Filing 1099s in 2023 – Updates and New IRS Filing Portal

What is a 1099?

• The IRS Forms 1099 are a series of forms used to report certain types of income that do not come from a direct employer in the form of wages, salaries, tips, etc. The most common is Form 1099-NEC (nonemployee compensation), frequently used by small business owners.
• The primary purpose of these forms is to give nonemployees (contractors or subcontractors) a record of total annual payments they received and need to report during tax time. When paying a nonemployee, businesses do not withhold or pay any employer taxes on those payments. When tax time comes, each individual or business who has received a 1099 is required to report this income and pay any related taxes.

Businesses and Individuals Required to file Forms 1099

• If a business pays $600 or more in compensation through the year to a contractor or other nonemployee, the business is required to send copies of Form 1099-NEC to the IRS and payees. This form is typically issued to individuals, sole proprietors, partnerships, interest payees, rent payees, and single member LLCs (businesses are not required to send a 1099-NEC to S and C corporations). However, all attorneys receive a 1099, even if they are an S or C corporation.
• Refer to the IRS guidance here.

Due Date for Forms 1099

• The due date for filing a copy of a 1099 with the IRS and providing a copy to your contractors and vendors is January 31 for most businesses. If the business is not filing Forms 1099-NEC, the due date to submit any other type of 1099 is February 28. If either of these dates is on a weekend, the deadline falls on the following Monday.

Information required to file a 1099

• Have all contractors complete a Form W-9. This will request their full name, social security number, and address (if it is an individual) or their business name, EIN, and address (if it is a business).
• A total of all payments made to the nonemployee (contractor) throughout the year.

Electronic Filing Update – New IRS Portal

• The IRS is scheduled to launch a new internet filing portal in early January 2023. Under Section 2102 of the Taxpayer First Act, the IRS is developing an internet portal that will allow taxpayers to electronically file Forms 1099 after December 31, 2022. Reference part F of the IRS Instructions for additional information.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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1. Active Income (wages, business where the taxpayer is materially participating, etc.)
2. Passive Income

There are two kinds of passive activities.

1. Trade or business activities in which you don’t materially participate during the year

2. Rental activities, even if you do materially participate in them, unless you’re a real estate professional

 

3. Portfolio Income (royalties, capital gains, interest, qualified dividends, etc.)

How is Active Income is taxed? Ordinary tax rates plus self employment tax (SS and Medicare tax) of 15.3%.

 

For employees, SS and Medicare is automatically taken out of your paycheck and split 50/50 with employer. For someone who is self employed or active in a business, they must pay both halves of the SS and Medicare, known as self employment tax.

 

How is Passive Income taxed? Ordinary tax rates with no self employment tax. Subject to Net Investment Income Tax (NIIT) of 3.8% if your AGI is above the threshold of $250,000 for MFJ.

 

How is Portfolio Income taxed? Ordinary tax rates or preferential rates for LTCG and qualified dividends.

 

So this might seem that having passive income is better than active income. NOT NECESSARILY.

 

Losses: When you are an owner in a pass through entity (partnership, S Corp), you need to be careful with how you categorize your participation in the business because if the company is generating losses, you may not get to take them.

 

Passive Activity Losses (PALs): When a taxpayer has a loss from a passive activity, it can only offset passive income, NOT active income.

 

Example of passive investor and passive activity loss limitations:

Pete is an individual taxpayer who owns a 25% interest in an LLC. He is categorized as a limited partner and his 25% ownership interest is just an investment as he does not participate in the day-to-day managerial decisions of the business. This means that Pete is a passive partner. The LLC generated a $100,000 loss, $25,000 allocated to Pete on his Schedule K-1. Pete has a full time job where he makes a salary of $100,000.

 

It would appear that Pete can offset his $100,000 income from his W-2 with his $25,000 loss from his Schedule K-1, however, because the loss is passive and the income is active, Pete cannot deduct the $25,000 loss until he has passive income. Therefore, the loss rolls forward until the LLC generates income in a future year, or Pete has passive income from another income stream.

 

How do you qualify as material participation?

