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Seasonal Summer Employees Can Provide Tax Benefit

by with No Comment Firm NewsTax

Summer is upon us, which signals the need for seasonal employees to fill in for workers who are on vacation during the busy months ahead and even for some gearing up for the upcoming hectic holiday season. However, given the current labor shortage, many businesses are facing a tight jobs market. So, it may be time to become creative.

One solution might be hiring family members. Financially, it makes more sense to keep the family employed rather than hiring strangers, provided, of course, that the family member is suitable for the job.

You might even consider hiring your children to work in your business. Rather than helping to support your children with your after-tax dollars, you can instead hire them in your business and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the hours and the job worked. Click here for information related to hiring your children in your business and the associated tax breaks.

Another solution might be hiring long-term unemployment recipients and other groups of workers facing significant barriers to employment. Doing so may allow you to benefit from the Work Opportunity Tax Credit (WOTC).

The Work Opportunity Tax Credit (WOTC) is a general business tax credit that is jointly administered by the Internal Revenue Service (IRS) and the Department of Labor (DOL). The WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025.

The WOTC may be claimed by any employer that hires and pays or incurs wages to certain individuals who are certified by a designated local agency (sometimes referred to as a state workforce agency) as being a member of one of 10 targeted groups.

In general, the WOTC is equal to 40% of up to $6,000 of wages paid to, or incurred on behalf of, an individual who:

  • Is in their first year of employment with the business;
  • Is certified as being a member of a targeted group; and
  • Performs at least 400 hours of services for that employer.

However, an employer cannot claim the WOTC for employees who are rehired.

Maximum Credit – Thus, the maximum tax credit is generally $2,400. A 25% rate applies to wages for individuals who perform fewer than 400 but at least 120 hours of service for the employer. Up to $24,000 in wages may be considered in determining the WOTC for certain qualified veterans.

Who Can Claim the Credit – Employers of all sizes are eligible to claim the WOTC. This includes both taxable and certain tax-exempt employers located in the United States and in certain U.S. territories. Taxable employers claim the WOTC against income taxes, and in general, may carry the current year’s unused WOTC back one year and then forward 20 years. “Carrying back” the credit means that the tax return filed for the prior year will need to be amended to claim the credit on that return. The procedure is different for eligible tax-exempt employers; please contact this office for details.

Qualified Employees – An employer may claim the WOTC for an individual who is certified as a member of any of the following targeted groups:

  • Qualified IV-A Recipient (relates to Temporary Assistance for Needy Families (TANF))
  • Qualified Veteran
  • Qualified Ex-Felon
  • Qualified Designated Community Resident (DCR)
  • Qualified Vocational Rehabilitation Referral
  • Qualified Summer Youth Employee
  • Qualified Supplemental Nutrition Assistance Program (SNAP) Recipient
  • Qualified Supplemental Security Income (SSI) Recipient
  • Qualified Long-Term Family Assistance Recipient
  • Qualified Long-Term Unemployment Recipient 

Pre-screening and Certification – An employer must obtain certification that an individual is a member of the targeted group before the employer may claim the credit. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work. Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850. The instructions to Form 8850 provide details about the targeted groups.

Please contact this office for additional information and assistance to determine if hiring family members or hiring individuals who qualify for the WOTC is appropriate for your business.

TAX TIPS. text on white notepad paper on white background. near the table clock

6 Tax Tips for 2023

by with No Comment Tax

It’s that time of year again: tax time. And while many of your money-saving options might be limited after Dec. 31, there’s still a lot you can do to help lower your taxes, save money and avoid penalties. Here’s a quick snapshot.

Contribute to Your Retirement Accounts

Yes, doing this will help lower your tax bill. So, if you haven’t already maxed out your contribution for 2022, you can still do so up until April 18 for a traditional IRA (deductible or not), and a Roth IRA. If you have a Keogh or Simplified Employment Pension Plan (SEP), you can apply for a tax filing extension until Oct. 16; however, it’s best not to wait that long to contribute to those plans so you begin tax-free compounding. Plus, when you make a deductible contribution, your money will compound tax deferred. For instance, if you put away $5,000 a year for 20 years with an annual return of 8 percent, your $100,000 in contributions will grow to more than $250,000. Do you see these numbers? Gotta love this.

File a Form 2210

So last year, if you had an income windfall that arrived after Aug. 31, 2022, and you think you might owe taxes on it, you can file what is called an Underpayment of Estimated Tax. It will help annualize your estimated tax liability and possibly reduce any extra charges. That said, don’t try to pay too much. It’s better to owe the government than to expect a refund. As we all know, the IRS doesn’t give you any interest when they borrow money from you.

