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15 Apr 2024

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FEDERAL JUDGE DECLARES CORPORATE TRANSPARENCY ACT UNCONSTITUTIONAL!

Important Update for Small Businesses

Background – Corporate Transparency Act (CTA)

This year’s January issue of the Pearson Perspective alerted small business owners to be sure to find out if your business is one of millions affected by the Corporate Transparency Act (CTA). Congress enacted the CTA in 2021 to combat sources of financial criminal activity and abuse of anonymous companies. The law became effective January 1 of this year.

The Problem: Congress identified a widespread tactic by individuals with malicious intent to affect national security and economic integrity. Specifically, the scheme is to conceal or profit from the ownership of U.S. companies to facilitate illegal operations.

The Solution: The intent of the CTA is to curb unlawful financial activity including tax fraud, money laundering, and terrorism financing. Compliance requires a majority of privately held corporations, limited liability companies, and similar entities … domestic and foreign … doing business in the United States to report to the Financial Crimes Enforcement Network information about the individuals who own or control them.

The measure is targeted squarely at small businesses with fewer than 20 employees or $5 million or less in gross receipts. Companies larger than this are exempt … as are many lines of financial services businesses that are far more able to be abusive than approximately 11 million small businesses that are expected to incur annual compliance costs exceeding $1 billion.

Small Businesses Push Back!

In 2020, two plaintiffs filed suit in the U.S. District Court for the Northern District of Alabama against the Treasury Department. Together, the National Small Business Association (NSBA) and NSBA member Isaac Winkles challenged the constitutionality of the CTA’s reporting requirements on the basis that the Act is:

unduly burdensome for small businesses;
a violation of privacy and free speech protections; and
an infringement on a state’s power to govern business.

Unexpectedly, Federal Judge Liles C. Burke ruled on March 1 that the CTA is unconstitutional “because it cannot be justified as an exercise of Congress’ enumerated powers.” Clearly, small businesses have reason to cheer this decision.

Notably, there are similar pending cases in other states that have challenged the requirements of the CTA.

Cautious Cause for Celebration

The ruling is certainly good news for small businesses and for everyone concerned about financial privacy in the United States. That said, it is only the first step in what shapes up to be a long legal process. The Financial Crimes Enforcement Network (FinCen) promptly reacted by releasing a statement that addresses the court ruling, its intention to respond further and continued enforcement of the CTA i.e. “reporting companies are still required to comply with the CTA and file beneficial ownership reports as provided in FinCEN’s regulations.”

In a further move, the Justice Department filed an appeal of the verdict on behalf of FinCen which will be heard in the U.S. Court of Appeals for the 11th Circuit. The appeal effectively ignores the holding of the Alabama District Court.

Key Takeaways

FinCEN, advises that “reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations”.
FinCEN indicated it would not attempt to enforce the CTA against the two named plaintiffs or others specified in the Alabama court’s injunction while litigation is continuing.
FinCEN has been notified of recent fraudulent attempts to solicit information from individuals and entities that may be subject to reporting requirements under the CTA. The fraudulent correspondence may be titled "Important Compliance Notice" and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests. Please do not respond to these fraudulent messages or click on any links or scan any QR codes within them.
Pearson & Co will keep you in the loop as the legal issues develop.

The foregoing is meant as an overview only. There is more to consider.
Give us a call and we’ll help you determine your company’s status
under the CTA plus help with reporting if necessary.

25 Mar 2024

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WORKER CLASSIFICATION – WHAT’S IN A NAME?

Déjà vu … All Over Again!

History, Confusion, Efforts to Clarify

Legal and regulatory debates have repeatedly taken center stage at the state and federal levels, the topic … what workers may appropriately be deemed “employees” and which class of workers may be classified as “independent contractors”?

There have been multiple efforts to define the above classifications since the 1938 inception of the Federal Labor Standards Act (FLSA). Disappointingly, the Act does not address the specific definition of either categorization.

