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The IRS is Targeting Business Transactions in Bitcoin and Other Virtual Currencies

Cryptocurrency and blockchain. Platform creation of digital currency. Web business, analytics and management.

Bitcoin and other forms of virtual currency are gaining popularity. But many businesses, consumers, employees and investors are still confused about how they work and how to report transactions on their federal tax returns. And the IRS just announced that it is targeting virtual currency users in a new “educational letter” campaign.

The nuts and bolts

Unlike cash or credit cards, small businesses generally don’t accept bitcoin payments for routine transactions. However, a growing number of larger retailers — and online businesses — now accept payments. Businesses can also pay employees or independent contractors with virtual currency. The trend is expected to continue, so more small businesses may soon get on board.

Bitcoin has an equivalent value in real currency. It can be digitally traded between users. You can also purchase and exchange bitcoin with real currencies (such as U.S. dollars). The most common ways to obtain bitcoin are through virtual currency ATMs or online exchanges, which typically charge nominal transaction fees.

Once you (or your customers) obtain bitcoin, it can be used to pay for goods or services using “bitcoin wallet” software installed on your computer or mobile device. Some merchants accept bitcoin to avoid transaction fees charged by credit card companies and online payment providers (such as PayPal).

Tax reporting

Virtual currency has triggered many tax-related questions. The IRS has issued limited guidance to address them. In a 2014 guidance, the IRS established that virtual currency should be treated as property, not currency, for federal tax purposes.

As a result, businesses that accept bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received. This is measured in equivalent U.S. dollars.

From the buyer’s perspective, purchases made using bitcoin result in a taxable gain if the fair market value of the property received exceeds the buyer’s adjusted basis in the currency exchanged. Conversely, a tax loss is incurred if the fair market value of the property received is less than its adjusted tax basis.

Wages paid using virtual currency are taxable to employees and must be reported by employers on W-2 forms. They’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date of receipt.

Virtual currency payments made to independent contractors and other service providers are also taxable. In general, the rules for self-employment tax apply and payers must issue 1099-MISC forms.

IRS campaign

The IRS announced it is sending letters to taxpayers who potentially failed to report income and pay tax on virtual currency transactions or didn’t report them properly. The letters urge taxpayers to review their tax filings and, if appropriate, amend past returns to pay back taxes, interest and penalties.

By the end of August, more than 10,000 taxpayers will receive these letters. The names of the taxpayers were obtained through compliance efforts undertaken by the IRS. The IRS Commissioner warned, “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics.”

Last year, the tax agency also began an audit initiative to address virtual currency noncompliance and has stated that it’s an ongoing focus area for criminal cases.

Implications of going virtual

Contact us if you have questions about the tax considerations of accepting virtual currency or using it to make payments for your business. And if you receive a letter from the IRS about possible noncompliance, consult with us before responding.

© 2019

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FAQs About CAMs

In July, the Public Company Accounting Oversight Board (PCAOB) published two guides to help clarify a new rule that requires auditors of public companies to disclose critical audit matters (CAMs) in their audit reports. The rule represents a major change to the brief pass-fail auditor reports that have been in place for decades.

One PCAOB guide is intended for investors, the other for audit committees. Both provide answers to frequently asked questions about CAMs.

What is a CAM?

CAMs are the sole responsibility of the auditor, not the audit committee or the company’s management. The PCAOB defines CAMs as issues that:

  • Have been communicated to the audit committee,
  • Are related to accounts or disclosures that are material to the financial statements, and
  • Involve especially challenging, subjective or complex judgments from the auditor.

Examples might include complex valuations of indefinite-lived intangible assets, uncertain tax positions and goodwill impairment.

Does reporting a CAM indicate a misstatement or deficiency?

CAMs aren’t intended to reflect negatively on the company or indicate that the auditor found a misstatement or deficiencies in internal control over financial reporting. They don’t alter the auditor’s opinion on the financial statements.

