting, however, are maintenance expenses; they are not tax deductible and do not add to the basis.
Example: As the owner of a welding company, you purchased a portable trailer-mounted welder and generator for $6,000. After owning it for 3 years, you then decide to sell it and buy a larger one. During this period, you used it in your business and deducted $3,376 in related deprecation on your tax returns. Thus, the adjusted basis of the welder is $6,000 – $3,376 = $2,624.
Keeping records regarding improvements is extremely important, but this task is sometimes overlooked, especially for home improvements. Generally, you need to keep the records of all improvements for 3 years (and perhaps longer, depending on your state’s rules) after you have filed the return on which you report the disposition of the asset. Gift Basis – If you receive a gift, you assume the donor’s (giver’s) adjusted basis for that asset; in effect, the donor transfers any taxable gain from the sale of the asset to you.
Example: Your mother gives you stock shares that have a market value of $15,000 at the time of the gift. However, your mother originally purchased the shares for $5,000. You assume your mother’s basis of $5,000; if you then immediately sell the shares, your taxable gain is $15,000 – $5,000 = $10,000.
There is one significant catch: If the fair market value (FMV) of the gift is less than the donor’s adjusted basis and you then sell it for a loss, your basis for determining the loss is the gift’s FMV on the date of the gift.
Example: Again, say that your mother purchased stock shares for $5,000. However, this time, the shares were worth $4,000 when she gave them to you, and you subsequently sold them for $3,000. In this case, your tax-deductible loss is only $1,000 (the sales price of $3,000 minus the $4,000 FMV on the date of the gift), not $2,000 ($3,000 minus your mother’s $5,000 basis).
Inherited Basis – Generally, a beneficiary who inherits an asset uses the asset’s FMV on the date of the owner’s death as the tax basis. This is because the tax on the decedent’s estate is based on the FMV of the decedent’s assets at the time of death. Normally, inherited assets receive a step up (increase) in basis. However, if an asset’s FMV is less than the decedent’s basis, then the beneficiary’s basis is stepped down (reduced). (Congress has been considering a change that would make the inherited basis the amount of the decedent’s adjusted basis, thus eliminating the beneficial step-up in basis rule. Please check with this office for the current status of the legislation.)
Example: You inherited your uncle’s home after he died in 2020. Your uncle’s adjusted basis in the home, which he purchased in 1995, was $50,000, and its FMV was $400,000 when he died. Your basis in the home is equal to its FMV: $400,000. Example: You inherit your uncle’s car after he died in 2020. Your uncle’s adjusted basis in the car, which he purchased in 2015, was $50,000, and its FMV was $20,000 at his date of death. Your basis in the car is equal to its FMV: $20,000.
An inherited asset’s FMV is very important because it is used to determine the gain or loss after the sale of that asset. If an estate’s executor is unable to provide FMV information, the beneficiary should obtain the necessary appraisals. Generally, if you sell an inherited item in an arm’s-length transaction within a short time, the sales price can be used as the FMV. A simple example of a transaction not at arm’s length is the sale of a home from parents to children. The parents might wish to sell the property to their children at a price below market value, but such a transaction might later be classified by a court as a gift rather than a bona fide sale, which could have tax and other legal consequences. For vehicles, online valuation tools such as the Kelly Blue Book can be used to determine FMV. The value of publicly traded stocks can similarly be determined using website tools. On the other hand, for real estate and businesses, valuations generally require the use of certified appraisal services. The foregoing is only a general overview of how basis applies to taxes. If you have any questions, please call this office for help.
