Thirty years ago, when I was a real accountant (haha), January was one of the most hectic months of the year. The preparation of annual payroll tax returns marks the quiet beginning of tax season. You should now start to receive W-2’s, 1099’s, and other tax forms to be set aside for the preparation of your 2020 individual income tax return. Many of our regular readers are now working from home on either an intermittent or permanent basis. For those of you in this category, you may be able to take advantage of the employee home office deduction. In the past, the standards for deducting home office use have proven notoriously prohibitive. Pursuant to the 2018 Tax Cuts and Jobs Act, requirements for W-2 wage earners clearly stipulate that for its costs to qualify, a given home office must: Be used at the convenience of the employer Constitute a specifically allocated area used expressly for work-related purposes and Have space for storing work-related materials. There are of course numerous other requirements, but historically these have proven sufficient barriers for many remote employees. But since the advent of COVID-19, two novel legislative pathways have opened up: Section 139 (Disaster Relief Payments) and Section 165 (Losses) The primary purpose of this blog post is to briefly discuss both of these two sections of the Internal Revenue Code. Section 139 (Disaster Relief Payments) Section 139 provides that any funds an individual may receive as Qualified Disaster Relief Payments cannot be included in […]
Monthly Archives: January 2021
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Home Office Deduction Considerations During COVID-19
Posted in Economic Damages, on Jan 2021, By: Mark S. GottliebShare
What To Consider In Determining Owner’s Compensation
Posted in Business Valuation, on Jan 2021, By: Mark S. GottliebShare
Whether a company is being valued for a shareholder or an equitable distribution dispute, one of the most common normalization adjustments to a subject company’s income stream is owner compensation. Both the Court and the IRS tend to closely scrutinize this issue, with the IRS in frequent disagreement as to the reasonableness of shareholder-employee compensation. For income tax purposes, business owners typically prefer to classify payments as tax-deductible wages. This allocation reduces both their corporate taxes and their federal taxable income. As one might imagine, the IRS is correspondingly meticulous in its examination of these classifications. If it believes that owner compensation is excessive, it may claim that non-deductible dividends have been disguised as compensation. As they pertain to business valuation, the determination and application of reasonable shareholder-employee compensation are similarly contentious. The correlative relationship between owner compensation and cash flow means that when compensation is inflated, the available cash flow is reduced. Correspondingly, the indicated value under the income approach will be likewise reduced. But whether challenges to owner compensation emanate from taxing authorities or a rival valuation expert, the case law in this area strongly indicates that there is no global rule of thumb – reasonable officer compensation is determined according to the particular circumstances of an individual case. It is for this reason that Trial and Appellate Courts often struggle to resolve questions regarding reasonable officer compensation. For non-valuation professionals, this confusion is perhaps attributable to the number and diversity of sources used to ascertain reasonableness. […]