Author: Leon Clinton

If you received an Employee Retention Credit (ERC) refund in 2026 for wages paid in 2020 or 2021, you may have an opportunity to recover the tax you pay on that refund.

The IRS currently says that if you failed to reduce your wage deductions in the original years, you should report the receipt of an ERC refund in 2026 as taxable income in 2026. We have previously recommended following that guidance and filing a protective refund claim to preserve your rights while the legal issues are resolved.

A recent court case, Twitchco, gives that strategy additional support.

In Twitchco, a federal court ruled that the IRS could not use the “tax benefit rule” to tax an improper deduction from a tax year that was already closed by the statute of limitations. That reasoning may apply to many ERC recipients because the wage deductions became improper in 2020 or 2021—not when the refund check arrived in 2026.

This does not mean every taxpayer will win their ERC protective refund claim. The legal authority is limited; other courts have reached different conclusions, and the IRS is expected to defend its position aggressively. Your filing dates, the jurisdiction you live in, and the specific facts of your ERC claim can all affect the strength of your case.

For that reason, the protective refund claim remains the most prudent strategy for most taxpayers. It allows you to comply with current IRS guidance while preserving your right to a refund if the courts ultimately reject the IRS’s position.

If you want to discuss your ERC refund, please call me directly at xxx-xxx-xxxx.

• By Leon Clinton
• August 6, 2026

Businesses that produce goods or purchase merchandise for resale have traditionally treated those items as inventory. Under the general tax rules, the business capitalizes inventory costs and deducts them only in the year the inventory is sold.

The Tax Cuts and Jobs Act changed these rules for many small businesses. As a result, qualifying businesses may be able to deduct certain inventory costs in the year they purchase the inventory instead of waiting until it is sold.

A small business generally qualifies if its average annual gross receipts for the prior three tax years do not exceed $32 million. Eligible businesses may use the cash method of accounting and choose one of three methods for treating inventory. They may treat inventory

• as nonincidental materials and supplies (NIMS);
• the same way they treat it in an applicable financial statement (AFS); or
• the same way they treat it in their books and records if they do not have an AFS.

Under the NIMS method, a business deducts inventory costs in the later of (1) the year it pays for the inventory or (2) the year it uses or consumes the inventory in its business. Inventory purchased for resale is considered used or consumed when it is sold, so this method generally does not accelerate the deduction.

Businesses with an applicable financial statement must follow that statement’s treatment of inventory. Because generally accepted accounting principles (GAAP) financial statements generally require inventory to be capitalized, this method typically does not permit immediate expensing.

Businesses without an applicable financial statement may deduct inventory costs in accordance with their books and records. If they expense inventory rather than capitalize it in their books, they may also deduct those costs for tax purposes in the year of purchase. All business records must consistently reflect this treatment.

An existing business that wants to adopt the cash method or change its inventory accounting method must file IRS Form 3115, Application for Change in Accounting Method. The IRS grants automatic consent for these changes when the requirements are met.

If you want to discuss your inventory, please call me directly at 408-778-9651

• By Leon Clinton
• July 31, 2026

If you own a traditional IRA, failing to take your required minimum distribution (RMD) can cost you far more than taking it and paying the associated income tax.

Owners of traditional IRAs, SEP IRAs, and SIMPLE IRAs generally must begin taking RMDs the year they reach age 73. (Roth IRA owners are not subject to lifetime RMDs.) You may delay your first RMD until April 1 of the following year, but all subsequent RMDs must be taken by December 31 each year.

Missing an RMD—or withdrawing less than the required amount—can trigger one of the steepest penalties in the tax code. The IRS may assess an excess accumulation penalty equal to 25 percent of the amount not withdrawn. For example, if your RMD is $50,000 and you withdraw only $30,000, you could owe a $5,000 penalty on the $20,000 shortfall.

Fortunately, you can reduce the penalty to 10 percent by correcting the shortfall within the IRS correction window. In most cases, you must withdraw the missed amount by the end of the second calendar year following the year in which you missed the RMD.

You may even qualify for a complete penalty waiver. The IRS often waives the penalty if you can show that the shortfall resulted from a reasonable error and that you have taken steps to correct the problem and prevent it from happening again.

To request a waiver, withdraw the missed RMD and file IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. Attach a signed statement explaining why you missed the distribution and describing the steps you have taken to avoid future errors.

Acceptable explanations may include a serious illness, a family emergency, a custodial error, or a misunderstanding of the first-year RMD rules. Preventive measures might include establishing automatic RMD withdrawals or reviewing your annual RMD calculation with your IRA custodian.

The IRS frequently grants a waiver when a taxpayer misses an RMD for the first time and promptly corrects the mistake.

If you want to discuss RMDs, please call me directly at 408-778-9651

• By Leon Clinton
• July 28, 2026