Trends – Roth&Co

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Roth&Co hosted a webinar on February 28, 2024, featuring Tax Controversy Manager Ahron Golding, Esq. The webinar discussed the recent approach that the IRS has been taking towards the Employee Retention Credit (ERC), scrutinizing ERC claims for abuse and fraud. Audits and criminal investigations on promoters and businesses filing questionable claims are intensifying, with thousands of audits already in the pipeline.

What is the IRS looking for? Here is what the IRS refers to as the ‘suspicious seven:’

Too many quarters being claimed

Some promoters have urged employers to claim the ERC for all 7 quarters that the credit was available. Since the IRS believes that it is rare for a business to legitimately qualify for all quarters, making a claim for all of them is a red flag.

Government orders that don’t qualify

In order for a business to qualify for the ERC due to a government order that compromised their operations:

the order must have been in effect for the periods claimed
the order must have been directed towards the business rather than towards the customer
the full or partial shutdown must have been by order and not simply via guidance or recommendation
the IRS is looking for the negative financial impact on the business

Claiming that an entire segment of a business was shut down, though that segment was not significant compared to the entire business, will cause a claim to be disallowed.

Too many employees and wrong ERC calculations

The laws are complex, and have changed throughout 2020 and 2021. Dollar limits, credit amounts, and the definition of qualified wages changed as well. Make sure your calculations are accurate.

Supply chain issues

The IRS is not looking kindly at claims based on general supply chain disruption.

Business claiming the ERC for too much of a tax period

If eligibility is based on full or partial suspension, then a business can only claim the ERC for wages paid during the period of actual suspension, not necessarily the whole quarter.

Business did not pay wages or did not exist during the eligibility period

If the business did not exist or pay any wages during the period of the claim, the claim will be disallowed by the IRS and prosecuted for fraud.

Promoter says there’s nothing to lose

Promoters that urged businesses to claim the ERC because they had “nothing to lose” were mistaken. Incorrectly claiming the ERC invites repayment requirements, penalties, interest, audits, and the expense of hiring someone to help resolve the error, amend returns, and represent the business in an audit.

The IRS has a comprehensive ERC eligibility checklist here.

Many businesses have neglected to take into account the issue of aggregation as it applies to the ERC credit. This can potentially effect employee count, revenue, and other crucial calculations.

Overall, the IRS is not too pleased with ERC promoters. IRS auditors have been trained to start an audit by asking who the taxpayer used to help prepare their claim. The IRS expects a taxpayer to utilize a trusted tax professional, rather than a dubious ‘ERC mill’.

What if the employer has an opinion letter to back up his claim? Generally, opinion letters are only as valuable as the backup data they provide. If a claim can be justified by hard numbers, it will help the employer if challenged.

If a business determines that it incorrectly claimed the Employee Retention Credit, it can use the ERC claim withdrawal process outlined here, so long as the business has not yet received the credit or hasn’t deposited an ERC check. Requesting a withdrawal means a business is asking the IRS not to process their entire adjusted return that included the ERC claim. If the IRS accepts the request, the claim will be treated as if it was never filed.

If a business incorrectly received the ERC before December 21, 2023, and deposited the check, they can apply for the ERC Voluntary Disclosure Program before March 22nd, 2024. This program allows participants to repay only 80% of the ERC they received as a credit on their return or as a refund. Click here for more details.

If your business received an opinion letter regarding ERC eligibility that you would like us to review, please email engage@rothcocpa.com.

This summary has been presented for educational purposes only and does not constitute a comprehensive study of the ERC tax laws or serve as a legal opinion or tax advice.

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There are two accounting methods businesses use to figure their taxable income: cash and accrual. According to the IRS, your choice of accounting method should properly reflect the income and expenses you report for tax purposes. Very often, the cash method provides significant tax benefits for eligible businesses – but not always. It is imperative for your business to evaluate which method will work best to ensure that it achieves the most advantageous tax benefits.

Cash method – Are you eligible?

“Small businesses” are generally eligible to use either cash or accrual accounting for tax purposes, and some may also be eligible to use various hybrid approaches. The Tax Cuts and Jobs Act (TCJA) defined a “small business” by establishing a single gross receipts threshold:

A “small business” is one whose average annual gross receipts for the three-year period ending before the 2024 tax year are $30 million or less (up from $29 million for 2023).

This is a notable change from before the TCJA took effect, where the gross receipts threshold for classification as a small business varied from $1 million to $10 million depending on how a business was structured.

Difference between the methods

The main difference between the cash basis and accrual basis of accounting is the timing of when expenses and income are recorded in your financial statements. Using the cash basis, a business will record transactions when payment is exchanged. Accrual basis accounting records income as it’s earned and expenses when they are incurred. For example, if a business pays for an insurance policy in one lump sum at the beginning of the year, using the cash basis, it will record this entire transaction when it’s paid. If using the accrual basis, the business would record a portion of the cost each month over the entire year.

Tax Advantages

For most businesses, the cash method provides both significant tax advantages as well as cash flow benefits. Because cash-basis businesses recognize income when received and deduct expenses when they are paid, they have greater control over the timing of income and deductions. Income is taxed in the year received, so using the cash method helps ensure that a business has the funds needed to pay its tax bill. Additionally, this method offers the bonus benefits of simplified inventory accounting, an exemption from the uniform capitalization rules, an exemption from the business interest deduction limit, and several other tax advantages.

The accrual method may be preferable if, for example, a company’s accrued income tends to be lower than its accrued expenses. This would result in lower tax liability. Other potential advantages of the accrual method include the ability to deduct year-end bonuses paid within the first 2½ months of the following tax year and the option to defer taxes on certain advance payments.

