Is the Employee Retention Credit Taxable?

Getting paid for keeping employees on payroll? Sounds like some sort of utopia. Or maybe it’s just a tax incentive for business owners during the pandemic called the employee retention credit.

What is the Employee Retention Credit?

The employee retention credit (ERC) is a tax credit established under the CARES Act in 2020 as a companion to the Paycheck Protection Program to provide a refundable employment tax credit to help businesses with the cost of keeping staff employed. The tax credit can be as high as $5,000 per employee in 2020 and as high as $21,000 per employee in 2021.

To qualify for the tax credit, employers had to have their business fully or partially suspended by government order due to COVID-19 or have experienced significant declines in quarterly gross receipts.

So if the ERC has been around for two years now, why bring it up in 2022? Well, you can still claim the credits from 2020 and 2021 if you haven’t already done so. Additionally, it is important to properly reflect the credit amounts on your 2021 tax filings.

Is the ERC Taxable?

The ERC is a payroll tax, which means it’s not included in gross income. The credit itself, however, is subject to the “expense disallowance rules,” which applies to the wages used to calculate the credit. Therefore, for federal tax purposes, the ERC is considered taxable income.

On the state level, New York State has not published guidance on whether the ERC is considered taxable but it’s likely to be considered not considered taxable on the state level. The Sasserath & Co. team has had correspondence with multiple NYS revenue agents who have told us to treat this as not taxable on the state level.  

Professional Guidance

Need to apply for the ERC for wages paid to employees in 2020 and 2021? Not sure which amended forms to fill out to receive the tax credits? Confused on the taxable nature of the ERC you received? We understand the rules and regulations surrounding the employee retention credit can seem confusing. Please contact your Sasserath & Co. professional for guidance.

NFT Tax Guidance for Creators, Investors, and Traders

By George Batas, CPA

Did you know that over $17.7 billion has been spent on NFTs in 2021 alone? And that the most expensive NFT sold to date was worth $91.8 million? Given these numbers, you might be asking yourself, what is this booming industry, how can I get involved, and what are NFT tax implications? Well, let’s talk about it.

What is an NFT?

An NFT, or non-fungible token, is a digital asset that is unique and cannot be transferred. It represents both tangible and intangible items including art, GIFs, videos/sports highlights, collectibles, music etc. Each NFT is registered online using blockchain technology similar to the way that cryptocurrency works. The registration system allows each NFT owner to possess proof of ownership of that asset. You can’t simply download a digital file or take a screenshot of an NFT and say you have ownership of that actual file without authentication.

IRS Guidance on NFTs

Tax law is often slow to keep up with our ever-changing society. While NFTs have been around since 2014, their popularity and explosion into the mainstream scene only recently occurred in 2021. Due to the rapid uptick in popularity, the IRS has not yet had the ability to issue much guidance on NFT tax.

What we do know is that NFTs can be viewed as collectibles, investments, or inventory, and depending on which category it falls in, the taxation can vary greatly. To figure out the tax consequences of an NFT transaction, the first step is to figure out whether someone is a creator, investor, or trader of NFTs.

NFT Creators

While this is a very new area and the IRS has not yet weighed in, the most likely NFT tax scenario for creators is that they will be subject to ordinary income tax and even self-employment taxes which would occur once the NFT project has been sold. The gain from the sale or exchange of the NFT for a creator will most likely be taxed as ordinary income because the NFT is part of the creator’s business. Likewise, any percentage from subsequent sale proceeds would be classified as ordinary income as well.

NFT Investors

NFT investors are typically people who buy and sell NFTs at a profit. Therefore, unless the NFT falls outside of the definition of a capital asset, an NFT investment that is sold would be taxed as a capital gain.

NFT Traders

An NFT trade occurs when an owner trades their NFT for someone else’s NFT or other cryptocurrencies. From the IRS perspective, if you are trading an NFT for another NFT, they will consider this a taxable transaction even though you never received any cash.

Conclusion

Whether you’re involved in creating, investing, or trading NFTs, it’s important to be aware of the tax considerations. When taxable events are triggered, it’s also important to know your whether your taxable gain is going to be considered capital in nature or ordinary.

Therefore, it’s critical to understand the full scope of the tax consequences and potential tax strategies available before any major transactions occur. While understanding the differences between ordinary income tax and capital gains tax on NFTs can be confusing, Sasserath & Co. can help clear the fog.

Contact us for guidance on your next NFT sale, investment, or purchase.

Pass-Through Entity Tax Filing: Sasserath & Co. Navigates Tough Situation to Save Client Significant Funds

As Ben Franklin once said, “In this world, nothing is certain except death and taxes.” Modern-day accountants might add another certainty: pass-through entity tax returns filed in New York State cannot be amended or adjusted once filed according to NYS rules. This usually holds true, unless Sasserath & Co. is on the case.

