Stephen Merritt, CPA, PC | Certified Public Accountants | (757) 420-5778
233 Business Park Drive, Suite 104, Virginia Beach, VA 23462
- April Newsletter:
- Partner Capital Accounts Required to be Reported on Tax Basis for 2020
- 5 Tips to Spice Up Working From Home
- May Newsletter:
- Business Meal Deduction Changes from the Consolidated Appropriations Act
- What is Internal Control?
- June Newsletter:
- Re-Imagining Your Chart of Accounts
- Requesting a Private Letter Ruling
- Caption Contest!
Partner Capital Accounts Required to be Reported on Tax Basis for 2020
In response to the Tax Cuts and Jobs Acts of 2017, there were a number of changes to the disclosure requirements for partnerships and LLCs filing as partnerships – specifically, on the K-1s of Form 1065 returns, some of which became effective for the 2019 tax year.
For the current (2020) tax year, however, the most significant change relates to the reporting associated with partner capital accounts. Beginning with the 2020 year, partnerships are required to report capital accounts for partners using the tax basis method. The prior rules allowed the capital accounts to be reported in accordance with Generally Accepted Accounting Principles or Section 704(b). This will no longer be permitted.
According to IRS, most partnerships/LLCs taxed as partnerships have already been reporting capital accounts on a tax basis. For those taxpayers, no change is required.
For partnerships that were not using tax basis, the “transactional approach” must be used to switch to tax basis for capital reporting purposes. Under that approach, partnerships use partner contributions, the partner’s share of partnership net income or loss, withdrawals and distributions, and other increases or decreases using tax basis principles, instead of reporting using other methods such as GAAP.
For those partnerships that have never used tax basis, since many partnerships would have difficulty reconstructing tax basis, the IRS is allowing them to re-figure beginning basis using one of a number of options including the modified outside basis, modified previously taxed capital, or Section 704(b) methods. These options are all described on page 32 of the Form 1065 instructions.
The same basis method should be used for each partner. IRS is not assessing penalties as long as the calculation is done with “ordinary and prudent business care.”
“Small partnerships,” which are defined as having less than $250,000 in total receipts under $1 million in total assets, are exempt from reporting capital accounts on the tax basis.
The IRS is hoping this new disclosure will assist in assessing compliance risk and result in fewer audits for compliant taxpayers.
5 Tips to Spice Up Working from Home
We’ve been in a pandemic for what seems like five years now, right? All joking aside, if you’ve been lucky enough to work from home this past year, then it’s possible that you are in the process of going stir-crazy. Or maybe you’re simply ready to shake things up a bit.
Working from home has its benefits. Yet, if you are someone who enjoys going to the office every day, chatting with co-workers in person, attending meetings that aren’t all virtual, and having a little spontaneity each week, then we’re here to help. Here are five tips to boost your WFH (working from home) environment.
1. Take Short Breaks
Taking regular breaks throughout the day is so important, and more so now than ever before! Without a doubt, these breaks will help you mentally (that is, keep you from going stir-crazy), but they can also help your work productivity and quality. These breaks don’t need to be—and shouldn’t be—long or strenuous.
Walk the dog. Stand up and do some light stretches. Run up and down your stairs. Go outside into your backyard. Dance to a song. Do a quick chore, like emptying or loading the dishwasher. Call a friend. Or choose your own favorite break activity. The goal is to get the blood flowing and the fog cleared from your mind.
2. Switch Up Locations
Get creative and switch up your location. If you have a yard or patio of some sort – and good weather — that allows you to sit outside and work, perfect! If not, try working from the living room, the dining room, the kitchen, even the bedroom. The idea here is to change your surroundings a couple of times a week so that you don’t feel stuck or get lost in the monotony of a daily routine.
3. Treat Yourself with Lunch
Everyone needs something to look forward to, and what is better to look forward to than food? Depending on your budget, treat yourself to a special lunch once a week, every other week, or monthly. Consider trying new restaurants, different foods, places that you’ve always wanted to eat at but haven’t had the opportunity to do so. Not only will this be fun for you, but you will also be supporting small, local businesses. Win-win!
4. Dress for Success
We can probably all agree on one thing: sweatpants are comfortable! As such, it can be difficult to trade in the sweats for jeans or dress pants every day. After all, if you’re working from home and there’s no dress code to enforce, it can be hard to dress for success. Yet, doing so can give you a little burst of inspiration to get through the day. You can keep your outfits casual just as long as you have fun getting dressed. For example, you could have Sandal Mondays or Blue Shirt Fridays. Again, just have fun with it!
