For 2018-2025, the Tax Cuts and Jobs Act (TCJA) disallowed employees or individual taxpayers from taking itemized deductions. Taxpayers can take itemized deductions against their income in order to reduce their taxable income. But this is now disallowed on the updated TCJA.

Now, if employees incur business expenses, they have to have their employer reimburse these expenses. But the employer can make the reimbursement only if they have an Internal Revenue Service (IRS) accountable plan for expense reimbursement.

If you run cooperation, then this change can impact you and you should consult CPA Ontario. If you don’t reimburse employees for business expenses they incurred on behalf of your business, the TCJA denies them a deduction for those expenses.

Moreover, if you reimburse business expenses incorrectly, those tax-deductible reimbursements of business expenses become W-2 taxable income.

• Your employees incur business expenses without proper reimbursement. This can add to their personal taxable income and FICA taxes on the reimbursements.
• Your corporation has to pay extra payroll taxes for the proper business expense, which is now considered as a W-2 wage.

That is when accountable plans become necessary. The TCJA Act now disallows employees.

What is an IRS Accountable Plan for Expense Reimbursement?

An accountable plan follows the IRS regulations for reimbursing workers for business expenses that fall under the plan.

With the IRS accountable plans, the reimbursements are tax-free to recipient employees, and businesses can deduct reimbursements as business expenses. So, the reimbursement payments are not subject to withholding taxes or W-2 reporting. How this is going to affect you? Know by consulting with tax services San Bernardino.

IRS Accountable Plan Rules & Requirements

Business Connection

1. The plan must provide reimbursements only for a deductible business expense incurred by employees for performing company-related services to establish the business connection of the expense.
   
2. The company must clearly identify reimbursements when made. For example, if you pay salary and expenses reimbursements on one check, clearly show the reimbursement on the employee’s check stub.

Substantiation

3. The plan requires proper substantiation of reimbursed business-related expenses via an expense log, report, diary, or detailed receipt, within a reasonable period of time after the expenses are incurred.

4. For any lodging expense worth $75 or more, the plan needs a receipt or other document mentioning the following:

a. amount and business purpose of the expense

b. place and time of any travel

c. date and description of business gifts (if received) and the recipient’s relationship to the company.

Travel Expenses

5. For travel expenses, the plan can base reimbursements on the federal per diem rates for lodging, meals, and incidentals. It does not require substantiation of actual amounts spent.

6. Travel expenses for lodging and meals on a business trip are deductible only when they are not extravagant.

7. If an employee gets reimbursement for unsubstantiated or non-deductible travel expenses, the reimbursement is considered fully deductible by the company, reported as wages on Form W-2, and subject to employment taxes and federal income tax.

Entertainment Expenses

8. Do not cover disallowed entertainment expenses with the plan. Instead, your employees should be able to charge those expenses directly to your company account. Entertainment expenses will still be non-deductible, but it will simplify things for both the employee and the employer.

Return of Excess Reimbursement Advances

9. The employees must return any advance exceeding substantiated business expenses. Any unreturned excess reimbursement amount must be treated as additional wages subject to income taxes and federal employment taxes.

Reasonable Period of Time

10. Reimbursement and the return of any excess reimbursement advances must occur within a reasonable period of time, which is dictated by facts and circumstances:

a. Fixed Date Method: You automatically fulfill the reasonable time requirement in the following conditions stated in accountable plans: (1) Advances will be provided within 30 days before the employee incurs the intended expense. (2) expenses must be substantiated within 60 days after they are paid. (3) advances for unsubstantiated amounts must be returned within 120 days.

b. Periodic Statement Method: You automatically fulfill the reasonable time requirement if the plan states that the business will: (1) Issue statements to affected employees, ensuring they receive updates (at least quarterly) about outstanding advances that require substantiation. (2) ask for advances that are to be substantiated or returned to the company within 120 days after releasing the statement.

Using a Personal Vehicle for Business?

As per the 2018-2015 Cuts and Jobs Act (TCJA) rules:

• The personal vehicle used for corporate business is a business vehicle.
• Reap your rig.
• To obtain your reimbursements as per your accountable plans, you must submit expense reports as per the accountable plan rules. So, you need a mileage log defining the dollar amount of the corporate reimbursement. The log should include information such as date, starting and ending locations, purpose of the trip, and mileage driven.