The pass-through entity tax deadline is March 15. After a client mistakenly filed an incorrect return that would have cost them tens of thousands of dollars extra in taxes, they turned to Sasserath & Co. for help. Our client thought they were out of luck, but we stepped in and relentlessly pursued a solution. While most people would have given up before getting started, Sasserath & Co. stayed committed to the task, navigating through the maze of phone prompts, recordings, automated menus, and hold periods until we reached a person at the New York State Department of Taxation and Finance.

Even after receiving an answer that nothing could be done, our team refused to give up, escalating the issue multiple times to different supervisors until someone at the Department of Taxation and Finance finally gave us the result we were looking for. Lifting the burden off our client, Sasserath & Co. was able to save them money and a huge headache, changing a foregone conclusion into a success story.

That’s the kind of dedication the Sasserath & Co. team puts into our work. Each client receives the utmost professionalism and care. Just when our client thought they were out of options, our team was able to step in and turn things around.

Want a team like that in your corner? Contact us to learn more about how our services can help you.

8 Accounting Tips Every Small Business Owner Should Know

As a small business owner, you probably think about tracking expenses and keeping up with tax deductions, but these aren’t the only critical accounting tips you should know. Whether you’ve been in business for a while or you’re a new start-up entrepreneur, read on for our 8 best accounting tips.

1. Outsource your bookkeeping.

For every business, bookkeeping is critical. This essential task is keeping organized records of your business’s income and expenses. If you’re like most small business owners, bookkeeping isn’t your primary skillset. And even if it is, you probably don’t have time to crunch numbers and keep records. By outsourcing this critical task, you will free up your time; put this vital function in a professional’s capable hands and check one business owner-related stressor off the list.

2. Keep accurate records.

In addition to having someone overseeing your bookkeeping, it is up to you as the business owner to make sure you keep accurate records for your business. For example, you’ll need to account for:

  • Gross receipts are sales, deposits, credits, recipes, invoices, etc.
  • Expenses include all receipts, canceled checks, or anything else that shows the cost of doing business.
  • Fixed assets should be recorded so that annual depreciation can be calculated.

Pro tip: For tracking receipts, you may want to use a receipt scanning app on your smartphone. It makes it easy to scan and store receipts electronically instead of maintaining a large paper file.

3. Keep an accurate inventory.

Keeping accurate inventory records provides you with current data that reveals whether you can take on client requests or additional projects with inventory on hand and when you need to order stock. It also helps you identify trends over time and make basic predictions about your business operations. All of these factors allow you to plan and strategize about your business. This ability is critical to developing and maintaining a small business over time.

4. Separate personal and business accounts.

The most important reason to keep your personal and business accounts separate is taxes. As a business owner, you can deduct expenses like travel and office supplies; however, you must provide supporting documentation for these expenditures to claim them. Lumping personal expenses in with business expenses makes a tedious mess of separating expenses and could knock you out of some deductions. It is best to have a separate line of business credit, separate credit cards, and a separate bookkeeping system to be safe.

5. Have (and maintain) a budget.

You should have developed a budget when you created your business plan to make projections about revenue and expenditures. But beyond that, you must maintain a working budget at all times. This approach helps you stay on track with what you spend versus what you take in, and it provides accountability so that if you do get off track with your spending, it is readily apparent and can be corrected quickly.

6. Work with a tax professional.

When the average business owner attempts to complete their taxes, it costs them about 40 hours in valuable time. And even then, chances are, a professional’s help will be needed to ensure the business is getting all the deductions to which it is entitled. So why not start with a pro? After all, tax preparation fees are a tax-deductible business expense.

7. Plan ahead.

When a small business implements the accounting tips on this list, it allows for planning with accuracy. Accuracy is the key term. Anyone can guess what might happen, but only with accurate records and observations about business patterns can you confidently make targeted predictions. For example, a small business that tracks income and expenses can detect patterns that reveal the best time for large investments and expenses.

8. Monitor business performance with financial statements.

Again, we cannot emphasize the importance of logging income and expenses. It helps in the day-to-day operation of your small business and provides information about overall business performance. For example, income statements help your business determine profit or loss, a balance sheet shows assets and liabilities, and a cash flow statement shows how much money goes in and out of your business in a given time, as well as how much cash remains. These types of financial statements are also imperative when asking banks and investors to secure financing or funding.

With these eight tips, you can keep your small business on track, establish valuable patterns of business behavior, and make sound financial decisions for your business’s future.

If you would like help with some of these accounting tasks, contact us now.

Sasserath & Co. Welcomes Fred Rook as Partner

Sasserath & Co., a New York CPA firm providing accounting, tax, and business advisory services, is pleased to announce that Fred Rook has been promoted to Partner as of January 1, 2022.