Itemize Your Deductions

While it’s so much easier to take the standard deduction, you could save a boatload when you do this, especially if you’re self-employed, own a home or live in a high-tax area. Here are couple ways to figure out if this option is right for you.

  • When your qualified expenses add up to more than the 2022 standard deduction of $12,950 if you’re single and $25,900 if you’re married.
  • If the portion of your medical expenses exceeds 7.5 percent of your 2022 adjusted gross income.

Take that Home Office Deduction

Good news: eligibility rules for claiming your home office deduction have been loosened, so for small business owners this is huge. And the rules apply even when you don’t have clients visit you in your office space. Here’s what you can write off:

  • Rent or mortgage interest
  • Utilities
  • Insurance
  • Repairs or maintenance
  • Depreciation
  • Housekeeping

Note: The percentage of these costs that are deductible are based on the square footage of your office within the context of the total area in your home.

Provide Dependent Taxpayer IDs

Don’t forget to enter Taxpayer Identification Numbers (usually Social Security numbers) for your children or other dependents. If you fail to do this, the IRS will deny you these important credits that might rightfully be yours, such as the Child Tax Credit. However, you’ll want to be careful if you’re divorced. Only oneof you can claim your kids as dependents. If you and your ex both claim your child, your return process will be detoured and they’ll be contacting you for more information. If you’re a new parent, be sure to get your child’s Social Security card as soon as you can so you’ll have it ready at tax time.

Consult a Professional

If you feel you need help or if your numbers aren’t where you’d like them to be, get in touch with your trusted tax specialist. You might be missing some critical info in your return that could help lower your tax obligation.

Taxes are a necessary part of life in the United States, so make sure you have all the right tools when diving in. When you’re well-equipped, chances are this process won’t be as much of a chore.

Sources

https://www.irs.gov/newsroom/how-small-business-owners-can-deduct-their-home-office-from-their-taxes#:~:text=The%20home%20office%20deduction%2C%20calculated,%2C%20maintenance%2C%20depreciation%20and%20rent

https://turbotax.intuit.com/tax-tips/tax-planning-and-checklists/tax-tips-after-january-1st/L8fY6OyFl

Understanding the Latest Modifications to Form 1099-K Reporting Requirements

by with No Comment Tax

There has been updated guidance on how and when tax filers must file and report Form 1099-K, Payment Card, and Third-Party Network Transactions in 2022 and 2023. According to the December IRS release, new income and transaction reporting requirements for so-called third-party settlement organizations (TPSOs) have been delayed for one year.

A TPSO, according to the IRS, facilitates payments to “participating payees” of the platform. This type of organization can be an online marketplace, an app, or payment card processors that are used to facilitate commerce transactions. It could be a digital marketplace that holds auctions or items for sale that functions as a nexus between those selling items and those buying the items. The TPSO also is tasked with reporting the total amount of transactions to the IRS and the payee or individual who receives remittance(s) from the TPSO in conjunction with selling an item on an auction website or similar platform, based on the new $600 tax calendar year threshold.

The previous reporting threshold (which is in effect for filing taxes for the 2022 calendar year) for TPSOs to be mandated to report to the IRS was:

1. More than 200 transactions occurring annually

2. More than $20,000 in sales annually

Originally set to take effect for the 2022 tax calendar year and mandated in the American Rescue Plan (ARP) of 2021, the new reporting threshold is triggered when more than $600 is earned in aggregate for a single tax year, without regard to the number of transactions per calendar year. It will take effect starting Jan. 1, 2023.

When it comes to calculating tax obligations, it’s important to notice how differences exist between gains and losses. For example, the first step is to determine whether there’s been a sale or a loss. If there’s a gain, it must be reported on Schedule D and Form 8949.

Depending on the outcome of the sale (a gain or loss) the IRS gives guidance accordingly. If it’s a gain, when it comes to accounting for fees paid in conjunction with the item’s listing, the selling expenses should be reported as “a downward adjustment” on either Form 8949 or Schedule D. Another consideration on sales of personal items is determining whether it’s a short- or long-term gain. Items sold that are held for more than one year are recognized as long-term. If the item sold has been held for one year or less, the capital gain is recognized as short-term. But when it comes to losses, the IRS doesn’t permit filers’ deductions.