1. 1. You participated in the activity for more than 500 hours.
   2. Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
   3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
   4. The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities under Recharacterization of Passive Income, later.
   5. You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
   6. The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
   7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.

Rental Activities

Rental activities are always passive unless you are a “Real Estate Professional.” There is a special $25,000 allowance for a taxpayer who actively participates in a passive rental real estate activity. So you can deduct up to $25,000 of passive loss against active income if you are deemed to have “actively participated” in the rental real estate activity.

 

 

Active participation- not the same as material participation. Active participation is a less stringent standard than material participation. Examples of active participation (management decisions, approving new tenants, deciding on rental terms, approving expenses, etc.).

 

**So basically any taxpayer can easily qualify as active participation as long as they are making high level decisions for the rental.

 

Real Estate Professional Status

 

You qualified as a real estate professional for the year if you met both of the following requirements.

 

• More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.
• You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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Hunkered Down, day 6

Texas got a liquidity lifeline last night. Abbott announced that all Texas counties have been included in the Economic Injury Disaster Declaration, which grants access to the Economic Injury Disaster Loan (EIDL) program. The program provides long-term, low-interest loans to small businesses (3.75%) and nonprofits (2.75%) with repayment terms up to 30 years. That’s great news for our local mom-and-pops and employers who are sinking fast.

The turnaround time for the Express loan is reported to be 36 hours. I’m a little skeptical, but I’ll let you know. We are prioritizing these applications and working as quickly as we can to help all of our clients. Bear with us, the 4506-T is already down this morning, and I started at 4am. I’ll keep trying throughout the day and let you know if I get one to go through. Click here to complete the online application at the SBA website.

Proposed: The Main Street Emergency Grant Program would offer grants to small, and possibly mid-sized businesses, and nonprofits to cover payroll and fixed costs, such as rent. The grants would be made avialable “quickly” to provide liquidity and avoid layoffs. This proposal has not been finalized.

Recommendation: Defer the Texas Franchise Tax payment and filing deadline until August 15th, 2020. The delay would defer preparation fees and tax payments for taxpayers, while allowing more time for tax return preparers to help clients navigate the current crisis. Please contact Glenn Hegar at the Texas Comptroller of Public Accounts and encourage him to support this recommendation.

See also:

• Hunkered Down, day 4
• Hunkered Down, day 2

~Mitzi E. Sullivan, CPA

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

Businesses and Nonprofits Have Six Months to Extend Overtime Pay

The final rule on overtime pay protection was signed by president Obama and published on May 18, 2016.  The rule takes effect December 1, 2016.  The DOL estimates that the new rule will extend the right to overtime pay to an estimated 4.2 million workers.

Which businesses are affected?

Generally, businesses and nonprofit organizations with gross annual sales of $500,000 or more must extend overtime pay to qualified employees.  For nonprofits, only UBIT sales are considered toward the $500,000.

In addition, all hospitals, businesses providing medical or nursing care for residents, schools (whether operated for profit or not for profit) and public agencies must comply with the new rule.

Businesses must also extend protection to employees whose work regularly involves them in commerce between States (“interstate commerce”), even if the business is not covered on an enterprise-wide basis.

Which employees are affected?

Generally, overtime pay protection is extended to full-time salaried workers with earnings up to $47,476 annually or $913 per week.  Bona fide executive, administrative, and professional (“EAP”) employees are exempt.  In addition, the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test is increased to $134,004.  Nondiscretionary bonuses and incentive payments (including commissions) may be used to satisfy up to 10 percent of the new standard salary level.

Future automatic updates to salary thresholds will occur every three years, beginning on January 1, 2020.

What is overtime pay?

Employees covered by the Fair Labor Standards Act must receive pay for hours worked in excess of 40 in a workweek at a rate not less than one and one-half their regular rates of pay.

Check the DOL’s FAQs for more information.

~Mitzi E. Sullivan, CPA

M.E. Sullivan is a cloud based professional services provider specializing in cloud accounting.