Reimbursement Strategies

Under the TCJA’s accountable plans, employees are entitled to reimbursement for legitimate business expenses incurred using personal vehicles. Let us examine some effective reimbursement strategies from certified accountants that align with the TCJA guidelines:

Actual Expense Method: The actual expenses method allows employees to be reimbursed for the actual costs associated with their personal vehicle’s business use. This includes expenses such as fuel, maintenance, repairs, insurance, and depreciation.

To qualify for reimbursement, meticulous record-keeping is essential. Maintain accurate records, including receipts and mileage logs, to substantiate these expenses during tax audits or inquiries.

Standard Mileage Rate: Alternatively, employers may choose to reimburse employees based on the standard mileage rate set by the IRS. The standard mileage rate for 2023 is 58 cents per mile driven for business purposes.

This method simplifies the reimbursement process, as employees are not required to track and document actual expenses. However, it is important to note that if the standard mileage rate is used, it encompasses all vehicle-related costs, including fuel, maintenance, and insurance.

Takeaway

Using an IRS accountable plan for expense reimbursement properly ensures that your business, shareholders, and employees make the most of TCJA benefits for expenses made on behalf of your corporation.

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In 1996, California became the first US state to legalize medical cannabis. Then, in November 2016, the Adult Use of Marijuana Act legalized recreational cannabis in the state.

So today, cannabis is legal in California for both medical and recreational purposes for use, sale, and cultivation. And we can say that California is a marijuana-friendly market.

Despite the legalization, popularity, and growth of the industry, owners of recreational and medical cannabis dispensaries face tax-related challenges, thanks to federal laws regarding the sale of marijuana. This makes it crucial to work with CPA Ontario.

The state levies a 15 percent excise tax and sales tax which can reach as high as 8.25 percent. Combining these with other types of taxes, cannabis dispensaries end up paying huge money in taxes.

The Tax Dilemma for Cannabis Dispensaries in California

According to federal law, cannabis is still considered a Schedule I controlled substance. But, in 2013, the Justice Department issued a Cole Memo, which prevents federal prosecutors from enforcing federal marijuana laws against those complying with a “strong and effective state regulatory system.”

That’s why states can run legitimate cannabis businesses. But when it comes to cannabis taxes, they have to follow federal rules.

Under Internal Revenue Code section 280E, legitimate marijuana businesses are denied all ordinary and necessary deductions against their sales income.

Types of Business Expenses Scrutinized under Section 280E

• Wages, salaries, and benefits to employees
• Utility costs such as electricity, internet, and telephone service
• Health insurance premiums
• Advertising and marketing costs
• Rent or mortgage payments for the property where the business is conducted.
• Repairs and maintenance
• Payments to contractor …and more.

Moreover, the prohibition of deductions under Code Sec. 280E also disallows the following:

• all the deductions for depreciation under Code Sec. 167
• charitable contributions under Code Sec. 170
• state and local business tax under Code Sec. 164

As a result, cannabis dispensaries in California end up paying staggeringly higher than normal tax rates, exceeding over 70 percent.

As a result, cannabis dispensaries in California end up paying staggeringly higher than normal tax rates, exceeding over 70 percent.

Now, the Good News!

State-licensed cannabis dispensaries in California can deduct the COGS from their taxes.

All About Cost of Goods Sold (COGS)

COGS is not a deduction – it is subtracted from gross receipts when determining a taxpayer’s gross income. It is the cost of acquiring inventory through purchase or production, as per the Code Sec. 471 inventory valuation methods.

COGS typically include:

• General and administrative costs
• State excise tax
• Purchasing cannabis
• Storage of cannabis
• Depreciation of cannabis …and more.

These adjustments allow cannabis businesses to save on taxes and collect meager profits. So, you may want to maximize the expenses you can allocate to COGS.

Please note that as per Section 263A, you can allocate more indirect costs to inventory than do the Section 471 rules. But the IRS prohibits marijuana businesses from using Section 263A. They must instead use the Section 471 rules as they existed at the time of enactment of Section 280E in 1982.

This means that Section 263A cannot be used to capitalize indirect costs that would be considered non-deductible under Section 280E, which disallows deductions for businesses trafficking in controlled substances, including marijuana.

Section 471, on the other hand, provides the general rules for tax accounting in connection with inventories. It allows businesses to include in COGS both the direct costs of products and certain indirect costs, such as handling and storage costs.

