Each day I talk to business leaders about what they like best – and least – about their Certified Public Accountants (CPAs). The responses range from, “I won’t buy a mobile phone without checking with Mary,” to “Mark is okay, but he likes my rival football team and that’s unacceptable.”

Clearly, there are many factors that can solidify or dissolve a relationship with a trusted advisor such as your CPA. Some, while not preferred, are tolerable; others are absolute deal breakers. Still, the services of a CPA are crucial to the success of any company. That’s why you should ask yourself these five questions to determine if your CPA is meeting your needs, or it’s time to move on to someone else.

Does my CPA understand my business and industry?

As the business development manager of a “Top 50” accounting and wealth management firm, I hear the term “generalist” quite often. In the accounting world, the label applies to a professional with clients in multiple industries. Traditionally, a CPA’s role was to have a working knowledge of each of their clients’ industries. Today, top firms specialize in precise areas of focus to ensure they are experts in the tax laws that govern their clients’ industries. For example, if you own a construction company and the only construction company your CPA works with is your own, are you certain you are taking advantage of every potential tax benefit and functional process available to streamline and grow your operations?

Am I getting the value I deserve?

Value has different meanings for different people. Accounting value is leverageable by:

• Knowing your CPA is always there when you have questions
• Trusting your CPA is current with the ever-changing tax laws that govern business owners
• Counting on your CPA to complete important tasks on time

Value is essentially whatever you perceive it to be. Knowing what is important to you and your business will help you identify problems when your expectations of value are not being met. Make sure you can define “value” when working with your CPA, who must be a trusted advisor to be effective.

Have I outgrown my CPA?

You likely have a good relationship with your CPA. He or she has been with you since the beginning, seen your kids grow up, been there through tough times and good. But does that alone ensure he or she is the best partner for your company today? Can he or she guide you through the complex scenarios your business faces? In many cases after a consultation with their CPA of so many years, a business owner realizes the CPA is not only overwhelmed by the company’s growth, but also ill-prepared to help the company capitalize on its success. This is a dangerous place for a business owner.

Am I receiving the level of service I have come to expect from my CPA?

Do you feel like every time you call, your CPA isn’t in, and it takes forever to get a return call? Are you only meeting with your CPA once a year to drop off your tax documents? Have you ever had to write an unexpectedly large check to the IRS without knowing in advance why you owed so much? Think about what services you believe are most valuable to you, then ask yourself, are you receiving the level of service that you expect from your current CPA?

Are accounting services the only services the firm offers?

In today’s world, accounting firms must take a holistic approach to providing added value and top-level financial services. Does Mike from XYZ Tax do your accounting, Mary from the bank your 401k, and Diane from ABC Investments a business succession plan? What if your business could work with one company in a single location for all that? When the left hand knows what the right hand is doing, you gain significant efficiencies. Can you afford to not have all of your trusted business advisors working together, sharing information, and strategizing about your best options?

Having a trusted advisor as your CPA is more than simply hiring someone who belongs to your club or likes the same sports teams you do. It’s about partnering with a reliable professional who is a specialist in your field of business and who will help guide you and your company to the next level of financial success and security.

On February 17, 2022, The Pennsylvania Department of Revenue issued Corporate Tax Bulletin 2022-01 providing guidance on the apportionment of income by a taxpayer involved in activities subject to one or more special apportionment formulas.

All states require the apportionment of income for multi-state businesses. Apportionment is the determination of the percentage of a business’s profits that are subject to a given jurisdiction’s corporate income tax or other business taxes. Pennsylvania currently requires businesses to apportion income based on a single sales factor methodology, where only a company’s sales are considered. A specialized apportionment formula is required in Pennsylvania for companies within certain industries. Airlines, pipeline companies, publishing companies, railroads, and trucking companies are a few examples of industries that require a special apportionment formula.

In certain instances, a taxpayer could be positioned in a business that requires special apportionment as well as the regular method of apportionment required by the state. The matter of Buckeye Pipeline Co v Commonwealth presented such a case. Buckeye was a Delaware Corporation that was doing business in Pennsylvania. The company owned a one-percent interest, as the general partner in four limited partnerships. The sole business of these limited partnerships involved the transportation of petroleum products through 3,500 miles of pipeline situated in ten states, which included Pennsylvania. Buckeye provided complete operational management. In Buckeye Pipeline Co v. Commonwealth, the taxpayer requested the use of pipeline apportionment to apportion all its income. The pipeline apportionment method requested by Buckeye resulted in a tax liability that was more than fifty percent less than the method prescribed by the Commonwealth. Pennsylvania countered that 98.6% of the company’s gross receipts were derived from management activities and 1.4% of its gross receipts were derived from pipeline activities. The Commonwealth ultimately adopted a split method of apportionment for similarly situated taxpayers who engage in activities subject to both the standard apportionment formulas as well as one or more of the special apportionment formulas.