Calculating and Using your MRR and ARR to Monitor and Forecast SaaS Subscription Revenue
One of the most important tasks that a SaaS company must do each year is to estimate and project future revenue. Tracking both your monthly and annual subscription revenue is one of the most effective ways to do this, as it is a strong reflection of customer growth. Let’s take a look at the correct way to do both. Your calculations will largely depend upon the way that you have structured your subscription model. SaaS companies may offer either monthly or annual subscription plans and may have multiple levels of each from which customers can choose. These variables will make a big difference in how you calculate and use your metrics. Monthly Recurring Revenue and Annual Recurring Revenue Every company can choose whether to use their Monthly Recurring Revenue (MRR) or their Annual Recurring Revenue (ARR) to gauge and forecast growth, and the figures for one can be used to extrapolate the other – if you offer monthly subscriptions then you can annualize the recurring revenue by simply multiplying by twelve to get to the annual revenue, and likewise you can divide the annual by twelve to get to that revenue figure. The most obvious difference between the two is clearly the amount of time that clients for which clients are paying for subscriptions. Each is calculated by multiplying the number of customers by the amount of the subscription to yield the amount of revenue expected. If several plans are offered at different price points, then you calculate the revenue for each and add them together. When you want to forecast future revenue, it makes sense to use the current numbers as a base, but in order to do so you have to assume that you will neither lose nor gain subscribers and that subscribers will not change from one of the plans you offer to another. How to Apply MRR and ARR Numbers Though the MRR and ARR numbers can easily be translated into one another, that does not mean that they are used in the same ways. SaaS companies use their annualized figures to assess anticipated revenue and for future planning, while monthly figures are more useful for comparing sales and marketing performance and progress. They allow management to gauge customer satisfaction, as you can track cancellations and upgrades more easily, while the annual numbers are more useful to present to investors in order to reflect overall growth and stability. Both should be tracked and readily available so that both of these applications can be used, but there are important elements that need to be noted in order to ensure that you’re not including losses or extra revenue sources that can create confusion or skew results. These include one-time events such as promotions. Though these may help overall revenue, they can lead to inaccurate projections if included. Conversely, if customers upgrade to plans that provide higher levels of service (and cost them more), this revenue can be reflected in monthly numbers as well as annualized or use in projections: they also effectively offset losses from cancellations (known as churn) or from customers downgrading, which also needs to be reflected in each month’s numbers. Though monitoring and recording your monthly and annual revenue is laborious, it is one of the most effective ways to generate data that can assess performance, guide future planning, and assist with attracting investors. If you need assistance with tracking recurring revenue and applying the information that you’ve collected, we can help. Contact us today to learn how managing your financial data will help you achieve your goals.
What to do When a Loved One is Facing Mental Decline
Dementia, Alzheimer’s disease, and other cognitive decline diagnoses are among the health issues that people fear the most. Cognitive decline is devastating for the patient as well as for their loved ones, who not only bear witness to the deterioration but who are often tasked with ensuring that all financial matters have been addressed in keeping with the individual’s wishes. Even with a definitive diagnosis, raising the subject can be cause for discomfort, but the earlier you do so the more effective these conversations can be, and the more certain you can be that you’re doing the right thing. Here are our tips for what to do when a loved one is declining mentally.
Don’t delay. It is so easy to put off difficult conversations, but when it comes to financial planning in the face of a dementia diagnosis, the sooner you do it, the better. In most cases, there is enough time between diagnosis and significant deterioration for you to discuss your loved one’s wishes and put them into place without fear that their abilities are compromised. Now is the time to ask what type of care they want, to take them to different facilities and choose where they would like to be, to ask how they want their assets allocated, and more. Just keep in mind that time is not your friend. Act early, and if you meet resistance, keep pushing. Once everything is in place, everybody can take a deep breath and relax a bit.
Don’t ambush the individual. People who are facing cognitive decline are already vulnerable, so you don’t want the conversation to be intimidating. Give careful consideration to who will participate, and where and how you will broach the subject. Have a specific goal in mind so that the conversation can be controlled. This means that if you hope to have papers signed or brochures reviewed, you should bring them with you. Be mindful of your loved one’s condition and how different times of day and setting impact their cognition. You want to choose a time when they are generally attentive, strong and engaged.
Familiarize yourself with the proper paperwork. Addressing the needs of a person in cognitive decline requires more than agreement. There are legal documents that codify their wishes about their finances and medical directives, and if these are signed while the person is still in control of their mental powers, these documents will be extremely helpful. The most important documents to have in place are a durable power of attorney to indicate who is in charge of financial decisions, a will to indicate both the executor of the estate and its beneficiaries, and a living trust to designate the person who will manage all assets when they are no longer able. An advanced directive for medical decisions is also important.
Get control of the paperwork. We’re all familiar with our own daily transactions and documents – we receive and pay invoices, balance our checkbooks, and make sure that all of our financial obligations are attended to. The same is true for your loved one, but they will not be able to continue much longer. Now is the time to sit down with them and make sure that you know exactly what these duties are and make sure you have all of their obligations and tasks organized so that you can assume responsibility when the time comes.
Find professional help. Taking care of your loved one’s economic well-being is overwhelming, especially when you’re also taking care of your own needs. Do not be afraid to turn to financial planners, tax planners, social workers and others who have the experience and resources to help you manage your loved one’s finances, medical needs, expenses, and other tasks. Their expertise will prove to be invaluable as you try to find the right way to address each legal, medical, and financial issue that arises, including government benefits and tax issues.
