Do you and your spouse together operate a profitable unincorporated small business? If so, you face some challenging tax issues.
An unincorporated business with your spouse is classified as a partnership for federal income tax purposes, unless you can avoid that treatment. Otherwise, you must file an annual partnership return, on Form 1065. In addition, you and your spouse must be issued separate Schedule K-1s, which allocate the partnership’s taxable income, deductions and credits between the two of you. This is only the beginning of the unwelcome tax compliance tasks.
The SE tax is how the government collects Social Security and Medicare taxes from self-employed individuals. For 2023, the SE tax consists of 12.4% Social Security tax on the first $160,200 of net SE income plus 2.9% Medicare tax. Once your 2023 net SE income surpasses the $160,200 ceiling, the Social Security tax component of the SE tax ends. But the 2.9% Medicare tax component continues before increasing to 3.8% — thanks to the 0.9% additional Medicare tax — if the combined net SE income of a married joint-filing couple exceeds $250,000.
With your joint Form 1040, you must include a Schedule SE to calculate SE tax on your share of the net SE income passed through to you by your spousal partnership. The return must also include a Schedule SE for your spouse to calculate the tax on your spouse’s share of net SE income passed through to him or her. This can result in a big SE tax bill.
For example, let’s say you and your spouse each have net 2023 SE income of $150,000 ($300,000 total) from your profitable 50/50 partnership business. The SE tax on your joint tax return is a whopping $45,900 ($150,000 x 15.3% x 2). That’s on top of regular federal income tax.
Strategy 1: Use an IRS-approved method to minimize SE tax in a community property state
Under IRS Revenue Procedure 2002-69, for federal tax purposes, you can treat an unincorporated spousal business in a community property state as a sole proprietorship operated by one of the spouses. By effectively allocating all the net SE income to the proprietor spouse, only the first $160,200 of net SE income is hit with the 12.4% Social Security tax. That can cut your SE tax bill.
Strategy 2: Convert a spousal partnership into an S corporation and pay modest salaries
If you and your unincorporated spousal business aren’t in a community property state, consider converting the business to S corporation status to reduce Social Security and Medicare taxes. That way, only the salaries paid to you and your spouse get hit with the Social Security and Medicare tax, collectively called FICA tax. You can then pay modest, but reasonable, salaries to you and your spouse as shareholder-employees while paying out most or all remaining corporate cash flow to yourselves as FICA-tax-free cash distributions.
Strategy 3: Disband your partnership and hire your spouse as an employee
You can disband the existing spousal partnership and start running the operation as a sole proprietorship operated by one spouse. Then hire the other spouse as an employee of the proprietorship. Pay that spouse a modest cash salary. You must withhold 7.65% from the salary to cover the employee-spouse’s share of the Social Security and Medicare taxes. The proprietorship must also pay 7.65% as the employer’s half of the taxes. However, since the employee-spouse’s salary is modest, the FICA tax will also be modest.
With this strategy, you file only one Schedule SE — for the spouse treated as the proprietor — with your joint tax return. That minimizes the SE tax, because no more than $160,200 (for 2023) is exposed to the 12.4% Social Security portion of the SE tax.
Having a profitable unincorporated business with your spouse that’s classified as a partnership for federal income tax purposes can lead to compliance headaches and high SE tax bills. Work with us to identify appropriate tax-saving strategies.
The Tax Cuts and Jobs Act liberalized the rules for depreciating business assets. However, the amounts change every year due to inflation adjustments. And due to high inflation, the adjustments for 2023 were big. Here are the numbers that small business owners need to know.
For qualifying assets placed in service in tax years beginning in 2023, the maximum Sec. 179 deduction is $1.16 million. But if your business puts in service more than $2.89 million of qualified assets, the maximum Sec. 179 deduction begins to be phased out.
Eligible assets include depreciable personal property such as equipment, computer hardware and peripherals, vehicles and commercially available software.
Sec. 179 deductions can also be claimed for real estate qualified improvement property (QIP), up to the maximum allowance of $1.16 million. QIP is defined as an improvement to an interior portion of a nonresidential building placed in service after the date the building was placed in service. However, expenditures attributable to the enlargement of a building, elevators or escalators, or the internal structural framework of a building don’t count as QIP and usually must be depreciated over 39 years. There’s no separate Sec. 179 deduction limit for QIP, so deductions reduce your maximum allowance dollar for dollar.
For nonresidential real property, Sec. 179 deductions are also allowed for qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems.
Finally, eligible assets include depreciable personal property used predominantly in connection with furnishing lodging, such as furniture and appliances in a property rented to transients.
There’s a special limitation on Sec. 179 deductions for heavy SUVs, meaning those with gross vehicle weight ratings (GVWR) between 6,001 and 14,000 pounds. For tax years beginning in 2023, the maximum Sec. 179 deduction for heavy SUVs is $28,900.
For qualified new and used assets that were placed in service in calendar year 2022, 100% first-year bonus depreciation percentage could be claimed.
However, for qualified assets placed in service in 2023, the first-year bonus depreciation percentage dropped to 80%. In 2024, it’s scheduled to drop to 60% (40% in 2025, 20% in 2026 and 0% in 2027 and beyond).
Eligible assets include depreciable personal property such as equipment, computer hardware and peripherals, vehicles and commercially available software. First-year bonus depreciation can also be claimed for real estate QIP.
Exception: For certain assets with longer production periods, these percentage cutbacks are delayed by one year. For example, the 80% depreciation rate will apply to long-production-period property placed in service in 2024.
For federal income tax depreciation purposes, passenger autos are defined as cars, light trucks and light vans. These vehicles are subject to special depreciation limits under the so-called luxury auto depreciation rules. For new and used passenger autos placed in service in 2023, the maximum luxury auto deductions are as follows:
These allowances assume 100% business use. They’ll be further adjusted for inflation in future years.
Heavy SUVs, pickups, and vans (those with GVWRs above 6,000 pounds) are exempt from the luxury auto depreciation limitations because they’re considered transportation equipment. As such, heavy vehicles are eligible for Sec. 179 deductions (subject to the special deduction limit explained earlier) and first-year bonus depreciation.
Here’s the catch: Heavy vehicles must be used over 50% for business. Otherwise, the business-use percentage of the vehicle’s cost must be depreciated using the straight-line method and it’ll take six tax years to fully depreciate the cost.
Consult with us for the maximum depreciation tax breaks in your situation.
Employers will start receiving their official registration information by US mail and email. If you believe your company is exempt from the mandate, submit an exemption request.
Registration/Exemption Deadline: December 31, 2023 for 5 or more employees.
In 2022, California passed legislation (SB 1126) to expand the CalSavers mandate to employers with at least one employee. Starting on January 1, 2023, employers with 1-4 employees (as reported to the EDD in the preceding calendar year) who are not otherwise exempt from participation can register with CalSavers.
Registration/Exemption Deadline: December 31, 2025 for 1-4 employees
In business, where every decision can tip the scales of success or failure, a robust financial strategy is imperative. Enter Financial Planning & Analysis (FP&A) – an often underappreciated yet pivotal function that can revolutionize how businesses plan, analyze, and project their financial future.
What exactly is FP&A? At its core, FP&A serves as the bridge between strategic planning and its execution. It’s the analytical arm of the finance department, scrutinizing past performances and forecasting future trends. While traditional accounting looks backward, detailing where a company has been, FP&A looks forward, charting where it’s headed. It complements the accounting function by bringing an analytical and predictive dimension to the table. Together, they provide a holistic view of a company’s financial health.
FP&A is more than a tool reserved for accountants or financial experts. It’s an invaluable financial guide that acts as a compass for every entrepreneur and project manager. This financial guide offers:
By analyzing financial trends, FP&A drives strategic direction, ensures profitable revenues, and assists in budgeting and forecasting. It’s no wonder that businesses integrating FP&A report a 30% increase in forecast accuracy.
The business world is in constant flux. The days of static annual reviews have been left behind. With rapidly changing market dynamics, agility in financial planning isn’t a luxury—it’s a necessity. This fluid approach ensures that businesses remain proactive, ready to seize opportunities or avoid impending challenges.
Steps to Seamlessly Integrate FP&A in Project Planning
By understanding the nuances of FP&A and weaving it into business processes, companies can make informed decisions, minimize risks, and amplify profitability. In the unpredictable world of modern commerce, FP&A stands as a trusted compass, guiding firms towards a brighter future.
If you’re getting a divorce, you know the process is generally filled with stress. But if you’re a business owner, tax issues can complicate matters even more. Your business ownership interest is one of your biggest personal assets and in many cases, your marital property will include all or part of it.
In general, you can divide most assets, including cash and business ownership interests, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under this tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).
For example, let’s say that under the terms of your divorce agreement, you give your house to your spouse in exchange for keeping 100% of the stock in your business. That asset swap would be tax-free. And the existing basis and holding period for the home and the stock would carry over to the person who receives them.
Tax-free transfers can occur before a divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they’re made “incident to divorce.” This means transfers that occur within:
Eventually, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — when the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold (unless an exception applies).
What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex will continue to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex-spouse ultimately sells the shares, he or she will owe any capital gains taxes. You will owe nothing.
Note: The person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. That’s why you should always take taxes into account when negotiating your divorce agreement.
In addition, the beneficial tax-free transfer rule is now extended to ordinary-income assets, not just to capital-gains assets. For example, if you transfer business receivables or inventory to your ex-spouse in a divorce, these types of ordinary-income assets can also be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.
Like many major life events, divorce can have significant tax implications. For example, you may receive an unexpected tax bill if you don’t carefully handle the splitting up of qualified retirement plan accounts (such as a 401(k) plan) and IRAs. And if you own a business, the stakes are higher. Contact us. We can help you minimize the adverse tax consequences of settling your divorce.
Let’s say you decide to, or are asked to, guarantee a loan to your corporation. Before agreeing to act as a guarantor, endorser or indemnitor of a debt obligation of your closely held corporation, be aware of the possible tax implications. If your corporation defaults on the loan and you’re required to pay principal or interest under the guarantee agreement, you don’t want to be caught unaware.
If you’re compelled to make good on the obligation, the payment of principal or interest in discharge of the obligation generally results in a bad debt deduction. This may be either a business or a nonbusiness bad debt deduction. If it’s a business bad debt, it’s deductible against ordinary income. A business bad debt can be either totally or partly worthless. If it’s a nonbusiness bad debt, it’s deductible as a short-term capital loss, which is subject to certain limitations on deductions of capital losses. A nonbusiness bad debt is deductible only if it’s totally worthless.
In order to be treated as a business bad debt, the guarantee must be closely related to your trade or business. If the reason for guaranteeing the corporation loan is to protect your job, the guarantee is considered closely related to your trade or business as an employee. But employment must be the dominant motive. If your annual salary exceeds your investment in the corporation, this generally shows that the dominant motive for the guarantee was to protect your job. On the other hand, if your investment in the corporation substantially exceeds your annual salary, that’s evidence that the guarantee was primarily to protect your investment rather than your job.
Except in the case of job guarantees, it may be difficult to show the guarantee was closely related to your trade or business. You’d have to show that the guarantee was related to your business as a promoter, or that the guarantee was related to some other trade or business separately carried on by you.
If the reason for guaranteeing your corporation’s loan isn’t closely related to your trade or business and you’re required to pay off the loan, you can take a nonbusiness bad debt deduction if you show that your reason for the guarantee was to protect your investment, or you entered the guarantee transaction with a profit motive.
In addition to satisfying the above requirements, a business or nonbusiness bad debt is deductible only if you meet these three requirements:
Any payment you make on a loan you guaranteed is deductible as a bad debt in the year you make it, unless the agreement (or local law) provides for a right of subrogation against the corporation. If you have this right, or some other right to demand payment from the corporation, you can’t take a bad debt deduction until the rights become partly or totally worthless.
These are only some of the possible tax consequences of guaranteeing a loan to your closely held corporation. To learn all the implications in your situation, consult with us.
The SECURE 2.0 law, which was enacted last year, contains wide-ranging changes to retirement plans. One provision in the law is that eligible employers will soon be able to provide more help to staff members facing emergencies. This will be done through what the law calls “pension-linked emergency savings accounts.”
Effective for plan years beginning January 1, 2024, SECURE 2.0 permits a plan sponsor to amend its 401(k), 403(b) or government 457(b) plan to offer emergency savings accounts that are connected to the plan.
If a retirement plan participant withdraws money from an employer plan before reaching age 59½, a 10% additional tax or penalty generally applies unless an exception exists. This is on top of the ordinary tax that may be due.
The goal of these emergency accounts is to encourage employees to save for retirement while still providing access to their savings if emergencies arise. Under current law, there are specific exceptions when employees can withdraw money from their accounts without paying the additional 10% penalty but they don’t include all of the emergencies that an individual may face. For example, while participants can take penalty-free distributions to pay eligible medical expenses, they can’t take them for car repairs.
Here are some features of pension-linked emergency savings accounts:
In addition to these accounts, SECURE 2.0 adds a new exception for certain retirement plan distributions used for emergency expenses, which are defined as unforeseeable or immediate financial needs relating to personal or family emergencies. Only one distribution of up to $1,000 is permitted a year, and a taxpayer has the option to repay the distribution within three years. This provision is effective for distributions beginning January 1, 2024.
In addition to what is outlined here, other rules apply to pension-linked emergency savings accounts. The IRS is likely to issue additional guidance in the next few months. Be aware that plan sponsors don’t have to offer these accounts and many employers may find that they need more time to establish them before 2024. Or they may decide there are too many administrative hurdles to clear. Contact us with questions.
Does your business receive large amounts of cash or cash equivalents? If so, you’re generally required to report these transactions to the IRS — and not just on your tax return.
Each person who, in the course of operating a trade or business, receives more than $10,000 in cash in one transaction (or two or more related transactions), must file Form 8300. Who is a “person”? It can be an individual, company, corporation, partnership, association, trust or estate. What are considered “related transactions”? Any transactions conducted in a 24-hour period. Transactions can also be considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.
In order to complete a Form 8300, you’ll need personal information about the person making the cash payment, including a Social Security or taxpayer identification number.
For Form 8300 reporting purposes, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders.
Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.
Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.
Although many cash transactions are legitimate, the IRS explains that the information reported on Form 8300 “can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”
Failing to comply with the law can result in fines and even jail time. In one case, a Niagara Falls, NY, business owner was convicted of willful failure to file Form 8300 after receiving cash transactions of more than $10,000. In a U.S. District Court, he pled guilty and was recently sentenced to five months home detention, fined $10,000 and he agreed to pay restitution to the IRS. He had received cash rent payments in connection with a building in which he had an ownership interest.
Businesses required to file reports of large cash transactions on Forms 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic confirmation of receipt when they file.
Effective January 1, 2024, you may have to e-file Forms 8300 if you’re required to e-file other information returns, such as 1099 and W-2 forms. You must e-file if you’re required to file at least 10 information returns other than Form 8300 during a calendar year.
The IRS also reminds businesses that they can “batch file” their reports, which is especially helpful to those required to file many forms.
You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS. “Confirmation receipts don’t meet the recordkeeping requirement,” the tax agency added.
Contact us with any questions or for assistance.
If you operate your small business as a sole proprietorship, you may have thought about forming a limited liability company (LLC) to protect your assets. Or maybe you’re launching a new business and want to know your options for setting it up. Here are the basics of operating as an LLC and why it might be a good choice for your business.
An LLC is a bit of a hybrid entity because it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide the owners with the best of both worlds.
Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) generally aren’t liable for the debts of the business except to the extent of their investment. Thus, the owners can operate the business with the security of knowing that their personal assets are protected from the entity’s creditors. This protection is much greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.
The owners of an LLC can elect under the “check-the-box” rules to have the entity treated as a partnership for federal tax purposes. This can provide a number of benefits to the owners. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they “flow through” to the owners, in proportion to the owners’ respective interests in profits, and are reported on the owners’ individual returns and taxed only once.
To the extent the income passed through to you is qualified business income, you’ll be eligible to take the Section 199A pass-through deduction, subject to various limitations. (However, keep in mind that the pass-through deduction is temporary. It’s available through 2025, unless Congress acts to extend it.)
In addition, since you’re actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you (and your spouse, if you’re married) may have.
An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be a notable reason for using an LLC over an S corporation (a form of business that provides tax treatment that’s similar to a partnership). Another reason for using an LLC over an S corp is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corps regarding the number of owners and the types of ownership interests that may be issued.
In conclusion, an LLC can give you corporate-like protection from creditors while providing the benefits of taxation as a partnership. For these reasons, you may want to consider operating your business as an LLC. Contact us to discuss in more detail how an LLC might be an appropriate choice for you and the other owners.
If you play a major role in a closely held corporation, you may sometimes spend money on corporate expenses personally. These costs may end up being nondeductible both by an officer and the corporation unless the correct steps are taken. This issue is more likely to happen with a financially troubled corporation.
In general, you can’t deduct an expense you incur on behalf of your corporation, even if it’s a legitimate “trade or business” expense and even if the corporation is financially troubled. This is because a taxpayer can only deduct expenses that are his own. And since your corporation’s legal existence as a separate entity must be respected, the corporation’s costs aren’t yours and thus can’t be deducted even if you pay them.
To make matters worse, the corporation won’t generally be able to deduct them either because it didn’t pay them itself. Accordingly, be advised that it shouldn’t be a practice of your corporation’s officers or major shareholders to cover corporate costs.
On the other hand, if a corporate executive incurs costs that relate to an essential part of his or her duties as an executive, they may be deductible as ordinary and necessary expenses related to his or her “trade or business” of being an executive. If you wish to set up an arrangement providing payments to you and safeguarding their deductibility, a provision should be included in your employment contract with the corporation stating the types of expenses which are part of your duties and authorizing you to incur them. For example, you may be authorized to attend out-of-town business conferences on the corporation’s behalf at your personal expense.
Alternatively, to avoid the complete loss of any deductions by both yourself and the corporation, an arrangement should be in place under which the corporation reimburses you for the expenses you incur. Turn the receipts over to the corporation and use an expense reimbursement claim form or system. This will at least allow the corporation to deduct the amount of the reimbursement.
Contact us if you’d like assistance or would like to discuss these issues further.
If you own an unincorporated small business, you probably don’t like the size of your self-employment (SE) tax bills. No wonder!
For 2023, the SE tax is imposed at the painfully high rate of 15.3% on the first $160,200 of net SE income. This includes 12.4% for Social Security tax and 2.9% for Medicare tax. The $160,200 Social Security tax ceiling is up from the $147,000 ceiling for 2022, and it’s only going to get worse in future years, thanks to inflation. Above the Social Security tax ceiling, the Medicare tax component of the SE tax continues at a 2.9% rate before increasing to 3.8% at higher levels of net SE income thanks to the 0.9% additional Medicare tax, on all income.
For wages paid in 2023 to an S corporation employee, including an employee who also happens to be a shareholder, the FICA tax wage withholding rate is 7.65% on the first $160,200 of wages: 6.2% for Social Security tax and 1.45% for Medicare tax. Above $160,200, the FICA tax wage withholding rate drops to 1.45% because the Social Security tax component is no longer imposed. But the 1.45% Medicare tax wage withholding hits compensation no matter how much you earn, and the rate increases to 2.35% at higher compensation levels thanks to the 0.9% additional Medicare tax.
An S corporation employer makes matching payments except for the 0.9% Additional Medicare tax, which only falls on the employee. Therefore, the combined employee and employer FICA tax rate for the Social Security tax is 12.4%, and the combined rate for the Medicare tax is 2.9%, increasing to 3.8% at higher compensation levels — same as the corresponding SE tax rates.
Note: In this article, we’ll refer to the Social Security and Medicare taxes collectively as federal employment taxes whether paid as SE tax for self-employed folks or FICA tax for employees.
While wages paid to an S corporation shareholder-employee get hit with federal employment taxes, any remaining S corp taxable income that’s passed through to the employee-shareholder is exempt from federal employment taxes. The same is true for cash distributions paid out to a shareholder-employee. Since passed-through S corporation taxable income increases the tax basis of a shareholder-employee’s stock, distributions of corporate cash flow are usually free from federal income tax.
In appropriate circumstances, an S corp can follow the tax-saving strategy of paying modest, but justifiable, salaries to shareholder-employees. At the same time, it can pay out most or all of the remaining corporate cash flow in the form of federal-employment-tax-free shareholder distributions. In contrast, an owner’s share of net taxable income from a sole proprietorship, partnership and LLC (treated as a partnership for tax purposes) is generally subject to the full ravages of the SE tax.
Running your business as an S corporation and paying modest salaries to the shareholder-employee(s) may mean reduced capacity to make deductible contributions to tax-favored retirement accounts. For example, if an S corporation maintains a SEP, the maximum annual deductible contribution for a shareholder-employee is limited to 25% of salary. So the lower the salary, the lower the maximum contribution. However, if the S corp sets up a 401(k) plan, paying modest salaries generally won’t preclude generous contributions.
Converting an unincorporated business into an S corporation has other legal and tax implications. It’s a big decision. We can explain all the issues.