The proper interpretation and application of a state’s apportionment methods can often be complex with substantial financial consequences. In today’s complex multi-state landscape, it’s important to surround yourself with trusted State and Local Tax advisors. If your business has questions about the new regulation, HBK’s SALT practice can assist you. Please contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com with questions.

Under pressure from Congress, the IRS announced it will transition away from using a third-party facial recognition service to authenticate people creating new online accounts, as we mentioned in our article IRS Will Soon Require Selfies to Access Some Features on Their Site . Last year, the IRS began requiring taxpayers to use “ID.me” to access personalized eligibility information for the expanded child tax credits funded by the American Rescue Plan. The agency had planned to expand use of ID.me to all taxpayers later this year.

The use of facial recognition has received criticism on a bipartisan basis from the Senate Finance Committee. Republicans on the Committee sent a letter to IRS Commissioner Chuck Rettig last Thursday, writing: “While we understand the IRS’s use of ID.me is intended to protect data and reduce fraud, we have serious concerns about how ID.me may affect confidential taxpayer information and fundamental civil liberties.” On Monday, the Democratic chair of the Committee also sent a letter asking the IRS to discontinue the program, writing: “I have long argued that Americans should not have to sacrifice their privacy for security. The government can treat Americans with respect and dignity while protecting against fraud and identity theft. The IRS should take immediate steps to address the many valid concerns that have been raised by taxpayers about its use of facial recognition technology.”

IRS Commissioner Chuck Rettig quickly responded that the IRS would oblige: “The IRS takes taxpayer privacy and security seriously, and we understand the concerns that have been raised,” said Rettig. “Everyone should feel comfortable with how their personal information is secured, and we are quickly pursuing short-term options that do not involve facial recognition.”

To prevent larger disruptions during filing season, the transition will occur over the coming weeks. The IRS plans to “quickly” develop and bring online an additional authentication process that does not involve facial recognition. The transition announced today does not interfere with the taxpayer’s ability to file their return or pay taxes owed. The IRS will continue to accept tax filings and people should continue to file their taxes as they normally would.

UPDATE: See here for new update regarding ID.me Beginning this summer, taxpayers will be required to confirm their identity through a third-party company to access their IRS.gov account. To protect taxpayers’ privacy and reduce fraud, the IRS has partnered with ID.me to confirm users’ identities. We expect the IRS to expand the program in the future, but this should not impact your ability to pay or file taxes. If you have an existing login, it will be deactivated after the summer of 2022. You will need to create an ID.me login to continue using the following IRS services:

• Child Tax Credit Update Portal
• Get Transcript Online
• Get an Identity Protection Pin (IP Pin)
• View Online Payment Agreements

  Before you begin, you will need a valid government-issued photo ID – a driver’s license or passport are both valid forms of ID. You will also need access to a smartphone or a computer with a webcam to take a selfie. The steps can be quite lengthy – especially if you are required to use alternative methods for identity verification. Follow these steps when you are ready to begin: Step 1: Navigate to IRS.gov and click on “Sign in to Your Account” in the middle of the screen. You will be prompted to either login with ID.me or create a new account with ID.me. Step 2: Create a new account. You will be prompted to enter your email and create a password. Once this step is complete, you will be prompted to confirm your email address by clicking on the link in the verification email. Step 3: Choose a Multi-Factor Authentication (MFA) option from the following: text message, phone call, push notification, code generator application, FIDO security key, or NFC-enabled mobile security key. Step 4: Upload images of your government-issued ID. You have the option of taking a picture with your smartphone or uploading the ID. Step 5: Once your documents are accepted, you will be prompted to take a live selfie so that ID.me can compare the live image to your government-issued ID. Step 6: Verify your landline or cell phone number. Voice-over-IP will not be accepted. Step 7: Verify your social security number. Step 8: Review the summary of personal information and select the checkbox for the Fair Credit Reporting Act. Step 9: Grant access to your personal identifiable information to the IRS. If you deny access, you will not be granted a login. Creation of an ID.me login is not currently required. However, given the time investment required to go through these steps, we advise that you confirm your identity sooner rather than later so that you have access to your account when the need arises. If you have any questions regarding this new requirement, please reach out to your HBK tax advisor.

