UPDATE: The IRS has further extended the deadline to October 16, 2023: Disaster-area taxpayers in most of California and parts of Alabama and Georgia now have until October 16, 2023, to file various federal individual and business tax returns and make tax payments, the Internal Revenue Service announced on Friday. Previously, the deadline had been postponed to May 15th for these areas. See IR-2023-33, Feb. 24, 2023 for further details.
The IRS has provided disaster tax relief to victims of California storms that began on January 8, 2023. According to the IRS, storm victims who live or have a business in the disaster area now have until October 16, 2023, to file various federal individual and business tax returns and to make tax payments.
Disaster area. The disaster area includes the following counties: Alameda, Colusa, Contra Costa, El Dorado, Fresno, Glenn, Humboldt, Kings, Lake, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Mono, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Benito, San Bernardino, San Diego, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Tulare, Ventura, Yolo, and Yuba.
Postponed deadlines. The IRS has postponed various tax filing and payment deadlines that occurred beginning on January 8, 2023. As a result, individuals and households who live or have a business in the disaster area will have until October 16, 2023, to file returns and pay taxes that were originally due during this period.
This tax relief includes business returns due on March 15 and business and individual returns due on April 18, 2023. In addition, farmers who forgo making an estimated tax payment in January and normally file their returns by March 1, now have until October 16, 2023, to file their 2022 return and pay any tax due.
The October 16, 2023, deadline also applies to:
The quarterly estimated tax payments normally due on January 17, April 18, June 15 and Sept. 15 .
The quarterly payroll and excise tax returns normally due on January 31, April 30 and July 31.
In addition, penalties on payroll and excise tax deposits due on or after January 8, 2023, and before January 23, 2023, will be abated if the tax deposits are made by January 23, 2023.
Relief is automatic. The IRS will automatically apply this tax relief to any taxpayer with an address in the disaster area (“affected taxpayers”). However, affected taxpayers that receive a penalty notice from the IRS for a return that has a due date falling within the postponement period (January 8, 2023, to October 16, 2023) should call the phone number on the notice to have the penalty abated.
In addition, taxpayers who live or have a business outside the disaster area but whose tax records are in the disaster area and workers assisting in disaster relief activities should call the IRS at 866-562-5227 to ask for this tax relief.
Disaster losses. Victims in the disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the current year (2023) or prior year 2022 return. Taxpayers claiming disaster losses should write the FEMA declaration number—3691-EM—on any return claiming such a loss.
As of this posting, California has not conformed to this extended relief however, we expect they will shortly.
Please keep in mind that this relief doesn’t apply to information returns such as Forms W-2, 1094, 1095, 1097, 1098 or 1099 series; to Forms 1042-S, 3921, 3922 or 8027. These forms still have their normal due dates.
We recommend that you still submit all 2022 documents to our firm for completion of your return as soon as possible and use this relief as an opportunity to pay any tax as late as October 16th
If you have chosen the S corporation form for your business, you should be aware of certain steps that you should take to avoid an inadvertent termination of its S corporation status.
Avoid transfers to ineligible shareholders. In general, only individual U.S. citizens or residents, decedent estates, certain types of trusts, and certain exempt organizations may be S corporation shareholders. Therefore, it is important that you confirm that all the shareholders are eligible shareholders, i.e., (i) that no shareholder is a nonresident alien, a partnership, or a corporation; (ii) that all trusts are properly structured to be eligible shareholders, and (iii) that any election required for a trust shareholder is made.
Even if a corporation’s initial shareholders are all eligible shareholders, its S corporation status will terminate if any shares are transferred to a nonresident alien individual, a corporation, a partnership, or a trust (other than the specific types of trusts which may be S corporation shareholders).
In order to prevent a shareholder from terminating an S corporation’s status by transferring his shares to an ineligible shareholder, a shareholders’ agreement should prohibit transfers of any shares to any person other than a permitted S corporation shareholder and require a similar undertaking on the part of any transferee as a condition to any transfer. In addition, if permitted by local law, a restriction should be imposed in the corporation’s charter or by-laws that would void a purported transfer to an ineligible shareholder.