Instead, CAMs provide information to stakeholders about issues that came up during the audit that required especially challenging, subjective or complex auditor judgment. Auditors also must describe how the CAMs were addressed in the audit and identify relevant financial statement accounts or disclosures that relate to the CAM.

CAMs vary depending on the nature and complexity of the audit. Auditors for companies within the same industry may report different CAMs. And auditors may encounter different CAMs for the same company from year to year.

For example, as a company is implementing a new accounting standard, the issue may be reported as a CAM, because it requires complex auditor judgment. This issue may not require the same level of auditor judgment the next year, or it might be a CAM for different reasons than in the year of implementation.

When does the rule go into effect?

Disclosure of CAMs in audit reports will be required for audits of fiscal years ending on or after June 30, 2019, for large accelerated filers, and for fiscal years ending on or after December 15, 2020, for all other companies to which the requirement applies.

The new rule doesn’t apply to audits of emerging growth companies (EGCs), which are companies that have less than $1 billion in revenue and meet certain other requirements. This class of companies gets a host of regulatory breaks for five years after becoming public, under the Jumpstart Our Business Startups (JOBS) Act.

Coming soon

PCAOB Chairman James Doty has promised that CAMs will “breathe life into the audit report and give investors the information they’ve been asking for from auditors.” Contact us for more information about CAMs.

© 2019

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Take A Closer Look At Home Office Deductions

Working from home has its perks. Not only can you skip the commute, but you also might be eligible to deduct home office expenses on your tax return. Deductions for these expenses can save you a bundle, if you meet the tax law qualifications.

Under the Tax Cuts and Jobs Act, employees can no longer claim the home office deduction. If, however, you run a business from your home or are otherwise self-employed and use part of your home for business purposes, the home office deduction may still be available to you.

If you’re a homeowner and use part of your home for business purposes, you may be entitled to deduct a portion of actual expenses such as mortgage, property taxes, utilities, repairs and insurance, as well as depreciation. Or you might be able to claim the simplified home office deduction of $5 per square foot, up to 300 square feet ($1,500).

Requirements to qualify

To qualify for home office deductions, part of your home must be used “regularly and exclusively” as your principal place of business. This is defined as follows:

1. Regular use. You use a specific area of your home for business on a regular basis. Incidental or occasional business use isn’t considered regular use.

2. Exclusive use. You use a specific area of your home only for business. It’s not required that the space be physically partitioned off. But you don’t meet the requirements if the area is used for both business and personal purposes, such as a home office that you also use as a guest bedroom.

Your home office will qualify as your principal place of business if you 1) use the space exclusively and regularly for administrative or management activities of your business, and 2) don’t have another fixed location where you conduct substantial administrative or management activities.

Examples of activities that meet this requirement include:

  • Billing customers, clients or patients,
  • Keeping books and records,
  • Ordering supplies,
  • Setting up appointments, and
  • Forwarding orders or writing reports.

Other ways to qualify

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if you physically meet with patients, clients or customers on the premises. The use of your home must be substantial and integral to the business conducted.

Alternatively, you may be able to claim the home office deduction if you have a storage area in your home — or in a separate free-standing structure (such as a studio, workshop, garage or barn) — that’s used exclusively and regularly for your business.

An audit target

Be aware that claiming expenses on your tax return for a home office has long been a red flag for an IRS audit, since many people don’t qualify. But don’t be afraid to take a home office deduction if you’re entitled to it. You just need to pay close attention to the rules to ensure that you’re eligible — and make sure that your recordkeeping is complete.

The home office deduction can provide a valuable tax-saving opportunity for business owners and other self-employed taxpayers who work from home. Keep in mind that, when you sell your house, there can be tax implications if you’ve claimed a home office. Contact us if you have questions or aren’t sure how to proceed in your situation.

© 2019

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Attention: Accounting Rule Delays In The Works

would delay several landmark accounting rules for certain companies. If finalized, the deferral would apply to new guidance for reporting leases, hedging transactions, credit losses and long-term insurance contracts.