COVID-19 has been affecting all of our lives this year. While lockdowns and restrictions are currently being lifted, IRS operations are still significantly slowed down. This is impacting many of the services that the IRS offers, and causing significant delays.

IRS Offices Slowly Reopening
On June 1st, the IRS began to bring more people back onto its campuses and offices to perform work that cannot be performed remotely. The first phase included employees with non-portable work in Kentucky, Texas, and Utah.

The IRS plans to reopen additional operations in:

• Georgia and Tennessee beginning June 15th
• Missouri and Michigan beginning June 15th
• Indiana and Ohio beginning June 29th and
• California, Puerto Rico, Oregon beginning June 29th

Tax Identification Numbers
The IRS EIN-Unit that issues employer identification numbers for new businesses appears to only be issuing new EINs online. The office accepting EIN applications by fax is currently closed, which means that many new businesses that cannot use the online option are currently unable to obtain an EIN. Businesses that are organized outside the United States cannot use the online service, but may still be able to receive an EIN over the phone by calling 267-941-1099 between the hours of 6:00 am and 11:00 pm Eastern Time.

Individual taxpayers that need an individual taxpayer identification number (ITIN) can also expect significant delays. Typically, a new ITIN gets issued within six weeks, however, the current processing time for new ITINs appears to be over three months. Furthermore, the IRS office processing ITINs is currently not taking phone calls.

Status of Taxpayer Issues
Calling the IRS to check on taxpayer issues was not an option during the COVID-19 peak. Fortunately, the IRS has now opened the practitioner line to allow practitioners to call the IRS about many taxpayers’ issues. This has allowed HBK to follow up on the status of many client issues, but has to lead to other complications since most IRS agents are working from home, and not every IRS agent has access to a fax machine or other resources.

Stalled or Delayed Processing
Most IRS offices are still closed, and tax returns and tax payments mailed to IRS offices are still waiting to be processed. There have also been reports of mail being returned because the IRS office is unable to accept it. If a tax payment needs to be mailed to the IRS, we recommend that taxpayers use certified mail and keep adequate documentation to prove that the payment was mailed on time. If at all possible, electronic payments should be made via the IRS website.

S corporation shareholders can deduct losses only to the extent of their adjusted stock and debt basis in the corporation (see Can You Deduct Your S Corp Losses?, Passive Activity Loss Rule).

A shareholder creates stock basis by contributing capital, and debt basis by lending money to the S corporation, both of which are considered “actual economic outlays” by the shareholder. As described in a recent court case (Meruelo v. Comm., 123 AFTR 2d. 2019), to claim a loss from the activity the shareholder must have been “left poorer in a material sense after the transaction.”

Meruelo
In Meruelo, the S corporation suffered a nearly $27 million loss after banks foreclosed on its condominium complex. The taxpayer claimed he had sufficient basis to claim his $13 million share of the loss. His basis comprised of $5 million of capital contributions and more than $9 million of debt basis for transfers from other businesses in which he was an owner. The IRS ruled, and the Tax and Appellate Courts confirmed, that the taxpayer was entitled to claim a $5 million loss, but denied the deduction for any loss claimed on the debt as it was not directly from the shareholder.

The Problem with Debt Basis
It’s clear that a loan from a shareholder to their S corporation creates debt basis. Debt basis is also established when the shareholder borrows funds that it then loans directly to the S corporation, commonly referred to as a “back-to-back loan.” However, the IRS and courts have consistently ruled that anything outside a direct loan from the shareholder to the S corporation does not create debt basis.

In Meruelo, the taxpayer’s CPA was aware of this rule and drafted a promissory note from the S corporation to the taxpayer for a $10 million unsecured line of credit with a 6 percent interest rate. The CPA also reported the taxpayer’s share of related entity debt as shareholder loans on the S corporation’s tax return. The Court rejected the taxpayer’s argument that the arrangement was in effect a back-to-back loan, because there was no evidence that the funds had been lent to the taxpayer and then back to the S corporation. It explained that a shareholder could create debt basis by borrowing from an affiliated company and then lending the funds to an S corporation. But it also held that taxpayers are bound by the form of the transaction they initially choose; the funds advanced as intercompany loans cannot later be reclassified as shareholder loans to create basis.