There is one important distinction between online sellers and “personal transactions” with the 1099-K Form. When items are sold for a profit, the 1099-K Form intends to ensure income earned is reported to the IRS (and state revenue agency). However, if family members or friends are using such “third-party payment platforms” to split a purchase (for a meal, entertainment, ride-share, reimbursing a bill payment, etc.) such transactions are excluded because they qualify as “personal transactions” under IRS guidance.

With the guidance for smaller transactions evolving, which will undoubtedly impact more and more filers, individuals and those professionals helping them will undoubtedly have to keep an eye on future changes to 2023’s Tax Code.

person checking personal finances

5 Financial Resolutions You Can Live With

by with No Comment Tax

For the most part, New Year’s resolutions are hard to keep because many times you either list too many things or ones that aren’t manageable for the long haul – especially those that involve money. Here are a few simple tricks to help you make changes that are bite-sized, easy to implement, and more likely to stick.

Do a five-minute daily money check-in. Life is so busy that sometimes it’s easy to just spend money, then move on to the next task at hand. You might think, “I’ll check my bank balance later,” and then you never do. But if you’re serious about getting a handle on your finances, you might want to try this one thing: give yourself a “money minute.” Select a time of day, maybe after dinner, to log into your bank account. Take stock of what you spent money on. Did you really need that bottled water? That designer coffee? This way, you can nip those small (perhaps unnecessary) expenditures in the bud and make smarter choices in the coming days.

Get a money-saving app. One of the best ones to help you achieve financial goals is Ibotta. Let’s say you want to buy a new pair of running shoes; a good brand that’ll last. With this app, you’ll save on everyday purchases and when you’ve earned enough cash back, you can cash it in for a gift card from your selected store and get what you want.

Consider micro savings goals. This technique is actually about rewarding yourself financially for changing your behavior. For instance, every time you go to yoga or Pilates, stash away $5. Or if you wake up early or finish a difficult task, stash away $10. When you’ve saved enough money to buy whatever it is you’ve decided on beforehand, you’ve not only avoided the trap of putting your goodie on credit (and paying interest) but also most likely started a new, healthy habit.

Set up an automatic savings plan. After you’ve paid taxes, insurance premiums, and perhaps even your retirement account, you might consider tucking away money for yourself that you’ll never miss. Every. Single. Paycheck. That’s right. When you automatically have a set amount deducted every time you get paid, over time you’ll accumulate a bucket of money to use in whatever way you deem important – it could be saving for a vacation or a new car. It could also be a fund for emergencies. The point is, it’s an easy, failsafe way to save and achieve your goals.

Do one frugal thing a day. This is all about a little bit of forethought and then just taking action. And when you adopt this mindset, you’ll be working daily toward your financial goals like paying off debt, saving money to quit a job you hate, or even have enough extra cash to invest in real estate or whatever strikes your fancy. Here are a few things to consider: drink more water than soda. Eat at home. Use public transportation instead of driving when you can. But this just scratches the surface. For more smart ways to start living frugally, check out this super helpful article. You’ll be surprised at all the ways you can cut back and save.

All of these tricks are easy and, in some cases, no-brainers. When you take a few minutes, set your mind on what you want, anything’s possible. Here’s to fulfilling your dreams in the New Year! 

Sources: https://lifeandabudget.com/11-financial-resolutions-that-will-stick/

Tax Break for Commercial Real Estate Investors

by with No Comment Tax

COVID-19 impacted the economy dramatically, and commercial real estate was no exception in terms of decreased values. Often, the real property could no longer service the debt used to finance it. This debt restructuring and resulting debt forgiveness can result in taxable income.

Taxable Income and Debt Cancellation

If you have an $80,000 loan and the bank reduces the amount you owe down to $50,000, then you have an economic benefit of $30,000, which should be treated as taxable income. This is indeed how the cancellation of debt is treated, but there are exceptions, such as in the case of bankruptcy or insolvency. There is another unique scenario that applies only to commercial real estate.

Assuming that the taxpayer is not a C-corporation, debt cancellation is excludable from taxable income if it results from qualified real property business indebtedness (QRPBI). QRPBI is debt taken on to buy real property used for commercial purposes. Starting in 1993, debt used for building or improving a property also qualifies.

As we all know, there is no such thing as a free lunch. For debt cancellation to not be considered current taxable income, the taxpayer must reduce their basis in the real property by this same amount. This does not cancel the income; instead, it defers its recognition and helps cash flow as a result. Below, we look at an example of how this works.

Illustrative Example

Assume David bought a property in 2017 and he uses it for business purposes. In 2022, the property has a first mortgage of $200,000 and a second mortgage of $100,000 (both with the same bank), with a fair market value (FMV) of $240,000. He negotiates with the bank to reduce the second mortgage down to $20,000, resulting in income from the cancellation of debt of $80,000.

