Within a period of just a month, a Minnesota woman was charged with skimming more than $300,000 from her animal rescue charity, a Florida man was charged with multiple felonies for running several charities for his personal benefit, and a New York man was sentenced to 18 months in prison for defrauding his trade association employer. Not-for-profit organizations have about a 9% chance of being defrauded, according to the Association of Certified Fraud Examiners. Think of it this way: That’s almost one in 10.

Fortunately, strong internal controls can reduce your nonprofit’s risk. You may not think you need them, particularly if your leaders, staffers, volunteers and clients consider themselves to be one big happy family. But controls and trust can coexist.


Are your controls effective?
Internal controls are policies and procedures that govern everything from accepting cash to signing checks to training staff to keeping your IT network secure. Most nonprofits have at least a rudimentary set of internal controls, but dishonest employees and other criminals can usually find gaps in environments where controls aren’t thorough or adequately followed.

Why might nonprofits skimp on controls or enforcement? They may be so focused on programming that they don’t allocate enough budget dollars and other resources to fraud prevention. It’s not uncommon for executives or board members to indicate that fraud prevention is low on their priority list — probably because they underestimate their fraud risk.

Nonprofit boards may inadvertently enable fraud when they place too much trust in the executive director and fail to challenge that person’s financial representations. Unlike their for-profit counterparts, nonprofit board members may lack financial oversight experience.


Which controls are critical?
Some of the most common types of employee theft in nonprofit organizations are check tampering, expense reimbursement fraud and billing schemes. But proper segregation of duties — for example, assigning account reconciliation and fund depositing to different staff members — is a relatively easy and quite effective method of preventing such fraud. Strong management oversight and confidential fraud hotlines open to all stakeholders also have been proven to reduce employee theft.

Indeed, although you should trust staffers, you should also verify what they tell you. Conduct background checks on all prospective hires, as well as volunteers who’ll be handling money or financial records. Also, provide an orientation to new board members to ensure they have a clear understanding of their fiduciary role and the potential consequences of committing fraud.

Finally, handle fraud incidents seriously. Many nonprofits choose to quietly fire thieves and sweep their actions under the rug. But if an incident is hushed up, rumors could do more reputational damage than publicly addressing the issue head-on. It’s better to file a police report, consult an attorney and inform major stakeholders about the incident.


Do you trust too much?
Trust tends to be the biggest potential fraud weakness for nonprofits. Although it’s fine to regard your staff, volunteers and other stakeholders like family, you need to set guardrails. Contact us for help determining which controls you might lack and how to implement them.

With events related to climate change continuing to rock the news cycle, many business owners are looking for ways to lessen their companies’ negative environmental impact. One move you may want to consider, quite literally, is relocating to a commercial property with a “green lease.”

Increasing demand

Green leases are sometimes also known as “aligned,” “energy-efficient” or “high-performance” leases. Whatever the label, they generally use financial incentives to promote sustainable property management and energy usage. The leases typically include provisions related to cost recovery, submeters, data sharing and minimum efficiency standards. Done right, they can cut energy costs, conserve critical resources and improve building operations — offering benefits to property owners and tenants alike.

Businesses that sign on to green leases may gain several competitive advantages. Many customers and investors now prioritize visible commitments to environmentally friendly business practices. More and more job candidates do, too. Sustainability is particularly important to Millennials and members of Generation Z, who together now make up the largest subset of the U.S. workforce.
In addition, the pandemic boosted interest in so-called “healthy buildings,” which are often available through green leases. Healthy buildings feature more efficient lighting as well as pathogen-fighting heating, ventilation and air conditioning (HVAC) systems. For example, they draw in fresh air, as opposed to recirculating indoor air. Some even use ultraviolet germicidal irradiation to kill bacteria and mold, as well as reduce the number of viral particles in the air.

A research study published by Harvard University in 2021 found that working in an office with higher air quality and better ventilation can raise employees’ cognitive functioning. Indeed, subjects’ decision-making performance improved when they were exposed to higher ventilation rates and lower chemical and carbon dioxide levels.


Lease provisions
If your company decides to explore environmentally friendly commercial properties, you’ll likely encounter standardized green leases. However, you may want to negotiate or at least double-check provisions regarding:
Certification. Many commercial properties are certified green under various standards, the most well-known of which is Leadership in Energy and Environmental Design (LEED). The standards usually require periodic recertification. To ensure renewal, property owners may require commercial tenants to use sustainable design components, construction materials and office equipment.


Improvements. Property owners don’t want to jeopardize their buildings’ certifications with noncompliant tenant improvements. So, if you’ll likely want to substantially improve a property, you’ll need to ensure the project satisfies the relevant lease terms. In the event you install energy-saving improvements that benefit both you and the property owner, the lease should provide for how costs will be shared.


Renewable energy. If applicable, the lease should address how a conversion to a renewable energy source, such as solar panels, will be handled. For example, which party will be responsible for installation and maintenance? Who will receive any revenue from selling excess output to local utilities (where allowed)?
Green leases also may contain provisions related to:

• HVAC system design and components,
• Water usage,
• Energy management and monitoring,
• Irrigation and landscaping,
• Air quality,
• Lighting,
• Waste management and recycling, and
• Maintenance, including cleaning products used.

A lease may even include transportation components, such as requiring a tenant to provide bike racks or public transportation passes for employees.


Many positives
There are many positive reasons to consider signing a green lease. However, the costs of relocating and ongoing expenses related to the lease still must make sense for your business. We can assist you in analyzing the decision, including projecting the financial impact.

Are your not-for-profit’s board members subject to term limits? If not, you might want to consider implementing what’s widely considered a best practice.

Some board members lose enthusiasm for the job over time or might even become ineffective or disruptive. Negative attitudes at the board level can easily trickle down and harm your organization’s programs and initiatives, not to mention its financial health. Then there are the board members who invest so much time and energy in your nonprofit that they risk burnout. Term limits give all of these board members a way to make a graceful exit.


Pros and cons
One of the great advantages of term limits is that they can help your organization build a more diverse board over time. They allow you to add people with certain skills and perspectives (such as financial or political expertise) as needed and make it easier to ensure your board represents its community’s gender, racial, economic, religious and other diverse groups. And as board positions open up, you can expand your circle of invested stakeholders beyond the usual core group of volunteers.

Another advantage is that term limits preempt “power hoarding” issues that can occur when authority is concentrated in the hands of a small, entrenched group. Sometimes, such cliques intimidate new members, as well as staff, and block necessary change. Regular turnover provides opportunities to eliminate domineering personalities and improve group dynamics.

Also, term limits can help prevent insider fraud. It’s generally easier for long-term board members who know an organization’s ins and outs to override internal controls and hide fraudulent schemes.

Term limits could have some disadvantages, however, including potential loss of institutional knowledge, expertise and donations from both board members and their networks. You could lose significant volunteer hours, as well. Regular turnover also requires time and resources. You’ll need to regularly identify, recruit and train new members and work to build the cohesiveness required for collaboration.


Setting terms
If term limits sound like a good idea, you’ll need to establish rules. Don’t adopt terms that are too long because it could discourage new members from applying. On the other hand, terms that are too short don’t give members sufficient time to make meaningful contributions, at least if they’re combined with tight limits on the number of terms a member can serve. Short terms also mean holding frequent elections.

You might, for example, allow two consecutive three-year terms or a total of six years with a minimum one-year hiatus between terms. To reduce disruption, structure it so that only one-third of the board departs at a time. Consider conferring emeritus status or establishing advisory boards to keep these departing board members invested.


Amending bylaws
If you don’t already have term limits, you’ll need to amend your bylaws to establish them. 

More and more U.S. workers are calling for “pay transparency,” and not-for-profit employers need to listen — and act. Pay transparency is the idea that employers should openly share their compensation policies and practices with job candidates, current employees and the public. Many states and cities have already passed pay transparency laws. But even if you aren’t subject to such laws, consider disclosing pay ranges for specific positions and explaining how your organization calculates wages, raises and bonuses.


Employers and employees are on board

In its 2023 Compensation Best Practices Report, software and data company Payscale reported that 45% of employers now include pay ranges in their job postings. What’s more, 48% of organizations said that legislation is driving them to change compensation policies. In a different Payscale report, a majority of employers stated that compensation transparency, when analyzed in isolation, “decreases [worker] intent to quit by 30%.”

Surveys of employees, particularly younger workers, underline how important transparency is today. In a 2023 report, technology services company Symplicity revealed that 87% of Generation Z respondents thought that pay transparency was “important” or “very important,” and over half said they’d be discouraged from applying for a position if a salary range wasn’t publicized.


Providing rationalizations

But simply divulging compensation ranges in job listings isn’t enough. Your nonprofit also needs to clearly explain to job candidates how you determine pay and why the compensation you provide is competitive with that of other nonprofits (and, possibly, with what similar for-profit employers are offering).

Also explain what staffers need to do to receive raises — and what kinds of raises are realistic. Be as specific as possible and make sure you discuss the possibility of salary increases and job promotions with employees during their performance evaluations.


Comply or adopt voluntarily

If your state or municipality has passed laws regarding pay transparency, review your employment policies to ensure they’re in compliance. If no law applies, consider adopting these practices voluntarily. Pay policy disclosure can help you recruit serious job candidates in what remains a tight labor market. It can also help foster the kind of trusting and equitable work culture that most nonprofits strive to achieve.
If you’re unsure about how to set salary ranges, contact us. We can analyze internal and external data to determine your nonprofit’s ideal compensation targets.

When many business owners see the term “financial reporting,” they immediately think of their year-end financial statements. And, indeed, properly prepared financial statements generated at least once a year are critical.
But engaging in other types of financial reporting more frequently may help your company stay better attuned to the nuances of running a business in today’s inflationary and competitive environment.


Spot trends and trouble

Just how often your company should engage in what’s often referred to as “interim” financial reporting depends on factors such as its size, industry and operational complexity. Nevertheless, monthly, quarterly and midyear financial reports can enable you to spot trends and get early warnings of potential trouble.
For example, you might compare year-to-date revenue for 2023 against your annual budget. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives or change your marketing strategy.

It’s also important to more closely track costs in light of the current level of inflation. If your business is starting to lose money, you might need to consider raising prices or cutting discretionary spending. You could, for instance, temporarily scale back on your hours of operation, reduce travel expenses or implement a hiring freeze.

Your balance sheet is important as well. Reviewing major categories of assets and liabilities can help you detect working capital problems before they spiral out of control. For example, a buildup of accounts receivable could signal troubles with collections. A low stock of key inventory items may foreshadow delayed shipments and customer complaints, signaling an urgent need to find alternative suppliers. Or, if your company is drawing heavily on its line of credit, your operations might not be generating sufficient cash flow.


Don’t panic

If interim financial reports do uncover inconsistencies, they may not indicate a major crisis. Some anomalies might be attributable to more informal accounting practices that are common during the calendar year. Typically, either your accounting staff or CPA can correct these items before year-end financial statements are issued.