Government officials saw a large increase in the number of new businesses launched during the COVID-19 pandemic. And the U.S. Census Bureau reports that business applications are still increasing slightly (up 0.4% from April 2023 to May 2023). The Bureau measures this by tracking the number of businesses applying for Employer Identification Numbers.
If you’re one of the entrepreneurs, you may not know that many of the expenses incurred by start-ups can’t be currently deducted on your tax return. You should be aware that the way you handle some of your initial expenses can make a large difference in your federal tax bill.
If you’re starting or planning to launch a new business, here are three rules to keep in mind:
In general, start-up expenses are those you incur to:
To qualify for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.
To be eligible as an “organization expense,” an expense must be related to establishing a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.
If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the election described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.
As we increasingly embrace the post-pandemic era, the world of work has undergone a significant shift. Many companies have opted for remote work models, dispersing employees across various states and countries. However, while beneficial in many respects, this transition carries complex tax implications for businesses. Understanding and adapting these implications has become vital to business planning and decision-making.
To navigate the labyrinth of tax consequences linked with remote work, it’s crucial first to understand the term ‘nexus.’ In tax language, ‘nexus’ indicates a sufficient connection between a taxpayer and a jurisdiction that establishes tax obligations in that jurisdiction. Generally, there are two types of nexus tests – physical and economic.
One primary concern for remote workers and businesses is the potential risk of double taxation. Double taxation occurs when an employee works remotely in one state for a company located in another, resulting in tax obligations in both states. This can occur due to conflicting tax laws among states or the lack of coordination regarding the taxation rights of remote workers.
As such, the convenience of remote work might sometimes lead to the inconvenience of grappling with multiple state tax obligations. Understanding each state’s tax laws is essential and discussing with your financial advisor how to mitigate the risk of double taxation.
The location of your employees can impact your business’s tax obligations significantly. As a business owner, you may need to register with each state where you have employees and comply with all tax obligations, including corporate income tax, gross receipts tax, franchise tax, and sales and use tax.
In addition, employment tax requirements such as income tax withholding, unemployment insurance, and workers’ compensation insurance need to be addressed in each jurisdiction where a remote employee is located. Failure to comply with these obligations can result in penalties, affecting your business’s financial health.
Given the complexity of these tax issues, it’s important to conduct thorough research and consult with a financial advisor or tax professional. This can help you develop a comprehensive understanding of the relevant concepts, conduct regular reviews of the factors impacting your business, and, ultimately, avoid unwelcome surprises.
While navigating this new tax landscape can be challenging, it’s crucial to remember that being proactive in understanding these changes can help your business adapt more effectively to the evolving world of work. Through an informed approach and consistent monitoring, business owners can ensure compliance and take full advantage of the opportunities presented by the remote work model.
If you own or manage a business with employees, there’s a harsh tax penalty that you could be at risk for paying personally. The Trust Fund Recovery Penalty (TFRP) applies to Social Security and income taxes that are withheld by a business from its employees’ wages.
The TFRP is dangerous because it applies to a broad range of actions and to a wide range of people involved in a business.
Here are some answers to questions about the penalty:
What actions are penalized? The TFRP applies to any willful failure to collect, or truthfully account for, and pay over taxes required to be withheld from employees’ wages.
Why is it so harsh? Taxes are considered the government’s property. The IRS explains that Social Security and income taxes “are called trust fund taxes because you actually hold the employee’s money in trust until you make a federal tax deposit in that amount.”
The penalty is sometimes called the “100% penalty” because the person found liable is personally penalized 100% of the taxes due. The amounts the IRS seeks are usually substantial and the IRS is aggressive in enforcing the penalty.
Who’s at risk? The penalty can be imposed on anyone “responsible” for collecting and paying tax. This has been broadly defined to include a corporation’s officers, directors and shareholders, a partnership’s partners and any employee with related duties. In some circumstances, voluntary board members of tax-exempt organizations have been subject to this penalty. In other cases, responsibility has been extended to professional advisors and family members close to the business.
According to the IRS, responsibility is a matter of status, duty and authority. Anyone with the power to see that taxes are (or aren’t) paid may be responsible. There’s often more than one responsible person in a business, but each is at risk for the entire penalty. You may not be directly involved with the payroll tax withholding process in your business. But if you learn of a failure to pay withheld taxes and have the power to pay them, you become a responsible person. Although taxpayers held liable can sue other responsible people for contribution, this action must be taken entirely on their own after the TFRP is paid.
What’s considered willful? There doesn’t have to be an overt intent to evade taxes. Simply paying bills or obtaining supplies instead of paying over withheld taxes is willful behavior. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook. Failing to do the job yourself can be treated as willful.
Here are two cases that illustrate the risks.
Under no circumstances should you “borrow” from withheld amounts. All funds withheld should be paid over to the government on time. Contact us with any questions.
If you and your employees are traveling for business this summer, there are a number of considerations to keep in mind. Under tax law, in order to claim deductions, you must meet certain requirements for out-of-town business travel within the United States. The rules apply if the business conducted reasonably requires an overnight stay.
Note: Under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses on their own tax returns through 2025. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025.
However, self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.
The actual costs of travel (for example, plane fare and cabs to the airport) are deductible for out-of-town business trips. You’re also allowed to deduct the cost of meals and lodging. Your meals are deductible even if they’re not connected to a business conversation or other business function. Although there was a temporary 100% deduction in 2021 and 2022 for business food and beverages provided by a restaurant, it was not extended to 2023. Therefore, there’s once again a 50% limit on deducting eligible business meals this year.
Keep in mind that no deduction is allowed for meal or lodging expenses that are “lavish or extravagant,” a term that’s been interpreted to mean “unreasonable.”
Personal entertainment costs on the trip aren’t deductible, but business-related costs such as those for dry cleaning, phone calls and computer rentals can be written off.
Some allocations may be required if the trip is a combined business/pleasure trip, for example, if you fly to a location for four days of business meetings and stay on for an additional three days of vacation. Only the costs of meals, lodging, etc., incurred for the business days are deductible — not those incurred for the personal vacation days.
On the other hand, with respect to the cost of the travel itself (plane fare, etc.), if the trip is primarily business, the travel cost can be deducted in its entirety and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. An important factor in determining if the trip is primarily business or personal is the amount of time spent on each (although this isn’t the sole factor).
If the trip doesn’t involve the actual conduct of business but is for the purpose of attending a convention, seminar, etc., the IRS may check the nature of the meetings carefully to make sure it isn’t a vacation in disguise. Retain all material helpful in establishing the business or professional nature of this travel.
The rules for deducting the costs of a spouse who accompanies you on a business trip are very restrictive. No deduction is allowed unless the spouse is an employee of you or your company, and the spouse’s travel is also for a business purpose.
Finally, note that personal expenses you incur at home as a result of taking the trip aren’t deductible. For example, let’s say you have to board a pet while you’re away. The cost isn’t deductible. Contact us if you have questions about your small business deductions.
If you’re claiming deductions for business meals or auto expenses, expect the IRS to closely review them. In some cases, taxpayers have incomplete documentation or try to create records months (or years) later. In doing so, they fail to meet the strict substantiation requirements set forth under tax law. Tax auditors are adept at rooting out inconsistencies, omissions and errors in taxpayers’ records, as illustrated by one recent U.S. Tax Court case.
In the case, a married couple claimed $13,596 in car and truck expenses, supported only by mileage logs that weren’t kept contemporaneously and were made using estimates rather than odometer readings. The court disallowed the entire deduction, stating that “subsequently prepared mileage records do not have the same high degree of credibility as those made at or near the time the vehicle was used and supported by documentary evidence.”
The court noted that it appeared the taxpayers attempted to deduct their commuting costs. However, it stated that “expenses a taxpayer incurs traveling between his or her home and place of business generally constitute commuting expenses, which … are nondeductible.”
A taxpayer isn’t relieved of the obligation to substantiate business mileage, even if he or she opts to use the standard mileage rate (65.5 cents per business mile in 2023), rather than keep track of actual expenses.
The court also ruled the couple wasn’t entitled to deduct $5,233 of travel, meal and entertainment expenses because they didn’t meet the strict substantiation requirements of the tax code. (TC Memo 2022-113)
This case is an example of why it’s critical to maintain meticulous records to support business expenses for vehicle and meal deductions. Here’s a list of “DOs and DON’Ts” to help meet the strict IRS and tax law substantiation requirements for these items:
DO keep detailed, accurate records. For each expense, record the amount, the time and place, the business purpose, and the business relationship of any person to whom you provided a meal. If you have employees who you reimburse for meals and auto expenses, make sure they’re complying with all the rules.
DON’T reconstruct expense logs at year end or wait until you receive a notice from the IRS. Take a moment to record the details in a log or diary or on a receipt at the time of the event or soon after. Require employees to submit monthly expense reports.
DO respect the fine line between personal and business expenses. Be careful about combining business and pleasure. Your business checking account shouldn’t be used for personal expenses.
DON’T be surprised if the IRS asks you to prove your deductions. Vehicle and meal expenses are a magnet for attention. Be prepared for a challenge.
With organization and guidance from us, your tax records can stand up to inspection from the IRS. There may be ways to substantiate your deductions that you haven’t thought of, and there may be a way to estimate certain deductions (called “the Cohan rule”), if your records are lost due to a fire, theft, flood or other disaster.
If you’re thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved, there are a couple of options to consider. Let’s take a look at a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).
SEPs are intended as an attractive alternative to “qualified” retirement plans, particularly for small businesses. The features that are appealing include the relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions.
If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.
When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $66,000 for 2023. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.
There are other requirements you’ll have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans.
The detailed records that traditional plans must maintain to comply with the complex nondiscrimination regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.
Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (SIMPLE). Under these plans, a “SIMPLE IRA” is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a “simple” 401(k) plan, with similar features to a SIMPLE plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.
For 2023, SIMPLE deferrals are up to $15,500 plus an additional $3,500 catch-up contributions for employees ages 50 and older.
Contact us for more information or to discuss any other aspect of your retirement planning.
Summer is around the corner so you may be thinking about hiring young people at your small business. At the same time, you may have children looking to earn extra spending money. You can save family income and payroll taxes by putting your child on the payroll. It’s a win-win!
Here are four tax advantages.
You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.
For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $13,850 standard deduction for 2023 to shelter his earnings.
Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10% rate, instead of being taxed at your higher rate.
Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year.
However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,250 for 2023 (and includes more than $400 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.
Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.
If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent aren’t considered employment for FICA tax purposes.
A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.
Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.
Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $66,000 for 2023).
Contact us if you have any questions about these rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too.
If you’re starting a business with some partners and wondering what type of entity to form, an S corporation may be the most suitable form of business for your new venture. Here are some of the reasons why.
A big benefit of an S corporation over a partnership is that as S corporation shareholders, you won’t be personally liable for corporate debts. In order to receive this protection, it’s important that:
If you expect that the business will incur losses in its early years, an S corporation is preferable to a C corporation from a tax standpoint. Shareholders in a C corporation generally get no tax benefit from such losses. In contrast, as S corporation shareholders, each of you can deduct your percentage share of losses on your personal tax return to the extent of your basis in the stock and in any loans you made to the entity. Losses that can’t be deducted because they exceed your basis are carried forward and can be deducted by you in the future when there’s sufficient basis.
Once the S corporation begins to earn profits, the income will be taxed directly to you whether or not it’s distributed. It will be reported on your individual tax return and be aggregated with income from other sources. Your share of the S corporation’s income won’t be subject to self-employment tax, but your wages will be subject to Social Security taxes. To the extent the income is passed through to you as qualified business income (QBI), you’ll be eligible to take the 20% pass-through deduction, subject to various limitations.
Note: Unless Congress acts to extend it, the QBI deduction is scheduled to expire after 2025.
If you’re planning to provide fringe benefits such as health and life insurance, you should be aware that the costs of providing such benefits to a more than 2% shareholder are deductible by the entity but are taxable to the recipient.
Also, be aware that the S corporation could inadvertently lose its S status if you or your partners transfer stock to an ineligible shareholder, such as another corporation, a partnership, or a nonresident alien. If the S election was terminated, the corporation would become a taxable entity. You would not be able to deduct any losses, and earnings could be subject to double taxation — once at the corporate level and again when distributed to you. In order to protect against this risk, it’s a good idea for each shareholder to sign an agreement promising not to make any transfers that would jeopardize the S election.
Before finalizing your choice of entity, consult with us. We can answer any questions you have and assist in launching your new venture.
It’s been years since the Tax Cuts and Jobs Act (TCJA) of 2017 was signed into law, but it’s still having an impact. Several provisions in the law have expired or will expire in the next few years. One provision that took effect last year was the end of current deductibility for research and experimental (R&E) expenses.
The TCJA has affected many businesses, including manufacturers, that have significant R&E costs. Starting in 2022, Internal Revenue Code Section 174 R&E expenditures must be capitalized and amortized over five years (15 years for research conducted outside the United States). Previously, businesses had the option of deducting these costs immediately as current expenses.
The TCJA also expanded the types of activities that are considered R&E for purposes of IRC Sec. 174. For example, software development costs are now considered R&E expenses subject to the amortization requirement.
Businesses should consider the following strategies for minimizing the impact of these changes:
For 2022 tax returns, the IRS recently released guidance for taxpayers to change the treatment of R&E expenses (Revenue Procedure 2023-11). The guidance provides a way to obtain automatic consent under the tax code to change methods of accounting for specified research or experimental expenditures under Sec. 174, as amended by the TCJA. This is important because unless there’s an exception provided under tax law, a taxpayer must secure the consent of the IRS before changing a method of accounting for federal income tax purposes.
The recent revenue procedure also provides a transition rule for taxpayers who filed a tax return on or before January 17, 2023.
We can advise you how to proceed. There have also been proposals in Congress that would eliminate the amortization requirements. However, so far, they’ve been unsuccessful. We’re monitoring legislative developments and can help adjust your tax strategies if there’s a change in the law.
With a recession on the horizon – or already here, depending on who you talk to – employees are feeling the sting of inflation, and employers are feeling the financial pinch from decreased consumer buying power and increased caution in spending. Traditionally, layoffs are one of the first options to save money, which harms productivity and employee morale in the long run. In today’s economic climate and tight labor market, CFOs have much to consider and a unique opportunity.
Americans are awful at using vacation hours. Even with lucrative time off policies, paid time off (PTO) hours can sit in a bank waiting to be used or cashed in when an employee leaves the company. The standard has been a tiered benefits package based on years of service with the organization. While the quality depends on the package, what’s true across the board is not every person will use every benefit. According to recent studies, women and persons of color are far less likely to use all their PTO. Furthermore, female team members are more likely to value an emergency fund than their male counterparts. Translation: your company is probably paying for benefits your employees may not use or value.
More and more companies are using convertible benefits to create flexibility and increase utilization, maximizing the employees’ value and balancing company’s cost.
Convertible benefits increase employee satisfaction. Approximately 80% of employees are not actively engaged, costing the company funds in productivity waste and increasing the likelihood of turnover.
Convertible benefits create an inclusive and attractive work culture. When recruiting new team members, studies show a diverse workforce is a key factor for many job seekers. A flexible benefits package can help attract talent from a range of backgrounds.
A convertible benefit program does not have to be complex. Employees should be able to use their PTO or trade it in for cash contributed to a retirement account or money to create an emergency fund. Younger team members may want to convert unused PTO into payments toward their student loans. The goal is to give the team options, listen to their feedback, and adjust where you can. For assistance reviewing your human capital costs and ideas on avoiding layoffs and salary reductions, please get in touch with our trusted team of professionals.
Many people began working from home during the COVID-19 pandemic — and many still work from their home offices either all the time or on a hybrid basis. If you’re self-employed and run your business from home or perform certain functions there, you might be able to claim deductions for home office expenses against your business income. There are two methods for claiming this tax break: the actual expense method and the simplified method.
In general, you qualify for home office deductions if part of your home is used “regularly and exclusively” as your principal place of business.
If your home isn’t your principal place of business, you may still be able to deduct home office expenses if:
Many eligible taxpayers deduct actual expenses when they claim home office deductions. Deductible home office expenses may include:
But keeping track of actual expenses can take time and it requires organized recordkeeping.
Fortunately, there’s a simplified method: You can deduct $5 for each square foot of home office space, up to a maximum of $1,500.
The cap can make the simplified method less valuable for larger home office spaces. Even for small spaces, taxpayers may qualify for bigger deductions using the actual expense method. So, tracking your actual expenses can be worth it.
When claiming home office deductions, you’re not stuck with a particular method. For instance, you might choose the actual expense method on your 2022 return, use the simplified method when you file your 2023 return next year and then switch back to the actual expense method for 2024. The choice is yours.
If you sell — at a profit — a home on which you claimed home office deductions, there may be tax implications. We can explain them to you.
Also be aware that the amount of your home office deductions is subject to limitations based on the income attributable to your use of the office. Other rules and limitations may apply. But any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.
Unfortunately, the Tax Cuts and Jobs Act suspended the business use of home office deductions from 2018 through 2025 for employees. Those who receive paychecks or Form W-2s aren’t eligible for deductions, even if they’re currently working from home because their employers closed their offices due to COVID-19.
We can help you determine if you’re eligible for home office deductions and how to proceed in your situation.
Many businesses in certain industries employ individuals who receive tips as part of their compensation. These businesses include restaurants, hotels, and salons.
Tips are optional payments that customers make to employees who perform services. They can be cash or noncash. Cash tips include those received directly from customers, electronically paid tips distributed to employees by employers, and tips received from other employees under tip-sharing arrangements. Generally, workers must report cash tips to their employers. Noncash tips are items of value other than cash. They may include tickets, passes, or other items that customers give employees. Workers don’t have to report noncash tips to employers.
For tax purposes, four factors determine whether a payment qualifies as a tip:
Tips can also be direct or indirect. A direct tip occurs when an employee receives it directly from a customer, even as part of a tip pool. Directly tipped employees include wait staff, bartenders and hairstylists. An indirect tip occurs when an employee who normally doesn’t receive tips receives one. Indirectly tipped employees include bussers, service bartenders, cooks and salon shampooers.
Tipped workers must keep daily records of the cash tips they receive. To keep track of them, they can use Form 4070A, Employee’s Daily Record of Tips. It is found in IRS Publication 1244.
Workers should also keep records of the dates and value of noncash tips. Although the IRS doesn’t require workers to report noncash tips to employers, they must report them on their tax returns.
Employees must report tips to employers by the 10th of the month following the month they were received. The IRS doesn’t require workers to use a particular form to report tips. However, a worker’s tip report generally should include:
Note: Employees whose monthly tips are less than $20 don’t need to report them to their employers but must include them as income on their tax returns.
Employers should send each employee a Form W-2 that includes reported tips. Employers also must:
In addition, “large” food or beverage establishments must file an annual report disclosing receipts and tips on Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.
If you’re an employer with tipped workers providing food and beverages, you may qualify for a federal tax credit involving the Social Security and Medicare taxes that you pay on employees’ tip income. The tip tax credit may be valuable to you. If you have any questions about the tax implications of tips, don’t hesitate to contact us.
If your small business has a retirement plan, and even if it doesn’t, you may see changes and benefits from a new law. The Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0) was recently signed into law. Provisions in the law will kick in over several years.
SECURE 2.0 is meant to build on the original SECURE Act, which was signed into law in 2019. Here are some provisions that may affect your business.
Retirement plan automatic enrollment. Under the new law, 401(k) plans will be required to automatically enroll employees when they become eligible, beginning with plan years after December 31, 2024. Employees will be permitted to opt out. The initial automatic enrollment amount would be at least 3% but not more than 10%. Then, the amount would be increased by 1% each year thereafter until it reaches at least 10%, but not more than 15%. All current 401(k) plans are grandfathered. Certain small businesses would be exempt.
Part-time worker coverage. The first SECURE Act requires employers to allow long-term, part-time workers to participate in their 401(k) plans with a dual eligibility requirement (one year of service and at least 1,000 hours worked or three consecutive years of service with at least 500 hours worked). The new law will reduce the three-year rule to two years, beginning after December 31, 2024. This provision would also extend the long-term part-time coverage rules to 403(b) plans that are subject to ERISA.
Employees with student loan debt. The new law will allow an employer to make matching contributions to 401(k) and certain other retirement plans with respect to “qualified student loan payments.” This means that employees who can’t afford to save money for retirement because they’re repaying student loan debt can still receive matching contributions from their employers into retirement plans. This will take effect beginning after December 31, 2023.
“Starter” 401(k) plans. The new law will allow an employer that doesn’t sponsor a retirement plan to offer a starter 401(k) plan (or safe harbor 403(b) plan) that would require all employees to be default enrolled in the plan at a 3% to 15% of compensation deferral rate. The limit on annual deferrals would be the same as the IRA contribution limit with an additional $1,000 in catch-up contributions beginning at age 50. This provision takes effect beginning after December 31, 2023.
Tax credit for small employer pension plan start-up costs. The new law increases and makes several changes to the small employer pension plan start-up cost credit to incentivize businesses to establish retirement plans. This took effect for plan years after December 31, 2022.
