For those in the accounting and payroll industries, tax season is kind of like the Super Bowl for an NFL franchise. Except, instead of two weeks of intense preparation leading up to the big game, it stretches on for months ahead of the April 15 deadline, and even after that date there are still questions to answer and clients to assist.
Adding to the chaotic nature of this time of year is that there is always a new set of regulations or updates to tax provisions that must be considered when preparing and filing either business or personal returns.
“Without a doubt: There’s always something new and every tax season has its own challenges,” says Reynold P. Cicalese III, associate partner at Alloy Silverstein Accountants and Advisers and the immediate past president of the Southwest Jersey chapter of the New Jersey Society of Certified Public Accountants.
“It’s really difficult to say what those challenges are going to be each year until you really get into it. Over the last few years, there have been issues with the IRS specifically where, since COVID, they’ve been really slow at getting things processed. … It’s gotten a little bit better—they’ve gotten caught up on that a little bit—but there’s always something new.”
Fortunately, business owners in the region have access to a number of experienced professionals who can help them overcome any obstacles, and South Jersey Biz spoke to several of them to get their thoughts on the 2024 tax season for the 2023 tax year.
In addition to Cicalese, the group includes Jo-Ann Weiner, a forensic accountant who previously worked for the IRS for 35 years and is now the owner of J.L. Weiner & Associates, with a focus on tax controversy resolution, business litigation and matrimonial matters; Kirsten Toler, a CPA and the owner of KMT Consulting, which specializes in small businesses in a range of industries, along with individual tax needs; and Frank Plum, president of Workplace HCM, a company whose services include payroll management and assistance with tax compliance.
The IRS is undergoing a massive overhaul and promises this tax season to be much smoother. Are you confident that some of the kinks have been worked out?
JW: I think it is still a dumpster fire. They are still catching up from the pandemic. They have hired new people who are learning, but they are still slow in responding and there are certain functions, like the Taxpayer Advocate Office, still overwhelmed by the volume of work. Now more than ever people will benefit from representation. People do not have to try to resolve these tax controversy issues alone. Without a background in tax law, rules and regulations, knowing the different divisions, how programs work, what the timelines are, what the next step is, people will be hard pressed to find solutions. It is easy to innocently say the wrong thing that means something different to a taxing authority.
What are some of the key changes to this tax season that you want your clients to be aware of?
KT: From a state perspective, New Jersey businesses still have the opportunity to elect something that allows them to pay state taxes at the business level, which actually gives individuals an advantage because in states like New Jersey, we pay a lot in income tax. The way that the tax laws in 2018 shifted things, state taxes and real estate taxes used to be a big deduction for people if they itemized their deductions on their personal return. Well, that became capped at $10,000, so people who live in states like New Jersey, California or New York, where the income tax rate and the real estate tax rates are higher, you kind of got the raw end of the deal. So several states, New Jersey included, now have the option for businesses—partnerships or S corporations where the income gets taxed to the person who owns it—to make an election to pay what’s called a BAIT, which allows them to pay the state taxes for the owners, and the business gets the deduction. That’s one thing that is continuing for 2023. The election has to be made by the end of the year, so if a business has not made the election then they can’t do it, but it is an advantage that many businesses take into consideration when they do year-end planning.
From a federal perspective, C corporations still have the lower tax rate of 21%. When the tax laws changed in 2018—and they don’t sunset until 2025—the corporate income tax rate went from 35% to 21%, which is a huge savings for C corporations. That’s one element of the 2023 tax landscape that will stay in effect, and that benefits the business.
Are there certain developments you’re especially keeping an eye on this tax season for your clients?
RC: We do a lot of tax projections here at our firm, and one thing I can tell you that a lot of people—both business and individuals—are probably going to be surprised about come April is that if you didn’t manage your cash correctly in the business or individually, you’re going to have a higher amount of interest due than prior years just because interest rates are higher. As a quick example, I had a client who had a business account that was a money-market account, so it was earning some high-yield interest, and their interest from 2022 to 2023 tripled. When that happens, because your income is higher, you’re going to have higher tax than the previous year. So if you didn’t plan for that properly in your business or your personal life, you may have a surprise tax bill when your tax return is finalized because you didn’t expect that specific type of income.
How has inflation affected tax brackets?
KT: Inflation means that you have to spend more to get the same, so when inflation goes up, then the earnings of people presumably are going up, because they need to use more money to buy the stuff they were buying before. Ideally, that’s what’s happening—companies are giving employees bigger pay raises because they need to be able to live. Anytime inflation goes up, it’s driven by other factors: Interest rates are going up, unemployment rates are changing. So ultimately, other percentages are going to be radically affected by what’s happening elsewhere. For tax brackets, there is always a shift for inflation, but the tax rates remain the same generally.
What else do you feel is important for people to understand heading into tax season?
JW: 1120-S business owners should know about reasonable compensation. If you are performing services for your 1120-S, you must get a reasonable compensation W-2 wage. If you do not take a reasonable compensation, you cannot take a distribution from your company tax free. In other words, in an 1120-S, you must pay yourself. In the past, working 1120-S owners were not taking wages, and they were getting away with not paying the Social Security taxes, so the IRS said, ‘You have to pay yourself, because you’re working.’ It is not acceptable to only take non-taxable distributions, you must take a reasonable compensation W-2 salary too.
From a payroll company’s perspective, why is the period leading into tax season so hectic?
FP: The reason it’s hectic is because you’ve got a couple of things happening all at one time. You have year-end happening, which is going to include employee W-2s and the employer W-3. You’re also going to have the 940 return that needs to be done, which is an annual return for FUTA, which stands for the Federal Unemployment Tax Act. You also have quarter end that just happened, so all of the tax returns for Q4 are due as well. … There’s a lot going on for one month, and you only have 31 days to do it. Before you even get there, especially for the W-2s, you have to do what we call ‘data integrity’ [to make sure employee information is updated for each client]. … It’s a lot of work and takes a lot of coordination.
What can your clients do to assist with the process?
FP: The best thing an existing client can do is to make sure when they are providing their data to us, whether it’s online or to their payroll specialist, that it’s all there. For instance, when you hire someone, make sure you get all of their information, such as their Social Security number and their address. If their address has changed, make sure you update it. ... The best thing a client can do to assist us is make sure they’re owning a piece of their data integrity as they go. Business owners are busy—I don’t want to say they set it and forget it, but that’s ultimately what happens a lot of times, and we’re then chasing them to chase the employee who doesn’t work for them anymore.
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Published (and copyrighted) in South Jersey Biz, Volume 14, Issue 1 (January 2024).
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