For instance, some controllers might liberally interpret period “cutoffs” or use subjective estimates for certain account balances and expenses. In addition, interim financial reports typically exclude costly year-end expenses, such as profit sharing and shareholder bonuses. The interim reports, therefore, tend to paint a rosier picture of a company’s performance than its full year-end financial statements.
Furthermore, many companies perform time-consuming physical inventory counts exclusively at year end. So, the inventory amount shown on the interim balance sheet might be based solely on computer inventory schedules or, in some instances, management’s estimate using historic gross margins.

Similarly, accounts receivable may be overstated because overworked finance managers might lack the time or personnel to adequately evaluate whether the interim balance contains any bad debts.


Glean more insights
Many business owners have had an “aha moment” or two when studying their year-end financial statements. Why not glean those insights more often? We can help you decide how frequently to engage in interim financial reporting and assist you in designing the reports that provide the information you need.

As summer slips away and fall shuffles forth, business owners and their leadership teams might want to take a look at the overall marketing strategy they’ve pursued this year. How’s yours doing? It may not be entirely too late to make some adjustments to ensure your sales numbers wind up where you want them.


What success looks like

The simple question you might ask regarding your marketing strategy is, “What are we trying to accomplish, and can we still get there?” (Okay, maybe that’s two questions.) Determine as specifically as possible what marketing success should look like this year.
If the goal is indeed to increase sales, what metrics are you using to calculate whether you’ve achieved adequate growth? You should be able to lay out these metrics in a report or chart to help you determine whether your money has been well spent so far.

Many companies divide their marketing efforts between recurring activities and “one off” or ad-hoc initiatives. For example, they invest in advertising on certain websites, social media platforms, or in a magazine or newspaper. Then they look for special opportunities, such as a local festival or annual trade show. You should have data indicating whether these initiatives are paying off, too.

Fine tune your efforts going forward by comparing inflows to outflows from various types of marketing. Will you be able to create a revenue inflow from sales that at least matches, if not exceeds, the outflow of marketing dollars?


Tracking methods

It’s imperative to track sources of new business, as well as leads and customers. Be sure your staff is asking new customers how they heard about your company. This one simple question can provide invaluable information about which aspects of your marketing strategy are generating the most leads.

Further, once you’ve discovered a lead or new customer, ensure that you maintain contact with the person or business. Letting leads and customers fall through the cracks will undermine your marketing efforts. If you haven’t already, explore (or upgrade) customer relationship management software to help you better track and analyze key data points.
In addition to generating leads, marketing can help improve brand awareness. Although an increase in brand awareness may not immediately translate to increased sales, it tends to do so over time. Identify ways to measure the impact of marketing efforts on your business’s brand. Possibilities include customer surveys, website traffic data and social media interaction metrics.


It can pay off

Sometimes business owners look at marketing as a sunk cost. You know you’ve got to allocate dollars to it, but the results may seem random and unpredictable. By refining your approach and tracking the right metrics, however, you can help ensure that your marketing strategy pays off. We can assist you in analyzing your marketing costs and picking the right ways to measure this mission-critical activity.

If your not-for-profit focuses all of its fundraising energy on the holiday season and end of the year, it’s not misguided. After all, 26% of charitable giving to nonprofits occurs in December, according to the 2023 M+R Benchmarks Study. But that means almost three quarters of annual donations need to be obtained during the rest of the year. Even if your December haul is much greater, you still risk experiencing cash shortfalls.
The best way to make fundraising an ongoing process with strategies you can use any time of the year is to build a fundraising plan.


It takes a team

The first step to a solid fundraising plan is to form a fundraising committee. This should consist of board members, your executive director and other key staffers. You may also want to include major donors and active community members.
Committee members need to start by reviewing past fundraising sources and approaches and weighing the advantages and disadvantages of each. Even if your overall fundraising efforts have been less than successful, some sources and approaches may still be worth keeping. Next, brainstorm new donation sources and methods and select those with the greatest fundraising potential.
As part of your plan, outline the roles you expect board members to play in fundraising efforts. For example, in addition to making their own donations, they can be crucial links to corporate and individual supporters.


A flexible plan

Once the committee has developed a plan for where to seek funds and how to ask for them, it’s time to create a fundraising budget that includes operating expenses, staff costs and volunteer projections. After the plan and budget have board approval, develop an action plan for achieving each objective and assign tasks to specific individuals.

Most important, once you’ve set your plan in motion, don’t let it sit on the shelf. Regularly evaluate the plan and be ready to adapt it to organizational changes and unexpected situations. Although you’ll want to give new fundraising initiatives time to succeed, don’t be afraid to cut your losses if it’s obvious an approach isn’t working.


Get going now

Perhaps you’re gearing up for your year-end campaign (most nonprofits start planning in September or October). That doesn’t mean you should wait until the new year to build a more comprehensive fundraising plan. Your organization’s cash flow depends on steady income, so the sooner you put a plan in place, the better. Contact us for more information.

Tax reporting may be the last thing on your mind when planning a special fundraising event. But your not-for-profit should carefully track revenues and expenses and retain related documentation now to facilitate the reporting process later. Pay attention to the following issues.


What to report

Tax reporting for an event may require different — and more — information than financial statement reporting does. If your organization adheres to Generally Accepted Accounting Principles (GAAP), you usually must report revenue and expenses related to special events on your financial statements as special event revenue. For tax purposes, though, your organization may be able to report some of the event ticket revenue as contributions. For example, if attendees pay more for a ticket to a dinner than the dinner’s fair market value (FMV), the excess would be a contribution.

Tax reporting can require more granular information, too. You report special event data on IRS Form 990, “Return of Organization Exempt from Income Tax.” If you’re reporting more than $15,000 in fundraising event gross income and contributions, you also need to complete Schedule G, “Supplemental Information Regarding Fundraising or Gaming Activities.”

Schedule G requires you to report amounts for cash prizes, noncash prizes, facilities rental, food and beverages, and entertainment. If your event includes gaming, you’ll have to answer a series of multi-part questions on Schedule G, too. In addition, you’ll need to allocate income and expenses between the gaming and fundraising event on Form 990.


How to handle donations and donors

Nonprofits often rely on donated services or facilities, as well as the work of volunteers. Although GAAP generally requires nonprofits to record such in-kind contributions and sometimes the value of volunteer time, the IRS doesn’t include them in contributions or expenses. Goods donated for an event, on the other hand, are reported as contribution revenue and, when used, as expenses.
Be sure to provide donors with information about the tax benefits they receive from participating in a special event. They might not be aware that their deductible contributions are reduced by the FMV of the benefit they receive. It’s generally up to you to report the value donors receive in a written statement, reminding them to deduct only the excess of their payment over the FMV.

Specifically, you must provide the disclosure for payments of more than $75. Note that it’s the initial payment amount that triggers the obligation — not the amount of the deductible portion. Failure to make the disclosure can result in a penalty of $10 per contribution, up to $5,000 per fundraising event.
Even if it’s not legally required, you should routinely provide special event participants with a statement of the benefits they receive. You’ll make it easier for them at tax time, which could result in the kind of goodwill that leads to future support.


When to start organizing

Although it may seem like more work, planning for tax reporting while you’re still in the early stages of your event preparation will pay dividends later. If you need help collecting data or complying with IRS rules, contact us.

Recently, the critically acclaimed television show “Succession” aired its final episode. If the series accomplished anything, it was depicting the chaos and uncertainty that can take place if a long-time business owner fails to establish a clearly written and communicated succession plan.
While there are many aspects to succession planning, one way to put some clear steps in writing — particularly if your company has multiple owners — is to draft a buy-sell agreement.


Avoiding conflicts

A “buy-sell,” as it’s often called for short, is essentially a contract that lays out the terms and conditions under which the owners of a business, or the business itself, can buy out an owner’s interest if a “triggering event” occurs. Such events typically include an owner dying, becoming disabled, getting divorced or deciding to leave the company.

If an owner dies, for example, a buy-sell can help prevent conflicts — and even litigation — between surviving owners and a deceased owner’s heirs. In addition, it helps ensure that surviving owners don’t become unwitting co-owners with a deceased owner’s spouse who may have little knowledge of the business or interest in participating in it.

A buy-sell also spells out how ownership interests are valued. For instance, the agreement may set a predetermined share price or include a formula for valuing the company that’s used upon a triggering event, such as an owner’s death or disability. Or it may call for the remaining owners to engage a business valuation specialist to estimate fair market value.

By facilitating the orderly transition of a deceased, disabled or otherwise departing owner’s interest, a buy-sell helps ensure a smooth transfer of control to the remaining owners or an outside buyer.
This minimizes uncertainty for all parties involved. Remaining owners can rest assured that they’ll retain ownership control without outside interference. The departing owner, or in some cases that person’s spouse and heirs, know they’ll be fairly compensated for the ownership interest in question. And employees will feel better about the company’s long-term stability, which may boost morale and retention.

Funding the agreement

There are several ways to fund a buy-sell. The simplest approach is to create a “sinking fund” into which owners make contributions that can be used to buy a departing owner’s shares. Or remaining owners can simply borrow money to purchase ownership shares.
However, there are potential complications with both options. That’s why many companies turn to life insurance and disability buyout insurance as a funding mechanism. Upon a triggering event, such a policy will provide cash that can be used to buy the deceased owner’s interest. There are two main types of buy-sells funded by life insurance:

1. Cross-purchase agreements. Here, each owner buys life insurance on the others. The proceeds are used to purchase the departing owner’s interest.

2. Entity-purchase agreements. In this case, the business buys life insurance policies on each owner. Policy proceeds are then used to purchase an owner’s interest following a triggering event. With fewer ownership interests outstanding, the remaining owners effectively own a higher percentage of the company.
A cross-purchase agreement tends to work better for businesses with only two or three owners. Conversely, an entity-purchase agreement is often a good choice when there are more than three owners because of the cost and complexity of owners having to buy so many different life insurance policies.

Getting expert guidance
Creating, administering and executing a buy-sell agreement calls for expert assistance. Our firm can help you identify, gather and organize the relevant financial information involved.

Summertime can mean hiring time for many types of businesses. With legions of working-age kids and college students out of school, and some spouses of business owners looking for part-time or seasonal work, companies may have a much deeper hiring pool to dive into this time of year.
If you’re considering hiring your children or spouse, there could be some tax advantages in play. However, you’ll need to be careful about following the IRS rules.


Employing your kids

Children who work for the business of a parent are subject to income tax withholding regardless of age. If the company is a partnership or corporation, children’s wages are also subject to Social Security and Medicare taxes (commonly known as FICA taxes) and Federal Unemployment Tax Act (FUTA) taxes — unless each partner is a parent of the child.

However, substantial savings are possible for a business that’s a sole proprietorship or a partnership in which each partner is a parent of the child-employee. In such cases:

• Children under age 18 aren’t subject to FICA or FUTA taxes, and
• Children who are 18 to 20 years old are subject to FICA taxes but not FUTA taxes.