Higher catch-up contributions for some participants. Currently, participants in certain retirement plans can make additional catch-up contributions if they’re age 50 or older. The catch-up contribution limit for 401(k) plans is $7,500 for 2023. SECURE 2.0 will increase the 401(k) catch-up contribution limit to the greater of $10,000 or 150% of the regular catch-up amount for individuals ages 60 through 63. The increased amounts will be indexed for inflation after December 31, 2025. This provision will take effect for taxable years beginning after December 31, 2024. (There will also be increased catch-up amounts for SIMPLE plans.)
Retirement savings for military spouses. SECURE 2.0 creates a new tax credit for eligible small employers for each military spouse that begins participating in their eligible defined contribution plan. This became effective in 2023.
These are only some of the provisions in SECURE 2.0. Contact us if you have any questions about your situation.
The IRS recently released the 2023 mileage rates for businesses to use as guidance when reimbursing workers for applicable miles driven within the year. The rates tend to increase yearly to account for rising fuel and vehicle and maintenance costs and insurance rate increases.
Businesses can use the standard mileage rate to calculate the deductible costs of operating qualified automobiles for business, charitable, medical, or moving purposes. Keep reading for the updated mileage rates and some reminders for mileage reimbursements and deductions.
Standard mileage rates for cars, vans, and pickups or panel trucks are as follows:
|Use Category||Mileage rate (as of Jan. 1, 2023)||Change from the previous year|
|Business miles driven||$0.655 per mile||$0.03 increase from mid-year 2022|
|Medical or moving miles driven*||$0.22 per mile||$0.00 increase from mid-year 2022|
|Miles driven for charitable organizations||$0.14 per mile||Note: Only congress may adjust the mileage rate for service to a charitable organization by a Congress-passed statute.|
*Moving miles reimbursement for qualified active-duty members of the Armed Forces
When reimbursing employees for miles driven, keep the following in mind:
To review your organization’s mileage reimbursement policy and any alternate methods for calculating appropriate reimbursement amounts, reach out to our team of knowledgeable professionals today.
The Employee Retention Credit (ERC) was a valuable tax credit that helped employers that kept workers on staff during the height of the COVID-19 pandemic. While the credit is no longer available, eligible employers that haven’t yet claimed it might still be able to do so by filing amended payroll returns for tax years 2020 and 2021.
However, the IRS is warning employers to beware of third parties that may be advising them to claim the ERC when they don’t qualify. Some third-party “ERC mills” are promising that they can get businesses a refund without knowing anything about the employers’ situations. They’re sending emails, letters and voice mails as well as advertising on television. When businesses respond, these ERC mills are claiming many improper write-offs related to taxpayer eligibility for — and computation of — the credit.
These third parties often charge large upfront fees or a fee that’s contingent on the amount of the refund. They may not inform taxpayers that wage deductions claimed on the companies’ federal income tax returns must be reduced by the amount of the credit.
According to the IRS, if a business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction. Your tax advisor can assist with this.
Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.
The ERC is a refundable tax credit designed for businesses that:
Eligible taxpayers could have claimed the ERC on an original employment tax return or they can claim it on an amended return.
To be eligible for the ERC, employers must have:
As a reminder, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021. Additionally, for any quarter, eligible employers cannot claim the ERC on wages that were reported as payroll costs in obtaining Paycheck Protection Program (PPP) loan forgiveness or that were used to claim certain other tax credits.
If you didn’t claim the ERC, and believe you’re eligible, contact us. We can advise you on how to proceed.
The new Secure Act 2.0 legislation expands upon the Secure Act of 2019 with updates to retirement savings plans across the country. Here’s what you need to know.
Plan sponsors of 401(k) and 403(b) plans will be required to automatically enroll eligible employees with a starting contribution of 3% of their salary beginning in 2025. This amount will increase annually by 1% until the deferral amount reaches 10% of their earnings. Employees can opt-out if they do not wish to enroll in the sponsored retirement plan. This goes into effect for all existing defined-contribution plans if the employer has more than 10 employees and has existed for more than three years. Government and churches are excluded.
In addition, unenrolled participant notification requirements have been eliminated except for an annual reminder of plan requirements and their opportunity to participate.
Over the next 10 years, the age when required minimum distributions go into effect will increase. Here are the highlights:
For those who failed to make their required minimum contribution, the Act reduces the penalty from 50% to 25%.
Certain hardships are eligible for penalty-free early withdrawals from retirement accounts, where retirement account owners are only responsible for applicable taxes instead of the early withdrawal fee. Eligible hardships have been expanded to include victims of domestic violence, terminally ill patients, and certain personal financial emergencies. In addition, victims of qualified federal disasters who have experienced significant financial impact may take an early withdrawal without penalty within 180 days of the disaster.
Currently, taxpayers aged 50 or older can make catch-up contributions to eligible retirement plans, like a 401(k) or IRA. Beginning in 2025, The Secure Act 2.0 increases limits to the greater of $10,000 or 50% more than the original catch-up amount for those aged 60, 61, 62, or 63. In addition, IRA catch-up limits will no longer be set to $1,000 per year but will increase with inflation. In 2024, catch-up contributions will also be subject to after-tax (ROTH) rules.
The Secure Act 2.0 permits qualified 403(b) and governmental 457(b) plans to allow employees to designate employer matching, nonelective contributions, and student loan matching contributions as pre- or post-tax contributions. Take note that Roth-designated employer contributions must be 100% vested.
If a part-time worker has worked for an employer for at least three consecutive years and worked a minimum of 500 hours per year for those three years, the plan sponsor must allow them to contribute to qualified 401(k) plans. Effective for 401(k) and 403 (b) plans beginning after December 31, 2024, the three-year requirement has been reduced to two years.
Beginning in 2023, businesses with 50 employees or fewer can take a credit of up to 100% of the startup costs for workplace retirement plans, up to the annual cap of $5,000. This is an increase from the 50% credit previously offered.
To review how your tax strategy is affected by the Secure Act 2.0, reach out to our team of knowledgeable professionals.
If you’re considering converting your C corporation to an S corporation, be aware that there may be tax implications if you’ve been using the last in, first out (LIFO) inventory method. That’s because of the LIFO recapture income that will be triggered by converting to S corporation status. We can meet to compute what the tax on this recapture would be and to see what planning steps might be taken to minimize it.
As you’re aware, your corporation has been reporting a lower amount of taxable income under LIFO than it would have under the first in, first out (FIFO) method. The reason: The inventory taken into account in calculating the cost of goods sold under LIFO reflects current costs, which are usually higher.
This benefit of LIFO over FIFO is equal to the difference between the LIFO value of inventory and the higher value it would have had if the FIFO method had been used. In effect, the tax law treats this difference as though it were profit earned while the corporation was a C corporation. To make sure there’s a corporate-level tax on this amount, it must be “recaptured” into income when the corporation converts from a C corporation to an S corporation. Also, the recapture amount will increase the corporation’s earnings and profits, which can have adverse tax consequences down the road.
There are a couple of rules that soften the blow of this recapture tax to some degree.
We can help you gauge your exposure to the LIFO recapture tax and can suggest strategies for reducing it. Contact us to discuss these issues in detail.
Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2023. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. If you have questions about filing requirements, contact us. We can ensure you’re meeting all applicable deadlines.
Give annual information statements to recipients of certain payments you made during 2022. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient. This due date applies only to the following types of payments:
If you own a business, you may wonder if you’re eligible to take the qualified business income (QBI) deduction. Sometimes this is referred to as the pass-through deduction or the Section 199A deduction.
The QBI deduction is:
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their QBI. For 2022, if taxable income exceeds $170,050 for single taxpayers, or $340,100 for a married couple filing jointly, the QBI deduction may be limited based on different scenarios. For 2023, these amounts are $182,100 and $364,200, respectively.
The situations in which the QBI deduction may be limited include whether the taxpayer is engaged in a service-type of trade or business (such as law, accounting, health or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in.
Some taxpayers may be able to achieve significant savings with respect to this deduction (or be subject to a smaller phaseout of the deduction), by deferring income or accelerating deductions at year-end so that they come under the dollar thresholds for 2022. Depending on your business model, you also may be able to increase the deduction by increasing W-2 wages before year-end. The rules are quite complex, so contact us with questions and consult with us before taking the next steps.
These days, most businesses have some intangible assets. The tax treatment of these assets can be complex.
IRS regulations require the capitalization of costs to:
Capitalized costs can’t be deducted in the year paid or incurred. If they’re deductible at all, they must be ratably deducted over the life of the asset (or, for some assets, over periods specified by the tax code or under regulations). However, capitalization generally isn’t required for costs not exceeding $5,000 and for amounts paid to create or facilitate the creation of any right or benefit that doesn’t extend beyond the earlier of 1) 12 months after the first date on which the taxpayer realizes the right or benefit or 2) the end of the tax year following the tax year in which the payment is made.
The term “intangibles” covers many items. It may not always be simple to determine whether an intangible asset or benefit has been acquired or created. Intangibles include debt instruments, prepaid expenses, non-functional currencies, financial derivatives (including, but not limited to options, forward or futures contracts, and foreign currency contracts), leases, licenses, memberships, patents, copyrights, franchises, trademarks, trade names, goodwill, annuity contracts, insurance contracts, endowment contracts, customer lists, ownership interests in any business entity (for example, corporations, partnerships, LLCs, trusts, and estates) and other rights, assets, instruments and agreements.
Here are just a few examples of expenses to acquire or create intangibles that are subject to the capitalization rules:
The IRS regulations generally characterize an amount as paid to “facilitate” the acquisition or creation of an intangible if it is paid in the process of investigating or pursuing a transaction. The facilitation rules can affect any type of business, and many ordinary business transactions. Examples of costs that facilitate acquisition or creation of an intangible include payments to:
Like most tax rules, these capitalization rules have exceptions. There are also certain elections taxpayers can make to capitalize items that aren’t ordinarily required to be capitalized. The above examples aren’t all-inclusive, and given the length and complexity of the regulations, any transaction involving intangibles and related costs should be analyzed to determine the tax implications.
Contact us to discuss the capitalization rules to see if any costs you’ve paid or incurred must be capitalized or whether your business has entered into transactions that may trigger these rules. You can also contact us if you have any questions.
How much can you and your employees contribute to your 401(k)s next year — or other retirement plans? In Notice 2022-55, the IRS recently announced cost-of-living adjustments that apply to the dollar limitations for pensions, as well as other qualified retirement plans for 2023. The amounts increased more than they have in recent years due to inflation.
The 2023 contribution limit for employees who participate in 401(k) plans will increase to $22,500 (up from $20,500 in 2022). This contribution amount also applies to 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan.
The catch-up contribution limit for employees age 50 and over who participate in 401(k) plans and the other plans mentioned above will increase to $7,500 (up from $6,500 in 2022). Therefore, participants in 401(k) plans (and the others listed above) who are 50 and older can contribute up to $30,000 in 2023.
The limitation for defined contribution plans, including a Simplified Employee Pension (SEP) plan, will increase from $61,000 to $66,000. To participate in a SEP, an eligible employee must receive at least a certain amount of compensation for the year. That amount will increase in 2023 to $750 (from $650 for 2022).
Deferrals to a SIMPLE plan will increase to $15,500 in 2023 (up from $14,000 in 2022). The catch-up contribution limit for employees age 50 and over who participate in SIMPLE plans will increase to $3,500 in 2023, up from $3,000.
The IRS also announced that in 2023:
The 2023 limit on annual contributions to an individual IRA will increase to $6,500 (up from $6,000 for 2022). The IRA catch-up contribution limit for individuals age 50 and older isn’t subject to an annual cost-of-living adjustment and will remain $1,000.
Current high inflation rates will make it easier for you and your employees to save much more in your retirement plans in 2023. The contribution amounts will be a great deal higher next year than they’ve been in recent years. Contact us if you have questions about your tax-advantaged retirement plan or if you want to explore other retirement plan options.
Companies that wish to reduce their tax bills or increase their refunds shouldn’t overlook the fuel tax credit. It’s available for federal tax paid on fuel used for nontaxable purposes.
The federal fuel tax, which is used to fund highway and road maintenance programs, is collected from buyers of gasoline, undyed diesel fuel, and undyed kerosene. (Dyed fuels, which are limited to off-road use, are exempt from the tax.)
But purchasers of taxable fuel may use it for nontaxable purposes. For example, construction businesses often use gasoline, undyed diesel fuel or undyed kerosene to run off-road vehicles and construction equipment, such as front loaders, bulldozers, cranes, power saws, air compressors, generators and heaters.
As of this writing, a federal fuel tax holiday has been proposed. But even if it’s signed into law (check with your tax advisor for the latest information), businesses can benefit from the fuel tax credit for months the holiday isn’t in effect.
Currently, the federal tax on gasoline is $0.184 per gallon, and the federal tax on diesel fuel and kerosene is $0.244 per gallon. Calculating the fuel tax credit is simply a matter of multiplying the number of gallons used for nontaxable purposes during the year by the applicable rate.
So, for instance, a company that uses 7,500 gallons of gasoline and 15,000 gallons of undyed diesel fuel to operate off-road vehicles and equipment is entitled to a $5,040 credit (7,500 x $0.184) + (15,000 x $0.244).
This may not seem like a large number, but it can add up over the years. And remember, a tax credit reduces your tax liability dollar for dollar. That’s much more valuable than a deduction, which reduces only your taxable income.
Keep in mind, though, that fuel tax credits are includable in your company’s taxable income. That’s because the full amount of the fuel purchases was previously deducted as business expenses, and you can’t claim a deduction and a credit on the same expense.
You can claim the credit by filing Form 4136, “Credit for Federal Tax Paid on Fuels,” with your tax return. If you don’t want to wait until the end of the year to recoup fuel taxes, you can file Form 8849, “Claim for Refund of Excise Taxes,” to obtain periodic refunds.
Alternatively, if your business files Form 720, “Quarterly Federal Excise Tax Return,” you can claim fuel tax credits against your excise tax liability.
No one likes to pay taxes they don’t owe, but if you forgo fuel tax credits, that’s exactly what you’re doing. Given the minimal burden involved in claiming these credits — it’s just a matter of tracking your nontaxable fuel uses and filing a form — there’s really no reason not to do so.
A significantly modified update to the Electric Drive Motor Vehicle Credit (IRC Section 30D), went into effect August 17, 2022, and changed this popular tax credit. As of January 1, 2023, the new Clean Vehicle Credit will go into effect. In this article we outline what you need to know about the updated credit.
While the previous credit also allowed up to a $7,500 credit for purchasers of eligible vehicles, it included a maximum manufacturing limit for each car manufacturer. That means General Motors and Tesla brand cars were no longer eligible for the credit. The new version of this tax credit is going to remove this cap but adds several new stipulations that will go into effect over time. In addition, the credit has been expanded to include all clean vehicle types, including plug-in hybrids and hydrogen fuel cell vehicles.
The Department of Entergy (DOE) has given a list of electric vehicles that may meet the updated Electric Drive Motor Vehicle Credit and new Clean Vehicle Credit at https://afdc.energy.gov/laws/inflation-reduction-act. They recommend that taxpayers still confirm that their vehicle meets the new North America assembly requirement.
Suppose you are one of the taxpayers that signed a purchase contract before August 16, 2022 but did not take possession until after August 16, 2022. In that case, you may have the opportunity to choose to use the updated Electric Drive Motor Vehicle Credit rules or be grandfathered into the old tax credit qualifications. This could benefit vehicles by manufacturers that have previously reached their manufacturing cap or for vehicles that do not meet the final assembly requirement. The National Highway Traffic Safety Administration (NHTSA) has a VIN decoder to see if the vehicle qualifies for tax credits.
The State of California does not have a comparable tax credit but offers rebates for purchases of qualified ‘clean vehicles.’ The rebate amounts range from $750 to $7,000 depending on the vehicle and the Manufacturer Suggested Retail Price (MRSP). In addition, low-income families can add up to $2,500 to the rebate for purchasing an eligible vehicle. View the list of vehicles eligible for the California rebate here.
To review your tax planning and whether a clean vehicle purchase would be advantageous, reach out to our team of knowledgeable tax professionals to schedule an appointment.
Many companies are eligible for tax write-offs for certain equipment purchases and building improvements. These write-offs can do wonders for a business’s cash flow, but whether to claim them isn’t always an easy decision. In some cases, there are advantages to following the regular depreciation rules. So it’s critical to look at the big picture and develop a strategy that aligns with your company’s overall tax-planning objectives.
Taxpayers can elect to claim 100% bonus depreciation or Section 179 expensing to deduct the full cost of eligible property up front in the year it’s placed in service. Alternatively, they may spread depreciation deductions over several years or decades, depending on how the tax code classifies the property.
Under the Tax Cuts and Jobs Act (TCJA), 100% bonus depreciation is available for property placed in service through 2022. Without further legislation, bonus depreciation will be phased down to 80% for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026; then, after 2026, bonus depreciation will no longer be available. (For certain property with longer production periods, these reductions are delayed by one year. For example, 80% bonus depreciation will apply to long-production-period property placed in service in 2024.)
In March 2020, a technical correction made by the CARES Act expanded the availability of bonus depreciation. Under the correction, qualified improvement property (QIP), which includes many interior improvements to commercial buildings, is eligible for 100% bonus depreciation not only following the phaseout schedule through 2026 but also retroactively to 2018. So, taxpayers that placed QIP in service in 2018 and 2019 may have an opportunity to claim bonus depreciation by amending their returns for those years. If bonus depreciation isn’t claimed, QIP is generally depreciable on a straight-line basis over 15 years.
Sec. 179 also allows taxpayers to fully deduct the cost of eligible property, but the maximum deduction in a given year is $1 million (adjusted for inflation to $1.08 million for 2022), and the deduction is gradually phased out once a taxpayer’s qualifying expenditures exceed $2.5 million (adjusted for inflation to $2.7 million for 2022).
While 100% first-year bonus depreciation or Sec. 179 expensing can significantly lower your company’s taxable income, it’s not always a smart move. Here are three examples of situations where it may be preferable to forgo bonus depreciation or Sec. 179 expensing:
You’re planning to sell QIP. If you’ve invested heavily in building improvements that are eligible for bonus depreciation as QIP and you plan to sell the building in the near future, you may be stepping into a tax trap by claiming the QIP write-off. That’s because your gain on the sale — up to the amount of bonus depreciation or Sec. 179 deductions you’ve claimed — will be treated as “recaptured” depreciation that’s taxable at ordinary-income tax rates as high as 37%. On the other hand, if you deduct the cost of QIP under regular depreciation rules (generally, over 15 years), any long-term gain attributable to those deductions will be taxable at a top rate of 25% upon the building’s sale.
You’re eligible for the Sec. 199A “pass-through” deduction. This deduction allows eligible business owners to deduct up to 20% of their qualified business income (QBI) from certain pass-through entities, such as partnerships, limited liability companies and S corporations, as well as sole proprietorships. The deduction, which is available through 2025 under the TCJA, can’t exceed 20% of an owner’s taxable income, excluding net capital gains. (Several other restrictions apply.)
Claiming bonus depreciation or Sec. 179 deductions reduces your QBI, which may deprive you of an opportunity to maximize the 199A deduction. And since the 199A deduction is scheduled to expire in 2025, it makes sense to take advantage of it while you can.
Your depreciation deductions may be more valuable in the future. The value of a deduction is based on its ability to reduce your tax bill. If you think your tax rate will go up in the coming years, either because you believe Congress will increase rates or you expect to be in a higher bracket, depreciation write-offs may be worth more in future years than they are now.
Keep in mind that forgoing bonus depreciation or Sec. 179 deductions only affects the timing of those deductions. You’ll still have an opportunity to write off the full cost of eligible assets; it will just be over a longer time period. Your tax advisor can analyze how these write-offs interact with other tax benefits and help you determine the optimal strategy for your situation.
No one needs to remind business owners that the cost of employee health care benefits keeps going up. One way to provide some of these benefits is through an employer-sponsored Health Savings Account (HSA). For eligible individuals, an HSA offers a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the key tax benefits:
To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2023, a “high deductible health plan” will be one with an annual deductible of at least $1,500 for self-only coverage or at least $3,000 for family coverage. (These amounts in 2022 were $1,400 and $2,800, respectively.) For self-only coverage, the 2023 limit on deductible contributions will be $3,850 (up from $3,650 in 2022). For family coverage, the 2023 limit on deductible contributions will be $7,750 (up from $7,300 in 2022). Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits for 2023 will not be able to exceed $7,500 for self-only coverage or $15,000 for family coverage (up from $7,050 and $14,100, respectively, in 2022).
An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2023 of up to $1,000 (unchanged from the 2022 amount).
If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan. It’s also excludable from an employee’s gross income up to the deduction limitation. Funds can be built up for years because there’s no “use-it-or-lose-it” provision. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.
HSA withdrawals (or distributions) can be made to pay for qualified medical expenses, which generally means expenses that would qualify for the medical expense itemized deduction. Among these expenses are doctors’ visits, prescriptions, chiropractic care, and premiums for long-term care insurance.
If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal unless it’s made after reaching age 65 or in the event of death or disability.
