Does your business file 10 or more information returns with the IRS? If the answer is yes, brace for a significant rule change that came into effect on January 1, 2024, impacting the 2023 tax year.

Lowered Thresholds for E-Filing

Previously, only businesses filing 250 or more information returns were mandated to file electronically. However, the threshold has now dropped from 250 to 10. Before the new rule, the 250-return threshold was applied separately to each type of information return. Now, businesses must e-file returns if the combined total of all information return types filed is 10 or more. The U.S. Department of the Treasury and the IRS issued final regulations on February 21, 2023, delineating the specifics of the new rule. Understanding these regulations is crucial for businesses adapting to the updated requirements.

Scope of the Rule Change

The IRS, receiving nearly 4 billion information returns annually, predicts this number will soar to over 5 billion by 2028. The new e-filing requirements encompass taxpayers "required to file certain returns, including partnership returns, corporate income tax returns, unrelated business income tax returns, withholding tax returns, certain information returns, registration statements, disclosure statements, notifications, actuarial reports, and certain excise tax returns."

Forms Involved: A Snapshot

Forms affected by the rule change include, but are not limited to, Forms 1099, reporting independent contractor income; interest and dividend income; retirement plan distributions; prizes and other payments; Form W-2, reporting employee wages; Form 1098, reporting mortgage interest paid for the year; and Form 8300, reporting cash payments over $10,000 received in a trade or business. For businesses filing W-2 wage statements, 1099-NEC forms for independent contractors, and other forms, the deadline for submissions to the government is January 31. Staying abreast of these deadlines is crucial for compliance.

Penalties and Exceptions

Companies required to e-file information returns but opting for paper filing may face penalties. However, filers encountering undue hardship in electronic filing can seek a waiver from the e-filing requirement by submitting Form 8508 to the IRS.

As businesses navigate this era of evolving tax regulations, this comprehensive guide provides essential insights into the recent IRS rule change, offering clarity on requirements, forms, deadlines, and potential penalties. Stay informed for seamless compliance with the updated e-filing landscape.

Exploring strategies to defer tax bills on gains from appreciated commercial or investment real estate? A Section 1031 "like-kind" exchange could be the key. This transaction involves exchanging the property instead of selling it, offering a tax-deferred solution to navigate market challenges and capitalize on profitable opportunities.

Understanding Like-Kind Exchanges: An Overview

A like-kind exchange encompasses any exchange of real property held for investment or business use (relinquished property) for like-kind investment, trade, or business real property (replacement property). While like-kind is broadly defined, properties held primarily for sale are excluded from this definition.

Tax Rules and Eligibility: Asset-for-Asset or Boot

Post the Tax Cuts and Jobs Act, tax-deferred Section 1031 treatment is restricted for personal property exchanges completed after December 31, 2017. If uncertain about eligibility, seeking professional advice is crucial. In a straight asset-for-asset exchange, no gain is recognized, and the basis in the replacement property aligns with the relinquished property. However, when cash or other property (boot) is involved due to property value disparities, gain recognition is limited to the amount of boot received.

Illustrative Example: Navigating the Exchange Process

Consider a scenario where business property with a $100,000 basis is exchanged for a $120,000 building and $15,000 in cash. While the realized gain is $35,000, only the cash received ($15,000) is recognized. The basis in the new building is adjusted accordingly.

Debt Considerations: Boot in the Context of Debt Relief

If the property involves debt relief, it is treated as boot. This is because assuming someone else's debt is akin to receiving cash. However, the treatment of boot is contingent on the net debt relief, ensuring a nuanced understanding when debt is a factor in the exchange.

Like-kind exchanges provide a tax-deferred avenue for disposing of investment, trade, or business real property. Complying with the eligibility criteria and understanding the intricacies of the exchange process are essential for maximizing the benefits of this tax strategy.

Podcast

From Hobby to Business: Elevate Your Side Hustle

In this episode, Jeff Dvorachek explains the intricacies of preparing and organizing your finances for the end of the year. Discover practical ideas, from dedicated business accounts to the strategic use of credit cards, ensuring a smooth and stress-free approach to your financial endeavors in the coming year.

Whether you’re in the process of making a retirement or estate plan, or intend to donate property to charity, you’ll need to know the value of your assets. For many hard-to-value items — such as closely held business interests, real estate, art or collectibles — an appraisal may be necessary.

Retirement and estate planning

To enjoy a comfortable retirement, you’ll need to calculate the income that can support your lifestyle when you’re ready to leave work. This means understanding the value of the assets you own. Once you have this information, you may decide to move your retirement date up — or back.

Knowing the value of your assets allows you to know whether you’re potentially subject to estate or gift taxes. It also allows you to identify strategies for minimizing or eliminating those taxes. In addition, it enables you to distribute your wealth fairly. Without appraisals of hard-to-value assets, it’s nearly impossible to divide your overall property equally among your children. 

Appraisals may also be necessary to avoid running afoul of tax basis consistency rules. The rules are intended to prevent heirs from arguing that estate property was undervalued, which would raise their basis for income tax purposes. According to these rules, the income tax basis of inherited property equals the property’s fair market value as finally determined for estate tax purposes. Appraisals can help ensure that your heirs receive the basis they deserve.

Gifts and charitable giving

The IRS has an unlimited amount of time to challenge the value of gifts for gift and estate tax purposes, unless they’re “adequately disclosed,” which generally binds the IRS to a three-year statute of limitations. A qualified professional appraisal with a timely filed gift tax return is the best way to disclose the value of a gift.

Charitable gifts of property valued at more than $5,000 (other than publicly traded securities) must be substantiated with a qualified appraisal by a qualified appraiser. This means that the appraiser meets certain education and experience requirements.

Know what you have

Without appraisals of your hard-to-value assets, it’s difficult to develop a realistic financial plan, treat your heirs fairly and avoid unwelcome tax liabilities. Asset values can fluctuate dramatically over time, so make sure you get updated appraisals periodically.

David Fochs, Jr., CPA, Advanced to Partner at Hawkins Ash CPAs

David Fochs, Jr., CPA, has been promoted to Partner at Hawkins Ash CPAs. As Partner, Fochs will continue to provide tax and business financial planning services to businesses and individuals in Southeast Minnesota.

Paula Haferman, CPA, Becomes a Partner at Hawkins Ash CPAs





Paula Haferman, CPA, has been promoted to Partner at Hawkins Ash CPAs. As Partner, she will continue to assist clients in all aspects of accounting and tax-related matters.

Employee Benefit Plan Resources – December 2023





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