Avoid violating the shareholder limitation. An S corporation cannot have more than 100 shareholders at any time. Even if this limit is not exceeded at organization, the S status will terminate if the limit is exceeded at any time in the future, whether as a result of new issuances or transfers of shares.
New issuances of stock require corporate action. You should keep this in mind when considering future issuances of stock to avoid exceeding the 100 shareholder limit.
Transfers by shareholders can be somewhat more problematic, since they can occur without any action on the part of the corporation. Therefore, a shareholders’ agreement should prohibit any transfer of shares to a person who is not already a shareholder or if the transfer would cause the 100 shareholder limit to be exceeded and transfers should be conditioned on the transferee being subject to the same restriction. If permitted by local law, an appropriate restriction should also be imposed in the corporation’s charter or by-laws so that a purported transfer that caused the limit to be exceeded would be void.
Don’t issue more than one class of stock. An S corporation can only have one class of stock. Be sure to keep this requirement in mind when considering future changes to the capital structure of the corporation, including purported debt owed by the corporation that may be recharacterized as equity. The IRS allows S corporations to use various equity incentive compensation arrangements without violating the one class of stock restriction. If you want to create an equity incentive compensation plan, we would be happy to discuss with you how to structure the plan.
Avoid excess passive investment income. If an S corporation has accumulated earnings and profits (because it was once a C corporation or is a transferee of a C corporation), its S election will terminate if, for a period of three consecutive tax years, its “passive investment income ” exceeds 25% of its gross receipts.
The first step in avoiding an inadvertent termination under this rule is to keep track of the corporation’s passive investment income to determine whether the 25% limitation may be exceeded. Although excess passive income is subject to a special tax, S corporation status will terminate only if the limit is exceeded for three consecutive years.
If a corporation is in danger of exceeding the 25% passive income limitation for three consecutive years, there are two basic approaches to avoid termination of S corporation status. Since termination will only occur if the corporation has accumulated earnings and profits from C corporation years, termination can be avoided by stripping out those earnings and profits by way of a dividend. Ordinarily, distributions by an S corporation reduce pre-S corporation earnings and profits only after the accumulated income from all S corporation years has been distributed. However, it is possible to elect to treat distributions as coming from pre-S corporation earnings and profits first. Moreover, if it desired to strip out earnings and profits without actually depleting the corporation’s cash or other liquid assets, a “deemed” dividend election can be made. Be aware, however, that a distribution out of pre-S corporation earnings and profits (whether actual or under the deemed dividend election) is generally taxable to shareholders as a dividend (unlike a distribution from accumulated S corporation income which is generally a return of capital).
A second approach to avoiding termination under the passive income rules is to tailor the corporation’s operations so that the 25% passive income limit is not exceeded. Since termination will occur only after the limit is exceeded for three consecutive years, if you are willing to incur the tax on excess passive income, there should be sufficient time to take action to avoid a termination.
This can be done by reducing the amount of passive investment income, or by increasing the amount of other income. Since the test is applied to gross receipts, acquiring a business that produces receipts that are not passive investment income, even if it does not produce much in the way of net income, is one possible solution. It may also be possible to restructure certain operations so that passive income (e.g., certain rental income) becomes active income. (Unfortunately, an investment in municipal bonds producing tax -exempt interest is not a solution under these rules.)
If, despite appropriate precautions, S corporation status is nevertheless terminated, all is not lost. It is possible to apply to IRS for a “waiver” of an inadvertent termination of S status. Naturally, the safest course of action is to avoid a termination in the first place.
If you have any further questions, or if you’d like to go into the appropriate provisions to avoid transfers of stock which would cause a termination, please contact us!