Ways to maximize COGS in a marijuana dispensary

• Increase the space for inventory storage, increasing related expenses that you can put into the cost of goods sold.
• Increase labor allocated to inventory management.

Running Separate Lines of Cannabis Business

If a cannabis dispensary runs multiple separate, legal business activities that are not subject to Section 280E, it may be able to allocate some of its expenses to those other business activities and thereby reduce its overall California cannabis tax liability. This is known as the “Separate Lines of Business” strategy.

For example, a dispensary might also sell non-cannabis merchandise, offer educational classes, or provide therapeutic services. If these activities are truly separate, they might not be subject to the same restrictions to tax cannabis sales. Working with small business bookkeeping services can greatly aid in managing these separate lines effectively and ensuring compliance.

However, it is important to note that the IRS scrutinizes these arrangements closely, and simply claiming separate lines of business is not enough. The businesses must be truly distinct, with separate bookkeeping. The non-cannabis business must be substantial and profitable on its own.

Also, the IRS and the courts look at factors such as the degree of economic interrelationship between the activities, the business purpose which is (or might be) served by carrying on the various activities within a single entity, and the similarity of the activities.

This is a complex area of tax law, and cannabis businesses should consult with a CPA Rancho Cucamonga to ensure they are in compliance with all applicable rules and regulations.

Quick tips to maximize your ability to deduct the expenses to other business lines:

• Charge market-rate prices for the goods and services in other business lines.
• Maintain proper accounting records that clearly reflect income and expenses between the lines of business.
• Keep the logistics of each business separate.

C Corporation – the Right Corporate Structure for Your Cannabis Business

C corporations can be a beneficial business structure for cannabis businesses that run other separate business lines. This is because C corporations are taxed at a flat rate, which can result in tax savings. This means that the tax rate remains the same regardless of how much your cannabis businesses earn.

Other key benefits of C corporations are:

Separate entity: A C corporation is a separate legal entity from its owners. This means that the corporation’s profits are taxed separately from the owner’s personal income. This can result in tax savings if the corporation’s tax rate is lower than the owner’s personal tax rate.

Tax strategies for cannabis companies: C corp structure allows cannabis businesses to benefit from more flexible tax planning. For example, a C corporation can retain earnings to lower its taxable income. This can be beneficial for cannabis companies, which often face high tax rates due to federal restrictions.

Running separate lines of businesses: If a cannabis dispensary also runs other separate lines of businesses, a C corporation can be beneficial. This is because each line of business can be treated as a separate entity for tax purposes. This allows cannabis retailers to take advantage of different tax rates and deductions for each line of business.

Takeaway

Although the IRS and tax court impose challenges on cannabis dispensaries in California, you can lower your taxes by allocating more expenses to COGS, having non-marijuana business lines, and becoming a C corporation.

Seeking professional advice from accounting and tax professionals can make it easy to navigate the process. These experts offer a wealth of resources and guidance, helping you make informed decisions for your cannabis business. Remember, your dispensary can thrive in this dynamic industry with the right strategies and guidance.

Original source: https://bit.ly/3S3e5gn

In the realm of internationalization of domestic nonprofits, more and more US-based domestic charities are extending their operations beyond borders, reaching out to communities in need worldwide.

Understanding tax deductions for a US charity with foreign operations can help:

• ensure compliance with IRS regulations
• maximize the benefits of charitable giving
• enhance the charitable organization’s ability to plan and execute international philanthropic activities effectively.

So, in this blog, we will discuss how domestic charitable organizations can enjoy tax benefits while supporting causes overseas.

Qualifying a Foreign Charitable Contribution for Tax Deductions

A domestic charity with foreign operations refers to a US-based non-profit organization that extends its charitable activities beyond the national borders. This means that while the charity is registered and primarily operates within the US, it also conducts significant activities in foreign countries.

Working with certified accountants is essential in this process to ensure proper compliance and optimization of tax benefits.

According to IRS regulations, for a donation to a US charity to be tax-deductible, the charity must have control and discretion over the use of the donated funds.

This means that the charity can use the funds to support foreign organizations or causes. However, the donor could not earmark funds for a specific foreign entity.