The needs of the elderly are unique, and an elder law attorney can be one of your most valuable resources. The National Academy of Elder Law Attorneys provides an online directory to help you find a professional in your local area, and the website LawHelp.org is specifically dedicated to supporting those for whom cost is an issue. You can also find help on financial planning from the Alzheimer’s Association website, or by contacting us directly and asking for help with putting a personalized tax plan in place.
Time is Running Out to Take Your 2021 RMD
Article Highlights:
2021 RMD
What Are RMDs?
Age 72 Distributions
IRAs and Qualified Plans
Computing the RMD
Required Minimum Distributions (RMD) are required taxable distributions from qualified retirement plans and are commonly associated with traditional IRAs, but they also apply to 401(k)s and SEP IRAs. The tax code does not allow taxpayers to indefinitely keep funds in their qualified retirement plans. Eventually, these assets must be distributed, and taxes must be paid on those distributions. If a retirement plan owner takes no distributions, or if the distributions are not large enough, then he or she may have to pay a 50% penalty on the required distribution amount that is not distributed. The penalty for failing to take the required minimum amount is 50% of the amount that should have been withdrawn but wasn’t. The penalty can be waived where the failure to take the required distribution was due to reasonable cause and steps are being taken to remedy the shortfall. The penalty waiver must be applied for, creating additional hassle, not to mention the potential additional tax created by multiple-year distributions in one year. Note: RMDs do not apply to Roth IRAs. RMDs historically have needed to begin in the year when the retirement plan owner became age 70½, but a recent tax law change upped the starting age to 72 for years after 2019. The first year’s distribution for those turning age 72 in 2021 can be delayed to no later than April 1 of 2022. However, delaying the first distribution means taking two distributions in the subsequent year which has tax consequences. RMDs for 2021 are determined based upon the values of the accounts as of December 31, 2020, divided by the distribution period. The distribution period is based the taxpayer’s life expectancy determined from the Uniform Lifetime Table for the taxpayer’s current age.
CURRENT UNIFORM LIFETIME TABLE – THROUGH 2021
Age
Distribution Period
Age
Distribution Period
Age
Distribution Period
Age
Distribution Period
Age
Distribution Period
70
27.4
80
18.7
90
11.4
100
6.3
110
3.1
71
26.5
81
17.9
91
10.8
101
5.9
111
2.9
72
25.6
82
17.1
92
10.2
102
5.5
112
2.6
73
24.7
83
16.3
93
9.6
103
5.2
113
2.4
74
23.8
84
15.5
94
9.1
104
4.9
114
2.1
75
22.9
85
14.8
95
8.6
105
4.5
115+
1.9
76
22.0
86
14.1
96
8.1
106
4.2
–
–
77
21.2
87
13.4
97
7.6
107
3.9
–
–
78
20.3
88
12.7
98
7.1
108
3.7
–
–
79
19.5
89
12.0
99
6.7
109
3.4
–
–
Example: Don’s oldest age during 2021 is 75 and he has a single IRA account with a value of $150,000 at the close of the business day on December 31, 2020. Using the Uniform Lifetime Table for years through 2021, we find that the distribution period for age 75 is 22.9 years. Thus, Don’s RMD for 2021 is $6,550 ($150,000/22.9).
Where an owner of a retirement plan or an IRA dies before receiving his or her entire RMD in the year of death, the unpaid amount must be distributed to the named beneficiaries or, if none, the decedent’s estate. Where an individual has multiple retirement plans and/or IRAs some additional complications may be encountered as to which accounts the distributions must be withdrawn from. Note that distributions from a 401(k) or other qualified retirement plan can’t be used to satisfy the RMD of an IRA or vice versa. If you need to make your 2021 RMD by December 31, and haven’t yet done so, keep in mind that the 31st, a Friday, will be observed as the New Year’s holiday by many financial institutions. So, a word to the wise: don’t wait until New Year’s Eve to arrange for the distribution. If you need assistance related to your RMD, please contact this office.
The IRS May be Getting a Massive Budget Increase. Will It Impact the Audit Rate?