A worker’s classification has real world financial consequences for both the individual worker and the company utilizing their services. Independent contractors are not eligible for state or federal minimum wages. Additionally, they are not entitled to overtime pay, workers compensation coverage, unemployment insurance, or benefits. Effectively, independent contractors do not enjoy the protections of state or federal workplace law as do employees.

Employers are often tempted to seek grounds to classify workers as independent contractors rather than employees. Doing so relieves the employer of paying its share of employment taxes … plus avoiding withholding and paying income, Social Security and Medicare taxes. That said, employers are cautioned to be diligent in their research before classifying workers as independent contractors. Misclassifying a worker may subject the business to significant financial penalties.

The latest effort to define employee or independent contractor classification under the FLSA occurred on January 10, 2024. On that date, the U.S. Department of Labor (DOL) published a final rule, effective March 11, 2024, which rescinds the more employer-friendly 2021 test implemented under the Trump Administration.

6 Key Factors to Determine Classification Status

A prudent place for employers to seek guidance is to review how the revised DOL rule restores the premise of equally weighting six factors identified in the rule.

Opportunity for profit or loss
Investments by the worker and the employer
Permanence of the work relationship
Nature and degree of control
Whether the work performed is integral to the employer’s business
Skills and initiative

Checklist Summary

Opportunity for profit or loss: Are profits or losses impacted by the worker exercising initiative or business expertise? For example, can the worker:

negotiate his/her compensation;
accept or decline jobs;
perform like a business, e.g. marketing functions, hiring/firing other workers, purchase materials and equipment?

Investments by the worker and the employer: Does the worker make investments in his/her business that demonstrates the worker is operating independently?

Permanence of the work relationship: The worker is more likely to be construed to be an independent contractor when similar jobs are:

provided to a variety of employers;
project based;
open-ended in duration.

Nature and degree of control: The following would favor classification as an employee:

sets own work schedule;
supervises performance of the work;
sets billing rates for services;
authority to discipline other workers;
freedom restricted to work for others.

Whether the work performed is integral to the employer’s business: Is the work performed a specific necessity for the employer’s principal business?

Skills and initiative: Both employees and independent contractors may demonstrate and perform applying specialized skills. That said, a worker who does not use specialized skills in performing work or requires training from the employer is likely to be classified as an employee.

Employer Action Items

With the above as a guide, an employee is generally considered anyone who performs services under circumstances that the business can control what will be done and how it will be done. What matters is that the business has the right to control the details of how the worker’s services are performed.

In contrast, independent contractors are typically people in an independent trade, business or profession in which they offer their services to the public. Workers often classified as independent contractors include truck drivers, home health workers, auto mechanics, carpenters, plumbers, painters, roofers, drywall installers, among others.

The new DOL rule expands the compliance standards for classifying employees. It makes sense for employers to review existing independent contractor agreements to assure compliance with the new federal requirements as well as state rules and regulations.

The foregoing is meant as an overview only. Click here for FAQs.

For more on how the above applies to your specific circumstances, be sure to give Pearson & Co a call or drop an email. We’ll respond immediately.

27 Feb 2024

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2023 TAXPAYER ADVOCATE ANNUAL REPORT

If you weren’t frustrated and inconvenienced by inefficiency in responses by the IRS, certainly you know one or more taxpayers who have … or heard of the considerable backlog in unprocessed returns and unissued refunds for the past three tax years.

Erin Collins is our National Taxpayer Advocate. In her 2023 Annual Report to Congress she presented an assessment of progress in reducing known bottlenecks as well as identifying agency improvements that may take more time. Collins introduced her report with, “The year 2023 was one of extraordinary transition for the IRS and therefore for taxpayers. Despair has turned to cautious optimism. Because of the COVID-19 pandemic, the three preceding years had been the most challenging years the agency and most taxpayers had ever experienced.”

Progress Resolving Taxpayer Frustrations

As evidence of progress, Collins reported that the backlog of processing paper Forms 1040 “has been virtually eliminated” from a peak of 17 million returns at the end of 2021. Similar success remains to be realized with amended individual tax returns, business amended tax returns, or correspondence, the backlogs of which “remain at double their pre-pandemic levels.”

