Lee B

New client, 55 year old male voluntarily quit his full time mid management job in October and took a $ 75,000 distribution from his 401 k to fund starting a new business. Based on his answers to my inquiries, he is not a qualifying person for a covid 19 distribution. He assumed based on a news article that he could spread the $ 75k over 3 years with no penalty. He withheld some state tax, but $ 0 federal tax. None of the 401 k money is left. Fortunately for him, his business has already turned the corner, generating enough positive cash to support his family and promises to be fairly profitable soon. Any ideas to lower the income tax and penalty hit on the $ 75 k distribution?

Unemployment benefits are not earned income so the exclusion has no effect on earned income.

Interesting approach, specifically how does that work?

The most recent information I read are that there are 13 states that tax unemployment benefits who would not conform with the tax exclusion unless these states take action.

Possi & and Tom, you have a very sick sense of humor

Alternatively, if they planted the trees, then you have a completely different scenario i.e. possibly capitalized reforestation expenses etc.

No, old Gross Profit % 21.00 % New Gross Profit % 19.12 % When you say Income previously reported, what you probably mean is Principal previously reported. Gross Profit previously reported 130,000 x .21 = $ 27,300 New Gross Profit $ 65,000 less $ 27,300 = $37,700 ( Gross Profit remaining to report) I did this quickly off the top of my head so if I screwed up I will fall on my sword However even if I made some numerical mistakes, the way the numbers need to crunch still follows the same pattern

Unless your client provides you a lot more information, the basis is $ 0 For starters date of acquisition, purchase price, allocation of purchase price, was there a timber cruise valuation etc etc

Interesting, according to several news articles, there is a significant minority of accountants that do not want the April 15th deadline extended, because it encourages clients to drag their feet and it makes tax season last too long!

If it was reported on a 1099 Misc,it's not SE Income because if it was it would have reported on a 1099 NEC ?

Gee, it must have the ghost gremlins that put the number on the W 2

It's been said that the practice of Accounting is an art form not a science. The same also applies to Tax Accounting. However Gail is definitely on the right track ! The only correct answer is the employer needs to prepare a W 2c and amend the relevant payroll reports. Depending on the circumstances. the employer may also need to refund the the IL WH to the the employee. Playing games with the numbers on the W 2 is really a bad idea!

More likely, the W-2 and the final pay stub are correct. The employer probably screwed up one or more paychecks with respect to State Taxable Income vis a vis State WH.

weirdities Yay, I've learned something new today

May the thoughts and memories of your mother offer you some comfort.

IRS EMPLOYER FAQS: "Special Issues for Employers: Income and Deduction 85. Does the Employee Retention Credit reduce the expenses that an Eligible Employer could otherwise deduct on its federal income tax return? Yes. Section 2301(e) of the CARES Act provides that rules similar to section 280C(a) of the Internal Revenue Code (the "Code") shall apply for purposes of applying the Employee Retention Credit. Section 280C(a) of the Code generally disallows a deduction for the portion of wages paid equal to the sum of certain credits determined for the taxable year. Accordingly, a similar deduction disallowance would apply under the Employee Retention Credit, such that an employer's aggregate deductions would be reduced by the amount of the credit as result of this disallowance rule. 86. Does an Eligible Employer receiving an Employee Retention Credit for qualified wages need to include any portion of the credit in income? No. An employer receiving a tax credit for qualified wages, including allocable qualified health plan expenses, does not include the credit in gross income for federal income tax purposes. Neither the portion of the credit that reduces the employer's applicable employment taxes, nor the refundable portion of the credit, is included in the employer's gross income." My previous post and this post is the best guidance that I can find, since I may be doing several of these.

Doesn't the second house have to be collateral on the mortgage for the interest to be deductible?

I have way too much experience with this problem. Thank to the All Mighty that all of these clients have sold their businesses, retired or are no longer clients

Copied from the Ernst & Young Website (Most detailed Article I could find): https://taxnews.ey.com/news/2020-1774-employee-retention-credits-present-challenges "On April 23, 2020, the staff of the Joint Committee on Taxation (JCT) published its description of the tax provisions of the CARES Act (JCT CARES Act Report).6 The description of the ERC in the JCT CARES Act Report indicates the JCT staff's view that the ERC itself is also taken into account for purposes of determining any amount allowable as a payroll tax deduction for federal income tax purposes. For example, assume an employer pays $2,500 of qualified wages for the quarter and claims an employee retention credit of $1,250 for qualified wages paid during the quarter. The employer's resulting OASDI [Old Age Survivors Disability Insurance or "Social Security"] tax liability (under [IRC S]ection 3111(a)) for the quarter is $155. Under the provision [CARES Act Section 2301(e)], the employer reduces its payroll tax expense by $155 and may deduct only $1,405 of qualified wages148 (assuming such wages are not subject to capitalization). [FN]148 $2,500 — ($1,250 - $155) = $1,4057 Based on our analysis of the statute and considering the information in the IRS ERC FAQs and JCT CARES Act Report, we believe that an employer must reduce its total deduction by the amount of the ERC in accordance with IRC Section 280C(a). An employer is not required to reduce its deduction for qualified wages in excess of the credit"

It looks like ATX still has all the same problems, it had when I left 3 years ago.

Doing this before you software is revised would work for the federal return but what about the state tax return?

According to the IRS, there has to be a business reason for electing S status, above and beyond the avoidance of payroll taxes.

Since the House votes tomorrow and the President hasn't signed the bill yet, I would put this return on the back burner.

Apparently it's for 2020. As far as 2021, who knows? We will have wait and see ?

Just because they have expenses doesn't mean they open for business ? I believe the path your propose must be done by March 15th.