This week’s writing needs to come with a disclaimer. I like to write in a more conversational manner here but that may not be possible today, for it is difficult to discuss shareholder basis and a new tax form for it that is showing up this year for S Corporations in a light and breezy manner. So to that end, if you know that does not apply to you, come back next week.

At its most, well, base level, basis is the amount a shareholder has invested in an S Corporation. This is important because it determines whether distributions are taxable and whether losses can be deducted on a personal tax return. The new tax form that will deal with this is Form 7203. The form itself can viewed in a draft form here and a draft of instructions for the form can be visited here. If this is something your business has been tracking all along, filling this form out may take some time, but is not overly complicated. If you have not, though, be thankful it is early in the year and you can start to get your books and recordkeeping in order to complete the task.

So you need to be sure that your bookkeeping is properly tracking this – making sure that any money contributed to the business from, and distributions to, individual shareholders are being recorded.

This form is going to be necessary if you are claiming a deduction for your share of a loss in an S corporation. The IRS wants to see that it is really your money that paid the expenses of the business that resulted in that loss.  After all, you should not get to claim a deduction for expenses that you did not help pay for.

Call it coincidence or not, but this increased reporting is coming at a time when many businesses may be reporting a loss. There are few businesses that have not been affected by the COVID-19 pandemic and many industries were so affected that they saw some big losses. At the same time, however, there was a lot of money available from many different programs whose purpose was to help businesses weather those difficult times. This means there are businesses that will not be showing a profit, but at the same time, their shareholders did not see what they had invested in the business evaporate. Rather, those businesses were paying expenses with money that came from elsewhere. And in that situation, its shareholders should not then get to deduct losses on their personal returns.

So as promised, that is a bit more explanation and actual accounting talk than we usually put here. But as something new, it deserved the space and hopefully will help some of you out there be more prepared for handling the new requirements. 

Warmly,

Josh Bousquet
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Recently, I been writing about how it will do you good to be on top of tax season early. You likely have now already received some tax documents, so here is to hoping you know where they are instead of burying them somewhere that you will find eventually (hopefully). That is a simple way to help tax season go well, but today, let’s talk about some ways it could go wrong.

The last two tax seasons came with new complications and challenges. They were so challenging that there are a significant number of paper returns from last year still being processed as we sit days away from the start of the 2021 tax season. So this year already promises to have its own challenges, but maybe we can stay out ahead of a couple of them.

Over the pandemic, many people paused their student loan payments. I do not want to cast any aspersions on this plan, for I am sure there are people who were greatly helped by not having to pay that bill during a time of diminished income. When you made those payments, though, it came with a tax deduction for paying the interest. Without that, it’s possible that some people could see a smaller refund than in the past, or possibly even owe some money. Again, getting ahead of things will get you that answer earlier and give you more of a chance to figure out how to handle it.

What could turn out to be even more of a difference for some, though, were the advance payments of the Child Tax Credit. I don’t think it’s right to go in depth on what it is here, but if you were getting money from the government on the 15th of the month for the second half of last year, yeah, it’s that money. And that money isn’t like the three stimulus payments many received during the pandemic, which was essentially free money handed to you. Instead, the Child Tax Credit money consisted of prepayments of a credit that you may have already been receiving on your tax return. Granted, this credit was larger than it was in the past, but there are still many situations when getting some of it ahead of time will affect the amount of a refund, or again, leave a taxpayer owing some money. And yet again, this is where being out ahead of things and having this answer early could be beneficial.

Of course, there are a lot of people who have had little change in their lives over the last couple years and their tax situation will likely not be a big surprise. These interesting times, though, mean there are more people than usual who are going to be surprised, so don’t let that happen to you and make those times even more harrowing.

Warmly,

Josh Bousquet
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It is that time of year when tax forms start gathering around you, but we wanted to highlight one that is sometimes misunderstood and at other times not even realized it is needed – the W-9.

Form W-9 is rather simple with only one purpose. It allows for the exchange of a Tax Identification Number (TIN) — which will either be an Employer Identification Number (EIN) or Social Security Number (SSN). This is different than many forms because it is an “information return” that gives information to someone else and not directly to the IRS.

So let’s start at exactly what the form is - IRS Form W-9, Request for Taxpayer Identification Number and Certification. As you can see via that link, it is only a one-page form and really goes no further than determining what type of entity someone is and obtains their TIN.

It does come up a lot this time of year because although it can be filled out and acquired at any time – and ideally it is a good practice to get it before making a first payment - that number is needed for some tax forms.

There are four common situations in which you might be required to fill out or send someone a W-9 form:

1. A contractor, freelancer, or consultant plans on being paid (or has been paid) more than $600 by a particular client in a tax year. A completed W-9 is needed before sending a 1099 form, which then also reports that income to the IRS.
2. Banks sometimes require a W-9 when you open a new account.
3. A bank or other financial institution might also need a W-9 from you in order to submit a 1099 form to report things like interest income, distributions, and proceeds from real estate transactions.
4. If someone forgives or cancels a debt, they’ll need to file a 1099 form with the IRS and need the completed W-9 to finish the process.

We also want to give a little warning here about sharing personal information. The W-9 is a real form and can be used for these multiple legitimate reasons, but it specifically requests sensitive information, so only fill one out if you are confident that the situation is legitimate. If you do not have that confidence, do not fill it out.

But overall, this is a simple form with straightforward uses. It essentially gathers a little bit of information so that other information can be properly reported to the IRS. 

Warmly,

Josh Bousquet
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So it is here – the new year. Hopefully this writing finds you full of the promise this can come with and feeling the strength necessary to make it all come true.

In these parts, it is impossible to move to a new year without feeling like it is time to gear ourselves up for the coming tax season. Now I know few others out there get personally excited by this, but I will be so bold as to say that this is something you should start giving some thought to, as well.

Many of the most important tax forms are required to be mailed to you by the end of this month. This means you will be seeing them hit your mailbox (be it real or electronic) soon and you should have a plan for what to do when this happens. This does not have to be an elaborate scheme, for now you can just gather them in a safe, predetermined place. Have a folder (again, be it real or electronic) where you just put them when they are received. There is rarely anything you have to do with these forms other than look at them, confirm they are reasonable, and turn them over to your tax preparer. Keeping them in one location, though, means you don’t have to scramble through a pile of mail (yep, real or electronic) that has been growing for a couple months to find the forms you need.

And then, of course, you’re going to question whether you really got them all, because you kind of remember possibly getting one that didn’t look exactly like the ones you have now …
Taxes are never really fun. I mean they involve looking at how much money you have paid out to receive things that are not always the most tangible. This makes it really easy to push off for as long as possible. Then they get pushed off and become something that places a time crunch on you, thus becoming even less fun. This means that next year, you’ll be looking forward to it even less …

Hopefully this early in January, though, you are not dreading the process that much yet. Use the current mood to get a head start on things. So you know that place where you’re going to keep all of this information? Put something in there that you know you’re going to need but will not necessarily come via a form in the mail. This way you won’t have to worry about it at the end of March, instead tackling it now when things still feel full of promise.

​Warmly,

Josh Bousquet
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