Wait times and answer rates of customer phone calls have been continuing frustrations for taxpayers. While more needs to be done, notably:

During fiscal year 2021, roughly 11% of phone calls were answered.
In contrast, 29% answered in fiscal 2023.
Collins commended the IRS for reducing the average wait time from 29 minutes in fiscal 2022 to 13 minutes in fiscal 2023.

Collins emphasized that tackling the phone call issues had a ripple effect resulting in continued interruptions processing amended returns, taxpayer communications and delays in issuing refunds.

As stated in the report, “The IRS cannot easily shuffle employees back and forth between answering phones and processing correspondence, so unproductive employee time was the price it had to pay to improve telephone service levels”. Going forward, the IRS needs to find a way to move employees between those two functions more nimbly. For present purposes, however, we need to keep in mind that backlogs in processing tax returns and taxpayer correspondence drive much of the phone volume.”

Tax-related identify theft remains a major outstanding IRS service issue. Self-reported cases during fiscal 2023 averaged 19 months to resolve and taxpayers to receive amounts owed. At the end of that year, about 484,000 were unresolved and remain in inventory for processing.

So, two workforce issues were highlighted as requiring remedial attention.

Collins urged the agency to address how open jobs are posted, expedite the pace of the hiring process, and make positions more competitive pay-wise.
Shuffling staff between customer support work and inventory processing is that new hires tend to lack sufficient training to succeed, especially when speaking directly with taxpayers.
“The IRS has always had challenges with training, and those challenges are greater when the agency is staffing up”, she reported.

10 Most Serious Taxpayer Service Problems in 2023

The IRS requires the National Taxpayer Advocate to include a summary of the ten most serious problems encountered by taxpayers each year. Here is the list for 2023 based directly on an IRS survey about taxpayer attitudes and preferences. Click here to link with any for which you seek additional detail.

Processing Delays
Hiring, Recruitment & Training
IRS Transparency
Telephone & In-Person Service
Return Preparer Oversight
Identity Theft
Online Account Access for Taxpayers & Tax
International
Compliance Challenges for Taxpayers Abroad
Appeals

Summary

“After several difficult years for taxpayers, the IRS, and society in general, tax administration in 2023 mostly managed to leave its COVID-19 problems behind. The IRS eliminated most of its processing backlog, generally paid refunds timely, and answered taxpayer telephone calls at pre-pandemic levels. The good news is that, with limited exceptions, we are back to business as usual.”

“The bad news is that the baseline level of ‘business as usual’ was not good enough. Our nation’s taxpayers deserve a 21st century tax administration agency that is fair and equitable, provides timely and clear guidance, makes it possible for all taxpayers to electronically file their tax returns, answers its phones and resolves most issues at the first point of contact, and allows taxpayers to conduct business on any follow-up matters through online accounts in the same way they conduct business with their financial institutions.”

–ERIN M. COLLINS, NATIONAL TAXPAYER ADVOCATE

09 Jan 2024

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SMALL BUSINESS OWNERS & BENEFICIAL OWNERS

Be Sure to Find Out If Your Business is One of Millions to be Affected By the Corporate Transparency Act

Background – Corporate Transparency Act (CTA)

The Problem: Congress identified a widespread tactic by individuals with malicious intent to affect national security and economic integrity. Specifically, the scheme is to conceal or profit from the ownership of U.S. companies to facilitate illegal operations.

The Solution: The Corporate Transparency Act (CTA) was enacted by Congress in 2021. The purpose of the legislation is to curb unlawful financial activity including tax fraud, money laundering, and terrorism financing. Compliance requires many companies, domestic and foreign, doing business in the United States to report information about the individuals who own or control them.

Under the amended legislation, businesses that meet certain criteria must comply by submitting a Beneficial Ownership Information (BOI) Report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The BOI Report identifies individuals who are associated with the reporting company.