Commonly Overlooked Deductions for Charitable Contributions

For taxpayers who itemize, deducting charitable contributions may help you lower your tax bill, especially if you are actively involved in ministry.  Don’t limit your deductions to cash contributions.  Keep a record of charitable miles and non-cash contributions made throughout the year.  You may be surprised at how much you can save in taxes.

In General

Deductions for charitable contributions must be:

1. contributed to a qualified organization or an agent acting on behalf of a qualified organization.
2. unreimbursed,
3. directly connected with the services you give,
4. incurred only because of the services you give,
5. not personal, living or family expenses, and
6. not given to a specific individual.

You can verify whether a charity qualifies at CharityCheck101.org.  Churches and governmental units (such as public schools and universities) automatically qualify and will not be listed in the database.

Note that expenses must be incurred for services you give.  This does not include expenses incurred for services that your child gives.

Charitable mileage deduction

You can deduct 14 cents per mile, or actual incremental costs, for miles driven for qualified charitable purposes, plus tolls and parking.

Examples may include:

• round trip mileage to volunteer at a charitable event, gala, fundraiser, etc.
• round trip mileage to volunteer for disaster relief
• round trip mileage incurred on a mission trip
• round trip mileage to volunteer at a federal park
• round trip mileage to choir practice
• round trip mileage as a volunteer chaperon
• round trip mileage to donate clothing and household items

You have the option to deduct actual incremental out-of-pocket costs (such as gas and oil) in lieu of the 14 cents per mile.  When gas costs are high, or you are driving a large vehicle, this method will give you a better deduction.

Travel and lodging deduction

You may be able to deduct travel and lodging costs, including meals, directly connected, and incurred only because of, the service you provided to a qualified charitable organization that required you to be away from home overnight.  The IRS specifies that there should be “no significant element of personal pleasure, recreation, or vacation in the travel” and makes important distinctions based on the level of involvement.  It’s okay to enjoy the work, just make sure you are working.  And make sure you meet all of the requirements in the “In General” section above.

Unreimbursed out-of-pocket expenses

As long as expenses meet the criteria listed in the “In General” section above, you may be able to deduct expenses that you paid on behalf of a qualified charity.

Examples may include:

• Food and paper goods purchased to provide meals at a qualified charitable activity (youth group, support raiser for a missions agency, etc.)
• small tools and equipment (contributed to the organization, or with no residual value)
• printing supplies
• postage

Gently used clothing and household items

Remember to get a receipt for your donated items and note on the receipt the fair market value of donated items.

Documentation Requirements

According to the IRS, “Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.

To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more. If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.

Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.”

Check with your CPA

The expenses discussed in this article are examples of expenses that may be deductible, depending on your unique circumstances.  Discuss them with your CPA to help you decide whether or not to claim a deduction.  The information contained in this article is for discussion purposes only and is not to be considered tax advice.

~Mitzi E. Sullivan, CPA

M.E. Sullivan is a cloud based professional services provider specializing in cloud accounting.

5 Essentials for Every Nonprofit

As a nonprofit auditor, I frequently meet with boards of directors that are struggling to properly govern while remaining ministry focused.  I always advise implementation of these 5 essential practices.

1. Make sure you have the basics covered.  Every nonprofit, regardless of size, should have these basic written policies.  All of these policies should be reviewed and updated annually and effectively communicated to board members and employees.  Click on the links below for some of my favorite resources, samples and templates.
   1. Conflicts of interest
   2. Code of ethics
   3. Document retention
   4. Gift acceptance
   5. Whistleblower protection
2. Retain a schedule of required board meetings and maintain minutes for each meeting.  Every ministry is required to have at least one board meeting annually.
3. Annually approve executive compensation and benefits and make sure they meet the criteria for reasonable compensation set forth by the IRS?
4. Review your 990 in detail with your board of directors.  Your 990 is available for all to see and provides a unique opportunity to show your donors how you are meeting your stewardship responsibility.
5. Have your financial statements prepared, compiled, reviewed or audited by a CPA, either in-house or by a third party.  With the new SSARS 21, CPAs have more flexibility in providing “prepared” financial statements at a reduced cost.

~Mitzi E. Sullivan, CPA

M.E. Sullivan is a cloud based professional services provider specializing in cloud accounting.