As you can see, substantial tax savings may be in the offing depending on your child’s age. Avoiding FICA or FUTA taxes, or both, means more money in your pocket and that of your child.

It’s also worth noting that children generally are taxed at lower rates than their parents. Moreover, a child’s income can be offset partially or completely by the child’s standard deduction ($13,850 for single taxpayers in 2023). If your child earns less than the standard deduction, income is tax-free for the child on top of being deductible for the business.


Hiring your spouse

When your spouse goes to work for your business, that individual’s wages are subject to income tax withholding and FICA taxes — but not FUTA taxes. Employers generally must pay 6% of an employee’s first $7,000 in earnings as the FUTA tax, subject to tax credits for state unemployment taxes paid. Thus, you’ll save the money you’d otherwise spend for a nonspouse employee’s FUTA taxes.
It’s important that your spouse is treated and compensated as an employee. When spouses run a business together, and they share in profits and losses, the IRS may deem them partners — even in the absence of a formal partnership agreement.
You also may reap some savings from hiring your spouse if you’re a sole proprietor and have a Health Reimbursement Arrangement (HRA). Your family can receive tax-free reimbursement from the business for medical expenses, and the business can deduct the reimbursements — reducing your income and self-employment taxes. HRA reimbursements aren’t subject to FICA taxes and the plan itself is a tax-free fringe benefit for your spouse. Do note, however, that this strategy isn’t available if you have other employees.


Handling it properly

Whether you decide to hire a child or spouse, or both, you’ll need to step carefully. Assign them actual job duties, pay them a reasonable amount, and keep thorough employment records (including timesheets as well as IRS Forms W-4 and I-9). Essentially, treat them as you would any other employee. Our firm can help you handle the situation properly.

Using the cash basis of accounting may make sense for your not-for-profit organization — at least at this stage. Many smaller nonprofits use the cash basis to prepare their financial statements because it’s generally quick, easy and intuitive and can alert them to current cash flow challenges. However, there’s a potential problem with cash basis accounting: It can require year-end adjustments. Let’s look at the issue.


Easy and intuitive method

Under cash basis accounting, income is recognized when you receive payments and expenses are recognized when you pay them. The cash “ins” and “outs” are totaled, generally by accounting software, to produce the internal financial statements and trial balance you use to prepare periodic statements.
The simplicity of this accounting method comes at a price, however: Accounts receivable (income you’re owed but haven’t yet received, such as pledges) and accounts payable and accrued expenses (expenses you’ve incurred but haven’t yet paid) don’t exist.

The result is that if your nonprofit periodically prepares internal financial statements for your board, your auditors may propose adjustments to these interim statements at year end. Why do auditors do this? Generally, it’s to reflect differences due to cash basis vs. accrual basis financial statements.


A truer picture

With accrual accounting, accounts receivable, accounts payable and other accrued expenses are recognized when they occur, allowing your financial statements to be a truer picture of your organization at any point in time. If a donor pledges money, you recognize it when it’s pledged rather than waiting until you receive the money — which could be next month or even next year.
Generally Accepted Accounting Principles (GAAP) require the use of accrual accounting and recognition of contributions as income when promised. Often, year-end audited financial statements are prepared on a GAAP basis. Larger nonprofits and charities with diverse funding sources typically use accrual accounting. Also, some charities are required by their funders to use it.
Note that internal and year-end statements can differ for reasons other than accounting method. For example, auditors may propose adjusting certain entries if, for example, your organization is party to a lawsuit for which there’s a reasonable estimate of the amount to be received or paid.


Minimize disparities

Disparities between monthly or quarterly and year-end financial statements can be confusing and inconvenient. Regardless of your accounting method, you can reduce such occurrences by using software suited to your nonprofit’s specific needs. Contact us for software recommendations and help with accounting estimates.

With the pandemic behind us and a red-hot summer in full swing, many of your company’s employees may be finally rediscovering the uninhibited joys of vacation.

Your workers might be having so much fun, in fact, that they might highly value being able to buy even more paid time off (PTO) as an employee benefit. Such a perk could also catch the attention of job candidates. Well, it’s all possible if your business sponsors a cafeteria plan (sometimes referred to as a Section 125 plan).


Compliance requirements

A “PTO buying” feature under a cafeteria plan allows employees to prospectively elect, during the annual open enrollment period before the beginning of each plan year, to buy additional PTO beyond that which they’d otherwise receive from their employer. These purchases typically occur via salary reductions or flex credits.
The rules for PTO buying under a cafeteria plan are complex, but let’s review a couple of the most critical compliance requirements. First, the PTO buying feature must not defer compensation from one plan year to the next. This means that PTO bought under the cafeteria plan generally must be used, cashed out or forfeited by the end of the plan year. Employees can’t carry over the PTO for use in a later plan year.

If you opt to permit employees to cash out unused PTO at the end of the plan year, you’ll need to clearly inform them that these dollars will be included in their taxable income. Employers can also choose to set up the plan feature so that employees simply forfeit unused PTO when the plan year ends. However, before going this route, you should check into whether your state’s laws restrict such forfeitures.

Second, something called the “ordering rule” applies. The IRS refers to additional PTO bought through a cafeteria plan as “elective” PTO. The ordering rule requires employees to use nonelective PTO before elective PTO. Thus, they can use their purchased PTO only after exhausting all PTO earned under normal compensation.
The practical consequence of the ordering rule is that employees must expend all their PTO — whether elective or nonelective — to prevent a cash-out or forfeiture of any elective PTO at the end of the plan year. Thus, a PTO buying feature under a cafeteria plan may not be a good fit for businesses with PTO policies that allow employees to carry over unused nonelective PTO to future years. And, again, a buying feature might conflict with state laws that prohibit forfeiture of unused PTO.


An appealing benefit.

Being able to buy additional PTO may not only be an appealing way to give employees more “beach time,” but also (and on a more serious note) a means of giving staff members more flexibility to care for their mental health. However, as mentioned, the rules involved are complex, so you’ll need to design and manage this cafeteria-plan feature carefully. Contact us for further information and 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.


Protecting your personal assets
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.


Tax issues
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.


Consider all angles
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’re age 50 or older, you can probably make extra “catch-up” contributions to your tax-favored retirement account(s). It is worth the trouble? Yes! Here are the rules of the road.

The deal with IRAs

Eligible taxpayers can make extra catch-up contributions of up to $1,000 annually to a traditional or Roth IRA. If you’ll be 50 or older as of December 31, 2023, you can make a catch-up contribution for the 2023 tax year by April 15, 2024.
Extra deductible contributions to a traditional IRA create tax savings, but your deduction may be limited if you (or your spouse) are covered by a retirement plan at work and your income exceeds certain levels.

Extra contributions to Roth IRAs don’t generate any up-front tax savings, but you can take federal-income-tax-free qualified withdrawals after age 59½. There are also income limits on Roth contributions.
Higher-income individuals can make extra nondeductible traditional IRA contributions and benefit from the tax-deferred earnings advantage.


How company plans stack up

You also have to be age 50 or older to make extra salary-reduction catch-up contributions to an employer 401(k), 403(b), or 457 retirement plan — assuming the plan allows them and you signed up. You can make extra contributions of up to $7,500 to these accounts for 2023. Check with your human resources department to see how to sign up for extra contributions.
Salary-reduction contributions are subtracted from your taxable wages, so you effectively get a federal income tax deduction. You can use the resulting tax savings to help pay for part of your extra catch-up contribution, or you can set the tax savings aside in a taxable retirement savings account to further increase your retirement wealth.


Tally the amounts

Here’s the proof of how much you can accumulate.

IRAs
Let’s say you’re age 50 and you contribute an extra $1,000 catch-up contribution to your IRA this year and then do the same for the following 15 years. Here’s how much extra you could have in your IRA by age 65 (rounded to the nearest $1,000).
4% Annual Return 6% Annual Return 8% Annual Return $22,000 $26,000 $30,000
Remember: Making larger deductible contributions to a traditional IRA can also lower your tax bills. Making additional contributions to a Roth IRA won’t, but you can take more tax-free withdrawals later in life.

Company plans
Say you’ll turn age 50 next year. You contribute an extra $7,500 to your company plan next year. Then, you do the same for the next 15 years. Here’s how much more you could have in your 401(k), 403(b), or 457 plan account (rounded to the nearest $1,000).
4% Annual Return 6% Annual Return 8% Annual Return $164,000 $193,000 $227,000
Again, making larger contributions can also lower your tax bill.

Both IRA and company plans
Finally, let’s say you’ll turn age 50 next year. If you’re eligible, you contribute an extra $1,000 to your IRA for next year plus you make an extra $7,500 contribution to your company plan. Then, you do the same for the next 15 years. Here’s how much extra you could have in the two accounts combined (rounded to the nearest $1,000).
4% Annual Return 6% Annual Return 8% Annual Return $186,000 $219,000 $257,000


Make retirement more golden

As you can see, making extra catch-up contributions can add up to some pretty big numbers by the time you retire. If your spouse can make them too, you can potentially accumulate even more. Contact us if you have questions or want more information.
 

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.


The S corp advantage

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.


Strategy: Become an S corporation

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.


Potential negative side effect

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.


Other implications

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.

“Thousands of people have lost millions of dollars and their personal information to tax scams,” according to the IRS. The scams may come in through email, text messages, telephone calls or regular mail. Criminals regularly target both individuals and businesses and often prey on the elderly.

Important: The IRS will never contact you by email, text or social media channels about a tax bill or refund. Most IRS contacts are first made through regular mail. So if you get a text message saying it’s the IRS and asking for your Social Security number, it’s someone trying to steal your identity and rob you. Remember that the IRS already has your Social Security number.

“Scammers are coming up with new ways all the time to try to steal information from taxpayers,” said IRS Commissioner Danny Werfel. “People should be wary and avoid sharing sensitive personal data over the phone, email or social media to avoid getting caught up in these scams.”
Here are some of the crimes the IRS has identified in recent months:

Email messages and texts that infect recipients’ computers and phones. In this scam, a phony email claims to come from the IRS. The subject line of the email often states that the message is a notice of underreported income or a refund. There may be an attachment or a link to a bogus web page with your “tax statement.” When you open the attachment or click on the link, a Trojan horse virus is downloaded to your computer.
The trojan horse is an example of malicious code (also known as malware) that can take over your computer hard drive, giving someone remote access to the computer. It may also look for passwords and other information. The scammer will then use whatever information is gathered to commit identity theft, gain access to bank accounts and more.