With year-end approaching, it is time to start thinking about moves that may help lower your taxes for this year and next. We have compiled a list of actions based on current tax rules that may help you save tax dollars if you ACT BEFORE YEAR-END. Not all of them will apply to you, but you (or a family member) may benefit from many of them. Upon your request, we can narrow down specific actions to tailor a particular plan for you. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves might be beneficial. We have broken out the potential actions into the following sections:
Many taxpayers won’t need to itemize because of the high basic standard deduction amounts that apply for 2022 ($25,900 for joint filers, $12,950 for singles and for married filing separately, $19,400 for heads of household), and because many itemized deductions have been reduced or abolished, including the $10,000 limit on state and local taxes; miscellaneous itemized deductions; and non-disaster related personal casualty losses. You can still itemize medical expenses that exceed 7.5% of your adjusted gross income (AGI), state and local taxes up to $10,000, your charitable contributions subject to various limitations, plus mortgage interest deductions on a restricted amount of debt. However, these deductions won’t save taxes unless they total more than your standard deduction.
Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, a taxpayer who will be able to itemize deductions this year but not next will benefit by making two years’ worth of charitable contributions this year.
Postpone income until 2023 and accelerate deductions into 2022 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2022 that are phased out over varying levels of AGI. These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may actually pay to accelerate income into 2022. For example, that may be the case for a person who will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or who expects to be in a higher tax bracket next year. That is especially a consideration for high income taxpayers who may be subject to higher rates next year under proposed legislation.
Consider donating appreciated publicly traded stock to get a two-fold benefit of the donation at fair market value without having to pick up the capital gains.
It may be advantageous to try to arrange with your employer to defer, until early 2023, a bonus that may be coming your way. This might cut as well as defer your tax. Again, considerations may be different for the highest income individuals.
Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2022 deductions even if you don’t pay your credit card bill until after the end of the year.
If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2022, consider asking your employer to increase withholding of state and local taxes (or make estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2022. However, this strategy is not good to the extent it causes your 2022 state and local tax payments to exceed $10,000.
Higher-income individuals must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of MAGI over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).
As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax will depend on the taxpayer s estimated modified adjusted gross income (MAGI) and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to reduce MAGI other than NII, and some individuals will need to consider ways to minimize both NII and other types of MAGI. An important exception is that NII does not include distributions from IRAs or most other retirement plans.
The 0.9% additional Medicare tax also may require higher-income earners to take year-end action. It applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds, above. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer.
If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional-IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA in 2022 if eligible to do so. Keep in mind that the conversion will increase your income for 2022, possibly reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for those potentially subject to higher tax rates under pending legislation or for those projected to be in a lower tax bracket this year.
Required minimum distributions RMDs from an IRA or 401(k) plan (or other employer-sponsored retirement plan) have not been waived for 2022. If you were 72 or older in 2021 you must take an RMD during 2022. Those who turn 72 this year have until April 1 of 2023 to take their first RMD but may want to take it by the end of 2022 to avoid having to double up on RMDs next year.
If you are age 70½ or older by the end of 2022, and especially if you are unable to itemize your deductions, consider making 2021 charitable donations via direct qualified charitable distributions from your traditional IRAs. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on as an itemized deduction. However, you are still entitled to claim the entire standard deduction. (The qualified charitable distribution amount is reduced by any deductible contributions to an IRA made for any year in which you were age 70½ or older, unless it reduced a previous qualified charitable distribution exclusion.)
Take an eligible rollover distribution from a qualified retirement plan before the end of 2022 if you are facing a penalty for underpayment of estimated tax and increasing your wage withholding won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2022. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2022, but the withheld tax will be applied pro rata over the full 2022 tax year to reduce previous underpayments of estimated tax.
Consider increasing the amount you set aside for next year in your employer’s FSA if you set aside too little for this year and anticipate similar medical costs next year or if you anticipate more medical costs next year.
If you become eligible in December of 2022 to make HSA contributions, you can make a full year’s worth of deductible HSA contributions for 2022.
Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $16,000 made in 2022 to each of an unlimited number of individuals. You can’t carry over unused exclusions to another year. These transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2022 return normally filed next year), or on the return for the prior year (2021), generating a quicker refund.
If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in 2022 to maximize your casualty loss deduction this year.
As year-end approaches, you should consider the following moves to make the best tax use of paper losses and actual losses from your stock market investments:
Sell at a loss to offset earlier gains. If you have realized gains earlier in the year from sales of stock held for more than one year (long-term capital gains) or from sales of stock held for one year or less (short-term capital gains), take a close look at your portfolio with a view to selling some of the losers—those shares that now show a paper loss. The best tax strategy is to sell enough of the losers to generate losses to offset your earlier gains plus an additional $3,000 loss. Selling to produce this amount of loss is a good idea from the tax viewpoint because a $3,000 capital loss (but no more) can offset the same amount of ordinary income each year.
Suppose that you believe that the shares showing a paper loss still have the potential to turn around and eventually generate a profit. In order to sell and then repurchase the shares without forfeiting the loss deduction, you must avoid the wash-sale rules. This means that you must buy the new shares outside of the period that begins 30 days before and ends 30 days after the sale of the loss stock. However, note that if you expect the price of the shares showing a paper loss to rise quickly, your tax savings from taking the loss may not be worth the potential investment gain you may lose by waiting more than 30 days to repurchase the shares.
Use earlier-in-the-year losses to offset gains you would benefit from taking. If you have capital losses on sales earlier in the year, consider whether you should take capital gains on some stocks that you still hold. For example, if you have appreciated stocks that you would like to sell, but don’t want to sell if it will cause you to have taxable gain this year, consider selling just enough shares to offset your earlier-in-the-year capital losses (except for $3,000 of those which can be used to offset ordinary income). You should consider selling appreciated stocks now if you believe those stocks have reached (or are close to) the peak price and you also believe that you can invest the proceeds from the sale in other property that will give you a better rate of return in the future.
If this strategy applies to you, and your holdings showing a paper gain consist of stocks you haven’t held for more than one year, as well as stocks you have held for more than one year, you should consider selling those stocks on which you will have short-term gain first, and then stocks that would yield long-term gain. This way, you’ll be in a better position to wind up with gain taxed at favorable rates when you sell other stocks with paper gains. To the extent possible, you should also try to use long-term capital losses to offset short-term capital gains. This can be done, however, only if the total of your long-term capital losses is more than your long-term capital gains. Deferring long-term capital gains until next year is one way of achieving this goal.
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to net long-term capital gain to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $83,350 for a married couple). If, say, $5,000 of long-term capital gains you took earlier this year qualifies for the zero rate then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses will offset $5,000 of capital gain that is already tax-free.
Since individual taxpayers may carry over capital losses indefinitely, there is no reason to sell appreciated stocks just to have offsetting gains. If you don’t have a better investment for the proceeds of a sale of these stocks, don’t sell them. You can carry over your capital losses to next year when you may have a better opportunity to make use of those losses. You can even offset another $3,000 of the carried over losses against ordinary income next year (and in succeeding years if the full amount of the capital loss carryover is not used next year).
If selling an investment in a qualified small business stock, consider the tax savings and rollover provisions.
Review your ISO, NQ, and RSU holdings to determine strategies to minimize tax.
The recently enacted Inflation Reduction Act of 2022 contains a multitude of new environmentally related tax credits that are of interest to individuals and small businesses. The Act also extends and modifies some pre-existing tax credits:
Extension, Increase, and Modifications of Nonbusiness Energy Property Credit. Before the Act, you were allowed a personal credit for specified nonbusiness energy property expenditures. The credit applied only to property placed in service before January 1, 2022. Now you may take the credit for energy-efficient property placed in service before January 1, 2033.
Increased credit: The Act increases the credit for a tax year to an amount equal to 30% of the sum of (a) the amount paid or incurred by you for qualified energy efficiency improvements installed during that year, and (b) the amount of the residential energy property expenditures paid or incurred by you during that year. The credit is further increased for amounts spent for a home energy audit. The amount of the increase due to a home energy audit can’t exceed $150.
