Weekly Tax Brief

Employers should be wary of ERC claims that are too good to be true

Details: Published: 10 January 2023 10 January 2023

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.

ERC Basics

The ERC is a refundable tax credit designed for businesses that:

Continued paying employees while they were shut down due to the COVID-19 pandemic, or
Had significant declines in gross receipts from March 13, 2020, to September 30, 2021 (or December 31, 2021 for certain startup businesses).

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:

Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,
Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
Qualified as a recovery startup business for the third or fourth quarters of 2021.

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.

How to Proceed

If you didn’t claim the ERC, and believe you’re eligible, contact us. We can advise you on how to proceed.

SECURE 2.0 law may make you more secure in retirement

Details: Published: 06 January 2023 06 January 2023

A new law was recently signed that will help Americans save more for retirement, although many of the provisions don’t kick in for a few years. The Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0) was signed into law on December 29, 2022.

SECURE 2.0 is meant to build on the original SECURE Act of 2019, which made major changes to the required minimum distribution (RMD) rules and other retirement provisions.

Here are some of the significant retirement plan changes and when they’ll become effective:

The age for beginning RMDs is going up. Employer-sponsored qualified retirement plans, traditional IRAs and individual retirement annuities are subject to RMD rules. They require that benefits start being distributed by the required beginning date. Under the new law, the age distributions must begin increases from age 72 to age 73 starting on January 1, 2023. It will then increase to age 75 starting on January 1, 2033.
There will be higher “catch-up” contributions for 401(k) participants ages 60 through 63. Currently, participants in certain retirement plans can make additional catch-up contributions if they’re age 50 or older. The limit on catch-up contributions to 401(k) plans is $7,500 for 2023. SECURE 2.0 will increase the 401(k) plan catch-up contribution limits for individuals ages 60 through 63 to the greater of $10,000 or 150% of the regular catch-up amount. The increased amounts will be indexed for inflation after 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.)
Tax-free rollovers will be allowed from 529 accounts to Roth IRAs. SECURE 2.0 will permit beneficiaries of 529 college savings accounts to make direct trustee-to-trustee rollovers from a 529 accounts in their names to their Roth IRAs without tax or penalty. Several rules apply. This provision is effective for distributions after December 31, 2023.
“Matching” contributions will be permitted for 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.” The result of this provision is 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.

Non-retirement plan provision

There are also some parts of the law that aren’t related to retirement plans, including a change to Achieving a Better Life Experience (ABLE) accounts. Tax-exempt ABLE programs are established by states to assist individuals with disabilities. Currently, in order to be the beneficiary of an ABLE account, an individual’s disability or blindness must have occurred before age 26. SECURE 2.0 increases this age limit to 46, which will make more people eligible to benefit from an ABLE account. This provision is effective for tax years beginning after December 31, 2025.

Just the beginning

These are only some of the many provisions in SECURE 2.0. Contact us if you have any questions about your situation.

The standard business mileage rate is going up in 2023

Details: Published: 03 January 2023 03 January 2023

Although the national price of gas is a bit lower than it was a year ago, the optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up in 2023. The IRS recently announced that the 2023 cents-per-mile rate for the business use of a car, van, pickup or panel truck is 65.5 cents. These rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles.

In 2022, the business cents-per-mile rate for the second half of the year (July 1 – December 31) was 62.5 cents per mile, and for the first half of the year (January 1 – June 30), it was 58.5 cents per mile.

How rate calculations are done

The 3-cent increase from the 2022 midyear rate is somewhat surprising because gas prices are currently lower than they have been. On December 29, 2022, the national average price of a gallon of regular gas was $3.15, compared with $3.52 a month earlier and $3.28 a year earlier, according to AAA Gas Prices. However, the standard mileage rate is calculated based on all the costs involved in driving a vehicle — not just the price of gas.

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, including 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, as it did in 2022.

Standard rate versus 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.

The standard rate can’t always 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 2023 — or claiming 2022 expenses on your 2022 income tax return.