Phishing and spear phishing messages. Emails or text messages that are designed to get users to provide personal information are called phishing. Spear phishing is a tailored phishing attempt sent to a specific organization or business department.
For example, one spear phishing scam targets employees who work in payroll departments. These employees might get an email that looks like it comes from an official source, such as the company CEO, requesting W-2 forms for all employees. The payroll employees might erroneously reply with these documents, which then provides criminals with personal information about the staff that can be used to commit fraud.
The IRS recommends using a two-person review process if you receive a request for W-2s. In addition, employers should require any requests for payroll to be submitted through an official process, like the employer’s human resources portal.

Scams keep evolving
These are only a few examples of the types of tax scams circulating. Be on guard for any suspicious messages. Don’t open attachments or click on links. Contact us if you get an email about a tax return we prepared. You can also report suspicious emails that claim to come from the IRS at phishing@irs.gov. Those who believe they may already be victims of identity theft should find out what do by going to the Federal Trade Commission’s website, OnGuardOnLine.gov.

The IRS recently released its audit statistics for the 2022 fiscal year and fewer taxpayers had their returns examined as compared with prior years. But even though a small percentage of returns are being chosen for audits these days, that will be little consolation if yours is one of them.


Recent statistics

Overall, just 0.49% of individual tax returns were audited in 2022. However, as in the past, those with higher incomes were audited at higher rates. For example, 8.5% of returns of taxpayers with adjusted gross incomes (AGIs) of $10 million or more were audited as of the end of FY 2022.

However, audits are expected to be on the rise in coming months because the Biden administration has made it a priority to go after high-income taxpayers who don’t pay what they legally owe. In any event, the IRS will examine thousands of returns this year. With proper planning, you may fare well even if you’re one of the unfortunate ones.


Be ready

The easiest way to survive an IRS examination is to prepare in advance. On a regular basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts or other proof — for all items reported on your tax returns.
Keep in mind that if you’re chosen, it’s possible you didn’t do anything wrong. Just because a return is selected for audit doesn’t mean that an error was made. Some returns are randomly selected based on statistical formulas. For example, IRS computers compare income and deductions on returns with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why.

Returns can also be selected if they involve issues or transactions with other taxpayers who were previously selected for audit, such as business partners or investors.

The government generally has three years from when a tax return is filed to conduct an audit, and often the exam won’t begin until a year or more after you file a return.


Tax return complexity

The scope of an audit generally depends on whether it’s simple or complex. A return reflecting business or real estate income and expenses will obviously take longer to examine than a return with only salary income.

In FY 2022, most examinations (78.6%) were “correspondence audits” conducted by mail. The rest were face-to-face audits conducted at an IRS office or “field audits” at the taxpayers’ homes, businesses, or accountants’ offices.

Important: Even if you’re chosen, an IRS examination may be nothing to lose sleep over. In many cases, the IRS asks for proof of certain items and routinely “closes” the audit after the documentation is presented.


Get professional help

It’s prudent to have a tax professional represent you at an audit. A tax pro knows the issues that the IRS is likely to scrutinize and can prepare accordingly. In addition, a professional knows that in many instances IRS auditors will take a position (for example, to disallow certain deductions) even though courts and other guidance have expressed contrary opinions on the issues. Because pros can point to the proper authority, the IRS may be forced to concede on certain issues.
Contact us if you receive an IRS audit letter or simply want to improve your recordkeeping.

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.


Sweeping penalty

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.

Recent cases

Here are two cases that illustrate the risks. A U.S. Appeals Court held a hospital administrator liable for the TFRP. The administrator was responsible for payroll, as well as signing and reviewing checks. She also knew that the financially troubled hospital wasn’t paying withheld taxes to the IRS. Instead of prioritizing paying taxes, she paid vendors and employees’ wages. (Cashaw, CA 5, 5/31/23) A corporation owner’s daughter/corporate officer was assessed a $680,472 TFRP for unpaid payroll taxes. She argued that she wasn’t a responsible party. She owned no stock and couldn’t hire and fire employees. But she did have the power to write checks and pay vendors and was aware of the unpaid taxes. A U.S. Appeals Court found the “great weight of evidence” indicated she was a responsible party and the TFRP was upheld. (Scott, CA 11, 10/31/22)


Best advice

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.

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2023. 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.


July 31
 

• Report income tax withholding and FICA taxes for second quarter 2023 (Form 941) and pay any tax due. (See the exception below, under “August 10.”)
• File a 2022 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10
 

• Report income tax withholding and FICA taxes for second quarter 2023 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15
 

• If a calendar-year C corporation, pay the third installment of 2023 estimated income taxes.
• If a calendar-year S corporation or partnership that filed an automatic six-month extension:
  • File a 2022 income tax return (Form 1120-S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
  • Make contributions for 2022 to certain employer-sponsored retirement plans.

Your business may be able to claim big first-year depreciation tax deductions for eligible real estate expenditures rather than depreciate them over several years. But should you? It’s not as simple as it may seem.


Qualified improvement property

For qualifying assets placed in service in tax years beginning in 2023, the maximum allowable first-year Section 179 depreciation deduction is $1.16 million. Importantly, the Sec. 179 deduction can be claimed for real estate qualified improvement property (QIP), up to the maximum annual allowance.
QIP includes any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service. For Sec. 179 deduction purposes, QIP also includes HVAC systems, nonresidential building roofs, fire protection and alarm systems and security systems that are placed in service after the building is first placed in service.

However, expenditures attributable to the enlargement of the building, any elevator or escalator, or the building’s internal structural framework don’t count as QIP and must be depreciated over several years.


Mind the limitations

A taxpayer’s Sec. 179 deduction can’t cause an overall business tax loss, and the maximum deduction is phased out if too much qualifying property is placed in service in the tax year. The Sec. 179 deduction limitation rules can get tricky if you own an interest in a pass-through business entity (partnership, LLC treated as a partnership for tax purposes, or S corporation). Finally, trusts and estates can’t claim Sec. 179 deductions, and noncorporate lessors face additional restrictions. We can give you full details.


First-year bonus depreciation for QIP

Beyond the Sec. 179 deduction, 80% first-year bonus depreciation is also available for QIP that’s placed in service in calendar year 2023. If your objective is to maximize first-year write-offs, you’d claim the Sec. 179 deduction first. If you max out on that, then you’d claim 80% first-year bonus depreciation.

Note that for first-year bonus depreciation purposes, QIP doesn’t include nonresidential building roofs, HVAC systems, fire protection and alarm systems, or security systems.


Consider depreciating QIP over time
Here are two reasons why you should think twice before claiming big first-year depreciation deductions for QIP.


1. Lower-taxed gain when property is sold

First-year Sec. 179 deductions and bonus depreciation claimed for QIP can create depreciation recapture that’s taxed at higher ordinary income rates when the QIP is sold. Under current rules, the maximum individual rate on ordinary income is 37%, but you may also owe the 3.8% net investment income tax (NIIT).
On the other hand, for QIP held for more than one year, gain attributable to straight-line depreciation is taxed at an individual federal rate of only 25%, plus the 3.8% NIIT if applicable.


2. Write-offs may be worth more in the future

When you claim big first-year depreciation deductions for QIP, your depreciation deductions for future years are reduced accordingly. If federal income tax rates go up in future years, you’ll have effectively traded potentially more valuable future-year depreciation write-offs for less-valuable first-year write-offs.
As you can see, the decision to claim first-year depreciation deductions for QIP, or not claim them, can be complicated. Consult with us before making depreciation choices.
© 2023

High-income taxpayers face a regular income tax rate of 35% or 37%. And they may also have to pay a 3.8% net investment income tax (NIIT) that’s imposed in addition to regular income tax. Fortunately, there are some ways you may be able to reduce its impact.


Affected taxpayers

The NIIT applies to you only if modified adjusted gross income (MAGI) exceeds:

• $250,000 for married taxpayers filing jointly and surviving spouses,
• $125,000 for married taxpayers filing separately,
• $200,000 for unmarried taxpayers and heads of household.

The amount subject to the tax is the lesser of your net investment income or the amount by which your MAGI exceeds the threshold ($250,000, $200,000, or $125,000) that applies to you.
Net investment income includes interest, dividend, annuity, royalty and rental income, unless those items were derived in the ordinary course of an active trade or business. In addition, other gross income from a trade or business that’s a passive activity is subject to the NIIT, as is income from a business trading in financial instruments or commodities.

There are many types of income that are exempt from the NIIT. For example, tax-exempt interest and the excluded gain from the sale of your main home aren’t subject to the tax. Distributions from qualified retirement plans aren’t subject to the NIIT. Neither are Social Security benefits. Wages and self-employment income also aren’t subject to the NIIT, though they may be subject to a different Medicare surtax.

It’s important to remember the NIIT applies only if you have net investment income and your MAGI exceeds the applicable thresholds above. But by following strategies, you may be able to minimize your net investment income.


Shifting investments

If your income is high enough to trigger the NIIT, shifting some income investments to tax-exempt bonds could result in less exposure to the tax. Tax-exempt bonds lower your MAGI and avoid the NIIT.

Dividend-paying stocks are taxed more heavily as a result of the NIIT. The maximum income tax rate on qualified dividends is 20%, but the rate becomes 23.8% with the NIIT.

As a result, you may want to consider rebalancing your investment portfolio to emphasize growth stocks over dividend-paying stocks. While the capital gains from these investments will be included in net investment income, there are two potential benefits: 1) the tax will be deferred because the capital gains won’t be subject to the NIIT until the stocks are sold, and 2) capital gains can be offset by capital losses, which isn’t the case with dividends.


Retirement plan distributions

Because distributions from qualified retirement plans are exempt from the NIIT, upper-income taxpayers with some control over their situations (such as small business owners) might want to make greater use of qualified plans.

These are only a couple of strategies you may be able to employ. You also may be able to make moves related to charitable donations, passive activities and rental income that may allow you to minimize the NIIT. If you’re subject to the tax, you should include it in your tax planning. Contact us for strategies in your situation.

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.


Rules that come into play

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.


Mixing business with pleasure

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.


Other expenses

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.

The IRS recently released guidance providing the 2024 inflation-adjusted amounts for Health Savings Accounts (HSAs).


HSA fundamentals

An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high-deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).
Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contributions to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.


Inflation adjustments for next year

In Revenue Procedure 2023-23, the IRS released the 2024 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limitation.

For calendar year 2024, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $4,150. For an individual with family coverage, the amount will be $8,300. This is up from $3,850 and $7,750, respectively, in 2023.
There is an additional $1,000 “catch-up” contribution amount for those age 55 and older in 2024 (and 2023).

High-deductible health plan defined. 

For calendar year 2024, an HDHP will be a health plan with an annual deductible that isn’t less than $1,600 for self-only coverage or $3,200 for family coverage (up from $1,500 and $3,000, respectively, in 2023). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $8,050 for self-only coverage or $16,100 for family coverage (up from $7,500 and $15,000, respectively, in 2023).


Advantages of HSAs

There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Contact your employee benefits and tax advisors if you have questions about HSAs at your business.

Are you getting ready to retire? If so, you’ll soon experience changes in your lifestyle and income sources that may have numerous tax implications.
Here’s a brief rundown of four tax and financial issues you may contend with when you retire:


Taking required minimum distributions.