Annual limitation in lieu of lifetime limitation: The Act also repeals the lifetime credit limitation, and instead limits the allowable credit to $1,200 per taxpayer per year. In addition, there are annual limits of $600 for credits with respect to residential energy property expenditures, windows, and skylights, and $250 for any exterior door ($500 total for all exterior doors). Notwithstanding these limitations, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.
Extension and Modification of Residential Clean Energy Credit: Before the Act, you were allowed a personal tax credit, known as the residential energy efficient property (REEP) credit, for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes in years before 2024.
The Act makes the credit available for property installed in years before 2035. The Act also makes the credit available for qualified battery storage technology expenditures.
Extension, Increase, and Modifications of New Energy Efficient Home Credit: Before the Act, a New Energy Efficient Home Credit (NEEHC) was available to eligible contractors for qualified new energy efficient homes acquired by a homeowner before Jan. 1, 2022. A home had to satisfy specified energy saving requirements to qualify for the credit. The credit was either $1,000 or $2,000, depending on which energy efficiency requirements the home satisfied.
The Act makes the credit available for qualified new energy efficient homes acquired before January 1, 2033. The amount of the credit is increased, and can be $500, $1,000, $2,500, or $5,000, depending on which energy efficiency requirements the home satisfies and whether the construction of the home meets prevailing wage requirements.
New Clean Vehicle Credit: Before the enactment of the Act, you could claim a credit for each new qualified plug-in electric drive motor vehicle (NQPEDMV) placed in service during the tax year.
The Act, among other things, retitles the NQPEDMV credit as the Clean Vehicle Credit and eliminates the limitation on the number of vehicles eligible for the credit. Also, final assembly of the vehicle must take place in North America.
No credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $300,000 for a joint return or surviving spouse, $225,000 for a head of household, or $150,000 for others. In addition, no credit is allowed if the manufacturer’s suggested retail price for the vehicle is more than $55,000 ($80,000 for pickups, vans, or SUVs).
Finally, the way the credit is calculated is changing. The rules are complicated, but they place more emphasis on where the battery components (and critical minerals used in the battery) are sourced.
Credit for Previously-Owned Clean Vehicles: A qualified buyer who acquires and places in service a previously-owned clean vehicle after 2022 is allowed an income tax credit equal to the lesser of $4,000 or 30% of the vehicle’s sale price. No credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $150,000 for a joint return or surviving spouse, $112,500 for a head of household, or $75,000 for others. In addition, the maximum price per vehicle is $25,000.
New Credit for Qualified Commercial Clean Vehicles: There is a new qualified commercial clean vehicle credit for qualified vehicles acquired and placed in service after December 31, 2022. The credit per vehicle is the lesser of: (1) 15% of the vehicle’s basis (30% for vehicles not powered by a gasoline or diesel engine) or (2) the “incremental cost” of the vehicle over the cost of a comparable vehicle powered solely by a gasoline or diesel engine. The maximum credit per vehicle is $7,500 for vehicles with gross vehicle weight ratings of less than 14,000 pounds, or $40,000 for heavier vehicles.
Increase in Qualified Small Business Payroll Tax Credit for Increasing Research Activities: Under pre-Act law, a “qualified small business” (QSB) with qualifying research expenses could elect to claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer’s share of Social Security tax.
Due to concerns that some small businesses may not have a large enough income tax liability to take advantage of the research credit, for tax years beginning after December 31, 2022, QSBs may apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit cannot exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.
Extension of Incentives for Biodiesel, Renewable Diesel and Alternative Fuels: Under pre-Act law, you could claim a credit for sales and use of biodiesel and renewable diesel that you use in your trade or business or sold at retail and placed in the fuel tank of the buyer for such use and sales on or before December 31, 2022. Now you are permitted to claim a credit for sales and use of biodiesel and renewable diesel fuel, biodiesel fuel mixtures, alternative fuel, and alternative fuel mixtures on or before December 31, 2024.