What Should Shareholders Do?
The fact pattern in Meruelo is one we often encounter, a taxpayer with ownership in multiple entities using earnings from one or more to fund the losses of another. The case highlights the potential tax pitfalls of using this arrangement without proper planning. Shareholders should avoid using intercompany transfers to fund operations where basis limitations could become an issue. Instead, they should consider taking distributions or loans from their related businesses and either contributing or loaning the funds to the entity in need of cash. Done properly, this will create basis.

For questions on this or related tax matters, please contact Ben DiGirolamo at BDiGirolamo@hbkcpa.com.

Of the many changes that came from the Tax Cuts and Jobs Act (“The TCJA”), Qualified Opportunity Zones (“QOZ”) have been one of the most talked about provisions as the 2018 tax season progresses. As a recap, through QOZs, taxpayers may elect to temporarily defer the tax to be paid on capital gains until the 2026 tax year that are invested in a Qualified Opportunity Fund (“QOF”) within 180 days of gain recognition, the QOF must invest 90 percent of its capital in QOZ Property. Taxpayers who hold investments in a QOF for at least five years may exclude 10 percent of the original deferred gain, and investments held for more than seven years qualify for an additional five percent exclusion of their original deferred gain. In what could be the most attractive feature of the new law, after 10 years, post-acquisition appreciation is 100 percent excluded from taxable income for federal tax purposes. Many states are still evaluating how they are going to deal with the new QOZ rules.

Click here to read the full update.

The New Jersey Amnesty program is in full swing, and taxpayers who are delinquent in their New Jersey taxes have until January 15, 2019 to participate. The program began November 15, 2018 and is for delinquent taxes and tax returns due on or after February 1, 2009 and due before September 1, 2017. In order for a tax to be eligible for New Jersey tax amnesty, it must be administered and collected by the New Jersey Division of Taxation. This excludes taxes such as local property taxes and payroll taxes owed to the New Jersey Department of Labor.

As part of the Amnesty program, the New Jersey Department of Revenue will waive most penalties and half the interest due as of November 1, 2018. Civil fraud and criminal penalties are not eligible for waiver.

In order to be approved, the participant must pay all outstanding taxes due, half the interest, and file all delinquent returns. Any payment remitted under the Amnesty program are not eligible for refund. In addition, taxpayers who pay taxes under the Amnesty program waive their right to appeal all amounts paid. As with most Amnesty programs, there is a penalty applied to those that choose not to participate. After the program has ended, an additional 5% penalty will be applied to the outstanding balance due. The nonparticipation penalty cannot be waived or abated by the Department of Revenue.

Who Qualifies?

Almost everyone qualifies for Amnesty. However, taxpayers who have filed an administrative or judicial appeal related to a tax assessment may only participate if they withdraw their appeal, waive all rights to a future appeal, and receive written approval from the Director of the Division. In addition, taxpayers under criminal investigation or who are charged with a New Jersey state tax matter by a county prosecutor or New Jersey Attorney General are not eligible to participate in the Amnesty Program.

Taxpayers will be denied Amnesty for:

• Failure to qualify for Amnesty
• Failure to complete the terms of the agreement under which this amnesty is being offered (acknowledging the Amnesty Waiver Statement, filing appropriate returns, and making full payment for the amnesty amount due).
• Submission of a payment that is dishonored (bounced, rejected)
• Failure to be granted specific approval from the Director of the Division of Taxation for tax matters pending before the Conference and Appeals Branch or the Tax Court of New Jersey (or other judicial body)

How Can I Participate?

Taxpayers wishing to participate must take the following actions before midnight on January 15, 2019:

• File all outstanding returns;
• Remit full payment of taxes and half the interest due as of November 1, 2018; and
• Acknowledge the online Payment and Waiver Statement

In November, the Department sent notices to all known eligible participants. The notice has a 13-character Amnesty ID and a Personal Identification Number (“PIN”). These numbers should be used when accessing the Amnesty website. The notices provide additional instructions on how to participate in the program. If you have outstanding New Jersey tax liabilities and have not received a notice with an Amnesty ID or PIN, go to the State of New Jersey’s website.

Please contact HBK if you believe you have outstanding New Jersey liabilities or if you have questions regarding the program.