These are the minimum amounts you must withdraw from your retirement accounts. You generally must start taking withdrawals from your IRA, SEP, SIMPLE and other retirement plan accounts when you reach age 73 if you were age 72 after December 31, 2022. If you reach age 72 in 2023, the required beginning date for your first RMD is April 1, 2025, for 2024. Roth IRAs don’t require withdrawals until after the death of the owner.

You can withdraw more than the minimum required amount. Your withdrawals will be included in your taxable income except for any part that was taxed before or that can be received tax-free (such as qualified distributions from Roth accounts).


Selling your principal residence.

Many retirees want to downsize to smaller homes. If you’re one of them and you have a gain from the sale of your principal residence, you may be able to exclude up to $250,000 of that gain from your income. If you file a joint return, you may be able to exclude up to $500,000.

To claim the exclusion, you must meet certain requirements. During a five-year period ending on the date of the sale, you must have owned the home and lived in it as your main home for at least two years.
If you’re thinking of selling your home, make sure you’ve identified all items that should be included in its basis, which can save you tax.


Getting involved in new work activities. 

After retirement, many people continue to work as consultants or start new businesses. Here are some tax-related questions to ask if you’re launching a new venture:

• Should it be a sole proprietorship, S corporation, C corporation, partnership or limited liability company?
• Are you familiar with how to elect to amortize start-up expenditures and make payroll tax deposits?
• Can you claim home office deductions?
• How should you finance the business?

Taking Social Security benefits.

If you continue to work, it may have an impact on your Social Security benefits. If you retire before reaching full Social Security retirement age (65 years of age for people born before 1938, rising to 67 years of age for people born after 1959) and the sum of your wages plus self-employment income is over the Social Security annual exempt amount ($21,240 for 2023), you must give back $1 of Social Security benefits for each $2 of excess earnings.
If you reach full retirement age this year, your benefits will be reduced $1 for every $3 you earn over a different annual limit ($56,520 in 2023) until the month you reach full retirement age. Then, your earnings will no longer affect the amount of your monthly benefits, no matter how much you earn.

Speaking of Social Security, you may have to pay federal (and possibly state) tax on your benefits. Depending on how much income you have from other sources, you may have to report up to 85% of your benefits as income on your tax return and pay the resulting federal income tax.


Tax planning is still important

As you can see, you may have to make many decisions after you retire. We can help maximize the tax breaks you’re entitled to so you can keep more of your hard-earned money.

Many businesses use independent contractors to help keep their costs down — especially in these times of staff shortages and inflationary pressures. If you’re among them, be careful that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be an expensive mistake.

The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, your company must withhold federal income and payroll taxes and pay the employer’s share of FICA taxes on the wages, plus FUTA tax. A business may also provide the worker with fringe benefits if it makes them available to other employees. In addition, there may be state tax obligations.

On the other hand, if a worker is an independent contractor, these obligations don’t apply. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if it’s $600 or more).


No one definition

Who’s an “employee?” Unfortunately, there’s no uniform definition of the term.
The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account including who provides tools and who pays expenses.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. This protection generally applies only if an employer meets certain requirements. For example, the employer must file all federal returns consistent with its treatment of a worker as a contractor and it must treat all similarly situated workers as contractors.
Note: Section 530 doesn’t apply to certain types of workers.


You can ask the IRS but think twice

Be aware that you can ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, you should also be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and it may unintentionally trigger an employment tax audit.

It may be better to properly set up a relationship with workers to treat them as independent contractors so that your business complies with the tax rules.
Workers who want an official determination of their status can also file Form SS-8. Dissatisfied independent contractors may do so because they feel entitled to employee benefits and want to eliminate their self-employment tax liabilities.

If a worker files Form SS-8, the IRS will notify the business with a letter. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.
These are the basic tax rules. Contact us if you’d like to discuss how to classify workers at your business. We can help make sure that your workers are properly classified.

If you’ve successfully filed your 2022 tax return with the IRS, you may think you’re done with taxes for another year. But some questions may still crop up about the return. Here are brief answers to three questions that we’re frequently asked at this time of year.


When will your refund arrive?

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status.” You’ll need your Social Security number, filing status and the exact refund amount.


Which tax records can you throw away
now?

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2019 and earlier years. (If you filed an extension for your 2019 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed legitimate returns. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)


Can you still collect a refund for a tax credit or deduction if you overlooked claiming it?

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later.
However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.


Help available all year long

Contact us if you have questions about retaining tax records, receiving your refund or filing an amended return. We’re not just here at tax filing time. We’re here all year long.
 

Whether you’re operating a new company or an established business, losses can happen. The federal tax code may help soften the blow by allowing businesses to apply losses to offset taxable income in future years, subject to certain limitations.


Qualifying for a deduction

The net operating loss (NOL) deduction addresses the tax inequities that can exist between businesses with stable income and those with fluctuating income. It essentially lets the latter average out their income and losses over the years and pay tax accordingly.

You may be eligible for the NOL deduction if your deductions for the tax year are greater than your income. The loss generally must be caused by deductions related to your:
 

• Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
• Casualty and theft losses from a federally declared disaster, or
• Rental property (Schedule E).

The following generally aren’t allowed when determining your NOL:
 

• Capital losses that exceed capital gains,
• The exclusion for gains from the sale or exchange of qualified small business stock,
• Nonbusiness deductions that exceed nonbusiness income,
• The NOL deduction itself, and
• The Section 199A qualified business income deduction.

Individuals and C corporations are eligible to claim the NOL deduction. Partnerships and S corporations generally aren’t eligible, but partners and shareholders can use their separate shares of the business’s income and deductions to calculate individual NOLs.


Limitations

The Tax Cuts and Jobs Act (TCJA) made significant changes to the NOL rules. Previously, taxpayers could carry back NOLs for two years, and carry forward the losses 20 years. They also could apply NOLs against 100% of their taxable income.

The TCJA limits the NOL deduction to 80% of taxable income for the year and eliminates the carryback of NOLs (except for certain farming losses). However, it does allow NOLs to be carried forward indefinitely.

A COVID-19 relief law temporarily loosened the TCJA restrictions. It allowed NOLs arising in 2018, 2019 or 2020 to be carried back five years and removed the taxable income limitation for years beginning before 2021. As a result, NOLs could completely offset income. However, these provisions have expired.

If your NOL carryforward is more than your taxable income for the year to which you carry it, you may have an NOL carryover. The carryover will be the excess of the NOL deduction over your modified taxable income for the carryforward year. If your NOL deduction includes multiple NOLs, you must apply them against your modified taxable income in the same order you incurred them, beginning with the earliest.


Excess business losses

The TCJA established an “excess business loss” limitation, which took effect in 2021. For partnerships or S corporations, this limitation is applied at the partner or shareholder level, after the outside basis, at-risk and passive activity loss limitations have been applied.

Under the rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus an inflation-adjusted threshold. For 2023, that threshold is $289,000 ($578,000 if married filing jointly). Remaining losses are treated as an NOL carryforward to the next tax year. In other words, you can’t fully deduct them because they become subject to the 80% income limitation on NOLs, reducing their tax value.

Important: Under the Inflation Reduction Act, the excess business loss limitation applies to tax years beginning before January 1, 2029. Under the TCJA, it had been scheduled to expire after December 31, 2026.


Planning ahead

The tax rules regarding business losses are complex, especially when accounting for how NOLs can interact with other potential tax breaks. We can help you chart the best course forward.
© 2023

One popular fringe benefit is an education assistance program that allows employees to continue learning and perhaps earn a degree with financial assistance from their employers. One way to attract, retain and motivate employees is to provide education fringe benefits so that team members can improve their skills and gain additional knowledge. An employee can receive, on a tax-free basis, up to $5,250 each year from his or her employer under a “qualified educational assistance program.”

For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, including those normally taken by individuals pursuing programs leading to a business, medical, law or other advanced academic or professional degrees.


More requirements

The educational assistance must be provided under a separate written plan that’s publicized to your employees, and must meet a number of conditions, including nondiscrimination requirements. In other words, it can’t discriminate in favor of highly compensated employees. In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals (including their spouses or dependents) who own 5% or more of the business.
No deduction or credit can be taken by the employee for any amount excluded from the employee’s income as an education assistance benefit.


Job-related education

If you pay more than $5,250 for educational benefits for an employee during the year, he or she must generally pay tax on the amount over $5,250. Your business should include the amount in income in the employee’s wages. However, in addition to, or instead of applying the $5,250 exclusion, an employer can satisfy an employee’s educational expenses on a nontaxable basis, if the educational assistance is job-related . To qualify as job-related, the educational assistance must:

• Maintain or improve skills required for the employee’s then-current job, or
• Comply with certain express employer-imposed conditions for continued employment.

“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for qualification in his or her employment or other trade or business.
Educational assistance meeting the above “job-related” rules is excludable from an employee’s income as a working condition fringe benefit.


Assistance with student loans

In addition to education assistance, some employers offer student loan repayment assistance as a recruitment and retention tool. Starting next year, employers can help more. Under the SECURE 2.0 law, an employer will be able 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. This will take effect in 2024.


Contact us to learn more about setting up an education assistance or student loan repayment plan at your business.

If you’re a crypto investor or user, you may have noticed something new on your tax return this year. And you may soon notice a new form reporting requirements for digital assets.

Check the box
Beginning with tax year 2022, taxpayers must check a box on their tax returns indicating whether they received digital assets as a reward, award or payment for property or services or whether they disposed of any digital assets that were held as capital assets through sales, exchanges or transfers. If the “yes” box is checked, taxpayers must report all income related to the digital asset transactions.

New information form
Under the broker information reporting rules, brokers must report transactions in securities to both the IRS and investors. Transactions are reported on Form 1099-B. Legislation enacted in 2021 extended these reporting rules to cryptocurrency exchanges, custodians and platforms and to digital assets such as cryptocurrency. The new rules were scheduled to be effective for returns required to be filed, and statements required to be furnished, for post-2022 transactions. But the IRS has postponed the effective date until it issues new final regulations that provide instructions.

In addition to extending this reporting requirement to cryptocurrency, the legislation also extended existing cash reporting rules (for cash payments of $10,000 or more) to cryptocurrency. That means businesses that accept crypto payments of $10,000 or more must report them to the IRS on Form 8300. These rules apply to transactions that take place in 2023 and later years.

Existing rules and new reporting for digital assets
Currently, if you have a stock account, whenever you sell securities, you receive a Form 1099-B. On the form, your broker reports details of transactions, such as sale proceeds, relevant dates, your tax basis for the sale and the gain or loss.
The 2021 legislation expanded the definition of “brokers” who must furnish Forms 1099-B to include businesses that regularly provide services accomplishing transfers of digital assets on behalf of another person. Thus, once the IRS issues final regulations, any platform where you buy and sell cryptocurrency will have to report digital asset transactions to you and the IRS.