HSAs offer a flexible option for providing health care coverage, and they may be an attractive benefit for your business. But the rules are somewhat complex. Contact us if you have questions or would like to discuss offering HSAs to your employees.
If you need to hire, be aware of a valuable tax credit for employers hiring individuals from one or more targeted groups. The Work Opportunity Tax Credit (WOTC) is generally worth $2,400 for each eligible employee but can be worth more — in some cases, much more.
Generally, an employer is eligible for the credit only for qualified wages paid to members of a targeted group. These groups are:
Employers of all sizes are eligible to claim the WOTC. This includes both taxable and certain tax-exempt employers located in the United States and in some U.S. territories. Taxable employers can claim the WOTC against income taxes. However, eligible tax-exempt employers can claim the WOTC only against payroll taxes and only for wages paid to members of the qualified veteran targeted group.
Many additional conditions must be fulfilled before employers can qualify for the credit. Each employee must have completed a minimum of 120 hours of service for the employer. Also, the credit isn’t available for employees who are related to the employer or who previously worked for the employer.
WOTC amounts differ for specific employees. The maximum credit available for the first year’s wages generally is $2,400 for each employee, or $4,000 for a recipient of long-term family assistance. In addition, for those receiving long-term family assistance, there’s a 50% credit for up to $10,000 of second-year wages. The maximum credit available over two years for these employees is $9,000 ($4,000 for Year 1 and $5,000 for Year 2).
For some veterans, the maximum WOTC is higher: $4,800 for certain disabled veterans, $5,600 for certain unemployed veterans, and $9,600 for certain veterans who are both disabled and unemployed.
For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth is $1,200 per employee.
Additional rules and requirements apply. For example, you must obtain certification that an employee is a target group member from the appropriate State Workforce Agency before you can claim the credit. The certification generally must be requested within 28 days after the employee begins work. And in limited circumstances, the rules may prohibit the credit or require an allocation of it.
Nevertheless, for most employers that hire from targeted groups, the credit can be valuable. Contact your tax advisor with questions or for more information about your situation.
The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $160,200 for 2023 (up from $147,000 for 2022). Wages and self-employment income above this threshold aren’t subject to Social Security tax.
The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers. One is for the Old Age, Survivors, and Disability Insurance program, which is commonly known as Social Security. The other is for the Hospital Insurance program, which is commonly known as Medicare.
There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2023, the FICA tax rate for employers is 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2022).
For 2023, an employee will pay:
For 2023, the self-employment tax imposed on self-employed people is:
What happens if one of your employees works for your business and has a second job? That employee would have taxes withheld from two different employers. Can the employee ask you to stop withholding Social Security tax once he or she reaches the wage base threshold? Unfortunately, no. Each employer must withhold Social Security taxes from the individual’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employee will get a credit on his or her tax return for any excess withheld.
Contact us if you have questions about 2023 payroll tax filing or payments. We can help ensure you stay in compliance.
Throughout the year, the Federal Emergency Management Agency (FEMA) will designate incidents that adversely affect residents in the affected areas as disasters. This FEMA designation puts relief efforts in motion, both short and long-term.
While immediate needs like food, water, and shelter are at the top of the list, long-term efforts, like relief options through the IRS, aim to help those affected get back on their feet.
In the past, the Senate was required to vote every time the IRS wanted to grant disaster relief provisions to FEMA-designated disaster areas. Now, the IRS can give disaster relief by extending deadlines for “certain time-sensitive acts.” This includes filing returns and paying taxes during the disaster period. For example, affected taxpayers usually receive a tax refund more quickly by “claiming losses related to the disaster on the tax return for the previous year.”
While in some areas of the country, disaster preparedness feels more like a what-if scenario, other parts of the country are all-too-familiar with preparing for floods, wildfires, and tornados. The IRS recommends:
Suppose you or your business have gone through a natural disaster, and you cannot access your original tax documents. In that case, the IRS recommends the following resources for obtaining important financial information when you are ready:
The IRS keeps a list of current and past disaster relief offered on its website. Some of the more recent disaster-related tax relief programs include:
We recommend talking with your tax advisor and visiting the IRS Disaster Relief Website for a comprehensive list.
Even though the overall IRS audit rate is currently low historically, it’s expected to increase as a result of provisions in the Inflation Reduction Act signed into law in August. So it’s more important than ever for taxpayers to follow the rules to minimize their chances of being subject to an audit. How can you reduce your audit chances? Watch for these 10 red flags that can trigger IRS scrutiny:
Of course, this isn’t the end of the list. There are many other potential audit triggers, depending on a taxpayer’s particular situation. Also, keep in mind that some audits are done on a random basis. So even if you have no common triggers on your return, you still could be subject to an audit (though the chances are lower).
With proper tax reporting and professional help, you can reduce the likelihood of triggering an audit. And if you still end up being subject to one, proper documentation can help you withstand it with little or no negative consequences.
Do you own commercial or investment real estate that has substantially increased in value? If you sell the property, you may be hit with a huge capital gain tax liability. Possible solution: Consider a Section 1031 exchange (also known as a like-kind exchange) in which you swap qualifying properties while paying zero or little current tax.
Recent legislation has narrowed the availability of Sec. 1031 exchanges, but you can still use this technique for qualified real estate transactions. However, keep in mind that a repeal or modification of the rules has been discussed. So, if you’re interested in an exchange, you may want to act soon.
Under Sec. 1031 of the Internal Revenue Code, you can defer tax on the exchange of like-kind real estate properties if specific requirements are met. Previously, this tax break was available for various types of property, such as trade-ins of business vehicles. But as of 2018, the Tax Cuts and Jobs Act strictly limits the Sec. 1031 rules to real estate transactions.
Note that the properties — both the one you relinquish and the one you receive — must be business or investment properties. You can’t avoid current tax if you swap personal residences, but you may be able to exchange a vacation home that is treated as a rental property. (There may be other complications, so consult with your tax advisor.)
Normally, a sale of appreciated real estate would result in capital gains tax. For individual property owners, the maximum tax rate is 20% if the property has been owned for longer than one year. Otherwise, the gain for individuals is taxed at ordinary income tax rates currently topping out at 37%.
If you meet the requirements under Sec. 1031, there’s no current tax due on the exchange — except to the extent that you receive “boot” as part of the deal. Boot includes cash needed to “even things out” or other concessions of value (such as a reduction of mortgage debt). In some cases, cash may be combined with a valued benefit.
If you receive boot, you owe current tax on the amount equal to the lesser of:
On the other hand, if you’re the one paying boot, you won’t realize any taxable gain.
For these purposes, “like-kind” refers to the property’s nature or character. The prevailing tax regulations provide a liberal interpretation of what constitutes like-kind properties. For instance, you can exchange improved real estate for raw land, a strip mall for an apartment building or a marina for a golf course. It doesn’t have to be the exact same type of property (for example, a warehouse for a warehouse).
Timing is everything. The following two deadlines must be met for a like-kind exchange to qualify for tax-free treatment:
The 180-day period begins to run on the date of the transfer of legal ownership of the relinquished property. If that period straddles two tax years, it might be shortened by the tax return due date. So, if you give up title to the property in November or December this year, the due date for 2022 returns (April 18, 2023) would arrive before 180 days are up. Keep this in mind as the end of the year approaches.
Also, in the real world, it’s unlikely that you’ll own property that another person wants to acquire while he or she also owns property that you desire. These one-for-one exchanges are rare. The vast majority of Sec. 1031 real estate exchanges involve multiple parties. (See the sidebar, “Multiple-party exchanges.”)
Unless you’re an expert in the field, a Sec. 1031 exchange is not a do-it-yourself proposition. Enlist the services of professionals, including your CPA, who can provide the assistance you need.
Depending on your situation, you might use a “qualified intermediary” to cement a Section 1031 exchange. Essentially, the qualified intermediary is a third party that helps facilitate the deal. The parties create an agreement whereby the qualified intermediary:
Note that the agreement must limit the taxpayer’s rights to receive, pledge, borrow or otherwise obtain benefits of cash or other property held by the intermediary. In addition, specific IRS reporting requirements must be met. Typically, the intermediary charges a fee based on the value of the properties.
Businesses can provide benefits to employees that don’t cost them much or anything at all. However, in some cases, employees may have to pay tax on the value of these benefits.
Here are examples of two types of benefits which employees generally can exclude from income:
However, many fringe benefits are taxable, meaning they’re included in the employees’ wages and reported on Form W-2. Unless an exception applies, these benefits are subject to federal income tax withholding, Social Security (unless the employee has already reached the year’s wage base limit) and Medicare.
The line between taxable and nontaxable fringe benefits may not be clear. As illustrated in one recent case, some taxpayers get into trouble if they cross too far over the line.
A retired airline pilot received free stand-by airline tickets from his former employer for himself, his spouse, his daughter, and two other adult relatives. The value of the tickets provided to the adult relatives was valued $5,478. The airline reported this amount as income paid to the retired pilot on Form 1099-MISC, which it filed with the IRS. The taxpayer and his spouse filed a joint tax return for the year in question but didn’t include the value of the free tickets in gross income.
The IRS determined that the couple was required to include the value of the airline tickets provided to their adult relatives in their gross income. The retired pilot argued the value of the tickets should be excluded as a de minimis fringe.
The U.S. Tax Court agreed with the IRS that the taxpayers were required to include in gross income the value of airline tickets provided to their adult relatives. The value, the court stated, didn’t qualify for exclusion as a no-additional-cost service because the adult relatives weren’t the taxpayers’ dependent children. In addition, the value wasn’t excludable under the tax code as a de minimis fringe benefit “because the tickets had a value high enough that accounting for their provision was not unreasonable or administratively impracticable.” (TC Memo 2022-36)
You may be able to exclude from wages the value of certain fringe benefits that your business provides to employees. But the requirements are strict. If you have questions about the tax implications of fringe benefits, contact us.
You and your small business are likely to incur a variety of local transportation costs each year. There are various tax implications for these expenses.
First, what is “local transportation?” It refers to travel in which you aren’t away from your tax home (the city or general area in which your main place of business is located) long enough to require sleep or rest. Different rules apply if you’re away from your tax home for significantly more than an ordinary workday and you need sleep or rest in order to do your work.
The most important feature of the local transportation rules is that your commuting costs aren’t deductible. In other words, the fare you pay or the miles you drive simply to get to work and home again are personal and not business miles. Therefore, no deduction is available. This is the case even if you work during the commute (for example, via a cell phone, or by performing business-related tasks while on the subway).
An exception applies for commuting to a temporary work location that’s outside of the metropolitan area in which you live and normally work. “Temporary,” for this purpose, means a location where your work is realistically expected to last (and does in fact last) for no more than a year.
On the other hand, once you get to the work location, the cost of any local trips you take for business purposes is a deductible business expense. So, for example, the cost of travel from your office to visit a customer or pick up supplies is deductible. Similarly, if you have two business locations, the costs of traveling between them is deductible.
If your deductible trip is by taxi or public transportation, save a receipt if possible or make a notation of the expense in a logbook. Record the date, amount spent, destination, and business purpose. If you use your own car, note miles driven instead of the amount spent. Note also any tolls paid or parking fees and keep receipts.
You’ll need to allocate your automobile expenses between business and personal use based on miles driven during the year. Proper recordkeeping is crucial in the event the IRS challenges you.
Your deduction can be computed using:
From 2018 – 2025, employees, may not deduct unreimbursed local transportation costs. That’s because “miscellaneous itemized deductions” — a category that includes employee business expenses — are suspended (not allowed) for 2018 through 2025. However, self-employed taxpayers can deduct the expenses discussed in this article. But beginning with 2026, business expenses (including unreimbursed employee auto expenses) of employees are scheduled to be deductible again, as long as the employee’s total miscellaneous itemized deductions exceed 2% of adjusted gross income.
Contact us with any questions or to discuss the matter further.
IRS audit rates are historically low, according to a recent Government Accountability Office (GAO) report, but that’s little consolation if your return is among those selected to be examined. Plus, the IRS recently received additional funding in the Inflation Reduction Act to improve customer service, upgrade technology and increase audits of high-income taxpayers. But with proper preparation and planning, you should fare well.
From tax years 2010 to 2019, audit rates of individual tax returns decreased for all income levels, according to the GAO. On average, the audit rate for all returns decreased from 0.9% to 0.25%. IRS officials attribute this to reduced staffing as a result of decreased funding. Businesses, large corporations, and high-income individuals are more likely to be audited, but overall, all types of audits are being conducted less frequently than they were a decade ago.
There’s no 100% guarantee that you won’t be picked for an audit because some tax returns are chosen randomly. However, the best way to survive an IRS audit is to prepare in advance. On an ongoing basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items to be reported on your tax returns. Keep all records in one place.
It also helps to know what might catch the attention of the IRS. Certain types of tax-return entries are known to involve inaccuracies, so they may lead to an audit. Here are a few examples:
Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them — for example, auto and travel expense deductions. In addition, an owner-employee’s salary that’s much higher or lower than those at similar companies in his or her location may catch the IRS’s eye, especially if the business is structured as a corporation.
If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS doesn’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.
Many audits simply request that you mail in documentation to support certain deductions you’ve claimed. Only the strictest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited emails or text messages about an audit. The IRS doesn’t contact people in this manner. These are scams.)
The tax agency doesn’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. Collect and organize all relevant income and expense records. If anything is missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.
If you’re audited, our firm can help you:
The IRS normally has three years within which to conduct an audit, and an audit probably won’t begin until a year or more after you file a return. Don’t panic if the IRS contacts you. Many audits are routine. By taking a meticulous, proactive approach to tracking, documenting and filing your company’s tax-related information, you’ll make an audit less painful and even decrease the chances you’ll be chosen in the first place.
Does your business need real estate to conduct operations? Or does it otherwise hold property and put the title in the name of the business? You may want to rethink this approach. Any short-term benefits may be outweighed by the tax, liability, and estate planning advantages of separating real estate ownership from the business.
Businesses that are formed as C corporations treat real estate assets as they do equipment, inventory and other business assets. Any expenses related to owning the assets appear as ordinary expenses on their income statements and are generally tax deductible in the year they’re incurred.
However, when the business sells the real estate, the profits are taxed twice — at the corporate level and at the owner’s individual level when a distribution is made. Double taxation is avoidable, though. If ownership of the real estate were transferred to a pass-through entity instead, the profit upon sale would be taxed only at the individual level.
Separating your business ownership from its real estate also provides an effective way to protect it from creditors and other claimants. For example, if your business is sued and found liable, a plaintiff may go after all of its assets, including real estate held in its name. But plaintiffs can’t touch property owned by another entity.
The strategy also can pay off if your business is forced to file for bankruptcy. Creditors generally can’t recover real estate owned separately unless it’s been pledged as collateral for credit taken out by the business.
Separating real estate from a business may give you some estate planning options, too. For example, if the company is a family business but some members of the next generation aren’t interested in actively participating, separating property gives you an extra asset to distribute. You could bequest the business to one heir and the real estate to another family member who doesn’t work in the business.
The business simply transfers ownership of the real estate and the transferee leases it back to the company. Who should own the real estate? One option: The business owner could purchase the real estate from the business and hold title in his or her name. One concern is that it’s not only the property that’ll transfer to the owner, but also any liabilities related to it.
Moreover, any liability related to the property itself could inadvertently put the business at risk. If, for example, a client suffers an injury on the property and a lawsuit ensues, the property owner’s other assets (including the interest in the business) could be in jeopardy.
An alternative is to transfer the property to a separate legal entity formed to hold the title, typically a limited liability company (LLC) or limited liability partnership (LLP). With a pass-through structure, any expenses related to the real estate will flow through to your individual tax return and offset the rental income.
An LLC is more commonly used to transfer real estate. It’s simple to set up and requires only one member. LLPs require at least two partners and aren’t permitted in every state. Some states restrict them to certain types of businesses and impose other restrictions.
Separating the ownership of a business’s real estate isn’t always advisable. If it’s worthwhile, the right approach will depend on your individual circumstances. Contact us to help determine the best approach to minimize your transfer costs and capital gains taxes while maximizing other potential benefits.
The business entity you choose can affect your taxes, your personal liability, and other issues. A limited liability company (LLC) is somewhat of a hybrid entity in that it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide you with the best of both worlds.
Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) generally aren’t liable for business debts except to the extent of their investment. Thus, they can operate the business with the security of knowing that their personal assets are protected from the entity’s creditors. This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.
LLC owners can elect under the check-the-box rules to have the entity treated as a partnership for federal tax purposes. This can provide a number of important benefits to them. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they “flow through” to the owners, in proportion to the owners’ respective interests in profits, and are reported on the owners’ individual returns, and are taxed only once. To the extent the income passed through to you is qualified business income, you’ll be eligible to take the Section 199A pass-through deduction, subject to various limitations.
In addition, since you’re actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you (and your spouse, if you’re married) may have.
An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be an important reason for using an LLC over an S corporation (a form of business that provides tax treatment that’s similar to a partnership). Another reason for using an LLC over an S corporation is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued.
In summary, an LLC would give you corporate-like protection from creditors while providing you with the benefits of taxation as a partnership. Be aware that the LLC structure is allowed by state statute, and states may use different regulations. Contact us to discuss in more detail how use of an LLC might benefit you and the other owners.
A key provision of the American Rescue Plan Act passed in 2021 includes lowering the thresholds that trigger a Form 1099-K – Payment Card and Third-Party Network Transactions. This means businesses and individuals may receive this form for tax year 2022, something they may not have seen in previous years.
For tax years before January 1, 2022, third-party processors were required to file a Form 1099-K when sales-related transactions exceeded both $20,000 and 200 in number. Beginning in 2023, third-party processors, including Venmo, PayPal, Square, Zelle, and others, must use this form to report when sales-related transactions exceed $600, regardless of how many transactions are involved.
Organizations dealing with credit cards, cash, or checks most likely will not receive a Form 1099-K. However, if an organization uses third-party organizations, which includes many gig-economy jobs such as Uber and Lyft, or online retailers such as eBay and Etsy, there’s a chance they’ll see this form arrive with their tax documents for tax year 2022. Funds sent by friends and family are not included in the $600 threshold.
Businesses and individuals need to pay attention to how they manage their books and transactions from these payment types to make tax filing easier for the next tax season. Correctly logging any income received can help prevent unexpected tax bills in the future.
Form 1099-K is used to report the total amount of transactions received, and the form does not include calculations for credits, discounts, fees, and/or returns. Properly tracking income and debits will help business owners and individuals deduct these business costs come tax time.
If an individual receives Form 1099-K, it may help to file a Schedule C with their Form 1040. Our tax professionals can help identify if this is the best course of action and any additional benefits a Schedule C may offer.
With the new threshold, third-party settlement companies may increase the number of tax document issues, which may lead them to create new infrastructure to help with their reporting accuracy. As with any large change, there may be growing pains, which means potential errors on some of the forms issued.
Some of the expected errors include:
If you receive Form 1099-K and suspect an error, contact the Payment Settlement Entity (third-party settlement company) and request a corrected Form 1099-K. Keep a copy of the original and corrected forms and any communication with your tax documents.
There is no need to panic if you receive a Form 1099-K for the first time. Simply reach out to Hamilton Tharp for more help.
Do you own a successful small business with no employees and want to set up a retirement plan? Or do you want to upgrade from a SIMPLE IRA or Simplified Employee Pension (SEP) plan? Consider a solo 401(k) if you have healthy self-employment income and want to contribute substantial amounts to a retirement nest egg.
This strategy is geared toward self-employed individuals, including sole proprietors, owners of single-member limited liability companies, and other one-person businesses.
With a solo 401(k) plan, you can potentially make large annual deductible contributions to a retirement account.
For 2022, you can make an “elective deferral contribution” of up to $20,500 of your net self-employment (SE) income to a solo 401(k). The elective deferral contribution limit increases to $27,000 if you’ll be 50 or older as of December 31, 2022. The larger $27,000 figure includes an extra $6,500 catch-up contribution that’s allowed for these older owners.
On top of your elective deferral contribution, an additional contribution of up to 20% of your net SE income is permitted for solo 401(k)s. This is called an “employer contribution,” though there’s technically no employer when you’re self-employed. (The amount for employees is 25%.) For purposes of calculating the employer contribution, your net SE income isn’t reduced by your elective deferral contribution.
For the 2022 tax year, the combined elective deferral and employer contributions can’t exceed:
Net SE income equals the net profit shown on Form 1040 Schedule C, E or F for the business minus the deduction for 50% of self-employment tax attributable to the business.
Besides the ability to make large deductible contributions, another solo 401(k) advantage is that contributions are discretionary. If cash is tight, you can contribute a small amount or nothing.
In addition, you can borrow from your solo 401(k) account, assuming the plan document permits it. The maximum loan amount is 50% of the account balance or $50,000, whichever is less. Some other plan options, including SEPs, don’t allow loans.
The biggest downside to solo 401(k)s is their administrative complexity. Significant upfront paperwork and some ongoing administrative efforts are required, including adopting a written plan document and arranging how and when elective deferral contributions will be collected and paid into the owner’s account. Also, once your account balance exceeds $250,000, you must file Form 5500-EZ with the IRS annually.