The amount of debt cancellation that can be deferred is equal to the amount of the second mortgage before the debt cancellation, less the FMV minus the first mortgage. In David’s case, before debt cancellation, the FMV ($240k) minus the first mortgage ($200k) was $40,000. The balance of the second mortgage ($100k) exceeded this by $60,000. Out of the total debt cancellation of $80,000, this $60,000 is subject to deferral, with only the remaining $20,000 reported as immediate taxable income.

The $60,000 is not considered as taxable income only to the extent that David has sufficient adjusted tax basis in the depreciable real property to absorb this as a reduction in basis. Assuming this is the case, the basis reduction applies the first day of the tax year after the debt cancellation (unless the property is sold before year-end — then it applies immediately).

In the example above, David would include the $10,000 of cancellation of debt income on his 2022 tax return and adjust his basis in the real property by $60,000 as of Jan. 1, 2023.

Filing Mechanics

For real estate held via partnerships instead of by individuals, determining if a debt is QRPBI qualified happens at the entity level, although reductions of basis are done at the individual level for each partner, allowing individual planning. The election to defer the cancellation of debt income is recorded on Form 982.

Conclusion

The COVID pandemic caused many real estate investors to restructure their debts. The option to defer debt income cancellation offers a great tax planning opportunity by delaying taxable income and improving cash flows.

The IRS is Auditing Fewer Returns than Ever

by with No Comment Tax

One of the perennial fears of taxpayers is getting audited by the IRS. Financially, few scenarios strike such fear into hearts. However, taxpayers can probably breathe a sigh of relief – at least for now. This is because the rate at which the IRS is initiating audits of individual taxpayers is dropping like a stone.

Decline in Audit Rates

The rate at which the IRS is auditing individual taxpayers has declined overall between the years 2010 and 2019 (2020 data is too new and 2021 returns are still being filed through the extension period). According to the Government Accountability Office (GAO), nearly 1 percent of all taxpayers were audited in 2010, compared to only 0.25 percent for the tax year 2019. The GAO chart below shows the ski slope-like drop in individual tax audit rates over the period.

Table #3 from the GAO Report

While the IRS continues to audit higher-earning taxpayers more often overall, during the 10 years charted, audit rates consistently declined for all levels of taxpayers, except those with the highest incomes. The audit rate for taxpayers with income between $200k and $500k experienced the largest drop, with the audit rate declining from 2.3 percent down to 0.2 percent; a 92 percent reduction in audits. Taxpayers with the highest incomes, defined as $10 million or more, saw a resurgence in audit rates from 2017-2018; however, even they experienced an overall decline, dropping from 21.2 percent in 2019 to only 3.9 percent in 2019 – equating to an 81 percent decline.

Impact on the Treasury

There is a theory that the prospect of a tax audit leads to greater voluntary compliance. In other words, if people think they won’t get audited, then they are more likely to cheat on their taxes.

Non-compliance with tax laws and regulations has a material impact on the Treasury. According to the IRS, it is estimated that on average, individual taxpayers under-reported nearly $250 billion a year for the period 2011-2013. This leads to the non-collection of taxes that are otherwise owed to the government and raises issues of fairness for taxpayers who are playing by the rules.

Why the Decline in Audit Rates?

One of the main drivers is a lack of resources at the IRS, a combination of both reduced funding and fewer auditors on staff. The number of agents working for the IRS has declined across the board since 2011. Tax examiners, the type who handle basic audits by mail, have dropped by 18 percent. Meanwhile, revenue agents, who handle the more complex cases in the field, declined by more than 40 percent over the same period.

Demographics point to an increase in these trends as there is a wave of coming retirements in the IRS. Over the next three years, nearly 14 percent of current tax examiners and 16 percent of revenue agents are expected to retire. Stack on top of this is the fact that the inexperience of newer agents and the time to complete audits is also taking longer.

Conclusion

The IRS claims it is missing out on millions in legally due tax revenues due to the inability to maintain enforcement. They say they need more funding to hire more agents to perform more audits, which not only find fraud in the audits themselves but also increase overall compliance due to the pressure this creates.

Currently, there is no political focus on bringing significant new resources to the IRS, so we are not likely to see an uptick in individual tax audit rates anytime soon. The trend of focusing on the highest earners, however, will likely continue as this is where the IRS can find the most bang for its buck.