These exchanges/platforms will have to gather information from customers, so they can issue Forms 1099-B. Specifically, they will have to get customers’ names, addresses and phone numbers, the gross proceeds from sales, capital gains or losses and whether they were short-term or long-term.

Note: It’s not yet known whether exchanges/platforms will have to file Form 1099-B (modified to include digital assets) or a new IRS form.

Cash transaction reporting
Under a set of rules separate from the broker reporting rules, when a business receives $10,000 or more in cash, it must report the transaction to the IRS, including the identity of the person from whom the cash was received. This is done on Form 8300. For this reporting requirement, businesses will have to treat digital assets like cash.

Form 8300 requires reporting information including address, occupation and taxpayer identification number. The current rules that apply to cash usually apply to in-person payments in actual cash. It may be difficult for businesses seeking to comply with the reporting rules to collect the information needed for crypto transactions.

What you should know
If you use a cryptocurrency exchange or platform, and it hasn’t already collected a Form W-9 from you, expect it to do so. In addition to collecting information from customers, these businesses will need to begin tracking the holding periods and the buy-and-sell prices of digital assets in customers’ accounts. Contact us for more information in your situation.

If you’re the owner of an incorporated business, you know there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Therefore, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.

However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.

Steps to help protect yourself
There’s no simple way to determine what’s reasonable. If the IRS audits your tax return, it will examine the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.

There are four steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation: Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay). In the minutes of your corporation’s board of directors’ meetings, contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.) Cite any executive compensation or industry studies that back up your compensation amounts. Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by the IRS. If the business is profitable, pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.

You can avoid problems and challenges by planning ahead. Contact us if you have questions or concerns about your situation.

A common question for people planning their estates or inheriting property is: For tax purposes, what’s the “cost” (or “basis”) an individual gets in property that he or she inherits from another? This is an important area and is too often overlooked when families start to put their affairs in order.

Under the fair market value basis rules (also known as the “step-up and step-down” rules), an heir receives a basis in inherited property that’s equal to its date-of-death value. So, for example, if your grandfather bought shares in an oil stock in 1940 for $500 and it was worth $5 million at his death, the basis would be stepped up to $5 million for your grandfather’s heirs. That means all of that gain escapes income taxation forever!

The fair market value basis rules apply to inherited property that’s includible in the deceased individual’s gross estate, whether or not a federal estate tax return was filed, and those rules also apply to property inherited from foreign persons, who aren’t subject to U.S. estate tax. The rules apply to the inherited portion of property owned by the inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before his or her inheritance. The fair market value basis rules also don’t apply to reinvestments of estate assets by fiduciaries.


Lifetime gifting

It’s crucial for you to understand the fair market value basis rules so that you don’t pay more tax than you’re legally required to.

For example, in the above scenario, if your grandfather instead decided to make a gift of the stock during his lifetime (rather than passing it on when he died), the “step-up” in basis (from $500 to $5 million) would be lost. Property acquired by gift that has gone up in value is subject to the “carryover” basis rules. That means the person receiving the gift takes the same basis the donor had in it ($500 in this example), plus a portion of any gift tax the donor pays on the gift.

A “step-down” occurs if someone dies owning property that has declined in value. In that case, the basis is lowered to the date-of-death value. Proper planning calls for seeking to avoid this loss of basis. Giving the property away before death won’t preserve the basis. That’s because when property that has gone down in value is the subject of a gift, the person receiving the gift must take the date of gift value as his or her basis (for purposes of determining his or her loss on a later sale). Therefore, a good strategy for property that has declined in value is for the owner to sell it before death so he or she can enjoy the tax benefits of the loss.

These are the basic rules. Other rules and limits may apply. For example, in some cases, a deceased person’s executor may be able to make an alternate valuation election. And gifts made just before a person dies (sometimes called “death bed gifts”) may be included in the gross estate for tax purposes. Contact us for tax assistance when estate planning or after receiving an inheritance.

If your business occupies substantial space and needs to increase or move from that space in the future, you should keep the rehabilitation tax credit in mind. This is especially true if you favor historic buildings.

The credit is equal to 20% of the qualified rehabilitation expenditures (QREs) for a qualified rehabilitated building that’s also a certified historic structure. A qualified rehabilitated building is a depreciable building that has been placed in service before the beginning of the rehabilitation and is used, after rehabilitation, in business or for the production of income (and not held primarily for sale). Additionally, the building must be “substantially” rehabilitated, which generally requires that the QREs for the rehabilitation exceed the greater of $5,000 or the adjusted basis of the existing building.

A QRE is any amount chargeable to capital and incurred in connection with the rehabilitation (including reconstruction) of a qualified rehabilitated building. QREs must be for real property (but not land) and can’t include building enlargement or acquisition costs.

The 20% credit is allocated ratably to each year in the five-year period beginning in the tax year in which the qualified rehabilitated building is placed in service. Thus, the credit allowed in each year of the five-year period is 4% (20% divided by 5) of the QREs with respect to the building. The credit is allowed against both regular federal income tax and alternative minimum tax.

The Tax Cuts and Jobs Act, which was signed at the end of 2017, made some changes to the credit. Specifically, the law:

• Requires taxpayers to take the 20% credit ratably over five years instead of in the year they placed the building into service
• Eliminated the 10% rehabilitation credit for pre-1936 buildings

Contact us to discuss the technical aspects of the rehabilitation credit. There may also be other federal tax benefits available for the space you’re contemplating. For example, various tax benefits might be available depending on your preferences as to how a building’s energy needs will be met and where the building is located. In addition, there may be state or local tax and non-tax subsidies available.

Getting beyond these preliminary considerations, we can work with you and construction professionals to determine whether a specific available “old” building can be the subject of a rehabilitation that’s both tax-credit-compliant and practical to use. And, if you do find a building that you decide you’ll buy (or lease) and rehabilitate, we can help you monitor project costs and substantiate the compliance of the project with the requirements of the credit and any other tax benefits.

Once you file your 2022 tax return, you may wonder what personal tax papers you can throw away and how long you should retain certain records. You may have to produce those records if the IRS audits your return or seeks to assess tax.
It’s a good idea to keep the actual returns indefinitely. But what about supporting records such as receipts and canceled checks? In general, except in cases of fraud or substantial understatement of income, the IRS can only assess tax within three years after the return for that year was filed (or three years after the return was due). For example, if you filed your 2019 tax return by its original due date of April 15, 2020, the IRS has until April 15, 2023, to assess a tax deficiency against you. If you file late, the IRS generally has three years from the date you filed.
However, the assessment period is extended to six years if more than 25% of gross income is omitted from a return. In addition, if no return is filed, the IRS can assess tax any time. If the IRS claims you never filed a return for a particular year, a copy of the return will help prove you did.


Property-related records

The tax consequences of a transaction that occurs this year may depend on events that happened years ago. For example, suppose you bought your home in 2007, made capital improvements in 2014 and sold it this year. To determine the tax consequences of the sale, you must know your basis in the home — your original cost, plus later capital improvements. If you’re audited, you may have to produce records related to the purchase in 2007 and the capital improvements in 2014 to prove what your basis is. Therefore, those records should be kept until at least six years after filing your return for the year of sale.
Retain all records related to home purchases and improvements even if you expect your gain to be covered by the home-sale exclusion, which can be up to $500,000 for joint return filers. You’ll still need to prove the amount of your basis if the IRS inquires. Plus, there’s no telling what the home will be worth when it’s sold, and there’s no guarantee the home-sale exclusion will still be available in the future.

Other considerations apply to property that’s likely to be bought and sold — for example, stock or shares in a mutual fund. Remember that if you reinvest dividends to buy additional shares, each reinvestment is a separate purchase.


Marital breakup

If you separate or divorce, be sure you have access to tax records affecting you that are kept by your spouse. Or better yet, make copies of the records since access to them may be difficult. Copies of all joint returns filed and supporting records are important, since both spouses are liable for tax on a joint return and a deficiency may be asserted against either spouse. Other important records include agreements or decrees over custody of children and any agreement about who is entitled to claim them as dependents.


Loss or destruction of records

To safeguard records against theft, fire, or other disaster, consider keeping important papers in a safe deposit box or other safe place outside your home. In addition, consider keeping copies in a single, easily accessible location so that you can grab them if you must leave your home in an emergency.

Contact us if you have any questions about record retention.

If you’re an art collector, you may wonder about the tax breaks available for donating a work of art to charity. Several different tax rules may come into play in connection with such contributions.

Basic rules
Your deduction for a charitable contribution of art is subject to be reduced if the charity’s use of it is unrelated to the purpose or function that’s the basis for its qualification as a tax-exempt organization. The reduction equals the amount of capital gain you would have realized had you sold the property instead of giving it to charity.

Example: You bought a painting five years ago for $10,000 and now it’s worth $20,000. You contribute it to a hospital. Your deduction is limited to $10,000 because the hospital’s use of the painting is unrelated to its charitable function and you would have had a $10,000 long-term capital gain had you sold it.
But what if you donate the painting to an art museum? In this case, your deduction is $20,000.

Substantiation requirements
There are substantiation rules when you donate a work of art. First, if you claim a deduction of less than $250, you must get and keep a receipt from the charity and you must keep reliable written records for each item you contributed.
If you claim a deduction of at least $250, but not more than $500, you must get and keep an acknowledgment of your contribution from the charity. The acknowledgment must state whether the organization gave you any goods or services in return for your contribution and include a description and good-faith estimate of the value.
If you claim a deduction of more than $500, but not over $5,000, in addition to getting an acknowledgment, you must maintain written records that include information about how and when you obtained the artwork and its cost basis. You must also complete an IRS form and attach it to your tax return.
If the claimed value of the property exceeds $5,000, in addition to an acknowledgment, you must also have an appraisal of the property. This appraisal must be done by a qualified appraiser no more than 60 days before the contribution date and meet other requirements. You include information about these donations on the IRS form you file with your return.
If your total deduction is $20,000 or more, you must attach a copy of the signed appraisal. The IRS may request that you provide a photograph. If an item has been appraised at $50,000 or more, you can ask the IRS to issue a “Statement of Value,” which can be used to substantiate the value.

Percentage limitations
In addition, your deduction may be limited to 20%, 30%, 50%, or 60% of your contribution base, which usually is your adjusted gross income. The percentage varies depending on the year the contribution is made, the type of organization and whether the deduction had to be reduced because of the unrelated use rule explained above. The amount not deductible on account of a ceiling may be deductible in a later year under carryover rules.

Partial interest gifts
Donors sometimes make gifts of partial interests in artwork. For example, a donor may contribute a 50% interest in a painting to a museum, with the understanding that the museum will exhibit it for six months of the year and the donor will keep possession of it for the other six months. Special requirements apply to these donations.

We can help
Contact us for guidance on large charitable gifts. We can help ensure the best tax outcome.

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.