Save for retirement by getting the most out of your 401(k) plan

Details: Published: 23 December 2022 23 December 2022

Socking away money in a tax-advantaged retirement plan can help you reduce taxes and help secure a comfortable retirement. If your employer offers a 401(k) or Roth 401(k), contributing to the plan is a smart way to build a substantial nest egg.

If you’re not already contributing the maximum allowed, consider increasing your contribution. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions can have a major impact on the amount of money you’ll have in retirement.

With a 401(k), an employee makes an election to have a certain amount of pay deferred and contributed by an employer on his or her behalf to the plan. The amounts are indexed for inflation each year and not surprisingly, they’re going up quite a bit. The contribution limit in 2023 is $22,500 (up from $20,500 in 2022). Employees age 50 or older by year end are also permitted to make additional “catch-up” contributions of $7,500 in 2023 (up from $6,500 in 2022). This means those 50 and older can save a total of $30,000 in 2023 (up from $27,000 in 2022).

Contributing to a traditional 401(k)

A traditional 401(k) offers many benefits, including:

Contributions are pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8% net investment income tax.
Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
Your employer may match some or all of your contributions pretax.

If you already have a 401(k) plan, take a look at your contributions. In 2023, you may want to try and increase your contribution rate to get as close to the $22,500 limit (with an extra $7,500 if you’re age 50 or older) as you can afford. Keep in mind that your paycheck will be reduced by the amount of the contribution only, because the contributions are pretax — so, income tax isn’t withheld.

Contributing to a Roth 401(k)

Employers may also include a Roth option in their 401(k) plans. If your employer offers this, you can designate some or all of your contributions as Roth contributions. While such amounts don’t reduce your current MAGI, qualified distributions will be tax-free.

Roth 401(k) contributions may be especially beneficial for higher-income earners, because they don’t have the option to contribute to a Roth IRA. That’s because your ability to make a Roth IRA contribution is reduced or eliminated if your adjusted gross income exceeds certain amounts.

Looking ahead

Contact us if you have questions about how much to contribute or the best mix between traditional and Roth 401(k) contributions. We can also discuss other tax and retirement-saving strategies in your situation.

How to minimize the S corporation LIFO recapture tax

Details: Published: 23 December 2022 23 December 2022

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.

Inventory reporting

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.

Soften the blow

There are a couple of rules that soften the blow of this recapture tax to some degree.

The increase in tax imposed on the C corporation in its final tax year because of the LIFO recapture may be paid over a four-year period.
The basis of the corporation’s inventory will be increased by the amount of income recognized. So, the net effect may be one primarily of timing — because of the basis increase, the corporation may realize less income in later years, though only if there are decrements in the adjusted LIFO layer.

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.

Selling stock by year-end? Watch out for the wash sale rule

Details: Published: 15 December 2022 15 December 2022

If you’re thinking about selling stock shares at a loss to offset gains that you’ve realized during 2022, it’s important to watch out for the “wash sale” rule.

The loss could be disallowed

Under this rule, if you sell stock or securities for a loss and buy substantially identical stock or securities back within the 30-day period before or after the sale date, the loss can’t be claimed for tax purposes. The rule is designed to prevent taxpayers from using the tax benefit of a loss without parting with ownership in any significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold. (If you participate in any dividend reinvestment plans, it’s possible the wash sale rule may be inadvertently triggered when dividends are reinvested under the plan, if you’ve separately sold some of the same stock at a loss within the 30-day period.)

The wash sale rule even applies if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA.

Although a loss can’t be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. So, the disallowed amount can be claimed when the new stock is finally disposed of in the future (other than in a wash sale).

Let’s look at an example

Say you bought 500 shares of ABC, Inc. for $10,000 and sold them on November 4 for $3,000. On November 29, you buy 500 shares of ABC again for $3,200. Since the shares were “bought back” within 30 days of the sale, the wash sale rule applies. Therefore, you can’t claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.

If only a portion of the stock sold is bought back, only that portion of the loss is disallowed. So, in the above example, if you’d only bought back 300 of the 500 shares (60%), you’d be able to claim 40% of the loss on the sale ($2,800). The remaining $4,200 loss that’s disallowed under the wash sale rule would be added to your cost of the 300 shares.