Summary of the changes

The following table summarizes key implementation date changes that the FASB unanimously voted to propose:

The term “smaller reporting companies” refers to those that have either 1) a public float of less than $250 million, or 2) annual revenue of less than $100 million and no public float or a public float of less than $700 million.

Unexpected delays

Private companies and nonprofits often receive an extra year to implement major accounting standards updates, compared to the effective dates that apply to public companies. In a shift in its philosophy for setting reporting dates on major new accounting standards, the FASB wants to give certain entities even longer to implement the changes.

Why are these delays needed? Many entities continue to struggle with implementing the new revenue recognition guidance that went into effect in 2018 for public companies and 2019 for other entities. A possible deferral of other new rules would also allow smaller entities to learn from public companies how to implement the changes — and it would give accounting software providers extra time to update their packages to support the new reporting models.

Proposal is coming soon

The FASB is expected to issue its proposal as soon as possible. Then it will be subject to a 30-day comment period.

These deferrals, if finalized, would be welcome news for many organizations. But they’re not an excuse to procrastinate. Depending on your industry and the nature of your transactions, implementing the changes and educating stakeholders could take significant resources. Contact us before the implementation deadline to come up with a realistic game plan.

© 2019

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Short Bits

Healthcare Costs Up

Want to know what you may spend a lot of money on in retirement? Health care. Fidelity Benefits Consulting estimates that a couple retiring in 2019, 65 years old, with average healthy life expectancies, will pay more than $280,000, not including long term care. If you can, contribute to a tax-deferred HSA while working and take tax-free contributions for qualified health expenses.

Retirement Confidence Up

Retirement confidence is higher than at any time since the early 2000s, according to the 29th Annual Retirement Confidence Survey, conducted by the Employee Benefit Research Institute (EBRI) and independent research firm Greenwald & Associates. Slightly better than two of three people surveyed are confident in their ability to live comfortably in retirement. Some 59% are confident they will have enough money for medical expenses in retirement and 52% believe they will have enough for long-term care.

GDP Up In Q1

The economy continued to hum, according to the Bureau of Economic Analysis, whose initial look at real gross domestic product during the first quarter of 2019 found a 3.2% gain. The increase reflected positive contributions from personal consumption expenditures, private inventory investment, exports, state and local government spending, and nonresidential fixed investment. Real GDP is an inflation-adjusted measure showing the value of all goods and services.

Employment Prospects Mostly Good

The Federal Reserve Bank of New York recently analyzed labor market outcomes by college major of recent graduates. Theology graduates and medical technicians had the lowest unemployment rates at 1.0%. Chemical, computer and electrical engineers had the highest early-career salaries at between $65,000 and $68,000, and the highest mid-career salaries at around and just over $100,000.

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Questions & Answers

Question:

I’m a small business owner and a storm damaged my home, which included my home business. How do I pay my estimated taxes when my paper records and computer were destroyed?

Answer:

We’re sorry to hear about the storm damage. Start, of course, by talking to your tax professional, who may have copies of some records you will need. Most newer computer programs include a cloud backup of word processing and spreadsheet files, so you could find some needed records there. Finally, for a copy of old tax records, go to www.IRS.gov and use the Get Transcript application.

Question:

My home was damaged by severe floods. Where can I learn if I am eligible for financial aid as I begin the recovery process?

Answer:

Start by going to www.disasterassistance.gov to learn if your region qualifies for federal disaster assistance. The website has a variety of resources, including contact information for local help.

Your state should also have an emergency management department and your community may have resources to help. Also look toward organizations like the American Red Cross for help, and check with the Federal Emergency Management Agency at www.fema.gov, where you may identify emergency shelters and longer-term rentals if you can’t return home.

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Nannies, Housekeepers and Taxes

If you hire a nanny, housekeeper or other household worker who will earn at least $2,100 from you in 2019, you will have to pay employment taxes. Here’s what you need to know, courtesy of the Internal Revenue Service.

