Tax

Did you receive a Form 1099-NEC that overstates your income? You’re not alone—and it could mean you’re paying more taxes than you owe.

This problem often arises at year-end when a business issues a 1099-NEC based on what it paid rather than what you received. For example, if you were paid in January for the previous December’s work, the payor might include that income on the prior year’s 1099-NEC—even though you didn’t receive the funds until the following year. Legally, that’s incorrect.

Once issued, 1099 errors can be hard to fix. If you’re stuck with an incorrect form, here’s what you should do:

• Try to get the payor to issue a corrected 1099—we can help you draft the request with the supporting IRS regulation.
• If that fails, report the full amount on your return to match the 1099, then offset the overstatement in “Other Expenses” with a brief explanation.
• Keep documentation—like the postmarked envelope of the actual payment, or email correspondence—proving the payment was received after year-end.

This approach can help you avoid an IRS mismatch letter or an IRS audit, while still accurately reporting your income.

Don’t let a payor’s mistake increase your tax bill. If you’ve received a questionable 1099-NEC, we’ll help you determine the correct income, prepare the supporting documentation, and ensure your return is properly filed.

If you want to discuss incorrect 1099-NECs, please contact me directly at 408-778-9651.

• By Leon Clinton
• June 13, 2025

How would you like to owe the IRS a $150,000 penalty because you failed to file a simple two-page form? It can happen all too easily if you have a solo 401(k) or another self-employed retirement plan.

If you’re self-employed and you have a qualified retirement plan, such as a solo 401(k) for yourself (and your spouse, if applicable), Form 5500-EZ must be filed with the IRS once the assets in the plan exceed $250,000. The form is usually due July 31 each year.

You—the business owner—are the plan administrator or plan sponsor and the one responsible for filing Form 5500-EZ. You can use a third-party administrator to manage your plan, complete Form 5500-EZ, and even file it with the IRS, but you continue to have, in the absence of a rare contractual arrangement, the legal responsibility for a correctly and timely filed 5500-EZ.

Beware. If you fail to file Form 5500-EZ, the potential penalties are substantial: $250 per day, up to a maximum of $150,000 for each plan.

Fortunately, it’s easy to avoid the big penalties. The IRS has an amnesty program called the Late Filer Penalty Relief Program. All you have to do is simultaneously file all the Form 5500-EZs you failed to file and pay a fee. The fee is $500 for each delinquent return, up to a maximum of $1,500 per plan. $1,500 is not free, but it is likely much less than the non-filing penalty.

You won’t qualify for the amnesty program if the IRS has assessed a late filing penalty against you and issued a penalty notice. In this event, your only recourse is to attempt to get the IRS to remove the penalty for reasonable cause. If you’re successful, you won’t have to pay the IRS anything. Grounds for relief include natural disasters, inability to obtain records, serious illness or death, or other reasons showing your failure to file was not due to a lack of ordinary business care and prudence.

You can forgo the amnesty program and make a reasonable cause request if the IRS has not assessed the penalty. If you win reasonable cause relief, you won’t pay the IRS fee. But this is risky. If the IRS denies your reasonable cause request, you’ll no longer qualify for amnesty because the IRS will assess the penalty for the delinquent return(s).

If you want to discuss IRS Form 5500-EZ, please call me directly at 408-778-9651.

• By Leon Clinton
• June 11, 2025

As you plan for 2025, it’s crucial to understand how recent tax law changes may impact your ability to deduct business losses. One such provision, the excess business loss disallowance rule, could limit how much of your business loss you can deduct in a given year—and delay the tax benefits you expect.

What Is the Excess Business Loss Rule?

Enacted as part of the Tax Cuts and Jobs Act (TCJA) and extended through 2028, the excess business loss rule restricts the aggregate business losses an individual taxpayer can deduct against non-business income, such as wages, investment income, or capital gains. For the tax year 2025, the thresholds are:

• $313,000 for single filers
• $626,000 for married couples filing jointly

Losses exceeding the limits must be treated as a net operating loss (NOL) and carried forward to future years—where the NOL can offset no more than 80 percent of taxable income in any given year.

But First: Passive Activity Losses

Before the excess business loss rule applies, your business losses must first pass the passive activity loss (PAL) test. If your losses are considered passive—due to limited participation or rental classification—they may already be disallowed until you either have sufficient passive income or dispose of the activity. Only losses that survive the PAL test are then subject to the excess business loss rule.

Why This Matters to You

If your business activities generate substantial losses, this rule could significantly delay your tax relief, particularly if you have significant income from other sources. Even losses from partnerships, LLCs, and S corporations are subject to these limitations—calculated at the individual level.

If you want to discuss the excess business loss rule, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 4, 2025