If you’ve cashed in some big gains in 2022, you may be looking for unrealized losses in your portfolio so you can sell those investments before year-end. By doing so, you can offset your gains with your losses and reduce your 2022 tax liability. But be careful of the wash sale rule. We can answer any questions you may have.

Do you qualify for the QBI deduction? And can you do anything by year-end to help qualify?

Details: Published: 13 December 2022 13 December 2022

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:

Available to owners of sole proprietorships, single member limited liability companies (LLCs), partnerships, and S corporations, as well as trusts and estates.
Intended to reduce the tax rate on QBI to a rate that’s closer to the corporate tax rate.
Taken “below the line.” In other words, it reduces your taxable income but not your adjusted gross income.
Available regardless of whether you itemize deductions or take the standard deduction.

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.

Year-end planning tip

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.

Answers to your questions about taking withdrawals from IRAs

Details: Published: 08 December 2022 08 December 2022

As you may know, you can’t keep funds in your traditional IRA indefinitely. You have to start taking withdrawals from a traditional IRA (including a SIMPLE IRA or SEP IRA) when you reach age 72.

The rules for taking required minimum distributions (RMDs) are complicated, so here are some answers to frequently asked questions.

What if I want to take out money before retirement?

If you want to take money out of a traditional IRA before age 59½, distributions are taxable and you may be subject to a 10% penalty tax. However, there are several ways that the 10% penalty tax (but not the regular income tax) can be avoided, including to pay: qualified higher education expenses, up to $10,000 of expenses if you’re a first-time homebuyer and health insurance premiums while unemployed.

When do I take my first RMD?

For an IRA, you must take your first RMD by April 1 of the year following the year in which you turn 72, regardless of whether you’re still employed.

How do I calculate my RMD?

The RMD for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is 10 or more years younger than the owner.

How should I take my RMDs if I have multiple accounts?

If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all of your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You don’t have to take a separate RMD from each IRA.

Can I withdraw more than the RMD?

Yes, you can always withdraw more than the RMD. But you can’t apply excess withdrawals toward future years’ RMDs.

In planning for RMDs, you should weigh your income needs against the ability to keep the tax shelter of the IRA going for as long as possible.

Can I take more than one withdrawal in a year to meet my RMD?

You may withdraw your annual RMD in any number of distributions throughout the year, as long as you withdraw the total annual minimum amount by December 31 (or April 1 if it is for your first RMD).

What happens if I don’t take an RMD?

If the distributions to you in any year are less than the RMD for that year, you’ll be subject to an additional tax equal to 50% of the amount that should have been paid out, but wasn’t.

Plan ahead wisely

Contact us to review your traditional IRAs and to analyze other aspects of your retirement planning. We can also discuss who you should name as beneficiaries and whether you could benefit from a Roth IRA. Roth IRAs are retirement savings vehicles that operate under a different set of rules than traditional IRAs. Contributions aren’t deductible but qualified distributions are generally tax-free.

Choosing a business entity? Here are the pros and cons of a C corporation

Details: Published: 07 December 2022 07 December 2022

If you’re launching a new business venture, you’re probably wondering which form of business is most suitable. Here is a summary of the major advantages and disadvantages of doing business as a C corporation.

A C corporation allows the business to be treated and taxed as a separate entity from you as the principal owner. A properly structured corporation can protect you from the debts of the business yet enable you to control both day-to-day operations and corporate acts such as redemptions, acquisitions and even liquidations. In addition, the corporate tax rate is currently 21%, which is lower than the highest noncorporate tax rate.

Following formalities

In order to ensure that a corporation is treated as a separate entity, it’s important to observe various formalities required by your state. These include:

Filing articles of incorporation,
Adopting bylaws,
Electing a board of directors,
Holding organizational meetings, and
Keeping minutes of meetings.

Complying with these requirements and maintaining an adequate capital structure will ensure that you don’t inadvertently risk personal liability for the debts of the business.