In September of 2021, the Congressional Budget Office announced a proposal to increase funding for the Internal Revenue Service by as much as $80 billion over the next ten years. The argument is that doing so would ultimately increase the revenue the organization is able to generate by as much as $200 billion over the next decade. A significant portion of the new money — to the tune of about $60 billion — is aimed at empowering enforcement actions in particular. All told, that means by 2031, the IRS will double the number of people working for it and will have a 90% higher budget than they do right now. This, of course, has led people to wonder — does that mean that more people than ever are about to get audited? Obviously, the situation is a lot more nuanced than people on both sides of the aisle are giving it credit for. Therefore, understanding what this means and what implications it may have requires you to keep a few key things in mind. The Current Situation With the IRS: What You Need To Know While it’s difficult to say exactly what the future might hold, some Republicans believe that the plan would indeed increase the rate at which people are audited. House Minority Leader Kevin McCarthy, for example, cited research saying that the funding would lead to an increase of 1.2 million additional audits each year compared to those that are taking place right now. More than that, he claimed that roughly 50% of them would target homes making under $75,000 per year. Others are not quite as pessimistic about the situation. According to a report filed in September from the CBO, it’s estimated that the new funding won’t necessarily lead to a “major increase” in audits in the strictest sense of the term. It’s just that the IRS has been understaffed and underfunded for so long that they haven’t been able to operate at their “normal” level of activity. Therefore, the increase in the budget — and the new employees that it will bring with it — will simply allow audit levels to rise to where they were roughly 10 years ago. It’s an increase over recent memory, yes — but historically, that isn’t necessarily the case. Despite all this, the United States Treasury has stated several times that its goal is for audit rates to not increase for households that make under $400,000 per year. Again, it’s difficult to know exactly what the future will bring with it — which is why this is one situation that many will be paying attention to moving forward. If you’d like to find out more information about whether the IRS’s new budget increase will impact the audit rate, or if you’d just like to discuss your own needs with someone in a bit more detail, please feel free to contact our office today.
Retroactive Termination of the Employee Retention Credit
Article Highlights:
Employee Retention Credit
Infrastructure Investment and Jobs Act
Retroactive Repeal of 4th Quarter Employee Retention Credit
Advance Payments
4th Quarter Employment Tax Deposits
Failure to Deposit Penalties
If you claimed the employee retention credit (ERC) in the fourth quarter of 2021, you better read this about a retroactive change affecting the credit for the fourth quarter of 2021. Background: The ERC was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and the American Rescue Plan Act (ARP Act) extended the ERC for wages paid through December 31, 2021. Now the recently passed Infrastructure Investment and Jobs Act (IIJ Act) has retroactively repealed the ERC for the fourth quarter of 2021 for all taxpayers except recovery start-up businesses. A recovery start-up business is an employer that began carrying on any trade or business after February 15, 2020, and has gross receipts under $1,000,000 for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the ERC is determined. Many businesses already claimed the ERC for wages paid the fourth quarter of 2021 before the IIJ Act was passed in mid-November. Thus, other than recovery start-up businesses, employers that have claimed a fourth quarter 2021 ERC will be required to repay advance payments but will not be subject to any penalties. IRS Notice 2021-65 provides guidance on how to repay any advance credit payments and how to avoid penalties. Employers That Received Advance Payments – If an employer requested and received an advance payment of the ERC for wages paid in the fourth calendar quarter of 2021, and the employer is not a recovery startup business, the employer must repay the amount of the advance. Employers who need to repay these advance ERC payments must do so by the due date for the applicable employment tax return that includes the fourth calendar quarter of 2021. Employers That Reduced Fourth Quarter 2021 Employment Tax Deposits – Thinking that they would qualify for an ERC for wages paid in the fourth quarter, some employers reduced their fourth quarter employment tax deposits before the ERC was repealed. The IRS has said that penalties will not be imposed for these employers that reduced fourth quarter 2021 employment tax deposits prior to December 21, 2021, if:
The employer reduced its deposits in anticipation of the ERC, consistent with the rules provided in Notice 2021-24; and
The employer deposits the amounts initially retained in anticipation of the ERC on or before the relevant due date for wages paid on December 31, 2021 (regardless of whether the employer actually pays wages on that date). Deposit due dates will vary based on the deposit schedule of the employer; and
The employer reports the tax liability resulting from the termination of the employer’s ERC on the applicable employment tax return.
Failure to deposit penalties will not be waived for reduced deposits made after December 20, 2021. Please contact this office if you need assistance correcting payroll for this change.