The passage of the Tax Cuts and Jobs Act (TCJA) resulted in a complete makeover of the forms used to prepare individual income tax returns. Apparently “filing on a post card” is possible; for some, the new Individual Income Tax Return will indeed be as simple and straightforward as filling out a two-sided post card-sized form. For many others, however, the new form will be accompanied by one or more of six new schedules.

The first page of the new form is informational. It lists the taxpayer’s filing status, name, address, social security number and dependents. It also includes a signature area for the taxpayers and the tax preparer.

The second page of the new form contains the information used to compute the tax due for the year; it has been significantly simplified from prior year forms. If additional information needs to be reported, the TCJA has provided the following schedules to be used:

• Schedule 1 should be included in any tax return where the taxpayer receives income from capital gains (reported on Schedule D), ordinary gains (reported on Form 4797), business income (reported on Schedule C), rental and pass through income (reported on Schedule E), or any other type of income typically referred to as “Other Income.” This form will also report any adjustments to income, such as the deductible part of self-employment tax (reported on Schedule SE), the self-employed health insurance deduction, the deduction for contributions to an IRA and the student loan interest deduction.
• Schedule 2 will be included in any tax return where the taxpayer is subject to the Alternative Minimum Tax (reported on Form 6251) or needs to make an excess advance premium tax credit repayment.
• Schedule 3 will be used to claim nonrefundable credits such as the foreign tax credit (reported on Form 1116), any residential energy credits, general business credits or child and dependent care expenses.
• Schedule 4 will be used to compute other taxes such as self-employment taxes (reported on Form SE), additional taxes on IRAs, net investment income taxes (reported on Form 8960), household employment taxes (reported on Schedule H) and any Section 965 taxes due.
• Schedule 5 will be used to report any estimated tax payments as well as any payments made with an extension. This schedule will also be used to claim any refundable credits that the taxpayer is entitled to other than the earned income credit, such as the American opportunity credit or the additional child tax credit.
• Schedule 6 should be included for any taxpayers who have a foreign address or wish to designate a third- party designee to discuss their return with the IRS.

In addition to these new schedules, taxpayers should be prepared to fill out many of the standard, familiar forms and schedules when completing 2018 returns.

Taxes can be complex, and it is important to understand how these changes might affect filings. The examples included in this article are not all-inclusive and not intended as a substitute for the value and knowledge of consulting with a tax specialist. Please contact a member of the HBK Tax Advisory Group with your questions and concerns. We’re here to help.

The IRS extended the due dates for furnishing individuals with certain forms related to the Affordable Care Act (ACA).

According to a recent announcement by the agency, it will allow sponsors of coverage who file the 2018 Health Coverage Form 1095-B and companies which file the 2018 Employer-Provided Health Insurance Offer Coverage Form 1095-C an extension from January 31, 2019 to March 4, 2019. No additional extensions for provision of these forms will be permitted.

The recent IRS notice announcing the change did not include extensions for filing forms 1094-B, 1095-B, 1094-C, and 1095-C with the IRS. The deadline for those forms is still February 28, 2019, if they are filed traditionally and April 1, 2019, if they are filed electronically. However, a 30-day extension for filing these forms with the IRS is still available through submission of Form 8809, the standard Application for Extension of Time to File Information Returns form.

The IRS has also provided guidance to individuals who do not receive Form 1095-B or Form 1095-C by the time they file their 2018 tax returns due to these extensions. The agency said via their update, “Taxpayers may rely on other information received from their employer, or other coverage provider, for purposes of filing their returns, including determining eligibility for the premium tax credit and confirming that they had the required minimum essential coverage. Taxpayers do not need to wait to receive Forms 1095-B and 1095-C before filing their returns.”

In addition, the notice provides relief from certain penalties to any reporting entity that can show they have made good faith efforts to comply with IRS reporting requirements for 2018 (both for furnishing said forms to individuals and for filing with the IRS) as they relate to incorrect or incomplete information contained on tax returns/forms. This applies to missing and inaccurate taxpayer identification numbers and errors in dates of birth or other identification information required on a tax return/form. No relief is provided in the case of reporting entities that cannot prove they made good faith efforts to comply with the regulations, or which fail to file appropriate and required tax returns/forms or statements by their due dates.

Please contact Michael Walston at mwalston@hbkcpa.com, or your HBK representative with any questions on this matter or others related to filing tax forms.