Switching methods

Besides considering the features offered by both methods, a business would have to carefully consider other factors before contemplating a switch. If your business prepares its financial statements in accordance with U.S. Generally Accepted Accounting Principles, it’s required to use the accrual method for financial reporting purposes. It would still be allowed to use the cash method for tax purposes, but it would require maintaining two sets of books – a costly and cumbersome choice. Changing accounting methods for tax purposes also may require IRS approval through filing. Before you make any changes, measure out the pros and cons for each method with your particular business in mind and reach out to the professionals at Roth&Co for advice and guidance.

This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

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A well-timed merger or an opportune acquisition can help your business grow, but it can also expose you and your business to risk. Buyers must consider the strengths and weaknesses of their intended partners or acquisition targets before entering into any new transactions.

When entering into any new buy/sell agreement, a robust due diligence process is imperative in order to avoid the risk of costly errors and financial losses. Due diligence means much more than just assessing the reasonableness of the sales price. It involves examining a company’s numbers, comparing the numbers over time, and benchmarking them against competitors. Proper due diligence can help verify the seller’s disclosures, confirm the target’s strategic fit, and ensure compliance with legal and regulatory frameworks.

What are the phases of the due diligence process, and how can they help in the decision-making process?

Defining Your Objectives

Before the due diligence process begins, it’s important to establish clear objectives. The work done during this phase should include a preliminary assessment of the target’s market position and financial statements, and the expected benefits of the transaction.

The process should also identify the inherent risks of the transaction and document how due diligence efforts will verify, measure and mitigate the buyer’s potential exposure to these risks.

Conducting Due Diligence

The primary focus during this step is evaluating the potential purchase’s financial statements, tax returns, legal documents and financing structure.

Look for red flags that may reveal liabilities and off-balance-sheet items. The overall quality of the company’s earnings should be scrutinized.
Budgets and forecasts should be analyzed, especially if prepared specifically for the M&A transaction.
Interviews with key personnel will help a prospective buyer fully understand the company’s operations, culture and its practical value.

AI – A Valuable Resource

With its ability to analyze vast quantities of customer data rapidly and proficiently, artificial intelligence (AI) is transforming how companies conduct due diligence. Using AI, the potential buyer can identify critical trends and risks in large data sets, especially those that may be related to regulatory compliance or fraud.

Structuring the deal

The goal of the due diligence review is to piece together all of the information reviewed into one coherent picture. When the parties meet to craft the provisions of the proposed transaction, the information gathered during due diligence will help them develop their agreement. For example, if excessive customer turnover, shrinking profits or a high balance of bad debts are revealed during the due diligence process, the potential buyer may negotiate for a lower offer price or an earnout provision. Likewise, if cultural problems are discovered, such as disproportionate employee turnover or a lack of strong company core values, the potential buyer may decide to revise some of the terms of the agreement, or even abandon the deal completely.

Hazards of the Due Diligence Process

Typical challenges in executing a successful due diligence process include:

Asking the wrong questions, or not knowing what to ask
Poor Timing – presentation or execution of documents may be delayed or unavailable
Lack of communication between potential buyers and sellers or their representatives
Cost – due diligence can be expensive, running into months and utilizing extensive specialist hours

We can help

Comprehensive financial due diligence boosts the quality of information available to decision-makers and acts as a foundation for a successful M&A transaction. If you’re thinking about merging with a competitor or buying another company, contact Roth&Co to help you gather the information needed to minimize the risks and maximize the benefits of a transaction that will serve the best interests of all parties involved.

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“But Mommy, how is school supposed to be canceled if there’s nowhere near a foot of snow?” complains every 9-year-old when, once again, the meteorologist’s weather prediction goes awry.

As much as we love to gripe about the weather-predicting pundits, at least they tend to get it in the general ballpark. They may forecast a chilly 29 degrees topped with a foot of snow, which could end up being a 38-degree, slushy, killjoy. Yet while they don’t always nail the precise form of precipitation, we can still be confident that those aren’t the days to whip out the beach umbrellas from the garage.

Contrary to our almost-accurate weathermen, there is a group of predictors who often can’t even forecast conditions in the right direction (but somehow manage to keep their fancy office jobs). Ladies and gents, put your hands together for the brilliant economists and analysts of Wall Street.

Each Wall Street bank boldly predicts where the stock market is headed and whether or not the economy will face a recession. In early 2023, the Street foresaw a looming recession. A CNBC article from the final week of 2022 titled, Why everyone thinks a recession is coming in 2023, attested to this. But as we all know, the recession never materialized and economists slowly retreated from their initial predictions.

What about their knack for predicting the stock market’s trajectory? At the beginning of the year, the S&P 500 stood at 3,839. Here were the predictions from various Wall Street giants as to where we would end the year:

J.P. Morgan: 4200
Wells Fargo: 4200
RBC: 4100
Credit Suisse: 4050
Goldman Sachs: 4000
HSBC: 4000
Citi: 4000
Bank of America: 4000
UBS: 3900
Morgan Stanley: 3900
Barclays: 3725

At year-end, the index closed at 4770. Not even the most elegant office chairs, sharpest suits or fancy Bloomberg terminals can guarantee an accurate prediction. Sometimes, not even close to accurate.

It’s time to grab a pair of noise-canceling headphones and drown out the external clamor about what to expect. Instead, like we always say, focus on a long-term plan and stick with it – through thick and thin.

Are you prepared to work on a long-term plan? Reach out to us at info@equinum.com for your personalized path to financial success.

Webinar Recap | The IRS Strikes Back

Cash or Accrual – Which is best for your business?

Mergers and Acquisitions: Using the Due Diligence Process

Weathermen vs. Wall Street Prognosticators