“Small Business” Defined

On November 29, 2023, FinCEN released a final rule to implement the CTA’s reporting requirements. The BOI reporting requirement applies to all domestic and foreign reporting companies categorized as “small businesses”.

Corporations and LLCs are the only business entities referred to in the new rule. FinCen has commented that it believes sole proprietorships and most general partnerships will not have to file a report.

Corporations or LLCs with less than $5 million in gross revenues and/or having 20 or fewer employees are defined as “small businesses” and must file an initial report of changes in ownership with FinCen no later than January 1, 2025. Effective January 1, 2024, any changes in ownership must be reported within 30 days of ownership transfer. Failure to report may result in a fine of $500 per day and/or criminal penalties.

Companies with more than 20 full-time employees and gross annual receipts in excess of $5 million may qualify for an exemption as a “large operating company”.

Who is Considered a Beneficial Owner?

Under the provisions of the CTA, an individual is deemed to be a beneficial owner if one or more of the following describes the person’s involvement with the reporting company.

Directly or indirectly have a significant ownership stake in the company;
Exercises a major influence on the reporting company’s decisions or operations;
Owns or has control of at least 25% of the company’s shares.

Beneficial Ownership Report Submission Requirements

Both domestic and foreign companies are required to submit BOI reports. Domestic companies include LLCs and corporations. Foreign companies are those registered to conduct business in the United States.

Qualifying reporting companies created before January 1, 2024, must submit the Beneficial Ownership Information (BOI) Report no later than the deadline of January 1, 2025.
Reporting companies registered or established between January 1, 2024, and January 1, 2025, have 90 days from inception to file.
Businesses established on or after January 1, 2025, will have 30 days from notification or public announcement of their formation to submit their first report to FinCEN.

There is no charge to businesses that submit BOI reports. Electronic filing forms are available on FinCen.gov website.

FinCen has not announced an annual reporting requirement. However, there are requirements to update the original submission when beneficial ownership changes occur. Examples that may trigger an update include beneficial owner changes to:

Address;
Name change due to marriage or divorce;
Obtaining a new driver’s license.

Additionally, changes to a person’s span of authority or duties may be considered events that establish substantial control of a business … and qualify the individual as a beneficial owner.

Note: The reporting timeline for these types of changes may be as short as 30 days.

FinCen Alert

FinCEN has been notified of recent fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the Corporate Transparency Act. The fraudulent correspondence may be titled “Important Compliance Notice” and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests. Please do not respond to these fraudulent messages or click on any links or scan any QR codes within them.

Key Takeaway

FinCen is not directly notifying companies to file the above report. If your business is required to report, you must initiate submission of the required forms.

The foregoing is meant as an overview only. There is more to consider. Give us a call and we’ll help you determine your company’s status under the CTA plus help with reporting if necessary.

Research Resources

19 Nov 2022

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OPPORTUNITY TO ACCELERATE YOUR RETIREMENT SAVINGS

401(k) and IRA Contribution Limits Increased

Contribution limits for 401(k)s, 403(b)s, 457(b)s, IRAs, Roth IRAs, HSAs, FSAs, SIMPLE IRAs, and SEP-IRAs are all indexed to inflation. While the contribution limits don’t go up every year, you will generally see an increased contribution every year or two.

The inflation rate is now running at a 40-year high. That triggered the IRS to announce significant jumps in allowed contributions for tax year 2023. More specifically:

Taxpayers under age 50 can contribute to their 401(k), 403(b), most 457 and the federal government’s Thrift Savings Plan accounts … increases to $22,500 for 2023 … a $2,000 bump over 2022 limits.
Notably, taxpayers 50 and older win a further concession … a $3,000 boost to $30,000 annually. That number includes a $7,500 so-called catch-up contribution, up from $6,500 in 2022.

Participants in qualifying plans can reduce their 2023 tax bill by
increasing the amount they contribute pre-tax to retirement accounts.

Here’s a summary of the key provisions of the changes for 2023.

