Hi there,

Welcome back to another round of 'The Accountable Advisor: Top Three Insights'! We're keeping it short and sharp today with 3 of the most important tax topics for your business and tax wisdom.

IRS Pumps Breaks on ERC Refunds

The IRS is finally slowing down the processing of refund claims related to the ERC.

In a way this feels like too little and too late. Tax practitioners have been raising the alarm for years based refunds shady-ERC firms have been submitting on behalf of clients. This has put tax-practioners in a bind because we can’t prepare the amended returns required to process the credit from the ERC, forcing us to disengage with clients who took ERC funds they weren’t eligible for.

What’s most likely going to happen as enforcement on prior claims ramps up - is the the IRS will go after these 3rd-party ERC firms who they find inappropriately prepared ERC claims for, and start going after their entire list. This means companies that worked with a bad-actor might be opening themselves up to an audit, even if their claim was legitimate. If I was running the enforcement of this, I’d cast my net as wide as possible.

Cost-Segregation Study Importance.

A cost-segregation study is an engineering study you can have done on either residential or commercial property, that divides up the building components into different depreciation lives.

Why this is important is because it allows you to take more depreciation in earlier years, as opposed to if you just use the standard depreciation lives (27.5 years for residential and 39 years for commercial).

It’s a very bad idea to do your own cost-segregation study since it will be difficult to have the supporting evidence to justify why you decided to allocate the assets and depreciation a certain way. An actual engineering study will provide the supporting evidence needed to take this deduction (I’ve seen these starting at about $1,500).

The couple of clients I’ve had do these on residential rental properties were able to push $100k in depreciation to the current year, and save roughly $30k on taxes, so the $1,500 was well spent.

Trust Scam Alert Part 1 - Business Trusts.

There’s another DUMB TikTok video going around about trusts with all the usual suspects - business trusts, feeding income through multiple layers, and of course there is a life insurance component.

To be clear - there are legitimate reasons to use trusts for some of those items, but when we smush them altogether under the guise of avoiding all income tax forever - that’s where we run into trouble. The video is hard to respond to because they get so much wrong in such a short amount of time - so I want to address the first piece of it that kicks everything off - setting up a business trust.

According to the IRS:

The term "business trust" is not used in the Internal Revenue Code. The regulations require that trusts operating a trade or business be treated as a corporation, partnership, or sole proprietorship, if the grantor, beneficiary or fiduciary materially participates in the operations or daily management of the business. If the grantor maintains control of the trust, then grantor trust rules will apply. Otherwise, the trust would be treated as a simple or complex trust, depending on the trust instrument.

In short - there’s no way to either 1) set-up a business trust or 2) put your business inside a trust as a way of avoiding income tax.

That’s not to say there aren’t other strategic tax reasons why you might place a business in a trust - two of those being 1) as an estate-planning move and 2) a way to stretch-out capital gains on the same of a business. But the SECOND you hear this maneuver will save you on income tax - run the other way.!