Fred Rook joined the firm in 2018 after a career in the real estate practice group of Ernst & Young and in the audit groups of two large regional firms. At Sasserath & Co., Rook services large corporations, small businesses, and individuals on Long Island, across the country, and around the world.

“I’ve been a CPA and have had the privilege of working in various firms over numerous years, however, it wasn’t until I found Sasserath & Co. that I felt I truly had found a place where I could put down roots for good. I look forward to all that the future holds here, and I am eager to dedicate myself to the continued success of Sasserath & Co. and our clients,” said Rook.

Rook will continue to focus on accounting and audit services in his new role. He brings over two decades of public accounting firm experience to his clients, and his industry experience includes working with medical practices, real estate operators and developers, staffing companies, restaurants, and many other industries. This depth of experience enables him to serve as a trusted business advisor to help his clients see the whole picture and position themselves for success.

As a mentor at Sasserath & Co., Rook spearheads the firm’s training initiatives through his work on the firm’s Leadership Team. He is an accomplished lecturer, teaching a number of CPE classes on various subjects, and is always available to help the team in any way he can.

“Fred always goes above and beyond not only for clients but the rest of the team,” said Sasserath & Co. Managing Partner Alan Sasserath. “His experience, leadership qualities, and dedication to seeing the entire team grow is a major asset to our partner group, and we look forward to seeing how Fred evolves with our growing firm.”

To contact Fred Rook, call (631) 368-3110 ext. 138 or email frook@sasscpas.com.

Why You Should Make a Charitable Contribution Before the Year Ends

Contributing to charity is, of course, an act that is beneficial in numerous ways. Your donation could save a life, feed a child, or give someone a home. Did you know that making a charitable contribution can actually help you financially? When done strategically, your charitable contributions can allow for tax benefits, including optimal tax deductions.

Tips for Making Charitable Contributions Before the Year-End

  1. Rather than making a cash donation, consider giving long-term appreciated securities.

Making your charitable contribution with appreciated stocks or bonds allows you to yield greater tax deductions in certain situations. If the donated security has been appreciated for over one year, you can claim the fair market value as an itemized tax deduction. Gifting stock can also help you minimize capital gains taxes and diversify your portfolio.

2. Itemize your tax deductions.

Single filers who do not itemize can claim up to $300 in donations, while married couples filing jointly can take up to a $600 deduction. Individuals who do itemize can give up to 100 percent of their adjusted gross income (AGI) and claim it on their tax returns. C Corporations are limited to cash donations equaling up to 25 percent of taxable income.

  1. Max out your IRA contributions.

For individuals over the age of 70.5 who need to fulfill their minimum IRA distribution, a charitable contribution can count.

You can also consider using a charitable donation to offset income from the conversion of a traditional IRA to a Roth IRA.

  1. Talk with your employer.

Find out if your employer will match your donation with an employee gift match program. This way, your donation will go that much further towards helping the organization that you care about.

  1. Keep proper documentation of your charitable contributions.

No matter how much you’ve contributed, keeping proper documentation of your donations is necessary for tax purposes. Whether it be a credit card statement, a W2, or a receipt, keep these documents safe and handy.

Here is a guide to what kind of documentation is needed:

Contribution Type Amount Contributed Records Required
Monetary
(cash, credit card, check)
Less than $250 Bank record or written receipt:

  • Name of organization
  • Amount of contribution
  • Date of contribution
Monetary
(cash, credit card, check)
$250 or more Same as for monetary contribution of less than $250 plus written acknowledgement stating:

  • Contribution amount
  • Whether charity provided goods/services in exchange
  • Description, estimated value of goods/services provided
Monetary
(payroll deduction)
Any amount Pay stub, Form W-2, or other document from employer that shows amount withheld for payment to charityPledge card showing charity’s name

Written acknowledgement if $250 or more is deducted from single paycheck

Property Less than $250 Receipt, letter, other written communication from charity stating:

  • Name of organization
  • Date and location of contribution
  • Property description

(Receipt not required when impractical to obtain.)

Record of property’s fair market value on contribution date and how value was determined

Property $250 to $500 Same as for property donation of less than $250 plus written acknowledgement that states whether charity provided goods or services in exchange and, if so, their value
Property $500 to $5,000 Written acknowledgement

Form 8283 (filed with tax return) stating:

  • How and when property was acquired
  • Cost or other adjusted basis of property (unless publicly traded securities)
Property $5,000 plus Same records as for property donations of $500-$5,000 plus:

  • Qualified appraisal (exceptions apply)
  • Appraisal summary with Form 8283

Lastly, to ensure that you qualify for these benefits, be sure to contribute to a registered, tax-exempt nonprofit organization, or a 501(c)(3). Not sure who to contribute to? Our firm is a loyal supporter of CMM Cares, a nonprofit organization that helps struggling families on Long Island.

Contact us for more help with year-end tax planning, IRA distributions, and optimal tax deductions.