You are also allowed now to claim a refund of excise tax for use of (1) biodiesel fuel mixtures for a purpose other than for which they were sold or for resale of biodiesel mixtures on or before December 31, 2024 and (2) alternative fuel as fuel in a motor vehicle or motorboat or as aviation fuel, for a purpose other than for which they were sold or for resale of such alternative fuel mixtures on or before December 31, 2024.
This year’s business planning is more challenging than usual due to the uncertainty surrounding pending legislation that could increase corporate tax rates plus the top rates on both business owners ordinary income and capital gain starting next year.
Whether or not tax increases become effective next year, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for most small businesses, as will the bunching of deductible expenses into this year or next to maximize their tax value.
If proposed tax increases do pass, however, the highest income businesses and owners may find that the opposite strategies produce better results: Pulling income into 2022 to be taxed at currently lower rates, and deferring deductible expenses until 2023, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all relevant factors.
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2022, if taxable income exceeds $340,100 for a married couple filing jointly, (approximately half that for others), the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income up to $100,000 above the threshold, and to other filers with taxable income up to $50,000 above their threshold.
Taxpayers may be able to salvage some or all of this deduction, by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout) for 2022. Depending on their business model, taxpayers also may be able increase the deduction by increasing W-2 wages before year-end. The rules are quite complex, so don’t make a move in this area without consulting us.
More small businesses are able to use the cash (as opposed to accrual) method of accounting than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test, which is satisfied for 2022 if, during a three-year testing period, average annual gross receipts don’t exceed $27 million. Not that many years ago it was $1 million. Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings until next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.
Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2022, the expensing limit is $1,080,000, and the investment ceiling limit is $2,700,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for interior improvements to a building (but not for its enlargement), elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.
The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. So expensing eligible items acquired and placed in service during the last days of 2022, rather than at the beginning of 2023, can result in a full expensing deduction for 2022.
Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service this year, and for qualified improvement property, described above as related to the expensing deduction. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2022.
Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs aren’t required to be capitalized under the UNICAP rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS, e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500.
Plan for funding a qualified retirement plan / setting up a Simplified Employee Pension (SEP).
Consider having your flow through entity pay a portion of your state tax liability under the new Pass-Through Entity tax credit provisions.
A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for 2022 (and substantial taxable income in 2023) may find it worthwhile to accelerate just enough of its 2023 income (or to defer just enough of its 2022 deductions) to create a small amount of taxable income for 2022. This allows the corporation to base its 2023 estimated tax installments on the relatively small amount of income shown on its 2022 return, rather than having to pay estimated taxes based on 100% of its much larger 2023 taxable income.
Year-end bonuses can be timed for maximum tax effect by both cash- and accrual-basis employers. Cash basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to them are established with reasonable certainty. However, the bonus must be paid within two and a half months after the end of the employer’s tax year for the deduction to be allowed in the earlier accrual year as long as not paid to an over 50% owner of the corporation. Accrual employers looking to defer deductions to a higher-taxed future year should consider changing their bonus plans before year end to set the payment date later than the 2.5-month window or change the bonus plan terms to make the bonus amount not determinable at year end.
To reduce 2022 taxable income, consider deferring a debt-cancellation event until 2023 or to accelerate, consider finalizing a debt-cancellation event.
Take steps to utilize prior year suspended basis, at-risk or passive losses:
Suspended basis and at-risk losses can be freed up by contributing capital into the business.
Sometimes the disposition of a passive activity can be timed to make best use of its freed-up suspended losses. Where reduction of 2022 income is desired, consider disposing of a passive activity before year-end to take the suspended losses against 2022 income. If possible 2023 top rate increases are a concern, holding off on disposing of the activity until 2023 might save more in future taxes.