If your business has one or more employees, you can’t have a solo 401(k). Instead, you must have a multi-participant 401(k) with all the resulting complications. The tax rules may require you to make contributions for those employees. However, there’s an important loophole: You can exclude employees who are under 21 and employees who haven’t worked at least 1,000 hours during any 12-month period from 401(k) plan coverage.
Bottom line: For a one-person business, a solo 401(k) can be a smart retirement plan choice if:
Before you establish a solo 401(k), weigh the pros and cons of other retirement plans — especially if you’re 50 or older. Solo 401(k)s aren’t simple, but they can allow you to make substantial and deductible contributions to a retirement nest egg. Contact us before signing up to determine what’s best for your situation.
The Inflation Reduction Act (IRA), signed into law by President Biden on August 16, contains many provisions related to climate, energy, and taxes. There has been a lot of media coverage about the law’s impact on large corporations. For example, the IRA contains a new 15% alternative minimum tax on large, profitable corporations. And the law adds a 1% excise tax on stock buybacks of more than $1 million by publicly traded U.S. corporations.
But there are also provisions that provide tax relief for small businesses. Here are two:
Under current law, qualified small businesses can elect to claim a portion of their research credit as a payroll tax credit against their employer Social Security tax liability rather than against their income tax liability. This became effective for tax years that begin after December 31, 2015.
Qualified small businesses that elect to claim the research credit as a payroll tax credit do so on IRS Form 8974, “Qualified Small Business Payroll Tax Credit for Increasing Research Activities.” Currently, a qualified small business can claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer’s share of Social Security tax.
The IRA makes changes to the credit beginning next year. It allows for qualified small businesses to apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit can’t exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward. This provision will take effect for tax years beginning after December 31, 2022.
A qualified small business must meet certain requirements, including having gross receipts under a certain amount.
Another provision in the new law extends the limit on excess business losses for noncorporate taxpayers. Under prior law, there was a cap set on business loss deductions by noncorporate taxpayers. For 2018 through 2025, the Tax Cuts and Jobs Act limited deductions for net business losses from sole proprietorships, partnerships, and S corporations to $250,000 ($500,000 for joint filers). Losses in excess of those amounts (which are adjusted annually for inflation) may be carried forward to future tax years under the net operating loss rules.
Although another law (the CARES Act) suspended the limit for 2018, 2019 and 2020 tax years, it’s now back in force and has been extended through 2028 by the IRA. Businesses with significant losses should consult with us to discuss the impact of this change on their tax planning strategies.
These are only two of the many provisions in the IRA. There may be other tax benefits to your small business if you’re buying electric vehicles or green energy products. Contact us if you have questions about the new law and your situation.
As you’re aware, certain employers are required to report information related to their employees’ health coverage. Does your business have to comply, and if so, what must be done?
Certain employers with 50 or more full-time employees (called “applicable large employers” or ALEs) must use Forms 1094-C and 1095-C to report the information about offers of health coverage and enrollment in health coverage for their employees. Specifically, an ALE uses Form 1094-C to report summary information for each employee and to transmit Forms 1095-C to the IRS. A separate Form 1095-C is used to report information about each employee. In addition, Forms 1094-C and 1095-C are used to determine whether an employer owes payments under the employer shared responsibility provisions (sometimes referred to as the “employer mandate”).
Under the mandate, an employer can be subject to a penalty if it doesn’t offer affordable minimum essential coverage that provides minimum value to substantially all full-time employees and their dependents. Form 1095-C is also used in determining eligibility of employees for premium tax credits.
On Form 1095-C, ALEs must report the following for each employee who was a full-time employee for any month of the calendar year:
If an ALE offers health coverage through an employer’s self-insured plan, the ALE also must report more information on Form 1095-C. For this purpose, a self-insured plan also includes one that offers some enrollment options as insured arrangements and other options as self-insured.
If an employer provides health coverage in another manner, such as through an insured health plan or a multiemployer health plan, the insurance issuer or the plan sponsor making the coverage available will provide the information about health coverage to enrolled employees. An employer that provides employer-sponsored self-insured health coverage but isn’t subject to the employer mandate isn’t required to file Forms 1094-C and 1095-C and reports instead on Forms 1094-B and 1095-B for employees who enrolled in the employer-sponsored self-insured health coverage.
On Form 1094-C, an employer can also indicate whether any certifications of eligibility for relief from the employer mandate apply.
Be aware that these reporting requirements may be more complex if your business is a member of an aggregated ALE group or if the coverage is provided through a multiemployer plan.
Note: Employers also report certain information about health coverage on employees’ W-2 forms. But it’s not the same information as what’s reported on 1095-C. The information on either form doesn’t cause excludable employer-provided coverage to become taxable to employees. It’s for informational purposes only.
The above is a simplified explanation of the reporting requirements. Contact us with questions or for assistance in complying with the requirements.
The House of Representatives passed The Inflation Reduction Act (IRA) Friday, August 12, and President Joe Biden signed into law August 16. The legislation, which is a pared-down version of the proposed Build Back Better plan, was passed through the budget reconciliation process and is expected to pay for itself and decrease the budget deficit.
Key provisions in the IRA include funding for clean energy tax credits, an infusion of funds to the Internal Revenue Service, changes to Medicare prescription drug policies, and new corporate taxes.
Read on to learn about how these provisions could impact your business.
Lawmakers built several new tax provisions into the IRA to fund programs the bill introduces, modifies, or extends. In conjunction with the IRS measures listed below, these taxes are expected to fully fund the program and decrease the budget deficit. The two main taxes are:
Currently, the research tax credit allows for up to $250,000 to be deducted against qualifying payroll taxes which do not include the Medicare portion of FICA taxes. The IRA expands this credit to a $500,000 limit that also includes Medicare payroll taxes.
This goes into effect for tax years beginning after December 31, 2022, and allows for unused credit amounts to be carried forward in certain circumstances.
Much of the funding for the IRA – about $370 billion – is dedicated to green or renewable energy tax deductions. Of that amount, $60 billion is earmarked for growing the renewable energy infrastructure within manufacturing targeted at solar panels and wind turbines.
The IRA also modifies and extends through 2024 tax credits for producing electricity from qualified renewable resources, investments in qualified energy properties, and using alternative fuels and fuel mixtures (including biodiesel and renewable diesel).
New tax credits will be available in the coming years for the production and/or sale of:
With the modifications, businesses that use energy-efficient commercial buildings may see additional tax deduction opportunities. The IRS introduces a new credit for commercial clean vehicles and modifies the refundable tax credit on plug-in electric vehicle purchases.
The IRA provides funds so the Environmental Protection Agency (EPA) can create a greenhouse gas reduction fund and support existing programs that provide financial incentives to reduce air pollution emissions. These include replacing eligible medium- and heavy-duty vehicles with zero emissions options, identifying and reducing emissions from diesel engines, and monitoring air pollution and greenhouse gases.
The IRA provides additional funding for the IRS to hire more customer service representatives, processors, and auditors to decrease the time it takes to process returns for each tax year, lessen the hold times for taxpayers calling in, and increase audits. Audits are expected to target larger businesses and individuals with higher incomes.
The Inflation Reduction Act is expansive and could affect many business tax strategies. We’ll keep you updated as new information comes to light. In the meantime, consider scheduling your annual tax strategy review with one of our tax professionals to discuss how the IRA could impact your business.
Beginning January 1, 2022, the IRS has updated its 1099-K regulations to require all businesses that process payments to file a 1099-K for all sellers with more than $600 in gross sales in a calendar year. The American Rescue Plan Act of 2021 requires that sales completed on all e-commerce platforms —including Ticketmaster, StubHub, etc. — are subject to reporting to the IRS as of 01/01/2022. This means that any seller or fan earning more than $600 annually as a result of a sale, or sales, through any U.S. marketplace is required to complete a 1099 form.
In order to generate a complete Form 1099-K as required by state and federal tax laws, many of these sites will need your Taxpayer Identification Number (TIN). Your TIN is typically either your Social Security Number (SSN) or Employer Identification Number (EIN) for businesses.
If you meet these reporting requirements, you will receive a 1099-K at the beginning of each year. The same information will be sent to the IRS and state tax agencies where applicable. Be sure to keep track of the expenses as well, since these can be used to offset the income of the 1099-K.
For more information, please visit: https://www.irs.gov/businesses/understanding-your-form-1099-k
These days, most businesses have websites. But surprisingly, the IRS hasn’t issued formal guidance on when website costs can be deducted.
Fortunately, established rules that generally apply to the deductibility of business costs provide business taxpayers launching a website with some guidance as to the proper treatment of the costs. Plus, businesses can turn to IRS guidance that applies to software costs.
Hardware versus software
Let’s start with the hardware you may need to operate a website. The costs fall under the standard rules for depreciable equipment. Specifically, once these assets are operating, you can deduct 100% of the cost in the first year they’re placed in service (before 2023). This favorable treatment is allowed under the 100% first-year bonus depreciation break. Note: The bonus depreciation rate will begin to be phased down for property placed in service after calendar year 2022.
In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.
For tax years beginning in 2022, the maximum Sec. 179 deduction is $1.08 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount ($2.7 million for 2022) of qualified property is placed in service during the year.
There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).
Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.
Software developed internally
If, instead of being purchased, the website is designed in-house by the taxpayer launching the website (or designed by a contractor who isn’t at risk if the software doesn’t perform), for tax years beginning before calendar year 2022, bonus depreciation applies to the extent described above. If bonus depreciation doesn’t apply, the taxpayer can either:
For tax years beginning after calendar year 2021, generally, the only allowable treatment will be to amortize the costs over the five-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred.
If your website is primarily for advertising, you can currently deduct internal website software development costs as ordinary and necessary business expenses.
Paying a third party
Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.
Before business begins
Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences.
We can help
We can determine the appropriate treatment of website costs. Contact us if you want more information.
With inflation rates reaching historical highs and driving up the cost of doing business, business owners are seeking out creative ways to fight inflation. The Series I Savings Bond is one tool that’s been getting some buzz.
Also known as I Bonds, these low-risk savings products depend on higher inflation to produce better returns. The higher the inflation rate, the more interest you earn, rendering the investment inflation-proof.
And they’re not just available to individuals. Business owners can buy I Bonds for multiple entities, including corporations and partnerships.
There are rules specific to I Bonds, and there are more tax considerations for businesses than for individuals. To take full advantage of I Bonds, business owners must know the compliance and reporting rules.
How I Bonds work
A Series I Savings Bond is a security that earns interest based on both a fixed rate and a variable rate based on inflation. The fixed rate will remain for the life of the bond, whereas the variable changes every six months based on inflation levels measured in the U.S. Consumer Price Index.
I Bonds will earn interest for up to 30 years if they aren’t cashed out before then.
I Bonds vs. inflation
One of the advantages of I Bonds is they shield money from inflation. Based on current rates, the returns on an I bond are slightly outpacing the rate of inflation.
The U.S. inflation rate reached 9.1% in June, a 40-year high for the cost of the nation’s goods and services. By comparison, the current interest rate on new Series I savings bonds is 9.62% where it will remain through October 2022.
It’s worth noting this rate applies to the six months after the bond is purchased. So even if you buy an I Bond in October 2022, the bond will earn 9.62% interest for the next six months.
When leveraged and reported appropriately, I Bonds can generate respectable returns.
How to Buy I Bonds
While individuals can purchase I bonds electronically and in paper form (up to $5,000 each year by using their federal income tax refund), businesses, including corporations, partnerships, and other entities, can only do so in electronic form.
To purchase I bonds electronically, buyers must set up an account on TreasuryDirect, the federal government’s clearinghouse for purchasing and cashing in U.S. savings bonds, where they can purchase up to $10,000 in electronic bonds each year. However, if you own multiple business entities, each one can buy up to the $10,000 maximum, as long as the money is in a separate account for each business.
If you’re buying both personal and business I Bonds, keep them in separate accounts and avoid transferring funds from one account to another if you have purchased the annual maximum for both.
Series I Bonds are not subject to state or local taxes, but federal taxes are required on any interest you earn. You can choose between one of two methods to pay these taxes:
Any interest you earn on an I bond must be reported on Schedule B of Form 1040.
There are considerable differences when it comes to tax breaks for individuals and businesses:
The minimum term of ownership for an I Bond is one year. If you redeem your bond before the five-year mark, you will forfeit the interest from the previous three months. There is no interest penalty after that point.
I Bond compliance and reporting can get complicated, especially when managing a business in a challenging financial climate. If you need help navigating the savings bond landscape, our team of professionals can help you take full advantage of this investment vehicle.
Sometimes, bigger isn’t better: Your small- or medium-sized business may be eligible for some tax breaks that aren’t available to larger businesses. Here are some examples.
For 2018 through 2025, the qualified business income (QBI) deduction is available to eligible individuals, trusts, and estates. But it’s not available to C corporations or their shareholders.
The QBI deduction can be up to 20% of:
Pass-through business entities report tax items to their owners, who then take them into account on their owner-level returns. The QBI deduction rules are complicated, and the deduction can be phased out at higher income levels.
Eligibility for cash-method accounting
Businesses that are eligible to use the cash method of accounting for tax purposes have the ability to fine-tune annual taxable income. This is accomplished by timing the year in which you recognize taxable income and claim deductions.
Under the cash method, you generally don’t have to recognize taxable income until you’re paid in cash. And you can generally write off deductible expenses when you pay them in cash or with a credit card.
Only “small” businesses are potentially eligible for the cash method. For this purpose under current law, a small business includes one that has no more than $25 million of average annual gross receipts, based on the preceding three tax years. This limit is adjusted annually for inflation. For tax years beginning in 2022, the limit is $27 million.
Section 179 deduction
The Sec. 179 first-year depreciation deduction potentially allows you to write off some (or all) of your qualified asset additions in the first year they’re placed in service. It’s available for both new and used property.
For qualified property placed in service in tax years 2018 and beyond, the deduction rules are much more favorable than under prior law. Enhancements include:
Higher deduction. The Sec. 179 deduction has been permanently increased to $1 million with annual inflation adjustments. For qualified assets placed in service in 2022, the maximum is $1.08 million.
Liberalized phase-out. The threshold above which the maximum Sec. 179 deduction begins to be phased out is $2.5 million with annual inflation adjustments. For qualified assets placed in service in 2022, the phase-out begins at $2.7 million.
The phase-out rule kicks in only if your additions of assets that are eligible for the deduction for the year exceed the threshold for that year. If they exceed the threshold, your maximum deduction is reduced dollar-for-dollar by the excess. Sec. 179 deductions are also subject to other limitations.
While Sec. 179 deductions may be limited, those limitations don’t apply to first-year bonus depreciation deductions. For qualified assets placed in service in 2022, 100% first-year bonus depreciation is available. After this year, the first-year bonus depreciation percentages are scheduled to start going down to 80% for qualified assets placed in service in 2023. They will continue to be reduced until they reach 0% for 2028 and later years.
Contact us to determine if you’re taking advantage of all available tax breaks, including those that are available to small and large businesses alike.
A business or individual might be able to dispose of appreciated real property without being taxed on the gain by exchanging it rather than selling it. You can defer tax on your gain through a “like-kind” or Section 1031 exchange.
A like-kind exchange is a swap of real property held for investment or for productive use in your trade or business for like-kind investment real property or business real property. For these purposes, “like-kind” is very broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale. If you’re unsure whether the property involved in your exchange is eligible for a like-kind exchange, contact us to discuss the matter.
Here’s how the tax rules work
If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still have to report the exchange on a form that is attached to your tax return.
However, the properties often aren’t equal in value, so some cash or other (non-like-kind) property is thrown into the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property you gave up reduced by the amount of boot you received but increased by the amount of any gain recognized.
Here’s an example
Let’s say you exchange land (investment property) with a basis of $100,000 for a building (investment property) valued at $120,000 plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain: the amount of cash (boot) you received. Your basis in the new building (the replacement property) will be $100,000, which is your original basis in the relinquished property you gave up ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.
Note: No matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.
If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The theory is that if someone takes over your debt, it’s equivalent to him or her giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).
Like-kind exchanges can be complex, but they’re a good tax-deferred way to dispose of investment or trade or business assets. We can answer any additional questions you have or assist with the transaction.
Sadly, many businesses have been forced to shut down recently due to the pandemic and the economy. If this is your situation, we can assist you, including taking care of the various tax responsibilities that must be met.
Of course, a business must file a final income tax return and some other related forms for the year it closes its doors. The type of return to be filed depends on the type of business you have. Here’s a rundown of the basic requirements.
Sole proprietorships. You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year you close the business. You may also need to report self-employment tax.
Partnerships. A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.”
All corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.
C corporations. File Form 1120, “U.S. Corporation Income Tax Return,” for the year you close. Report capital gains and losses on Schedule D. Indicate this is the final return.
S corporations. File Form 1120-S, “U.S. Income Tax Return for an S Corporation,” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.
All businesses. Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.
Employees and contract workers
If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security, and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.
If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”
Other tax issues
If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing, and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees.
We can assist you with many other complicated tax issues related to closing your business, including debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.
We can advise you on the length of time you need to keep business records. You also must cancel your Employer Identification Number (EIN) and close your IRS business account.
If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these issues and get answers to any questions.
Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Creating a budget is a crucial task for any business. It helps owners, executives, and managers estimate revenues and expenses, set goals, and closely monitor costs throughout the year.
Of course, budgets are just that — estimates. The final amounts for revenues and expenses at the end of the month, quarter, or year will almost certainly differ from budget projections. Those differences are called variances and analyzing those variances can give leaders a deeper understanding of a company’s financial well-being.
What is variance analysis?
Variance analysis investigates the differences between budgeted and actual results.
For example, if you budget for $1 million in sales and actual sales are $800,000, your variance is $200,000. Comparing your budget to actual results is a helpful first step but investigating the reason for the difference is essential.
These factors and others can contribute to variances, so taking the time to understand why fluctuations occur can help management know what they need to do to change the situation.
What causes budget variances?
Variances can occur for various reasons. Some of the most common include:
How is a variance analysis created?
Modern accounting software makes creating a variance analysis relatively straightforward. Most solutions include a budget-to-actual report that compares actual results to the budget and finds the difference between the two values as a number and a percentage.
You can then export this report to an Excel or Google spreadsheet, adding a column for explanations for any budget deviations.
The following best practices can make this process more manageable.
How often should you prepare variance reports?
The cadence with which you prepare variance reports will depend on the size of your company and management needs. A small business might only go through the process quarterly or annually.
On the other hand, a larger company or one that is experiencing rapid growth might perform the analysis every month.
At a minimum, you should review your budget to actual numbers every month, looking for unexpected discrepancies. This high-level review can help you quickly spot errors or identify trends so you can take action to keep the business on track.
Do you need help analyzing or setting up your variance reports? Give our team a call today to set up a strategy!
Unless you specialize in tax law, you’re probably not an accounting expert, but understanding accounting basics can help lawyers ensure their legal practice complies with ethics rules and accounting regulations.
Unlike other business owners, lawyers need to be familiar with two types of accounting: business and legal. While there is overlap between the two, there are differences, especially when handling client funds.
Differences between business and legal accounting
Business accounting is what law firms have in common with other businesses and includes expenses of running the law practice such as overhead, payroll, office rent, assets, liabilities, and equity.
Legal accounting is specific to law firms. It encompasses matter cost and income accounting — client costs, reimbursements, and fee income — as well as fee advances and retainer accounting.
Properly tracking the posting and reimbursement of matter costs is essential to ensure the firm’s accounting records are compliant. Law firms typically have two types of matter costs:
In accounting terms, any retainers received are liabilities — funds that haven’t yet been earned and still belong to someone else (the client).
Trust accounts are bank accounts set up specifically to hold client retainers.
General tips for accurate legal accounting
Consult with an Expert
Well-prepared and organized financial data not only helps with compliance but also offers critical insights into the operations of a law firm. Accountants can help law firms lay the foundation and establish best practices allowing firm leaders to focus on growing the firm.
Give our team a call if you need help ensuring you meet all of the regulatory requirements for your firm’s financial situation, including:
After the U.S. Supreme Court’s 2017 decision in South Dakota vs. Wayfair, many states quickly enacted laws resembling South Dakota’s to collect sales tax on remote purchases.
While physical nexus remains the first consideration in whether businesses are legally bound to collect and remit sales taxes on online sales, most states have adopted “economic nexus” rules, stating a business’ tax obligations kick in after it crosses a set level of sales in terms of quantity, dollar amounts, or both.
Receiving an audit notice from a state tax authority is one of the worst feelings a small business can have. Unfortunately, as states pursue tax collection, sales and use tax audits have become a standard part of doing business.
If your business is undergoing a sales tax audit or is worried about dealing with one in the future, here are four tips to navigate, prepare for, and avoid a sales tax audit.