Potential disadvantages

Since the corporation is taxed as a separate entity, all items of income, credit, loss and deduction are computed at the entity level in arriving at corporate taxable income or loss. One potential disadvantage to a C corporation for a new business is that losses are trapped at the entity level and thus generally cannot be deducted by the owners. However, if you expect to generate profits in year one, this might not be a problem.

Another potential drawback to a C corporation is that its earnings can be subject to double tax — once at the corporate level and again when distributed to you. However, since most of the corporate earnings will be attributable to your efforts as an employee, the risk of double taxation is minimal since the corporation can deduct all reasonable salary that it pays to you.

Providing benefits, raising capital

A C corporation can also be used to provide fringe benefits and fund qualified pension plans on a tax-favored basis. Subject to certain limits, the corporation can deduct the cost of a variety of benefits such as health insurance and group life insurance without adverse tax consequences to you. Similarly, contributions to qualified pension plans are usually deductible but aren’t currently taxable to you.

A C corporation also gives you considerable flexibility in raising capital from outside investors. A C corporation can have multiple classes of stock — each with different rights and preferences that can be tailored to fit your needs and those of potential investors. Also, if you decide to raise capital through debt, interest paid by the corporation is deductible.

Although the C corporation form of business might seem appropriate for you at this time, you may in the future be able to change from a C corporation to an S corporation, if S status is more appropriate at that time. This change will ordinarily be tax-free, except that built-in gain on the corporate assets may be subject to tax if the assets are disposed of by the corporation within 10 years of the change.

The optimum choice

This is only a brief overview. Contact us if you have questions or would like to explore the best choice of entity for your business.

Strategies for investors to cut taxes as year-end approaches

Details: Published: 01 December 2022 01 December 2022

The overall stock market has been down during 2022 but there have been some bright spots. As year-end approaches, consider making some moves to make the best tax use of paper losses and actual losses from your stock market investments.

Tax rates on sales

Individuals are subject to tax at a rate as high as 37% on short-term capital gains and ordinary income. But long-term capital gains on most investment assets receive favorable treatment. They’re taxed at rates ranging from 0% to 20% depending on your taxable income (inclusive of the gains). High-income taxpayers may pay an additional 3.8% net investment income tax.

Sell at a loss to offset earlier gains

Have you realized gains earlier in the year from sales of stock held for more than one year (long-term capital gains) or from sales of stock held for one year or less (short-term capital gains)? Take a close look at your portfolio and consider selling some of the losers — those shares that now show a paper loss. The best tax strategy is to sell enough losers to generate losses to offset your earlier gains plus an additional $3,000 loss. Selling to produce this loss amount is a tax-smart idea because a $3,000 capital loss (but no more) can offset the same amount of ordinary income each year.

For example, let’s say you have $10,000 of capital gain from the sale of stocks earlier in 2022. You also have several losing positions, including shares in a tech stock. The tech shares currently show a loss of $15,000. From a tax standpoint, you should consider selling enough of your tech stock shares to recognize a $13,000 loss. Your capital gains will be offset entirely, and you’ll have a $3,000 loss to offset against the same amount of ordinary income.

What if you believe that the shares showing a paper loss may turn around and eventually generate a profit? In order to sell and then repurchase the shares without forfeiting the loss deduction, you must avoid the wash-sale rules. This means that you must buy the new shares outside of the period that begins 30 days before and ends 30 days after the sale of the loss stock. However, if you expect the price of the shares showing a loss to rise quickly, your tax savings from taking the loss may not be worth the potential investment gain you may lose by waiting more than 30 days to repurchase the shares.

Use losses earlier in the year to offset gains

If you have capital losses on sales earlier in 2022, consider whether you should take capital gains on some stocks that you still hold. For example, if you have appreciated stocks that you’d like to sell, but don’t want to sell if it causes you to have taxable gain this year, consider selling just enough shares to offset your earlier-in-the-year capital losses (except for $3,000 that can be used to offset ordinary income). Consider selling appreciated stocks now if you believe they’ve reached (or are close to) the peak price and you also feel you can invest the proceeds from the sale in other property that’ll give you a better return in the future.

These are just some of the year-end strategies that may save you taxes. Contact us to discuss these and other strategies that should be put in place before the end of December.

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