5. Create a New Playlist
Does music motivate you? Are you able to work and listen to music at the same time? If so, create different music playlists to listen to throughout your day. Try listening to various genres or new artists, anything that keeps you alert and stimulated, even excited about your workday. Depending on the type of music you enjoy listening to, you can even get up periodically and take dance breaks (Tip #1)!
Keep your day fresh, and boost your productivity and mood by using your imagination and trying the tips above.
Louis has been working hard this tax season!
Business Meal Deduction Changes from the Consolidated Appropriations Act
The Consolidated Appropriations Act that was signed into law December 27, 2020 includes a temporary provision allowing a 100 percent write-off for business meals from January 1, 2021 through December 31, 2022. The food and beverages must be provided by a restaurant, although they do not need to be consumed on a restaurant’s premises. The deduction also includes any delivery fees, tips and sales tax. This is an increase from the 50 percent deduction that applied for 2020 and earlier years.
It is important to note that other than lifting the 50 percent limitation on deductions for meal expenses, this legislation doesn’t amend any of the other rules related to business meal deductions. Therefore, to be deductible:
- Business meals should still have a business purpose and involve dining with current or prospective customers, clients, suppliers, employees, partners, or professional advisors.
- The food and beverages should not be lavish or extravagant under the circumstances.
You or one of your employees must be present when the food or beverages are served.
- Although meals are 100 percent deductible, entertainment expenses are still disallowed. So, while taking a client out for a dinner is tax deductible, the cost of the baseball game after dinner is not. Furthermore, if an entertainment event includes food and beverages, they must either be purchased separately from the entertainment or broken out on a separate invoice or receipt. Be sure to update your chart of accounts to make an account for meals and another for entertainment.
What Is Internal Control?
In accounting, a key term to know is “internal control.” Internal control is the series of processes and procedures that are performed within the organization to ensure the integrity and accuracy of the financial information and reporting of that organization. Internal control is very important to consider in order to protect the business owners, employees, vendors, investors, and other stakeholders.
In a small business, maintaining good internal control is often a challenge since staff size is smaller and resources are limited. Yet, it is essential to understand so that the business owners understand what risks they are taking every day in their businesses. A good system of internal controls can help the organization reduce the risk of fraud, safeguard against loss, and demonstrate good business practices.
Segregation of duties is the first of three key concepts of internal control. It means that tasks should be assigned to different people when there is a risk that having everything assigned to one person could hide errors or even theft. For example, the person who opens the mail and receives checks should not be the same person who applies the check to the correct customer in Accounts Receivable.
Delegation of authority is the second key concept of internal control. While the owner has ultimate control, they cannot do everything. They must delegate to staff. Staff have the responsibility to maintain internal controls in their area of responsibility.
System access is the third concept of internal control. Access to documents, rooms, computers, applications, and other items should be on a need-to-know basis to reduce risk. While one person might have system access to enter a transaction, they should not also be the one to have system access to review or approve that same transaction.
Every aspect of the business should be considered while setting up the company’s policies and procedures. In a small business, an easy way to develop internal controls is to review each major transaction flow and implement the controls needed.
On the customer side, this includes receiving the customer order, sales contracts, shipping, invoicing, managing accounts receivables, collections, bank deposits or merchant reconciliations, and cash management. It can also include customer service, pricing, and promotional activity.
On the vendor side, the process includes adding controls for vendor selection, purchase orders, receiving, bill pay, managing accounts payable, payments, managing travel and expense accounts, and company credit cards.
Depending on the company, additional areas that need to be reviewed for internal control include inventory and supply chain management and government contracts, if any.
When hiring, the process of hiring, onboarding, training, evaluating performance, and payroll should be considered. Safety is also an important consideration.
A very large part of internal control development should focus on the information technology operations of the company. Areas include user access and controls, password management, naming conventions, physical security, disaster recovery, and network and applications development, updates, and change control. Data entry should also be considered and is best included when developing controls for the customer, vendor, and employee functions.
Additional functions that need internal control processes include treasury and financing; financial reporting, budgeting, and planning; records storage, access, retention, and destruction; asset management; and insurance.
Internal controls can be applied to small businesses as well as large organizations. It’s all about being able to feel confident that your business is operating with financial integrity, accuracy, efficiency, and a reduced risk of failure. If you have questions about how internal control applies to your business, be sure to reach out to us any time.
Louis wants to remind you to take breaks and stretch those legs!
Re-Imagining Your Chart of Accounts
The Chart of Accounts is the backbone of your accounting records. It is a list of all of the accounts – bank, loan, asset, revenue, and expense – in your General Ledger, which holds all of your accounting transactions.