Divorce and Taxes – What Are the Implications?

by with No Comment Tax

This article explains the precautions to take when getting a divorce, and several tax concerns that need to be addressed to ensure that taxes are kept to a minimum and important tax-related decisions are properly made. Five issues to consider in the process of divorce include alimony or support payments, child support, personal residence, pension benefits, and business interests. Each spouse could save thousands on their home, up to $500,000 of avoidable tax, if they owned and used the residence as their principal residence for two of the previous five years. Another issue to consider if getting a divorce is deciding how to file your tax return. For more information on divorce accounting, click the link!

To view this article, click here to access the original content.

Tax-Avoiding Schemes Are at the Top of the 2022 “Dirty Dozen” List

by with No Comment Tax

This article explains some tax-avoiding strategies that the IRS will be flagging down. Some strategies include “concealing assets in offshore accounts and improper reporting of digital assets, non-filing of income tax returns by high-income individuals, abusive syndicated conservation easements, and abusive micro captive insurance arrangements.” The article proceeds to categorize other sources of taxable income, all of which the IRS will punish if found to be abused.

To view this article, click here to access the original content.

Tax Break for Commercial Real Estate Investors

by with No Comment Tax

COVID-19 impacted the economy dramatically, and commercial real estate was no exception in terms of decreased values. Often, the real property could no longer service the debt used to finance it. This debt restructuring and resulting debt forgiveness can result in taxable income.

Taxable Income and Debt Cancellation

If you have an $80,000 loan and the bank reduces the amount you owe down to $50,000, then you have an economic benefit of $30,000, which should be treated as taxable income. This is indeed how the cancellation of debt is treated, but there are exceptions, such as in the case of bankruptcy or insolvency. There is another unique scenario that applies only to commercial real estate.

Assuming that the taxpayer is not a C-corporation, debt cancellation is excludable from taxable income if it results from qualified real property business indebtedness (QRPBI). QRPBI is debt taken on to buy real property used for commercial purposes. Starting in 1993, debt used for building or improving a property also qualifies.

As we all know, there is no such thing as a free lunch. For debt cancellation to not be considered current taxable income, the taxpayer must reduce their basis in the real property by this same amount. This does not cancel the income; instead, it defers its recognition and helps cash flow as a result. Below, we look at an example of how this works.

Illustrative Example

Assume David bought a property in 2017 and he uses it for business purposes. In 2022, the property has a first mortgage of $200,000 and a second mortgage of $100,000 (both with the same bank), with a fair market value (FMV) of $240,000. He negotiates with the bank to reduce the second mortgage down to $20,000, resulting in income from the cancellation of debt of $80,000.

The amount of debt cancellation that can be deferred is equal to the amount of the second mortgage before the debt cancellation, less the FMV minus the first mortgage. In David’s case, before debt cancellation, the FMV ($240k) minus the first mortgage ($200k) was $40,000. The balance of the second mortgage ($100k) exceeded this by $60,000. Out of the total debt cancellation of $80,000, this $60,000 is subject to deferral, with only the remaining $20,000 reported as immediate taxable income.

The $60,000 is not considered as taxable income only to the extent that David has sufficient adjusted tax basis in the depreciable real property to absorb this as a reduction in basis. Assuming this is the case, the basis reduction applies the first day of the tax year after the debt cancellation (unless the property is sold before year-end — then it applies immediately).

In the example above, David would include the $10,000 of cancellation of debt income on his 2022 tax return and adjust his basis in the real property by $60,000 as of Jan. 1, 2023.

Filing Mechanics

For real estate held via partnerships instead of by individuals, determining if a debt is QRPBI qualified happens at the entity level, although reductions of basis are done at the individual level for each partner, allowing individual planning. The election to defer the cancellation of debt income is recorded on Form 982.

Conclusion

The COVID pandemic caused many real estate investors to restructure their debts. The option to defer debt income cancellation offers a great tax planning opportunity by delaying taxable income and improving cash flows.

R&D Tax Credits for Startups

by with No Comment Tax

This article explains the significant benefits that startups in 2022 receive when using R&D tax credits. For companies to qualify for R&D tax credits, their ideas must be a new or improved business component for a permitted purpose, include activities technological in nature, have elimination of uncertainty, and use the process of experimentation. The amount companies get back in R&D research “depends on the sum of your Qualified Research Expenses (QRE), which can include wages, contractor costs, and supply costs.” Start-ups can now use the R&D tax credit to offset up to $250,000 of their FICA payroll tax for their first five taxable years. Less than one-third of companies are aware that they qualify for the R&D tax credit. Be sure to hit the link for more information on the benefits of R&D tax credit!

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