“Earmarking” in this context refers to the practice of designating funds for a specific purpose or entity. When funds are earmarked for a specific foreign entity, it means that the donor has specified that their donation must go to a particular organization or cause in a foreign country.

In the case of a foreign subsidiary, the domestic organization should have full control of every aspect of its operations.

The charitable organization may or may not have an administrative arm or subsidiary in the foreign country. Here, the term “administrative arm” or “foreign subsidiary” typically refers to a part of an organization that handles administrative tasks.

These tasks can include things like managing finances, handling paperwork, coordinating activities, and other behind-the-scenes work that helps the organization function smoothly. Working with the best CPA for small business can be invaluable in managing these aspects efficiently.

Reporting Requirements for Foreign Operations

Transparency and accountability are cornerstones of effective philanthropy. For US-based charities with foreign operations, this means adhering to specific reporting requirements set forth by the Internal Revenue Service (IRS). These requirements ensure that the organization’s activities align with its charitable mission and comply with US tax laws.

Important Note: Additional reporting requirements may apply if the organization has financial accounts in foreign countries or makes certain payments to foreign persons or entities.

One of the primary reporting tools for these organizations is Form 990, the “Return of Organization Exempt From Income Tax.”

What is the Form 990?

The Form 990 is used by tax-exempt organizations, non-exempt charitable trusts, and section 527 political organizations to provide the IRS with the information required by section 6033.

Form 990 includes a variety of schedules that organizations may need to complete, depending on the nature of their activities. For charities with foreign operations, one of the most relevant is Schedule F, “Statement of Activities Outside the United States.”

What is Schedule F?

Schedule F is designed to report the organization’s activities conducted outside the US during the tax year. This includes grants and other forms of assistance to organizations or individuals in foreign countries. It also covers other types of foreign activities, such as investments, fundraising activities, program services, and the maintenance of offices or employees in foreign countries. For example, if a US-based charity provides a grant to a school in India, this would need to be reported on Schedule F. Similarly, if the charity has an office in France or employees in Kenya, these will also need to be reported.

In addition to these activities, Schedule F also requires information about the organization’s policies and procedures related to its foreign activities. This includes the charity’s procedures for monitoring the use of its grant funds in foreign countries, its practices for ensuring that its foreign activities comply with US tax laws, and its procedures for maintaining records of its foreign activities. Completing Schedule F accurately is crucial for maintaining a charity’s tax-exempt status and ensuring the integrity of its foreign operations. It provides the IRS with a comprehensive picture of the organization’s foreign activities and ensures that these activities are in line with the organization’s tax-exempt status. Collaborating with a reputable CPA accounting firm can provide the necessary expertise for accurate and compliant reporting.

Common Mistakes when Navigating Foreign Operations and Tax Deductions

Understanding common mistakes that charities make when dealing with foreign operations and tax deductions can help organizations proactively avoid these pitfalls. Here are some common errors and tips to mitigate them:

Lack of Proper Documentation

Failure to maintain accurate and detailed records of foreign activities, including grant agreements, financial transactions, and compliance documents, can result in difficulties during audits or when substantiating deductions. So, establish robust record-keeping procedures and document all foreign transactions, ensuring compliance with IRS guidelines.

Inadequate Due Diligence

Insufficient due diligence when partnering with foreign entities or allocating funds can lead to potential misuse of donations or improper activities. Conduct thorough research and vetting processes for foreign organizations, ensuring they align with the charity’s mission and adhere to local regulations. Implement internal controls and monitoring mechanisms to maintain accountability and mitigate risks.

Earmarking Contributions

As mentioned earlier, earmarking funds for specific foreign entities or purposes can jeopardize the tax-deductibility of donations. So, ensure that the charity has full control and discretion over the use of the funds.

Non-compliance with Reporting Requirements

Failing to meet reporting obligations for foreign activities can lead to penalties and potential loss of tax-exempt status. Understand the reporting requirements, including Form 990 and Schedule F, and ensure timely and accurate submissions.

However, navigating Form 990 and Schedule F can be a complex process. However, it is a crucial part of maintaining a charity’s tax-exempt status and ensuring the integrity of its foreign operations. So, it is recommended that organizations consult with a tax professional or legal advisor to understand their specific reporting obligations.

Original source: https://bit.ly/47dD6e8

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Original Source: https://bityl.co/K2WG

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Original Source: https://bityl.co/K2Uv