1. Shifting business earnings
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.

2. Claiming income tax withholding exemption
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.

3. Saving Social Security tax
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.

4. Saving for retirement
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:

• The corporation be adequately financed,
• The existence of the corporation as a separate entity be maintained, and
• Various formalities required by your state be observed (for example, filing articles of incorporation, adopting by-laws, electing a board of directors and holding organizational meetings).

Dealing with losses
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.

Protecting S status
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.

Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2023. 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.

April 18

• If you’re a calendar-year corporation, file a 2022 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due.
• For corporations pay the first installment of 2023 estimated income taxes.
• For individuals, file a 2022 income tax return (Form 1040 or Form 1040-SR) or file for an automatic six-month extension (Form 4868) and pay any tax due.
• For individuals, pay the first installment of 2023 estimated taxes, if you don’t pay income tax through withholding (Form 1040-ES).

May 1

• Employers report income tax withholding and FICA taxes for the first quarter of 2023 (Form 941) and pay any tax due.

May 10

• Employers report income tax withholding and FICA taxes for the first quarter of 2023 (Form 941), if they deposited on time and fully paid all of the associated taxes due.

June 15

• Corporations pay the second installment of 2023 estimated income taxes.

Did you make large gifts to your children, grandchildren or other heirs last year? If so, it’s important to determine whether you’re required to file a 2022 gift tax return. And in some cases, even if it’s not required to file one, you may want to do so anyway.

Filing requirements

The annual gift tax exclusion has increased in 2023 to $17,000 but was $16,000 for 2022. Generally, you must file a gift tax return for 2022 if, during the tax year, you made gifts:

• That exceeded the $16,000-per-recipient gift tax annual exclusion for 2022 (other than to your U.S. citizen spouse),
• That you wish to split with your spouse to take advantage of your combined $32,000 annual exclusion for 2022,
• That exceeded the $164,000 annual exclusion in 2022 for gifts to a noncitizen spouse,
• To a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($80,000) into 2022,
• Of future interests — such as remainder interests in a trust — regardless of the amount, or
• Of jointly held or community property.

Keep in mind that you’ll owe gift tax only to the extent that an exclusion doesn’t apply and you’ve used up your lifetime gift and estate tax exemption ($12.06 million in 2022). As you can see, some transfers require a return even if you don’t owe tax.

You might want to file anyway

No gift tax return is required if your gifts for 2022 consisted solely of gifts that are tax-free because they qualify as:

• Annual exclusion gifts,
• Present interest gifts to a U.S. citizen spouse,
• Educational or medical expenses paid directly to a school or health care provider, or
• Political or charitable contributions.

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, you should consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

The deadline is April 18

The gift tax return deadline is the same as the income tax filing deadline. For 2022 returns, it’s April 18, 2023 — or October 16, 2023, if you file for an extension. But keep in mind that, if you owe gift tax, the payment deadline is April 18, regardless of whether you file for an extension. If you’re not sure whether you must (or should) file a 2022 gift tax return, contact us.

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.

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.

Potential strategies
Businesses should consider the following strategies for minimizing the impact of these changes:

• Analyze costs carefully to identify those that constitute R&E expenses and those that are properly characterized as other types of expenses (such as general business expenses under IRC Sec. 162) that continue to qualify for immediate deduction.
• If cost-effective, move foreign research activities to the United States to take advantage of shorter amortization periods.
• If cost-effective, purchase software that’s immediately deductible, rather than developing it in-house, which is now considered an amortizable R&E expense.
• Revisit the R&E credit if you haven’t been taking advantage of it.

Recent IRS guidance
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.

Planning ahead
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.

Under tax law, businesses can generally deduct advertising and marketing expenses that help keep existing customers and bring in new ones. This valuable tax deduction can help businesses cut their taxes.
However, in order to be deductible, advertising and marketing expenses must be “ordinary and necessary.” As one taxpayer recently learned in U.S. Tax Court, not all expenses are eligible. An ordinary expense is one that’s common and accepted in the industry. And a necessary expense is one that’s helpful and appropriate for the business.
According to the IRS, here are some advertising expenses that are usually deductible:

• Reasonable advertising expenses that are directly related to the business activities.
• An expense for the cost of institutional or goodwill advertising to keep the business name before the public if it relates to a reasonable expectation to gain business in the future. For example, the cost of advertising that encourages people to contribute to the Red Cross or to participate in similar causes is usually deductible.
• The cost of providing meals, entertainment, or recreational facilities to the public as a means of advertising or promoting goodwill in the community.

Facts of the recent case
An attorney deducted his car-racing expenses and claimed they were advertising for his personal injury law practice. He contended that his racing expenses, totaling over $303,000 for six tax years, were deductible as advertising because the car he raced was sponsored by his law firm.

The IRS denied the deductions and argued that the attorney’s car racing wasn’t an ordinary and necessary expense paid or incurred while carrying on his business of practicing law. The Tax Court agreed with the IRS.

When making an ordinary and necessary determination for an expense, most courts look to the taxpayer’s primary motive for incurring the expense and whether there’s a “proximate” relationship between the expense and the taxpayer’s occupation. In this case, the taxpayer's car-racing expenses were neither necessary nor common for a law practice, so there was no “proximate” relationship between the expense and the taxpayer’s occupation. And, while the taxpayer said his primary motive for incurring the expense was to advertise his law business, he never raced in the state where his primary law practice was located and he never actually got any legal business from his car-racing activity.

The court noted that the car “sat in his garage” after he returned to the area where his law practice was located. The court added that even if the taxpayer raced in that area, “we would not find his expenses to be legitimate advertising expenses. His name and a decal for his law firm appeared in relatively small print” on his car.

This form of “signage,” the court stated, “is at the opposite end of the spectrum from (say) a billboard or a newspaper ad. Indeed, every driver’s name typically appeared on his or her racing car.” (TC Memo 2023-18)

Keep meticulous records
There are no deductions allowed for personal expenses or hobbies. But as explained above, you can deduct ordinary and necessary advertising and marketing expenses in a bona fide business. The key to protecting your deductions is to keep meticulous records to substantiate them. Contact us with questions about your situation.

You generally must pay federal tax on all income you receive but there are some exceptions when you can exclude it. For example, compensatory awards and judgments for “personal physical injuries or physical sickness” are free from federal income tax under the tax code. This includes amounts received in a lawsuit or a settlement and in a lump sum or in installments.

But as taxpayers in two U.S. Tax Court cases learned, not all awards are tax-free. For example, punitive damages and awards for unlawful discrimination or harassment are taxable. And the tax code states that “emotional distress shall not be treated as a physical injury or physical sickness.”


Here are the facts of the two cases.

Case #1: Payment was for personal injuries, not physical injuries

A taxpayer received a settlement of more than $327,000 from his former employer in connection with a lawsuit. He and his spouse didn’t report any part of the settlement on their joint tax return for the year in question. The IRS determined the couple owed taxes and penalties of more than $119,000 as a result of not including the settlement payment in their gross income.

Although the settlement agreement provided the payment was “for alleged personal injuries,” the Tax Court stated there was no evidence that it was paid on account of physical injuries or sickness. The court noted that the taxpayer’s complaint against the employer “alleged only violations of (state) labor and antidiscrimination laws, wrongful termination, breach of contract, and intentional infliction of emotional distress.”

The taxpayer argued that he had a physical illness that caused his employer to terminate him. But he didn’t provide a “direct causal link” between the illness and the settlement payment. Therefore, the court ruled, the amount couldn’t be excluded from his gross income. (TC Memo 2022-90)


Case #2: Legal malpractice payment doesn’t qualify for exclusion

This case began when the taxpayer was injured while at a hospital receiving medical treatment. She sued for negligence but lost her case. She then sued her attorneys for legal malpractice.
She received $125,000 in a settlement of her lawsuit against the attorneys. The amount was not reported on her tax return for the year in question. The IRS audited the taxpayer’s return and determined that the $125,000 payment should have been included in gross income. The tax agency issued her a bill for more than $32,000 in taxes and penalties.

The taxpayer argued that the payment was received “on account of personal physical injuries or physical sickness” because if it wasn’t for her former attorneys’ allegedly negligent representation, she “would have received damages from the hospital.” The IRS argued the amount was taxable because it was for legal malpractice and not for physical injuries. The U.S. Tax Court and the 9th Circuit Court of Appeals agreed with the IRS. (Blum, 3/23/22)


Strict requirements

As you can see, the requirements for tax-free income from a settlement are strict. If you receive a court award or out-of-court settlement, consult with us about the tax implications.

If you’re a parent, you may be confused about the rules for claiming the Child Tax Credit (CTC). The rules and credit amounts have changed significantly over the last six years. This tax break became more generous in 2018 than it was under prior law — and it became even better in 2021 for eligible parents. Even though the enhancements that were available for 2021 have expired, the CTC is still valuable for parents. Here are the current rules.
For tax years 2022 and 2023, the CTC applies to taxpayers with children under the age of 17 (who meet CTC requirements to be ‘’qualifying children’’). A $500 credit for other dependents is available for dependents other than qualifying children.

CTC amount
The CTC is currently $2,000 for each qualifying child under the age of 17. (For tax years after 2025, the CTC will go down to $1,000 per qualifying child, unless Congress acts to extend the higher amount.)

Refundable portion
The refundable portion of the credit is a maximum $1,400 (adjusted annually for inflation) per qualifying child. The earned income threshold for determining the amount of the refundable portion for these years is $2,500. (With a refundable tax credit, you can receive a tax refund even if you don’t owe any tax for the year.) The $500 credit for dependents other than qualifying children is nonrefundable.

Credit for other dependents
In terms of the $500 nonrefundable credit for each dependent who isn’t a qualifying child under the CTC rules, there’s no age limit for the credit. But certain tax tests for dependency must be met. This $500 credit can be used for dependents including:

• Those age 17 and older.
• Dependent parents or other qualifying relatives supported by you.
• Dependents living with you who aren’t related to the taxpayer.

AGI “phase-out” thresholds
You qualify for the full amount of the 2022 CTC for each qualifying child if you meet all eligibility factors and your annual adjusted gross income isn’t more than $200,000 ($400,000 if married and filing jointly). Parents with higher incomes may be eligible to claim a partial credit.
Before 2018 and after 2025, the income threshold amounts for the total credit are lower: $110,000 for a joint return; $75,000 for an individual filing as single, head of household or a qualifying widow(er); and $55,000 for a married individual filing a separate return.

Claiming the CTC
To claim the CTC for a qualifying child, you must include the child’s Social Security number (SSN) on your return. The number must have been issued before the due date for filing the return, including extensions. If a qualifying child doesn’t have an SSN, you may claim the $500 credit for other dependents for that child.
To claim the $500 credit for other dependents, you’ll need to provide a taxpayer identification number for each non-CTC-qualifying child or dependent, but it can be an Individual Taxpayer Identification Number, Adoption Taxpayer Identification Number or SSN.