401(k) Plans – Annual Contribution Limits

Employees under age 50 – $22,500, up $2,000 from 2022.
Employees 50 and older – $30,000 (Includes $7,500 catch-up contribution, up from $6,500)
If the Plan permits, additional after-tax employee contributions may be made to top-out the total employer/employee contribution limits – employees under age 50, $66,000; 50 and older, $73,500.

IRA – Annual Contribution Limits

Increased to $6,500 from $6,000
Participants 50 and older can make an additional $1,000 catch-up contribution.

Note: You can’t make a tax-deductible contribution to an IRA unless you have no workplace retirement plan, or your income is below certain limits. For 2023, the deduction will phase out for single taxpayers earning between $73,000 and $83,000 (up from $68,000 to $78,000) … and for married couples filing jointly earning $116,000 to $136,000 (up from $109,000 and $129,000 respectively).

If your spouse is covered by a workplace plan and you’re not, your deduction for an IRA phases out between $218,000 and $228,000 in 2023, up from $204,000 to $214,000 in 2022.

Roth IRA – Annual Contribution Limits

Increased to $6,500 from $6,000
Participants 50 and older can make an additional $3,000 catch-up contribution.

Note: The income phase-out for contributions to a Roth IRA for singles and heads of household will be $138,000 to $153,000 respectively in 2023, up from $129,000 to $144,000. For married couples filing jointly, the phase-out range will be $218,000 to $228,000, up from $204,000 to $214,000 this year.

Simple IRA Accounts – Annual Contribution Limits

Increased to $15,500, up from $14,000
If the Plan permits, employee participants 50 and older can make an additional $3,500 catch-up contribution, up from $3,000 in 2022.
Employee participation in other employer plans is limited to a combined annual contribution of $22,500.

Saver’s Credit

Low and moderate-income workers may add to their retirement fund value via federal tax credits that deliver a 100% reduction in the taxpayer’s tax-bill. Eligible workers may enjoy a tax credit in a range of 10% to 50% of contributions made to an IRA or employer sponsored retirement plan.

Note: The credit gradually reduces and phases out as a taxpayer’s income rises. In 2023, the credit will phase out at $73,000 for married couples filing joint tax returns (up from $68,000); $36,500 for singles and couples filing separately (up from $34,000); and $54,750 for heads of household (up from $51,000).

SEP IRAs – Annual Contribution Limits
(Self-employed & Small Business Owners)

Increased to $66,000 from 2022 limit of $61,000
Self-employed persons may contribute up to 20% of earnings up to $330,000, up from $305,000.

For more on how the above applies to your specific circumstances,
be sure to give Pearson & Co a call or drop an email. We’ll respond immediately.

20 Sep 2022

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PEARSON RECRUITING

About

Pearson & Company has helped small to mid-size companies and individuals with their
strategic financial goals and related tax needs since 1989. Our offices are conveniently
located in Mechanicsville, Virginia at an attractive, safe and well-maintained office park.

The Opportunity

Requires minimum 3 years of success in tax preparation for individuals and businesses
Proficiency with the Thomson Reuters of Software … Ultra Tax, Practice CS, etc.
Full Time:
- Salary Range: $70K – $85K
- 100% employer funded health insurance
- Matching 401(k)
- 3 weeks paid vacation; 8 paid holidays
Seasonal: Hourly Range: $34 – $41

Next Step

Your Choice … email your resume or contact us for a preliminary phone conversation.

20 Sep 2022

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INFLATION REDUCTION ACT

Key Tax Provisions … a Summary

The Inflation Reduction Act, was signed into law on Aug. 16. It includes numerous tax provisions that relate to both businesses and individuals … including clean-energy-related tax incentives, and expanded funding for IRS enforcement.

This month’s article offers a summary outline of key provisions of the Act.

Business

Individuals

Internal Revenue Service

The foregoing outlines key provisions of the Inflation Reduction Act as it applies primarily to small businesses and individuals. There are many other provisions that apply to larger entities that are renewable energy oriented and measures to address potential climate change issues.