How to reduce the risk of a sales tax audit
Several factors can trigger a sales tax audit. Many states use systematic methods and data analytics to identify businesses at risk for underreporting or underpaying their sales taxes. According to Thomson Reuters, some of the most common triggers for a sales tax audit include:
Your business also might be randomly selected for audit, so there’s no sure-fire way to avoid facing a sales tax audit. However, familiarizing yourself with the sales and use tax laws in the states where you do business, analyzing your nexus exposure, and registering and paying taxes in the proper jurisdictions is a good first step.
How to prepare for a sales tax audit
Time is of the essence once you receive notice you’ve been selected for an audit. Gathering and preparing the appropriate records takes time, so you want to start the process immediately.
Documents requested in the IDR typically include:
If any requested items aren’t available or you don’t believe they apply to the audit, be prepared to explain your reasons for not providing them.
In addition to looking for potential underpayments, look for overpayments, such as using a higher sales tax rate or charging tax on non-taxable items. These can potentially offset any underpayments uncovered during the audit.
Being under the microscope of a sales tax audit is stressful and can take up a lot of time. A professional who is well versed in sales and use taxes and knows how to deal with auditors can be an invaluable member of your team. By crafting a game plan for the audit and managing auditor expectations, they can potentially save your business thousands of dollars in taxes and penalties.
These professionals typically know how to answer the auditor’s questions truthfully without volunteering extra information that can invite additional scrutiny.
Have you received notice that you’re a target for a sale tax audit, or are you worried you may be on the radar? Contact us today to help you prepare for and navigate the process!
There’s a valuable tax deduction available to a C corporation when it receives dividends. The “dividends-received deduction” is designed to reduce or eliminate an extra level of tax on dividends received by a corporation. As a result, a corporation will typically be taxed at a lower rate on dividends than on capital gains.
Ordinarily, the deduction is 50% of the dividend, with the result that only 50% of the dividend received is effectively subject to tax. For example, if your corporation receives a $1,000 dividend, it includes $1,000 in income, but after the $500 dividends-received deduction, its taxable income from the dividend is only $500.
The deductible percentage of a dividend will increase to 65% of the dividend if your corporation owns 20% or more (by vote and value) of the payor’s stock. If the payor is a member of an affiliated group (based on an 80% ownership test), dividends from another group member are 100% deductible. (If one or more members of the group is subject to foreign taxes, a special rule requiring consistency of the treatment of foreign taxes applies.) In applying the 20% and 80% ownership percentages, preferred stock isn’t counted if it’s limited and preferred as to dividends, doesn’t participate in corporate growth to a significant extent, isn’t convertible, and has limited redemption and liquidation rights.
If a dividend on stock that hasn’t been held for more than two years is an “extraordinary dividend,” the basis of the stock on which the dividend is paid is reduced by the amount that effectively goes untaxed because of the dividends-received deduction. If the reduction exceeds the basis of the stock, gain is recognized. (A dividend paid on common stock will be an extraordinary dividend if it exceeds 10% of the stock’s basis, treating dividends with ex-dividend dates within the same 85-day period as one.)
Holding period requirement
The dividends-received deduction is only available if the recipient satisfies a minimum holding period requirement. In general, this requires the recipient to own the stock for at least 46 days during the 91-day period beginning 45 days before the ex-dividend date. For dividends on preferred stock attributable to a period of more than 366 days, the required holding period is extended to 91 days during the 181-day period beginning 90 days before the ex-dividend date. Under certain circumstances, periods during which the taxpayer has hedged its risk of loss on the stock are not counted.
Taxable income limitation
The dividends-received deduction is limited to a certain percentage of income. If your corporation owns less than 20% of the paying corporation, the deduction is limited to 50% of your corporation’s taxable income (modified to exclude certain items). However, if allowing the full (50%) dividends-received deduction without the taxable income limitation would result in (or increase) a net operating loss deduction for the year, the limitation doesn’t apply.
Let’s say your corporation receives $50,000 in dividends from a less-than-20% owned corporation and has a $10,000 loss from its regular operations. If there were no loss, the dividends-received deduction would be $25,000 (50% of $50,000). However, since taxable income used in computing the dividends-received deduction is $40,000, the deduction is limited to $20,000 (50% of $40,000).
Other rules apply if the dividend payor is a foreign corporation. Contact us if you’d like to discuss how to take advantage of this deduction.
Technology has long made accounting easier, from the first adding machines to electronic spreadsheets to today’s cloud computing ecosystem. While recent advancements have allowed business owners and their accountants to collaborate efficiently from any location, they also created a growing cybersecurity risk that cyber insurance can help manage.
Cyberattacks Threaten All Organizations
According to a 2022 survey commissioned by CyberCatch, 75% of small and medium-sized businesses (SMBs) could only survive three to seven days if they suffered a cyberattack.
Big businesses are frequent targets, and their security breaches tend to make headlines. But smaller businesses are easier prey for cybercriminals because they lack the complicated security infrastructure that larger businesses maintain.
The cost of a data breach can be devastating for small businesses. A data breach costs SMBs, on average, $101,000, according to Kaspersky’s IT Security Economics Report for 2020. That cost includes detecting and shutting down the attack, recovering lost data, notifying third parties, legal expenses related to the breach, and lost business.
Cloud accounting is more secure than having all your business’ accounting data on a desktop or device because providers typically deploy top-of-the-line security features. However, any system — cloud or otherwise — is only as strong as its weakest link. It only takes one user falling victim to a social engineering attack, using a weak password, or opening a malware-inflected attachment to give cybercriminals access to your payroll records, vendor and customer lists, bank account numbers, and more.
Manage the Risk with Cyber Insurance
Cyber insurance has become an increasingly important risk management tool for businesses. This insurance policy provides businesses with various coverage options to help recover from data breaches and other security issues.
While the exact coverages vary from policy to policy, cyber insurance typically covers two broad categories of losses:
Like any insurance policy, cyber insurance policies have exclusions. Typical cyber policy exclusions include lost future profits, the lost value related to intellectual property theft, and the cost of upgrading security after a data breach.
How to Buy Cyber Insurance
Most major commercial insurance carriers offer cyber insurance coverage, so reach out to your agent or broker to get a quote. But keep in mind while cyber insurance is increasingly essential coverage for most small businesses, it can also be difficult — and expensive — to buy. According to Marsh, a New York City-based insurance broker, and advisor, cyber insurance premiums in the U.S. increased by an average of 96% from 2020 to 2021.
Following a few IT security best practices can reduce your risk and improve your chances of getting coverage at an affordable price. Those best practices include:
As technology evolves, so will your exposure to various types of cyber-risks. While cyber insurance coverage can be a critical part of managing those risks, it doesn’t replace security best practices. Take the necessary steps to protect your business to a better chance of minimizing your exposure.
The Internal Revenue Service will raise the optional standard mileage rate for the final six months of 2022 to help offset the rise in gas prices nationwide.
The new rates to calculate the deductible costs of operating an automobile for business and certain other purposes become effective July 1, 2022, and will remain in place through January 1, 2023. Those revised rates are:
Taxpayers should use the following rates for any miles traveled between January 1, 2022, and June 30, 2022:
The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute.
The IRS, which last made such an increase in 2011, noted it considered depreciation, insurance, and other fixed and variable costs in addition to the rising gas prices when raising the rates mid-year.
Businesses can use the standard mileage rate to calculate the deductible costs of operating qualified automobiles for business, charitable, medical, or moving purposes.
Important reminders and considerations
When reimbursing employees for miles driven, keep in mind the following reminders and considerations:
To review your organization’s mileage reimbursement policy and any alternate methods for calculating appropriate reimbursement amounts, reach out to our team of knowledgeable professionals today.
Here’s an interesting option if your small company or start-up business is planning to claim the research tax credit. Subject to limits, you can elect to apply all or some of any research tax credits that you earn against your payroll taxes instead of your income tax. This payroll tax election may influence some businesses to undertake or increase their research activities. On the other hand, if you’re engaged in or are planning to engage in research activities without regard to tax consequences, be aware that some tax relief could be in your future.
Here are some answers to questions about the option.
Why is the election important?
Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Therefore, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, a wage-paying business, even a new one, has payroll tax liabilities. The payroll tax election is thus an opportunity to get immediate use out of the research credits that a business earns. Because every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that’s a big help in the start-up phase of a business — the time when help is most needed.
Which businesses are eligible?
To qualify for the election a taxpayer:
In making these determinations, the only gross receipts that an individual taxpayer takes into account are from his or her businesses. An individual’s salary, investment income or other income aren’t taken into account. Also, note that neither an entity nor an individual can make the election for more than six years in a row.
Are there limits on the election?
Research credits for which a taxpayer makes the payroll tax election can be applied only against the employer’s old-age, survivors, and disability liability — the OASDI or Social Security portion of FICA taxes. So the election can’t be used to lower 1) the employer’s liability for the Medicare portion of FICA taxes or 2) any FICA taxes that the employer withholds and remits to the government on behalf of employees.
The amount of research credit for which the election can be made can’t annually exceed $250,000. Note too that an individual or C corporation can make the election only for those research credits which, in the absence of an election, would have to be carried forward. In other words, a C corporation can’t make the election for research credits that the taxpayer can use to reduce current or past income tax liabilities.
The above Q&As just cover the basics about the payroll tax election. And, as you may have already experienced, identifying and substantiating expenses eligible for the research credit itself is a complex area. Contact us for more information about the payroll tax election and the research credit.
Business travel is back.
COVID restrictions have eased, and in-person conferences are back on the calendar. And as more people return to offices, companies are warming to sending their employees on work trips.
For many businesses, it’s been a minute since they’ve had to account for employee travel expenses. So it might be time for a refresher on which expenses are tax-deductible, which aren’t, and what pandemic-related tax incentives are available.
When is it business travel?
A trip is considered business travel when you travel outside what’s known as your “tax home.” The location of your tax home is the city or area of your primary place of business, regardless of where you live. For expenses to count as deductible travel costs, they have to be incurred away from your tax home for longer than a typical workday — but no longer than one year. Anything considered an “ordinary and necessary expense” of doing business would qualify.
As long as the expenses are business-related, most, if not all, expenses from a typical work trip can receive a tax deduction. So what is deductible?
Business Meals, Beverages
Perhaps the most significant change for business travel is a temporary tax incentive to encourage restaurant spending during the pandemic. Through the end of 2022, food and beverages from restaurants are 100% tax-deductible versus the usual 50% deduction for businesses. The 100% deduction applies to any restaurant meals and drinks purchased after December 31, 2020, and before January 1, 2023.
The IRS defines a restaurant as “a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” The deduction includes:
Non-restaurant meals are still eligible for a 50% deduction, but the 100% deduction excludes prepackaged food and drinks from:
That means if you want to purchase a salad to go, buying it from a restaurant would get you a 100% deduction while buying it from a grocery store is only eligible for a 50% deduction.
Other rules for food and beverage deductions include:
Travel and Transportation
You can deduct 100% of the cost of any travel by airplane, train, bus, or car between your home and business destination. That includes car rental expenses. Also deductible is parking fees, tolls, and fares for taxis, shuttles, ferry rides, and other modes of transportation.
Hotels and Lodging
Hotel stays are tax-deductible, as are tips and fees for hotel staff and baggage carriers. Depending on how you schedule your trip, you may even be able to deduct lodging costs for non-workdays.
You can write off costs for shipping baggage or any materials related to business operations.
Business Calls, Communication
Fees for calls, texts, or Wi-Fi usage during business travel are deductible.
Dry Cleaning, Laundry
Costs to launder work clothes on a business trip get a tax break.
Tips for services related to any of these expenses also qualify.
Gifts of up to $25
Gifts for clients or other business associates are included, although you can deduct no more than $25 per gift recipient. So if two clients each receive a $60 fruit basket, for a total of $120 spent on gifts, the company can write off $50 of the expense.
What Isn’t Deductible?
To make the most of your tax deductions, collect receipts and keep detailed records of all travel expenses. Set a standard meal allowance for traveling employees and write off that amount to make meal tracking easier.
Managing business travel expenses and calculating deductions requires attention to detail, and businesses may be out of practice after two years with little to no travel. If you need help figuring out business travel deductions, our team of professionals can assist your business in getting back on track — and ready for takeoff.
The next quarterly estimated tax payment deadline is June 15 for individuals and businesses so it’s a good time to review the rules for computing corporate federal estimated payments. You want your business to pay the minimum amount of estimated taxes without triggering the penalty for underpayment of estimated tax.
The required installment of estimated tax that a corporation must pay to avoid a penalty is the lowest amount determined under each of the following four methods:
Under the current year method, a corporation can avoid the estimated tax underpayment penalty by paying 25% of the tax shown on the current tax year’s return (or, if no return is filed, 25% of the tax for the current year) by each of four installment due dates. The due dates are generally April 15, June 15, September 15, and January 15 of the following year.
Under the preceding year method, a corporation can avoid the estimated tax underpayment penalty by paying 25% of the tax shown on the return for the preceding tax year by each of four installment due dates. (Note, however, that for 2022, certain corporations can only use the preceding year method to determine their first required installment payment. This restriction is placed on a corporation with taxable income of $1 million or more in any of the last three tax years.) In addition, this method isn’t available to corporations with a tax return that was for less than 12 months or a corporation that didn’t file a preceding tax year return that showed some tax liability.
Under the annualized income method, a corporation can avoid the estimated tax underpayment penalty if it pays its “annualized tax” in quarterly installments. The annualized tax is computed on the basis of the corporation’s taxable income for the months in the tax year ending before the due date of the installment and assuming income will be received at the same rate over the full year.
Under the seasonal income method, corporations with recurring seasonal patterns of taxable income can annualize income by assuming income earned in the current year is earned in the same pattern as in preceding years. There’s a somewhat complicated mathematical test that corporations must pass in order to establish that their income is earned seasonally and that they therefore qualify to use this method. If you think your corporation might qualify for this method, don’t hesitate to ask for our assistance in determining if it does.
Also, note that a corporation can switch among the four methods during a given tax year.
We can examine whether your corporation’s estimated tax bill can be reduced. Contact us if you’d like to discuss this matter further.
Are you a partner in a business? You may have come across a situation that’s puzzling. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner.
Why does this happen? It’s due to the way partnerships and partners are taxed. Unlike C corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent a partner from currently using his or her share of a partnership’s loss to offset other income.)
Pass through your share
While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions, and credits. This makes it possible to pass through to partners their share of these items.
An information return must be filed by a partnership. On Schedule K of Form 1065, the partnership separately identifies income, deductions, credits, and other items. This is so that each partner can properly treat items that are subject to limits or other rules that could affect their correct treatment at the partner’s level. Examples of such items include capital gains and losses, interest expense on investment debts, and charitable contributions. Each partner gets a Schedule K-1 showing his or her share of partnership items.
Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his or her partnership interest (the determination of which varies depending on how the interest was acquired) is increased by his or her share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners just reduce their basis by the amount of the distribution. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain, which often is a capital gain.
Two people each contribute $10,000 to form a partnership. The partnership has $80,000 of taxable income in the first year, during which it makes no cash distributions to the two partners. Each of them reports $40,000 of taxable income from the partnership as shown on their K-1s. Each has a starting basis of $10,000, which is increased by $40,000 to $50,000. In the second year, the partnership breaks even (has zero taxable income) and distributes $40,000 to each of the two partners. The cash distributed to them is received tax-free. Each of them, however, must reduce the basis in his or her partnership interest from $50,000 to $10,000.
More rules and limits
The example and details above are an overview and, therefore, don’t cover all the rules. For example, many other events require basis adjustments and there are a host of special rules covering noncash distributions, distributions of securities, liquidating distributions, and other matters. Contact us if you’d like to discuss how a partner is taxed.
The State of California now requires businesses with ﬁve or more employees to either offer an employee retirement plan or participate in the CalSavers Retirement Savings Program by June 30, 2022. CalSavers is a state-based payroll withholding savings program using Roth (post-tax) individual retirement accounts. All employers with ﬁve or more employees must either register with CalSavers or offer a qualifying retirement plan.
The CalSavers program has been rolled out in phases, and the state is already issuing penalty notices to businesses that missed the earlier deadlines or failed to allow eligible employees to participate in the retirement savings program. The penalties are significant:
Eligible employers must register with the program via the program website (employer.CalSavers.com) or by calling 855-650-6916.
Employers have the following options:
We can work with you to determine the best retirement solutions to fit your needs. Please contact us at 858.481.7702 for further assistance.
California enacted Assembly Bill 150 (“AB 150”) in late 2021 as a method for deducting state and local taxes in excess of federal deduction limitations. AB 150 allowed passthrough entities (“PTEs”) to have the tax imposed and paid at the entity level rather than at the individual level, which permitted PTE owners to bypass the deduction limitation. For those owners who have elected to participate in this program, PTEs pay the tax on the qualified net income and their owners receive a corresponding credit against the state income tax liability related to their PTE income. Any unused credit at the owner level may be carried forward for up to five years.
Governor Newsom signed Senate Bill 113 (“SB 113”) on February 9, 2022, which modified and expanded the passthrough entity elective tax benefits previously established under AB 150. The goal of SB 113 was to add clarity and conformity to the state’s original objectives for establishing the PTE credit.
The PTE election is made annually on the original filed return, including extensions. For tax years 2022 through 2025, the first PTE installment payment is due June 15th of each year, and is equal to the greater of:
The second PTE elective tax installment is due by the entity’s tax return due date (without extensions), which for most partnerships, LLCs, and S corps will be March 15, 2023.
If a payment is not made by June 15th, the election may not be made and the pass-through entity and owners may not participate in the program for that corresponding tax year.
There are many unanswered questions surrounding the PTE program. For example, since many 2021 returns will not be filed by June 15th, taxpayers may not know what 50% of the 2021 tax will actually be. If a good faith estimate is paid on June 15 but ends up being short of the 50% when the 2021 return is filed, the 2022 PTE election is invalid.
Hamilton Tharp is recommending that taxpayers add more funds to ensure that they do not underpay the tax. If the PTE did not participate in the program for 2021, but the owners of the PTE are fairly certain they will want to participate in the PTE program for 2022, we are recommending the payment be made with all available financial information or the $1,000.
If you have any questions, please contact us. In most cases, if you or your firm qualify to participate in this program, we have already reached out and discussed the payments.
The IRS has begun mailing notices to businesses, financial institutions, and other payers that filed certain returns with information that doesn’t match the agency’s records.
These CP2100 and CP2100A notices are sent by the IRS twice a year to payers who filed information returns that are missing a Taxpayer Identification Number (TIN), have an incorrect name, or have a combination of both.
Each notice has a list of persons who received payments from the business with identified TIN issues.
If you receive one of these notices, you need to compare the accounts listed on the notice with your records and correct or update your records, if necessary. This can also include correcting backup withholding on payments made to payees.
Which returns are involved?
Businesses, financial institutions, and other payers are required to file with the IRS various information returns reporting certain payments they make to independent contractors, customers, and others. These information returns include:
Do you have backup withholding responsibilities?
The CP2100 and CP2100A notices also inform recipients that they’re responsible for backup withholding. Payments reported on the information returns listed above are subject to backup withholding if:
Do you have to report payments to independent contractors?
By January first of the following year, payers must complete Form 1099-NEC, “Nonemployee Compensation,” to report certain payments made to recipients. If the following four conditions are met, you must generally report payments as nonemployee compensation:
Contact us if you receive a CP2100 or CP2100A notice from the IRS or if you have questions about filing Form 1099-NEC. We can help you stay in compliance with all rules.
As a business owner, your company’s financial statements play a significant role in monitoring your company’s performance and financial standing. However, the information presented in financial statements is susceptible to distortion when certain economic factors come into play — notably inflation.
The cumulative impact of a global pandemic, labor shortages, and supply chain disruptions have merged to create the highest inflation rates the United States has seen this century. In fact, the Consumer Price Index (CPI) rose 7.9% between February 2021 and February 2022, representing the most significant annualized growth in CPI inflation since 1982.
While the tangible effects of inflation vary by company and industry, the national and global implications are widespread and generally impact at least some aspects of every business. Even if the obvious effects feel minimal, it’s essential to understand inflation often trickles down to affect the most basic accounting and financial reporting information.
Here are some common ways inflation can affect financial statements and paint a misleading picture of your business.
Inflation can most heavily affect companies’ reported profits with considerable inventories when it comes to financial reporting. Imagine, for example; a widget company reported $100,000 in sales last year with $75,000 in cost of goods sold and a gross profit of $25,000. Since widgets do not expire, the company keeps and sells unsold inventory year after year.
The company sells the same number of widgets the following year, but because of a rising inflation rate, it decides to raise its prices by 5% to offset a 5% increase in its costs of goods. Half of its sales this year were taken from the prior year’s inventory, and the other half comprised the new inventory carrying the 5% production increase.
Because of its 5% increase in both cost of goods sold and widget sales price, the company reports $105,000 in sales and $76,875 in cost of goods sold, totaling $3,750 in gross profits. When you factor in half of the previous year’s inventory, the company still reports an increase of $1,875 in gross profits (because of selling last year’s inventory) even though it sold the same number of widgets as the previous year.
This is called “inflation profit,” meaning the increased profit results from inflation rather than an actual improvement in business performance.
For businesses looking to impress investors or potential purchasers, this is just one example of how inflation could distort financial planning efforts if not properly recognized and considered.