Final points
If you expect the CTC to reduce your income tax, you may want to reduce your wage withholding. This is done by filing a new Form W-4, Employee’s Withholding Certificate, with your employer.
These are the basics of the CTC. As you can see, it’s changed quite a bit and the credit is scheduled to change again in 2026. Contact us if you have any questions.

Merger and acquisition activity dropped dramatically last year due to rising interest rates and a slowing economy. The total value of M&A transactions in North America in 2022 was down 41.4% from 2021, according to S&P Global Market Intelligence.
But some analysts expect 2023 to see increased M&A activity in certain industries. If you’re considering buying or selling a business, it’s important to understand the tax implications.

Two approaches
Under current tax law, a transaction can basically be structured in two ways:

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.
The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive. That’s because the corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The current individual federal tax rates have also made ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also is taxed at lower rates on a buyer’s personal tax return. However, individual rate cuts are scheduled to expire at the end of 2025.

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

What buyers want
For several reasons, buyers usually prefer to buy assets rather than ownership interests. In general, a buyer’s primary goal is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after a transaction closes.
A buyer can step up (or increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

What sellers want
In general, sellers prefer stock sales for tax and nontax reasons. One of their objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock, or partnership or LLC interests) as opposed to selling assets.
With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Seek advice before a transaction
Be aware that other issues, such as employee benefits, can also cause tax issues in M&A transactions. Buying or selling a business may be the largest transaction you’ll ever make, so it’s important to seek professional assistance before finalizing a deal. After a transaction is complete, it may be too late to get the best tax results. Contact us about how to proceed.

Many businesses in certain industries employ individuals who receive tips as part of their compensation. These businesses include restaurants, hotels and salons.

Tip definition
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: The customer voluntarily makes the payment, The customer has the unrestricted right to determine the amount, The payment isn’t negotiated with, or dictated by, employer policy, and The customer generally has the right to determine who receives the payment.

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.

Daily tip records
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.

Reporting to employers
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:

• The employee’s name, address, Social Security number and signature,
• The employer’s name and address,
• The month or period covered, and
• Total tips received during the period.

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.

Employer requirements
Employers should send each employee a Form W-2 that includes reported tips. Employers also must:

• Keep their employees’ tip reports.
• Withhold taxes, including income taxes and the employee’s share of Social Security tax and Medicare tax, based on employees’ wages and reported tip income.
• Pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as reported tip income.
• Report this information to the IRS on Form 941, Employer’s Quarterly Federal Tax Return.
• Deposit withheld taxes in accordance with federal tax deposit requirements.

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.

Tip tax credit
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.

An array of tax-related limits that affect businesses are indexed annually, and due to high inflation, many have increased more than usual for 2023. Here are some that may be important to you and your business.

Social Security tax
The amount of employees’ earnings that are subject to Social Security tax is capped for 2023 at $160,200 (up from $147,000 for 2022).

Deductions

• Section 179 expensing:
  • Limit: $1.16 million (up from $1.08 million)
  • Phaseout: $2.89 million (up from $2.7 million)
• Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
  • Married filing jointly: $364,200 (up from $340,100)
  • Other filers: $182,100 (up from $170,050)

Retirement plans

• Employee contributions to 401(k) plans: $22,500 (up from $20,500)
• Catch-up contributions to 401(k) plans: $7,500 (up from $6,500)
• Employee contributions to SIMPLEs: $15,500 (up from $14,000)
• Catch-up contributions to SIMPLEs: $3,500 (up from $3,000)
• Combined employer/employee contributions to defined contribution plans (not including catch-ups): $66,000 (up from $61,000)
• Maximum compensation used to determine contributions: $330,000 (up from $305,000)
• Annual benefit for defined benefit plans: $265,000 (up from $245,000)
• Compensation defining a highly compensated employee: $150,000 (up from $135,000)
• Compensation defining a “key” employee: $215,000 (up from $200,000)

Other employee benefits

• Qualified transportation fringe-benefits employee income exclusion: $300 per month (up from $280)
• Health Savings Account contributions:
  • Individual coverage: $3,850 (up from $3,650)
  • Family coverage: $7,750 (up from $7,300)
  • Catch-up contribution: $1,000 (no change)
• Flexible Spending Account contributions:
  • Health care: $3,050 (up from $2,850)
  • Dependent care: $5,000 (no change)

These are only some of the tax limits and deductions that may affect your business and additional rules may apply. Contact us if you have questions.

The IRS announced it opened the 2023 individual income tax return filing season on January 23. That’s when the agency began accepting and processing 2022 tax year returns. Even if you typically don’t file until much closer to the mid-April deadline (or you file for an extension), consider filing earlier this year. The reason is you can potentially protect yourself from tax identity theft.

Here are some answers to questions taxpayers may have about filing.

How can your tax identity be stolen?
In a typical tax identity theft scam, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund.

The actual taxpayer discovers the fraud when he or she files a return and is told by the IRS that the return is being rejected because one with the same Social Security number has already been filed for the tax year. Ultimately, the taxpayer should be able to prove that his or her return is the legitimate one, but tax identity theft can be time consuming and frustrating to straighten out. It can also delay a refund.
Your best defense may be to file early. Why? If you file first, the tax return filed by a potential thief will be rejected.

What are this year’s deadlines?

This year, the filing deadline to submit 2022 returns or file an extension is Tuesday, April 18 for most taxpayers. The due date is April 18, instead of April 15, because the 15th falls on a weekend and the District of Columbia’s Emancipation Day holiday falls on Monday, April 17.
If you’re requesting an extension, you’ll have until October 16, 2023, to file. Keep in mind that an extension of time to file your return doesn’t grant you any extension of time to pay your taxes. You should estimate and pay any taxes owed by the regular deadline to help avoid penalties.

When will your W-2s and 1099s arrive?

To file your tax return, you need all of your Form W-2s and 1099s. January 31 is the deadline for employers to issue 2022 W-2s to employees and, generally, for businesses to issue Form 1099s to recipients of any 2022 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).

If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, ask us how to proceed.

Are there any other advantages to filing early?

In addition to protecting yourself from tax identity theft, another advantage of early filing is that, if you’re getting a refund, you’ll get it sooner. The IRS expects most refunds to be issued within 21 days. The time may be shorter if you file electronically and receive a refund by direct deposit into a bank account.
Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable or caught in mail delays.

Need assistance?

If you have questions or would like an appointment to prepare your return, please contact us. We can help ensure you file an accurate return and receive all of the tax breaks to which you’re entitled.

With the 2023 filing season deadline drawing near, be aware that the deadline for businesses to file information returns for hired workers is even closer. By January 31, 2023, employers must file these forms:

Form W-2, Wage and Tax Statement.
W-2 forms show the wages paid and taxes withheld for the year for each employee. They must be provided to employees and filed with the Social Security Administration (SSA). The IRS notes that “because employees’ Social Security and Medicare benefits are computed based on information on Form W-2, it’s very important to prepare Form W-2 correctly and timely.”

Form W-3, Transmittal of Wage and Tax Statements.
Anyone required to file Form W-2 must also file Form W-3 to transmit Copy A of Form W-2 to the SSA. The totals for amounts reported on related employment tax forms (Form 941, Form 943, Form 944 or Schedule H for the year) should agree with the amounts reported on Form W-3.
Failing to timely file or include the correct information on either the information return or statement may result in penalties.

Independent contractors
The January 31 deadline also applies to Form 1099-NEC, Nonemployee Compensation. These forms are provided to recipients and filed with the IRS to report non-employee compensation to independent contractors.
Payers must complete Form 1099-NEC to report any payment of $600 or more to a recipient.

If the following four conditions are met, you must generally report payments as nonemployee compensation:

• You made a payment to someone who isn’t your employee,
• You made a payment for services in the course of your trade or business,
• You made a payment to an individual, partnership, estate, or, in some cases, a corporation, and
• You made payments to a recipient of at least $600 during the year.

Your business may also have to file a Form 1099-MISC for each person to whom you made certain payments for rent, medical expenses, prizes and awards, attorney’s services and more.

We can help
If you have questions about filing Form W-2, Form 1099-NEC or any tax forms, contact us. We can assist you in staying in compliance with all rules.

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.

If you’re a parent or grandparent with college-bound children, you may want to save to fund future education costs. Here are several approaches to take maximum advantage of the tax-favored ways to save that may be available to you.

Savings bonds

Series EE U.S. savings bonds offer two tax-saving opportunities when used to finance college expenses: You don’t have to report the interest on the bonds for federal tax purposes until the bonds are cashed in, and Interest on “qualified” Series EE (and Series I) bonds may be exempt from federal tax if the bond proceeds are used for qualified college expenses.

To qualify for the college tax exemption, you must purchase the bonds in your own name (not the child’s) or jointly with your spouse. The proceeds must be used for tuition, fees, etc. — not room and board. If only some proceeds are used for qualified expenses, only that part of the interest is exempt.

If your modified adjusted gross income (MAGI) exceeds certain amounts, the exemption is phased out. For bonds cashed in 2023, the exemption begins to phase out when joint MAGI hits $137,800 for married joint filers ($91,850 for other returns) and is completely phased out if MAGI is $167,800 or more for joint filers ($106,850 or more for others).

Qualified tuition programs or 529 plans
Typically known as a “529 plans,” these programs allow you to buy tuition credits or make contributions to an account set up to meet a child’s future higher education expenses. 529 plans are established by state governments or private institutions.

Contributions aren’t deductible and are treated as taxable gifts to the child. But they’re eligible for the annual gift tax exclusion ($17,000 in 2023). A donor who contributes more than the annual exclusion limit for the year can elect to treat the gift as if it were spread out over a five-year period.

Earnings on the contributions accumulate tax-free until the college costs are paid from the funds. Distributions from 529 plans are tax-free to the extent the funds are used to pay “qualified higher education expenses,” which can include up to $10,000 in tuition for an elementary or secondary school. Distributions of earnings that aren’t used for “qualified higher education expenses” are generally subject to income tax plus a 10% penalty.

Coverdell education savings accounts (ESAs)
You can establish a Coverdell ESA and make contributions of up to $2,000 for each child under age 18. This age limitation doesn’t apply to beneficiaries with special needs.
The right to make contributions begins to phase out once AGI is over $190,000 on a joint return ($95,000 for single taxpayers). If the income limit is an issue, the child can make a contribution to his or her own account.

Although contributions aren’t deductible, income in the account isn’t taxed, and distributions are tax-free if spent on qualified education expenses. If the child doesn’t attend college, the money must be withdrawn when the child turns 30 and any earnings will be subject to tax plus a penalty. However, unused funds can be transferred tax-free to a Coverdell ESA of another member of the family who hasn’t reached age 30. The age 30 requirement doesn’t apply to individuals with special needs.

We can help
These are just some of the tax-favored ways to save a college fund for your children. Contact us with any questions regarding tax-favorable college savings. 

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.