Tax Information Reporting Requirement for Cryptocurrency Added by Infrastructure Bill
Article Highlights:
IRS Compliance Campaign
New Reporting Requirement for Crypto Exchanges
Form W-9
Form 1099-B
Cryptocurrency as Property
Digital Assets Definition
Transfer Reporting
Cash Transaction Reporting
1040 Crypto Question
Over the last 3 years, the Internal Revenue Service has been engaged in a virtual currency compliance campaign to address tax noncompliance related to cryptocurrency use. The IRS’ efforts have included outreach to taxpayers through education, audits of taxpayers’ returns and even criminal investigations. Soon the IRS will have another arrow in its quiver. Thanks to a requirement included by Congress in the Infrastructure Investment and Jobs Act (IIJA) of 2021, signed into law November 15, 2021, cryptocurrency exchanges will be subject to information reporting requirements similar to those that stockbrokers have to follow when a taxpayer sells stock or other securities. These new rules generally will apply to digital asset transactions starting in 2023, so the first reporting forms related to cryptocurrency transactions will be issued to the IRS and crypto investors in January 2024. Form W-9 – As crypto exchanges gear up for the new reporting requirement, and if they don’t have a record of their users’ taxpayer identification numbers (usually a Social Security number), they will contact their users for the information, likely using IRS Form W-9, Request for Taxpayer Identification Number and Certification. If the taxpayer doesn’t complete and return the W-9 to the requestor, the taxpayer may be subject to back-up withholding, which means the exchange would have to withhold 24% of future transactions and submit the withheld tax to the IRS. Form 1099-B – At this time it’s not known if the IRS will modify Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, currently most commonly used by brokers to report stock sales, for reporting crypto transactions, or if a new form will be created. As with the information on the 1099-B that brokers report, the IRS will then use the reported crypto transaction details – sales proceeds, acquisition and sale dates, tax basis for the sale, and character of the gain or loss – to match to the information reported on the taxpayer’s tax return. Those who don’t report, or don’t properly report, their cryptocurrency transactions will be liable for the tax, penalties, and interest. In some cases, taxpayers could be subject to criminal prosecution. Crypto is Treated as Property – Although cryptocurrency may seem like money, according to the IRS it is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. So, it is necessary to report the disposition of cryptocurrency when it is sold for cash, used to buy something or traded for another cryptocurrency. But just transferring the currency from an on-line wallet to an exchange, or vice versa, is not a disposition. The character of the gain or loss from the transaction generally depends on whether the cryptocurrency is a capital asset in the hands of the taxpayer. Generally, a taxpayer realizes capital gain or loss on the sale or exchange of cryptocurrency that is held as a capital asset. On the other hand, a taxpayer generally realizes ordinary gain or loss on the sale or exchange of cryptocurrency that he or she does not hold as a capital asset. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset. Digital Assets – The IIJA defines a digital asset as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology. Furthermore, the IRS can modify this definition. As it stands, the definition will capture most cryptocurrencies as well as potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork. Transfer Reporting – Based on the IIJA change, the definition of brokers who will need to furnish Forms 1099-B (or whatever new form the IRS might design) includes businesses, referred to as crypto exchanges, that are responsible for providing any transfer services for the transfer of digital assets on a taxpayer’s behalf. So, any platform on which a taxpayer can buy and sell cryptocurrency will be required to report digital asset transactions, both to the taxpayer and the IRS. Of course, not every transfer transaction is a sale or exchange. An example would be transferring cryptocurrency from a wallet at Crypto Exchange #1 to the taxpayer’s wallet in Crypto Exchange #2. In this case, Crypto Exchange #1 will be required to provide relevant digital asset information to Crypto Exchange #2. Such a transaction is not a reportable sale or exchange, and similar to when a taxpayer switches stock brokers, the prior exchange must provide the new exchange with the basis, and purchase dates, just as a stock broker must when the brokerage firms are changed. Cash Transaction Reporting for Businesses – Currently when a business receives $10,000 or more in cash in a transaction, the business is required to report the transaction on IRS Form 8300, including the ID of the person from whom the cash was received. Under the IIJA rules, businesses will be required to treat digital assets like cash for purposes of this reporting requirement. The $10,000 may occur in a single transaction, or a series of related transactions. Transactions between a buyer, or agent of the buyer, and a seller that occur within a 24-hour period are related transactions. 1040 Crypto Question – Starting with the 2020 tax return, the IRS asks a question on the return that requires a yes or no answer. The draft of the 2021 Form 1040 shows the following question will be posed: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” Once the IIJA crypto reporting requirement is effective, the IRS will know if the taxpayer’s response to the question is correct. Taxpayers should consider that when signing their Form 1040, they are attesting under penalties of perjury to filing a true, correct and complete return. A response contrary to the 1099-B reporting information could lead to unwanted interaction with the IRS. If you have questions about reporting cryptocurrency transactions, please don’t hesitate to contact this office for assistance.