Supply Chain Disruptions
Many businesses rely on a complex network of supply chains to manufacture and deliver goods. These systems become particularly volatile when one or more parts of that supply chain begin raising prices because of factors such as labor shortages, freight costs, increased employee wages, and material costs.
When companies have existing long-term revenue contracts with customers, it may be difficult (or even impossible) to break those contracts and raise prices enough to offset any increase in production costs.
Therefore, companies should consider the monthly implications caused by reduced or negative profitability and the period in which to record the loss, if applicable. Business owners should also be conscientious of the repercussions lost contracts and unstable profits may have on monthly planning and forecasting.
Despite its increased prevalence this past year, inflation always impacts reporting and accounting. Although generally accepted accounting principles (GAAP) largely combat the most glaring discrepancies among financial statements, some variations may still occur based on how your particular business accounts for inflation.
Contact our team today if you need help accommodating inflation into your financial statement preparation, reporting, and analysis.
As U.S. companies struggle to recruit, hire, and retain talent, more businesses are turning to independent contractors instead of full-time employees. But understanding the difference between an employee and an independent contractor can be complex.
Getting it right is critical because misclassifying workers – intentionally or not – can result in penalties including, but not limited to, fines and back taxes. If the IRS believes a misclassification was intentional, there’s also the possibility of criminal and civil penalties.
There’s no single test at the federal level to determine a worker’s classification. Studies show that 10% to 20% of employers misclassify at least one employee. At its most basic level, the question boils down to this: Is the worker an employee or an independent contractor?
What the IRS Says
The IRS defines an independent contractor as someone who performs work for someone else while controlling how the work is done. The Internal Revenue Code defines an employee for employment tax purposes as “any individual who, under the usual common-law rules, applicable in determining the employer-employee relationship, has the status of an employee.”
Under this test, an individual is classified in one of the two buckets after examining relevant facts and circumstances and an application of common law principles. The IRS analyzes the evidence of the degree of control and independence through three overarching categories:
No one factor stands alone in making this determination and the relevant factors will vary depending on the facts and circumstances.
If it is still unclear whether a worker is an employee or an independent contractor after reviewing the three categories of evidence, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. The form may be filed by either the business or the worker, and the IRS will review the facts and circumstances and officially determine the worker’s status.
The IRS cautions it can take at least six months to get a determination.
Penalties for Misclassifying
If the misclassification was unintentional, the employer faces, at a minimum, the following penalties:
If the IRS suspects fraud or intentional misconduct, it can impose additional fines and penalties. The employer could be subject to criminal penalties of up to $10,000 per misclassified worker and one year in prison. In addition, the person responsible for withholding taxes could also be held personally liable for any uncollected tax.
Tips for Employers
Take pre-emptive steps to avoid worker misclassification issues by:
Remember, a worker’s classification may be different under the Fair Labor Standards Act than under various state laws, the National Labor Relations Act, and/or the Internal Revenue Code. Workers who are properly classified as independent contractors under one state’s test may not be properly classified under another’s.
Employers should ensure proper classification of their workers and remain cognizant of and comply with applicable state and local laws, which may be different from federal law.
Does your organization need help classifying or ensuring your workers are classified correctly? Contact our team today!
Operating as an S corporation may help reduce federal employment taxes for small businesses in the right circumstances. Although S corporations may provide tax advantages over C corporations, there are some potentially costly tax issues that you should assess before making a decision to switch.
Here’s a quick rundown of the most important issues to consider when converting from a C corporation to an S corporation:
Built-in gains tax
Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective if those gains are recognized within 5 years after the corporation becomes an S corporation. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.
S corporations that were formerly C corporations are subject to a special tax if their passive investment income (such as dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.
C corporations that use LIFO inventories have to pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.
If your C corporation has unused net operating losses, the losses can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.
There are other factors to consider in switching from C to S status. Shareholder-employees of S corporations can’t get the full range of tax-free fringe benefits that are available with a C corporation. And there may be complications for shareholders who have outstanding loans from their qualified plans. All of these factors have to be considered to understand the full effect of converting from C to S status.
There are strategies for eliminating or minimizing some of these tax problems and for avoiding unnecessary pitfalls related to them. But a lot depends upon your company’s particular circumstances. Contact us to discuss the effect of these and other potential problems, along with possible strategies for dealing with them.
Typically, businesses want to delay recognition of taxable income into future years and accelerate deductions into the current year. But when is it prudent to do the opposite? And why would you want to?
One reason might be tax law changes that raise tax rates. There have been discussions in Washington about raising the corporate federal income tax rate from its current flat 21%. Another reason may be because you expect your non-corporate pass-through entity business to pay taxes at higher rates in the future because the pass-through income will be taxed on your personal return. There have also been discussions in Washington about raising individual federal income tax rates.
If you believe your business income could be subject to tax rate increases, you might want to accelerate income recognition into the current tax year to benefit from the current lower tax rates. At the same time, you may want to postpone deductions into a later tax year, when rates are higher, and when the deductions will do more tax-saving good.
To accelerate income
Consider these options if you want to accelerate revenue recognition into the current tax year:
To defer deductions
Consider the following actions to postpone deductions into a higher-rate tax year, which will maximize their value:
Contact us to discuss the best tax planning actions in light of your business’s unique tax situation.
The federal government is helping to pick up the tab for certain business meals. Under a provision that’s part of one of the COVID-19 relief laws, the usual deduction for 50% of the cost of business meals is doubled to 100% for food and beverages provided by restaurants in 2022 (and 2021).
So, you can take a customer out for a business meal or order take-out for your team and temporarily write off the entire cost — including the tip, sales tax and any delivery charges.
Despite eliminating deductions for business entertainment expenses in the Tax Cuts and Jobs Act (TCJA), a business taxpayer could still deduct 50% of the cost of qualified business meals, including meals incurred while traveling away from home on business. (The TCJA generally eliminated the 50% deduction for business entertainment expenses incurred after 2017 on a permanent basis.)
To help struggling restaurants during the pandemic, the Consolidated Appropriations Act doubled the business meal deduction temporarily for 2021 and 2022. Unless Congress acts to extend this tax break, it will expire on December 31, 2022.
Currently, the deduction for business meals is allowed if the following requirements are met:
In the event that food and beverages are provided during an entertainment activity, the food and beverages must be purchased separately from the entertainment. Alternatively, the cost can be stated separately from the cost of the entertainment on one or more bills.
So, if you treat a client to a meal and the expense is properly substantiated, you may qualify for a business meal deduction as long as there’s a business purpose to the meal or a reasonable expectation that a benefit to the business will result.
Provided by a restaurant
IRS Notice 2021-25 explains the main rules for qualifying for the 100% deduction for food and beverages provided by a restaurant. Under this guidance, the deduction is available if the restaurant prepares and sells food or beverages to retail customers for immediate consumption on or off the premises. As a result, it applies to both on-site dining and take-out and delivery meals.
However, a “restaurant” doesn’t include a business that mainly sells pre-packaged goods not intended for immediate consumption. So, food and beverage sales are excluded from businesses including:
The restriction also applies to an eating facility located on the employer’s business premises that provides meals excluded from an employee’s taxable income. Business meals purchased from such facilities are limited to a 50% deduction. It doesn’t matter if a third party is operating the facility under a contract with the business.
Keep good records
It’s important to keep track of expenses to maximize tax benefits for business meal expenses.
You should record the:
In addition, ask establishments to divvy up the tab between any entertainment costs and food/ beverages. For additional information, contact your tax advisor.
Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
The start of a new tax filing season often brings with it longer hold times with the IRS, as taxpayers and their tax preparers inundate phone lines with questions and concerns. But the 2022 filing season promises to be particularly challenging.
The IRS continues to work through a backlog of millions of paper-filed returns and correspondence from the 2021 tax filing season. Add staffing challenges and congressional underfunding to the issue and trying to track down a missing refund or deal with an unexpected tax notice is bound to be frustrating.
Roots, Results of the IRS Backlog
As of December 2021, the IRS had a backlog of 6 million unprocessed individual income tax returns, 2.3 million amended returns, and more than 2 million quarterly payroll tax returns, according to a statement from the Taxpayer Advocate Service (TAS).
That backlog stems from a combination of COVID-related shutdowns at many of the agency’s processing centers, budget cuts that forced reduced staff sizes, and the IRS overseeing new initiatives, such as stimulus payments and the expanded Child Tax Credit.
Reaching the IRS via phone hasn’t been easy in recent years, and the problem likely will worsen. According to the TAS report, there was a record 282 million taxpayer calls to the IRS in 2021, but the agency answered just 11% of those calls and those who did get through endured long wait times and frequent disconnects.
Understanding what’s going on behind the scenes isn’t much help when you’re facing missing tax refunds, incorrect notices, and other tax troubles. The following tips can help you navigate the IRS backlog and get the answers you need.
Send a complete copy of the correspondence and any other essential documents to your advisor as soon as you receive the notice. Tax professionals have access to a unique IRS customer service line reserved for practitioners, but delays are common there as well, so don’t wait until the last minute to loop them in.
Finally, have patience. The good news is the IRS is working to catch up by fast-tracking hiring, reassigning workers, and scrapping plans to close a tax processing center in Austin, Texas. In the meantime, stay in touch with your tax advisor to be as proactive as possible.
In today’s economy, many small businesses are strapped for cash. They may find it beneficial to barter or trade for goods and services instead of paying cash for them. Bartering is the oldest form of trade and the internet has made it easier to engage with other businesses. But if your business gets involved in bartering, be aware that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.
How it works
Here are some examples:
In these cases, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence.
In addition, if services are exchanged for property, income is realized. For example,
Many businesses join barter clubs that facilitate barter exchanges. These clubs generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.
In general, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year and that each unit is redeemable for $2 in goods and services. In that year, you’ll have $5,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed once on that income.
If you join a barter club, you’ll be asked to provide your Social Security number or Employer Identification Number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club is required to withhold tax from your bartering income at a 24% rate.
Reporting to the IRS
By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.
Conserve cash, reap benefits
By bartering, you can trade away excess inventory or provide services during slow times, all while hanging onto your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties. If you need assistance or would like more information, contact us.
The credit for increasing research activities, often referred to as the research and development (R&D) credit, is a valuable tax break available to eligible businesses. Claiming the credit involves complex calculations, which we can take care of for you. But in addition to the credit itself, be aware that the credit also has two features that are especially favorable to small businesses:
1. Eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability.
2. The credit can be used by certain even smaller startup businesses against the employer’s Social Security payroll tax liability.
Let’s take a look at the second feature. Subject to limits, you can elect to apply all or some of any research tax credit that you earn against your payroll taxes instead of your income tax. This payroll tax election may influence you to undertake or increase your research activities. On the other hand, if you’re engaged in — or are planning to undertake — research activities without regard to tax consequences, be aware that you could receive some tax relief.
Why the election is important
Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Thus, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, any wage-paying business, even a new one, has payroll tax liabilities. Therefore, the payroll tax election is an opportunity to get immediate use out of the research credits that you earn. Because every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that’s a big help in the start-up phase of a business — the time when help is most needed.
To qualify for the election a taxpayer must:
In making these determinations, the only gross receipts that an individual taxpayer takes into account are from the individual’s businesses. An individual’s salary, investment income or other income aren’t taken into account. Also, note that an entity or individual can’t make the election for more than six years in a row.
Limits on the election
The research credit for which the taxpayer makes the payroll tax election can be applied only against the Social Security portion of FICA taxes. It can’t be used to lower the employer’s liability for the “Medicare” portion of FICA taxes or any FICA taxes that the employer withholds and remits to the government on behalf of employees.
The amount of research credit for which the election can be made can’t annually exceed $250,000. Note, too, that an individual or C corporation can make the election only for those research credits which, in the absence of an election, would have to be carried forward. In other words, a C corporation can’t make the election for the research credit that the taxpayer can use to reduce current or past income tax liabilities.
The above are just the basics of the payroll tax election. Keep in mind that identifying and substantiating expenses eligible for the research credit itself is a complex area. Contact us about whether you can benefit from the payroll tax election and the research tax credit.
If you own your own company and travel for business, you may wonder whether you can deduct the costs of having your spouse accompany you on trips.
The rules for deducting a spouse’s travel costs are very restrictive. First of all, to qualify, your spouse must be your employee. This means you can’t deduct the travel costs of a spouse, even if his or her presence has a bona fide business purpose unless the spouse is a bona fide employee of your business. This requirement prevents tax deductibility in most cases.
If your spouse is your employee, then you can deduct his or her travel costs if his or her presence on the trip serves a bona fide business purpose. Merely having your spouse perform some incidental business service, such as typing up notes from a meeting, isn’t enough to establish a business purpose. In general, it isn’t sufficient for his or her presence to be “helpful” to your business pursuits — it must be necessary.
In most cases, a spouse’s participation in social functions, for example as a host or hostess, isn’t enough to establish a business purpose. That is, if his or her purpose is to establish general goodwill for customers or associates, this is usually insufficient. Further, if there’s a vacation element to the trip (for example, if your spouse spends time sightseeing), it will be more difficult to establish a business purpose for his or her presence on the trip. On the other hand, a bona fide business purpose exists if your spouse’s presence is necessary to care for a serious medical condition that you have.
If your spouse’s travel satisfies these tests, the normal deductions for business travel away from home can be claimed. These include the costs of transportation, meals, lodging, and incidental costs such as dry cleaning, phone calls, etc.
A non-employee spouse
Even if your spouse’s travel doesn’t satisfy the requirements, however, you may still be able to deduct a substantial portion of the trip’s costs. This is because the rules don’t require you to allocate 50% of your travel costs to your spouse. You need only allocate any additional costs you incur for him or her. For example, in many hotels, the cost of a single room isn’t that much lower than the cost of a double. If a single would cost you $150 a night and a double would cost you and your spouse $200, the disallowed portion of the cost allocable to your spouse would only be $50. In other words, you can write off the cost of what you would have paid traveling alone. To prove your deduction, ask the hotel for a room rate schedule showing single rates for the days you’re staying.
And if you drive your own car or rent one, the whole cost will be fully deductible even if your spouse is along. Of course, if public transportation is used, and for meals, any separate costs incurred by your spouse wouldn’t be deductible.
Contact us if you have questions about this or other tax-related topics.
The IRS has provided an additional exception for qualified domestic partnerships and S corporations to file their schedules K-2 and K-3 for tax year 2021 to further ease the transition to these new schedules. The new schedules standardize international tax information to partners and flow-through investors while clarifying obligations and standardizing the reporting format.
Simply put, eligible entities, those with no foreign activities, foreign partners or shareholders, and without knowledge of partners or shareholders needing information on items of international relevance, will not have to file the new Schedules K-2 and K-3 for tax year 2021.
To qualify for this exception, partnerships and S corps must meet the following:
If a partnership or S corporation qualifies for this exception, it does not need to file Schedules K-2 and K-3 with the IRS or its partners or shareholders. However, if a partner or shareholder notifies the partnership or S corporation that all or part of the information contained on Schedule K-3 is needed to complete their tax return, the partnership or S corporation must provide the information to the partner or shareholder.
If a partner or shareholder notifies the partnership or S corporation before the partnership or S corporation files its return, the partnership or S corporation must provide the Schedule K-3 to the partner or shareholder and file the Schedules K-2 and K-3 with the IRS.
Click here to read the IRS notice regarding the relief options. More information can be found in the IRS’ updated Schedule K-2 and K-3 frequently asked questions. Please get in touch with our office today if you need help navigating this new relief or completing your schedules K-2 and K-3.
Do you want to withdraw cash from your closely held corporation at a minimum tax cost? The simplest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax-efficient since it’s taxable to you to the extent of your corporation’s “earnings and profits.” It’s also not deductible by the corporation.
Fortunately, there are several alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five areas where you may want to take action:
1. Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the debt repayment may be taxed as a dividend. If you make future cash contributions to the corporation, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.
2. Salary. Reasonable compensation that you (or family members) receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient. The same rule applies to any compensation in the form of rent that you receive from the corporation for the use of property. In both cases, the amount of compensation must be reasonable in relation to the services rendered or the value of the property provided. If it’s excessive, the excess will be nondeductible and treated as a corporate distribution.
3. Loans. You may withdraw cash from the corporation tax-free by borrowing from it. However, to avoid having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or a note and be made on terms that are comparable to those on which an unrelated third party would lend money to you. This should include a provision for interest and principal. All interest and principal payments should be made when required under the loan terms. Also, consider the effect of the corporation’s receipt of interest income.
4. Fringe benefits. Consider obtaining the equivalent of a cash withdrawal in fringe benefits that are deductible by the corporation and not taxable to you. Examples are life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other employees of the corporation. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.
5. Property sales. Another way to withdraw cash from the corporation is to sell property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50% owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50% owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those on which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.
Keep taxes low
If you’re interested in discussing any of these approaches, contact us. We’ll help you get the most out of your corporation at the minimum tax cost.
If you’re in business for yourself as a sole proprietor, or you’re planning to start a business, you need to know about the tax aspects of your venture. Here are eight important issues to consider:
1. You report income and expenses on Schedule C of Form 1040. The net income is taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have any losses, they’re generally deductible against your other income, subject to special rules relating to hobby losses, passive activity losses, and losses in activities in which you weren’t “at risk.”
2. You may be eligible for the pass-through deduction. To the extent your business generates qualified business income, you’re eligible to take the 20% pass-through deduction, subject to various limitations. The deduction is taken “below the line,” so it reduces taxable income, rather than being taken “above the line” against gross income. You can take the deduction even if you don’t itemize and instead take the standard deduction.
3. You might be able to deduct home office expenses. If you work from home, perform management or administrative tasks from a home office or store product samples or inventory at home, you may be entitled to deduct an allocable portion of certain costs. And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.
4. You must pay self-employment taxes. For 2022, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your self-employment net earnings of up to $147,000 and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax is imposed on self-employment income in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separately, and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.
5. You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits your medical expense deduction to amounts in excess of 7.5% of your adjusted gross income.
6. You must make quarterly estimated tax payments. For 2022, these are due April 18, June 15, September 15, and January 17, 2023.
7. You should keep complete records of your income and expenses. Carefully record expenses in order to claim all of the deductions to which you are entitled. Certain expenses, such as automobile, travel, meals, and home office expenses, require special attention because they’re subject to special recordkeeping requirements or limits on deductibility.
8. If you hire employees, you need a taxpayer identification number and you must withhold and pay over employment taxes.
We can help
Contact us if you’d like more information or assistance with the tax or recordkeeping aspects of your business.
If you operate a business, or you’re starting a new one, you know you need to keep records of your income and expenses. Specifically, you should carefully record your expenses in order to claim all of the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns in case you’re ever audited by the IRS.
Be aware that there’s no one way to keep business records. But there are strict rules when it comes to keeping records and proving expenses are legitimate for tax purposes. Certain types of expenses, such as automobile, travel, meals and home office costs, require special attention because they’re subject to special recordkeeping requirements or limitations.
Here are two recent court cases to illustrate some of the issues.
Case 1: To claim deductions, an activity must be engaged in for profit
A business expense can be deducted if a taxpayer can establish that the primary objective of the activity is making a profit. The expense must also be substantiated and be an ordinary and necessary business expense. In one case, a taxpayer claimed deductions that created a loss, which she used to shelter other income from tax.
She engaged in various activities including acting in the entertainment industry and selling jewelry. The IRS found her activities weren’t engaged in for profit and it disallowed her deductions.
The taxpayer took her case to the U.S. Tax Court, where she found some success. The court found that she was engaged in the business of acting during the years in issue. However, she didn’t prove that all claimed expenses were ordinary and necessary business expenses. The court did allow deductions for expenses including headshots, casting agency fees, lessons to enhance the taxpayer’s acting skills and part of the compensation for a personal assistant. But the court disallowed other deductions because it found insufficient evidence “to firmly establish a connection” between the expenses and the business.
In addition, the court found that the taxpayer didn’t prove that she engaged in her jewelry sales activity for profit. She didn’t operate it in a businesslike manner, spend sufficient time on it or seek out expertise in the jewelry industry. Therefore, all deductions related to that activity were disallowed. (TC Memo 2021-107)
Case 2: A business must substantiate claimed deductions with records
A taxpayer worked as a contract emergency room doctor at a medical center. He also started a business to provide emergency room physicians overseas. On Schedule C of his tax return, he deducted expenses related to his home office, travel, driving, continuing education, cost of goods sold and interest. The IRS disallowed most of the deductions.
As evidence in Tax Court, the doctor showed charts listing his expenses but didn’t provide receipts or other substantiation showing the expenses were actually paid. He also failed to account for the portion of expenses attributable to personal activity.
The court disallowed the deductions stating that his charts weren’t enough and didn’t substantiate that the expenses were ordinary and necessary in his business. It noted that “even an otherwise deductible expense may be denied without sufficient substantiation.” The doctor also didn’t qualify to take home office deductions because he didn’t prove it was his principal place of business. (TC Memo 2022-1)
We can help
Contact us if you need assistance retaining adequate business records. Taking a meticulous, proactive approach can protect your deductions and help make an audit much less difficult.