Paying Taxes

Workers will generally pay 6.2% for social security and 1.45% for Medicare taxes (for a total of 7.65%) from all cash wages, although you have the option to pay these taxes for your nanny, housekeeper or other household employees. You must, however, pay your employer’s share, which is another 7.65% for the same taxes on income earned by these home workers. While it’s unlikely, you will have to withhold an additional Medicare tax of 0.9% on any home worker who earns more than $200,000. The tax is on the excess over the amount.

Other Requirements

You also need to complete Form W-2, the Wage and Tax Statement, for each employee, and a Form W-3, the Transmittal of Wage and Tax Statement. You are required to get an employer identification number, which you can do online, and get your employees’ social security numbers.

While not required, you have the option at the employee’s request to also withhold federal income taxes, for which you’ll have to get a completed Form W-4 from the employee. To learn more about these and other related taxes, talk to your tax professional.

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Working Capital And Your Company

It’s one thing to be thrifty if you own your own business, but you’ll need to open your company wallet if you want to grow your business. Here are some ways to find the working capital you’ll need.

Look Ahead

You monitor your receivables regularly to make sure you have enough to reimburse for supplies, pay vendors and deliver paychecks on time to your employees. You forecast your costs for rent or a mortgage, insurance, marketing, accounting and employee benefits. Strictly speaking, working capital is simply assets minus liabilities, and it’s sometimes hard to find those extra assets.

Seize Opportunities

Working capital is what’s left over after you pay your bills. Having enough of it can help you maximize opportunities and grow your business. One way to increase working capital is by matching inventory to sales more closely, thus lowering inventory costs.

You can do the same by reducing or eliminating debt, reducing expenses, lowering taxes and either increasing sales or raising prices on popular items. If you would rather not take on additional debt, an angel investor or a partner to grow, these and other steps can help your firm increase working capital. Your tax professional can help you identify more ways to increase working capital.

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Client Profile

Jean and Bill are snowbirds who spend half the winter in a Sunbelt state. They heard that they can establish their residency in that state and pay lower taxes because the warmer state has no income tax. How do they establish residency?

Where they live most of the year may be a key requirement of residency, but Jean and Bill should keep a record of where they are each day in case tax authorities question it. In some states, simply spending most of the year there may not be enough.

Jean and Bill may need to complete and sign a declaration of domicile, or residency, in their state of choice. They should also consider changing their address in all areas of their lives, from Social Security and Medicare to life insurance policies, retirement plans and even voting and car registrations.

Before they make a permanent move, they should reconsider how much taxes play a role in where they want to live. Then they should consider what states tax. Retirement income, real estate, estates and even everyday items they buy contribute to a total tax picture.

Client Profile is based on a hypothetical situation. The solutions discussed here may or may not be appropriate for you.

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Saving For College

Paying for college or university has become increasingly expensive. Outstanding student loan debt in the fourth quarter of 2018 rose to $1.46 trillion, an increase of $15 billion, according to the New York Federal Reserve. Higher education may be expensive, but even if high school graduation is only two years away, you have five years to save for senior year of college. A 529 plan and Coverdell Education Savings Account (ESA) are two tax-advantaged ways to save.

529 Plan

States administer 529 plans, and their contribution limits are as high as six figures. Additionally, there are no income restrictions on who can contribute, so anyone can put money into these plans. This combination, plus tax-deferred potential growth, tax-free distributions for qualified expenses and donor ownership of the account, makes a 529 plan ideal for building college savings quickly.

If grandparents or other relatives want to gift money for their grandchildren’s college, they can each give up to $15,000 per year (in 2019) free of federal gift tax. Not only that, but any individual can bunch five years’ worth of contributions into one year. That’s $75,000 in Year 1. In this case, you can’t contribute anything else in the subsequent four years.

Coverdell ESA

Unlike a 529 plan, an ESA has income limits, but they are fairly generous. The income limit is $110,000, or $220,000 for taxpayers filing jointly. Contribution limits, however, are small at $2,000 annually. Still, every little bit adds up over time, and potential growth is tax-deferred and withdrawals for qualified expenses tax-free.

Both a 529 plan and ESA affect potential financial aid differently, so talk to your tax and financial professionals to chart your best course.