Think of your Chart of Accounts as a collection of buckets that hold dollars of items related to your business. Each bucket should be meaningful and have a purpose. For example, if you have three checking accounts, you need three buckets on your Chart of Accounts to hold the transactions for each bank account. It would not make any sense to have more or less than exactly one bucket for each checking account.
While it’s standard to have certain buckets or accounts for assets, liabilities, and equity, the number of buckets that you create for revenue and expenses can vary greatly from company to company. It makes sense to create and design your accounts for what you need for tax, accounting, and decision-making purposes in your business.
Let’s say you are a hair stylist. Do you want your revenue to be in one big bucket? That’s all that Uncle Sam requires. But for decision-making purposes, you may want to break out men’s and women’s services, or cuts versus color and other treatments, or both. In that case, you would have four revenue accounts: men’s cuts, men’s color, women’s cuts, and women’s color. This type of detail would help you see where your revenue is highest so that you can better manage your supplies as well as target your marketing to that group.
Having certain expense accounts matched to the tax requirements can reduce extra work at tax time. For example, separating travel costs – hotel and airfare – from meals and entertainment is a common one, as is keeping meals and entertainment separate.
The goal is to get your Chart of Accounts working for you. If, when you first set up your accounting system, you accepted the default Chart of Accounts, it may be time to redesign and restructure the list so it serves your needs better. Here are some additional considerations.
- What revenue or expenses do you want to watch more carefully? Should they be broken out in more detail? You can also use subaccounts to group transactions.
- Is there cleanup work to do due to misspelling or other duplication?
- Have you interviewed all the financial information users in your company to see how they need the data organized?
- What spreadsheets could be eliminated if the Chart of Accounts was better organized?
- Does your Chart of Accounts support your budgeting process? If two people are responsible for controlling spending from one account, would it be useful to break it out?
- Do you have too many accounts? Or too few? (Most people have too many due to poor data entry hygiene.)
- Are you properly using other categorizing features in the accounting system, such as classes, divisions, and custom fields?
- What reports could produce better information for taking profit-focused actions in your business if the Chart of Accounts stored the transactions differently?
- How could key performance indicators be better linked to the Chart of Accounts?
These questions can help you begin thinking about how your Chart of Accounts can better serve you. After all, it’s your business, your accounting system, and your Chart of Accounts.
And if we can help you through the redesign process, please let us know.
Requesting a Private Letter Ruling
You may someday find yourself in a unique tax situation and want to remove any uncertainty of the tax treatment of that situation. In that case, you can request a Private Letter Ruling (PLR) from the Internal Revenue Service.
A PLR is a written statement that interprets and applies tax law to your particular facts. As long as the taxpayer frames the question properly and provides accurate information, the ruling can be considered binding for that specific situation and taxpayer.
A private letter ruling request has no specific form; it is basically a letter explaining your particular facts. The following are required to be addressed in a PLR request:
- Statement of Facts, including
- The names, addresses, phone numbers, and taxpayer identiﬁcation numbers of all interested parties;
- The annual accounting period and overall method of accounting;
- A description of the taxpayer’s business operation (if applicable);
- A complete statement of the reasons for the transaction; and
- A detailed description of the transaction.
- Copies of any contracts, deed, agreements, or other documents that are applicable.
- An analysis of the facts surrounding your transaction.
- If applicable, a statement regarding whether the same issue is on an earlier return.
- Your conclusion, with an explanation of what your grounds are for the conclusion and any authority you relied on to support it.
- Any authority contrary to your conclusion. If none exists, that should be mentioned.
- A statement identifying pending legislation, if any.
Requesting a PLR is not free – a “user fee” is required to be submitted when making the request. The user fees start at $275 but can be in the thousands of dollars in certain situations, and they must be submitted with the request. The first Revenue Procedure issued each year outlines the rules surrounding PLR submissions and the fees.
Because of the cost involved and the complexity, assess whether the IRS is likely to rule in your favor before going this route. Consider working with an experienced tax professional or tax attorney first to determine if this is the best option for you!
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Coronavirus Disease (COVID-19)
Stephen Merritt, CPA, P.C. understands the challenge the impact COVID-19 has on our community.
Fully-Vaccinated individuals are not required to wear a mask while in our office.
Unvaccinated or not Fully-Vaccinated individuals must wear masks and follow COVID-19 protocol, such as social distancing, while in our office to stop the spread of COVID-19.
Hours of Operation: Monday- Thursday 8:00 am till 5:00 pm.
Closed Every Friday during the Summer.
Tax documents may be mailed, FAXed, emailed, or dropped off.
Final Returns can be picked up or mailed out.
As always, please call, we are happy to assist.
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