While some businesses have closed since the start of the COVID-19 crisis, many new ventures have launched. Entrepreneurs have cited a number of reasons why they decided to start a business in the midst of a pandemic. For example, they had more time, wanted to take advantage of new opportunities or they needed money due to being laid off. Whatever the reason, if you’ve recently started a new business, or you’re contemplating starting one, be aware of the tax implications.
As you know, before you even open the doors in a start-up business, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.
Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away. Keep in mind that the way you handle some of your initial expenses can make a large difference in your tax bill.
Essential tax points
When starting or planning a new enterprise, keep these factors in mind:
Types of expenses
Start-up expenses generally include all expenses that are incurred to:
To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example would be the money you spend analyzing potential markets for a new product or service.
To qualify as an “organization expense,” the outlay must be related to the creation of a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing the new business and filing fees paid to the state of incorporation.
An important decision
Time may be of the essence if you have start-up expenses that you’d like to deduct for this year. You need to decide whether to take the election described above. Recordkeeping is important. Contact us about your business start-up plans. We can help with the tax and other aspects of your new venture.
Note: Congress is considering proposals that could expand the Work Opportunity Tax Credit for certain qualified groups. We will monitor this development and communicate updates as necessary.
As a business, tax planning can help create increased cash flow that allows management to expand, increase wages, bring in new inventory, and achieve other goals that require more financial flexibility. Business owners often go to tax credits involved with normal business operations but sometimes overlook human resource tax credits. One such tax credit is the Work Opportunity Tax Credit (WOTC).
This hiring-based tax credit was recently extended until Dec. 31, 2025, by the Consolidated Appropriations Act of 2021. Keep reading to learn how to use the WOTC.
What is the WOTC?
The WOTC is an employment-based tax credit the federal government offers to employers who hire from qualified groups and is based on wages paid to qualified employees.
While there is an extensive list of qualified groups a new employee may come from, they most often include groups that otherwise would be overlooked, including veterans, ex-felons, those graduating from rehabilitation programs, and individuals on certain state or federal government assistance programs. You can view the extended list here.
What credits can be taken?
The WOTC allows employers who hire from qualified groups to receive a tax credit for wages paid up to the specified maximum amounts, as shown below.
|Employee Category||Credit Amount||Maximum Wages|
|Qualified employees working 120+ hours a year||25% of first-year wages||$6,000 maximum wages used in calculation of credit|
|Qualified employees working 400+ hours per year||40% of first-year wages||$6,000 maximum wages used in calculation of credit|
|Temporary Assistance for Needy Families (TANF) recipients working 400+ hours per year||40% of first-year wages
50% of second-year wages
|$6,000 maximum wages used in calculation of credit|
|Qualified veterans||25% of first-year wages for employees working 120+ hours a year; 40% of first-year wages for employees working 400+ hours per year||$24,000 maximum wages used in calculation of credit|
|Rehires||0%||Rehires are not eligible for the WOTC|
Claiming the WOTC
There are several steps businesses need to take to claim the WOTC. Both employer and applicant must complete Form 8850 before or on the date an employment offer is made. That form must then be filed with the appropriate state workforce agency within 28 days of the start of work.
The state workforce agency will confirm whether the employee is considered part of a qualified group for the WOTC. If so, the employee can then submit Form 5884 and Form 3800 with their income tax returns to take the appropriate credit amount.
For assistance understanding the WOTC and the nuances involved in calculating the appropriate credit amounts, reach out to our team of tax professionals.
When the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-02 (ASC 842) several years ago, the deadlines for private and public businesses seemed to be far into the future. FASB delayed the reporting requirements for private-sector companies because of COVID-19; however, that delay ended as of Dec. 15, 2021.
All businesses must use financial statements conforming to the new lease accounting standard for any fiscal year beginning after Dec. 15, 2021. If you’re not up to date on the new requirements and how they can impact your business, keep reading to familiarize yourself with ASC 842.
Lease Accounting Updates
Historically, organizations were required to divide their leases into operating leases and capital leases. Capital leases (finance leases) needed to be reflected on the organization’s statement of financial position (balance sheet) as capital assets with related lease debt liabilities. Operating leases, on the other hand, were recognized as expenses as lease costs were incurred but not on the statement of financial position.
Under ASC 842, all organizations must include all lease agreements with lease terms greater than 12 months on the statement of financial position, whether they are finance or operating leases. When reporting, accounting teams must include the following on the balance sheet:
How the shift affects remote work policies
The shift to remote work has changed how many companies conduct business. The new lease accounting standard poses several new questions. If you’re licensing any equipment, such as computers, include these contracts in your lease accounting review.
Also, keep in mind any leases that may need to be renegotiated or canceled if your business stays remote. Do you need less office equipment or space because half of your workforce is fully remote? Are company vehicles no longer in use as your organization has shifted to remote meetings? Are you subsidizing employees for internet or office space? These are all questions to ask when you begin transitioning your lease accounting methods.
Other impacts of the new lease accounting methods
If your business has already transitioned to the new lease accounting method, you may have noticed some financial statistics changes. Financial statements may show an increase in assets or liabilities when leases that previously were recognized off-balance-sheet are moved to the balance sheet. This impact will be greater in businesses with more significant lease activity (by total volume or value of leases).
Things to remember when transitioning
The process of transitioning your lease accounting method can take time if your contracts are not centralized. If your organization hasn’t started the transition, it may be helpful to assign a team to compile the necessary information. As you start, keep in mind these tasks to help make a smoother transition.
Make time to review the lease accounting standard updates and transition lease agreements over to the new process. Waiting until the balance sheets are created and published will leave your teams rushing, which can lead to mistakes and oversights.
For help understanding the changes or creating a new reporting system, reach out to our team of experts to set up a consultation.
The IRS recently released the 2022 mileage rates for businesses to use as guidance when reimbursing workers for applicable miles driven within the year. The rates tend to increase every year to account for rising fuel and vehicle and maintenance costs and insurance rate increases.
Businesses can use the standard mileage rate to calculate the deductible costs of operating qualified automobiles for business, charitable, medical, or moving purposes. Keep reading for the updated mileage rates, as well as some reminders for mileage reimbursements and deductions.
Standard mileage rates for cars, vans, pickups and panel trucks are as follows:
|Use Category||Mileage rate
(as of Jan. 1, 2022)
|Change from previous year|
|Business miles driven||$0.585 per mile||$0.025 increase from 2021|
|Medical or moving miles driven*||$0.18 per mile||$0.02 increase from 2021|
|Miles driven for charitable organizations||$0.14 per mile||Note: Only congress may adjust the mileage rate for service to a charitable organization by a Congress-passed statute.|
*Moving miles reimbursement for qualified active-duty members of the Armed Forces
Important reminders and considerations
When reimbursing employees for miles driven, keep in mind the following reminders and considerations:
To review your organization’s mileage reimbursement policy and any alternate methods for calculating appropriate reimbursement amounts, reach out to our team of knowledgeable professionals today.
After two years of no increases, the optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up in 2022 by 2.5 cents per mile. The IRS recently announced that the cents-per-mile rate for the business use of a car, van, pickup or panel truck will be 58.5 cents (up from 56 cents for 2021).
The increased tax deduction partly reflects the price of gasoline. On December 21, 2021, the national average price of a gallon of regular gas was $3.29, compared with $2.22 a year earlier, according to AAA Gas Prices.
Don’t want to keep track of actual expenses?
Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.
The cents-per-mile rate is beneficial if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.
Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles a great deal for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.
If you do use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.
How is the rate calculated?
The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear.
When can the cents-per-mile method not be used?
There are some cases when you can’t use the cents-per-mile rate. It partly depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.
As you can see, there are many factors to consider in deciding whether to use the standard mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2022 — or claiming 2021 expenses on your 2021 income tax return.
Do you want to sell commercial or investment real estate that has appreciated significantly? One way to defer a tax bill on the gain is with a Section 1031 “like-kind” exchange where you exchange the property rather than sell it. With real estate prices up in some markets (and higher resulting tax bills), the like-kind exchange strategy may be attractive.
A like-kind exchange is any exchange of real property held for investment or for productive use in your trade or business (relinquished property) for like-kind investment, trade or business real property (replacement property).
For these purposes, like-kind is broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale.
Under the Tax Cuts and Jobs Act, tax-deferred Section 1031 treatment is no longer allowed for exchanges of personal property — such as equipment and certain personal property building components — that are completed after December 31, 2017.
If you’re unsure if the property involved in your exchange is eligible for like-kind treatment, please contact us to discuss the matter.
Assuming the exchange qualifies, here’s how the tax rules work. If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still must report it on Form 8824, “Like-Kind Exchanges.”
Frequently, however, the properties aren’t equal in value, so some cash or other property is tossed into the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property you gave up reduced by the amount of boot you received but increased by the amount of any gain recognized.
An example to illustrate
Let’s say you exchange land (business property) with a basis of $100,000 for a building (business property) valued at $120,000 plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain. That’s the amount of cash (boot) you received. Your basis in your new building (the replacement property) will be $100,000: your original basis in the relinquished property you gave up ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.
Note that no matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.
If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The theory is that if someone takes over your debt, it’s equivalent to the person giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).
Great tax-deferral vehicle
Like-kind exchanges can be a great tax-deferred way to dispose of investment, trade or business real property. Contact us if you have questions or would like to discuss the strategy further.
Many tax limits that affect businesses are annually indexed for inflation, and a number of them have increased for 2022. Here’s a rundown of those that may be important to you and your business.
Social Security tax
The amount of an employee’s earnings that is subject to Social Security tax is capped for 2022 at $147,000 (up from $142,800 in 2021).
In 2022 and 2021, the deduction for eligible business-related food and beverage expenses provided by a restaurant is 100% (up from 50% in 2020).
Other employee benefits
These are only some of the tax limits that may affect your business and additional rules may apply. Contact us if you have questions.
If you’re an employer with a business where tipping is customary for providing food and beverages, you may qualify for a federal tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income.
Basics of the credit
The FICA credit applies with respect to tips that your employees receive from customers in connection with the provision of food or beverages, regardless of whether the food or beverages are for consumption on or off the premises. Although these tips are paid by customers, they’re treated for FICA tax purposes as if you paid them to your employees. Your employees are required to report their tips to you. You must withhold and remit the employee’s share of FICA taxes, and you must also pay the employer’s share of those taxes.
You claim the credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15-per-hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.
Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.
An example to illustrate
Example: Let’s say a waiter works at your restaurant. He’s paid $2 an hour plus tips. During the month, he works 160 hours for $320 and receives $2,000 in cash tips which he reports to you.
The waiter’s $2-an-hour rate is below the $5.15 rate by $3.15 an hour. Thus, for the 160 hours worked, he is below the $5.15 rate by $504 (160 times $3.15). For the waiter, therefore, the first $504 of tip income just brings him up to the minimum rate. The rest of the tip income is $1,496 ($2,000 minus $504). The waiter’s employer pays FICA taxes at the rate of 7.65% for him. Therefore, the employer’s credit is $114.44 for the month: $1,496 times 7.65%.
While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit can’t be deducted, because that would amount to a double benefit. However, you can elect not to take the credit, in which case you can claim the deduction.
Claim your credit
If your business pays FICA taxes on tip income paid to your employees, the tip tax credit may be valuable to you. Other rules may apply. If you have any questions, don’t hesitate to contact us.
Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
January 17 (The usual deadline of January 15 is a Saturday)
The use of a company vehicle is a valuable fringe benefit for owners and employees of small businesses. This perk results in tax deductions for the employer as well as tax breaks for the owners and employees using the cars. (And of course, they get the nontax benefit of getting a company car.) Plus, current tax law and IRS rules make the benefit even better than it was in the past.
The rules in action
Let’s say you’re the owner-employee of a corporation that’s going to provide you with a company car. You need the car to visit customers, meet with vendors and check on suppliers. You expect to drive the car 8,500 miles a year for business. You also expect to use the car for about 7,000 miles of personal driving, including commuting, running errands and weekend trips. Therefore, your usage of the vehicle will be approximately 55% for business and 45% for personal purposes. You want a nice car to reflect positively on your business, so the corporation buys a new $55,000 luxury sedan.
Your cost for personal use of the vehicle is equal to the tax you pay on the fringe benefit value of your 45% personal mileage. By contrast, if you bought the car yourself to be able to drive the personal miles, you’d be out-of-pocket for the entire purchase cost of the car.
Your personal use will be treated as fringe benefit income. For tax purposes, your corporation will treat the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to your personal use. If the corporation finances the car, the interest it pays on the loan would be deductible as a business expense (unless the business is subject to the business interest expense deduction limitation under the tax code).
In contrast, if you bought the auto yourself, you wouldn’t be entitled to any deductions. Your outlays for the business-related portion of your driving would be unreimbursed employee business expenses that are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if you financed the car yourself, the interest payments would be nondeductible.
And finally, the purchase of the car by your corporation will have no effect on your credit rating.
Providing an auto for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use will have to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.
Despite the necessary valuation and paperwork, a company-provided car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. We can help you stay in compliance with the rules and explain more about this prized perk.
Has your company switched to a remote work or hybrid environment for employees? Government mandates and other health-related concerns at the beginning of the COVID-19 pandemic caused much of the workforce to transition from an office setting to a remote or hybrid work environment. As the pandemic stretched on and companies extended their remote work options, many employees started spreading out to find new locations to work from.
While many employers have researched return-to-work strategies, they’ve decided to allow employees to continue to work remotely either full-time or part-time based on their roles and responsibilities. The benefit is considerable for employees who wish for more flexibility or less time spent commuting to the office, but it may pose tax-withholding complications for companies.
Tax implications of remote workers
Most state and local sales-and-use taxes and payroll taxes are triggered by what’s considered a nexus event, which establishes a presence in a particular state. While a physical building or warehouse is the most widely known nexus, meeting a sales threshold for sales in that state or having an employee residing in the state can also trigger the tax withholding requirements for that state.
This means, if a remote worker moves to another state, it can complicate your organization’s tax situation immensely. For companies who are located near state borders, employees who previously commuted across state lines but are now working from home can change payroll and sales tax liabilities.
During COVID, many states granted exceptions for nexus events, while others loosened requirements. However, those requirements vary by state, sometimes overlap, and some are even coming to an end. This further complicates whether taxes should be withheld and filed in each state, and whether companies should collect and file sales-and-use taxes.
If you have remote workers, consider implementing a policy that includes (at minimum):
Remote workers who move without notifying their employer could open the company up to the consequences of misfiling tax payments.
Consequences of misfiling tax payments
Whether a remote worker moved without the company’s knowledge, or the company was unaware of the laws in place in the new state, the company remains liable for the payments and potential penalties. When payments are missed or misfiled, state and local jurisdictions may have fines and penalties in place.
For companies that have a worker in a new state where they previously did not have to file sales-and-use taxes, their system may be set up to waive sales-and-use taxes for that state or local jurisdiction. In that case, they may find themselves paying out of their revenue for these taxes that were not collected from their customers.
Solutions to manage taxes related to remote workers
Companies should consider several approaches to minimize the risk of misfiling sales-and-use taxes, as well as payroll and income taxes with a remote workforce.
Our team of accounting professionals can help you navigate the tax complexities associated with remote workers! Reach out to set up a consultation.
Don’t let the holiday rush keep you from considering some important steps to reduce your 2021 tax liability. You still have time to execute a few strategies.
Thinking about buying new or used equipment, machinery or office equipment in the new year? Buy them and place them in service by December 31, and you can deduct 100% of the cost as bonus depreciation. Contact us for details on the 100% bonus depreciation break and exactly what types of assets qualify.
Bonus depreciation is also available for certain building improvements. Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property: land improvements other than buildings (for example fencing and parking lots), and “qualified improvement property,” a broad category of internal improvements made to nonresidential buildings after the buildings are placed in service. The TCJA inadvertently eliminated bonus depreciation for qualified improvement property. However, the 2020 CARES Act made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.
Keep in mind that 100% bonus depreciation has reduced the importance of Section 179 expensing. If you’re a small business, you’ve probably benefited from Sec. 179. It’s an elective benefit that, subject to dollar limits, allows an immediate deduction of the cost of equipment, machinery, “off-the-shelf” computer software and some building improvements. Sec. 179 expensing was enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and thus has greatly reduced the cases in which Sec. 179 expensing is useful.
Write off a heavy vehicle
The 100% bonus depreciation deal can have a major tax-saving impact on first-year depreciation deductions for new or used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups and vans are treated for federal income tax purposes as transportation equipment. In turn, that means they qualify for 100% bonus depreciation.
Specifically, 100% bonus depreciation is available when the SUV, pickup or van has a manufacturer’s gross vehicle weight rating above 6,000 pounds. You can verify a vehicle’s weight by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door. If you’re considering buying an eligible vehicle, placing one in service before year end could deliver a significant write-off on this year’s return.
Time deductions and income
If your business operates on a cash basis, you can significantly affect your amount of taxable income by accelerating your deductions into 2021 and deferring income into 2022 (assuming you expect to be taxed at the same or a lower rate next year).
For example, you could put recurring expenses normally paid early in the year on your credit card before January 1 — that way, you can claim the deduction for 2021 even though you don’t pay the credit card bill until 2022. In certain circumstances, you also can prepay some expenses, such as rent or insurance and claim them in 2021.
As for income, wait until close to year-end to send out invoices to customers with reliable payment histories. Accrual-basis businesses can take a similar approach, holding off on the delivery of goods and services until next year.
Consider all angles
Bear in mind that some of these tactics could adversely impact other factors affecting your tax liability, such as the qualified business income deduction. Contact us to make the most of your tax planning opportunities.
The sheer amount of student loan debt individuals are graduating from higher education with has been increasingly covered in the news. While the government has been working to forgive student loan debt for certain people, there is something employers can do to help take the burden off employees and their tax liability. In addition to decreasing employee stress, it can also be used as an employee retention incentive.
The CARES Act and student loan repayment
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 and its extensions include a provision that allows employers to provide relief to employees with outstanding student loan debt. This program allows employers to pay up to $5,250 toward the student loan debt for eligible employees. All monies paid are to be excluded from income and payroll taxes for both the employee and employer portion.
This could be a significant principal decrease for employees with a national student loan average of more than $30,000.
What student loan debit is qualified?
Any amount an employer pays to a student loan held by an employee up to $5,250 is qualified for the income and payroll tax exclusion, if the payments are made before Dec. 31, 2025. This includes federal and private student loans and payments made directly to the employee or the loan servicer.
It’s not too late to provide this benefit and take advantage of the tax incentives for the 2021 tax year. For assistance creating an education assistance program and establishing benefits with appropriate tax documentation steps in place, contact our team of knowledgeable tax professionals today.
The Employee Retention Credit (ERC) was a valuable tax credit that helped employers survive the COVID-19 pandemic. A new law has retroactively terminated it before it was scheduled to end. It now only applies through September 30, 2021 (rather than through December 31, 2021) — unless the employer is a “recovery startup business.”
The Infrastructure Investment and Jobs Act, which was signed by President Biden on November 15, doesn’t have many tax provisions but this one is important for some businesses.
If you anticipated receiving the ERC based on payroll taxes after September 30 and retained payroll taxes, consult with us to determine how and when to repay those taxes and address any other compliance issues.
The American Institute of Certified Public Accountants (AICPA) is asking Congress to direct the IRS to waive payroll tax penalties imposed as a result of the ERC sunsetting. Some employers may face penalties because they retained payroll taxes believing they would receive the credit. Affected businesses will need to pay back the payroll taxes they retained for wages paid after September 30, the AICPA explained. Those employers may also be subject to a 10% penalty for failure to deposit payroll taxes withheld from employees unless the IRS waives the penalties.
The IRS is expected to issue guidance to assist employers in handling any compliance issues.
The ERC was originally enacted in March of 2020 as part of the CARES Act. The goal was to encourage employers to retain employees during the pandemic. Later, Congress passed other laws to extend and modify the credit and make it apply to wages paid before January 1, 2022.
An eligible employer could claim the refundable credit against its share of Medicare taxes (1.45% rate) equal to 70% of the qualified wages paid to each employee (up to a limit of $10,000 of qualified wages per employee per calendar quarter) in the third and fourth calendar quarters of 2021.
For the third and fourth quarters of 2021, a recovery startup business is an employer eligible to claim the ERC. Under previous law, a recovery startup business was defined as a business that:
However, recovery startup businesses are subject to a maximum total credit of $50,000 per quarter for a maximum credit of $100,000 for 2021.
The ERC was retroactively terminated by the new law to apply only to wages paid before October 1, 2021, unless the employer is a recovery startup business. Therefore, for wages paid in the fourth quarter of 2021, other employers can’t claim the credit.
In terms of the availability of the ERC for recovery startup businesses in the fourth quarter, the new law also modifies the recovery startup business definition. Now, a recovery startup business is one that began operating after February 15, 2020, and has average annual gross receipts of less than $1 million. Other changes to recovery startup businesses may also apply.
What to do now?
If you have questions about how to proceed now to minimize penalties, contact us. We can explain the options.