For more on how the above applies to your circumstances,
be sure to give Pearson & Co a call or drop an email. We’ll respond immediately

26 Aug 2022

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EMPLOYERS … HOW TO CLAIM THE EMPLOYEE RETENTION CREDIT RETROACTIVELY!

How to Claim the Employee Retention Credit… Retroactively!

The Employee Retention Credit (ERC) is an $80 billion dollars tax savings program. Included in the CARES Act, the ERC offered tax credits to encourage employers to retain employees at the height of the COVID-19 pandemic in March 2020. The driving principle for Congressional adoption of the incentive was to help pandemic-impaired businesses and tax-exempts to retain jobs and trigger job creation.

Regrettably, many of those employer benefit candidates have ignored participation in the program. That triggered a major loss to willing workers who have been displaced or are about to be. Likewise, employers suffer when they are unable to maintain their pre-pandemic payroll which further impairs their success in recovering from the financial ravages of C-19 and prevail as viable enterprises.

Many employers were and are confused as to qualification requirements and application procedures. As noted above, the ERC was included as a provision in the CARES Act. Added fuel for the confusion is the Paycheck Protection Program (PPP) which was enacted in that legislation as well. The unintended consequence for a significant number of employers was and is the belief that it was an either/or choice … ERC or PPP.

Note: Employers who received a PPP) loan are eligible to claim the ERC. However, there are restrictions … e.g., the employer cannot claim the same expenses for both programs.

A second area of qualification-confusion surfaced. Many business owners and tax-exempt managers incorrectly interpreted the rules. The first misconception was that to qualify an enterprise must have suffered a 50 percent reduction in revenues … not so. There are two alternate tests to qualify:

a revenue test, or
demonstration that your operating entity was significantly and negatively impacted by government order, e.g., a partial or full shutdown due to a government order at the federal, state, municipality, county or other local level authority.

With this knowledge of qualification criteria, hundreds of businesses and tax-exempt organizations have applied for and been approved for ERC assistance under one or another of the above tests. Notably, for employers that have not yet applied, the ERC can be claimed for three years after the filing date of the original payroll returns.

For employers with 500 or fewer employees,
this presents an opportunity to retroactively claim these credits.

Takeaways
Employers who qualify and have not yet claimed their ERC are urged to adopt a sense of urgency to do so. The 3-year window after the filing date of the original payroll returns that ERC can be claimed is on the horizon.

Of considerable financial significance, the 2020 credit can be as much as $5,000 per employee … the 2021 credit up to $21,000 per employee.

Give Pearson & Co a call or drop an email to determine if you qualify
… and if so, how to submit a claim.

25 Aug 2022

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WORKER CLASSIFICATION – WHAT’S IN A NAME?

Employee or Independent Contractor?

Legal and regulatory debates continue to rage at both the state and federal levels, the topic … what workers may appropriately be deemed “employees” and which class of workers may be classified as “independent contractors”?

A worker’s classification has real world financial and other consequences for both the individual worker and the company utilizing their services. Independent contractors are not eligible for state or federal minimum wages. Additionally, they are not entitled to overtime pay, workers compensation coverage, unemployment insurance, or benefits. Effectively, independent contractors do not enjoy the protections of state or federal workplace law as do employees.

Employers are cautioned to be diligent in their research before classifying workers as independent contractors.

Misclassifying a worker may subject the business to significant financial penalties.

A prudent place to seek guidance is to review how the IRS determines whether a worker is an independent contractor or an employee. There are 3 relational categories to consider.

Behavioral control − Does the company control or have the right to control what the worker does and how the worker does the job?
Financial control − Does the business direct or control the financial and business aspects of the worker’s job. Are the business aspects of the worker’s job controlled by the payer? Things like how the worker is paid, are expenses reimbursed, who provides tools/supplies, etc.
Relationship of the parties − Are there written contracts or employee type benefits such as pension plan, insurance, vacation pay? Will the relationship continue and is the work performed a key aspect of the business

For more on how the above applies to your specific circumstances,
be sure to give Pearson & Co a call or drop an email. We’ll respond immediately.