These are just some of the year-end steps that can be taken to save taxes. As you can tell from this letter, many provisions are quite complex and require some analysis based on individual facts. Even if you don’t believe any of these provisions will apply to your 2022 tax situation, you should consider contacting us so at a minimum, we can run a tax projection to help you avoid unnecessary surprises come April 2023. Again, by contacting us, we can tailor a particular plan that will work best for you.
Have you created your online accounts with the Internal Revenue Service (IRS) and Franchise Tax Board (FTB) yet? We encourage ALL of our clients to create or update their online accounts with the IRS and relevant state tax agencies. With online accounts, taxpayers gain access to important tax information including balances due, payments made, tax records, and more.
In many cases, you can locate or request relevant information via your online account which will minimize or eliminate the need to sit on hold with tax agencies. Plus, account creation takes just a few minutes! Individual taxpayers have the ability to create both Federal IRS and California FTB accounts, however businesses are only able to create California FTB accounts at this time.
The following and more can be done via your online accounts:
Both IRS and FTB:
View account balance, including taxes due from prior year returns
Make electronic payments and create payment plans
View tax payment history, including past estimated tax payments
View Notices and Letters of correspondence
View and authorize Power of Attorney (POA) for outside parties
IRS:
View tax records relating to advance payments of the Child Tax Credit and Economic Impact Payments (EIPs)
FTB:
View past copies of your California tax returns
Send a secure message to an FTB representative with questions regarding your account
Authorize Full Online Account Access for your tax professional representative(s)
View tax payment history, including the new Pass-Through Entity (PTE) Elective Tax payment
The IRS has partnered with ID.me, an IRS-trusted technology provider, to provide identity verification for IRS applications. Individual taxpayers and tax professionals are required to verify with ID.me for a secure login.
Please note, existing IRS username and passwords no longer work as of Summer 2022. As such, we suggest creating an ID.me account and completing the identity verification process now.
How to sign-up:
Select “Sign in to your Online Account” and either create a new account or sign-in using a previous login.
If you have an existing ID.me account from a state government or federal agency, you can sign-in without verifying your identity again. If you’re a new user, you’ll have to create a new ID.me account.
To create your account, you will need:
A valid email address.
Your birthdate.
Your Social Security Number (SSN).
Your current mailing address.
Your mobile phone number (must be a smart phone with internet and texting capabilities)
Your ID (driver’s license, passport, or state ID)
Tips for creating your ID.me account:
Make sure you have access to a computer, your smartphone, and your email. You’ll be asked to go between all 3 in order to verify your identity.
You’ll need to use your smartphone to take a photo of your ID.
You’ll need to use your smartphone or your computer’s webcam to take a computer-generated selfie photo.
You must have a recent California tax return on file in order to register for a MyFTB Individual account. If you filed a joint tax return, you must each register for a separate MyFTB Individual account.
To create your account, you will need:
A valid email address.
Your Social Security Number (SSN).
Your current mailing address.
Important! If you moved since you filed your last tax return, call the FTB to update your mailing address before you register for a MyFTB account, (800) 852-5711.
Information from a filed California tax return for one of the last five tax years.
After you create your account, you will receive a letter in the mail containing a Personal Identification Number (PIN). The PIN will be mailed via the United States Postal Service within 3 to 5 business days. Please allow 10 business days to receive the PIN. You have 21 days from the date you register to enter your PIN to activate your account.
This is a one-time use PIN is used to activate your MyFTB account. You will not need it again to login. You will need to enter this PIN online in order to activate and gain access to your account.
Please note: Individual taxpayers also have the option of activating their account via online “personal question” screening instead of the mailed PIN.
The Infrastructure Investment and Jobs Act, signed by President Biden earlier this week, contains many provisions related to individuals, businesses, information reporting, pensions and excise tax. Contained here is a high-level overview of some of the key provisions that may impact you or your business. For more detailed information, please contact us to discuss how these provisions relate to your specific tax situation.
Individual Provisions
Automatic extension of certain deadlines for taxpayers affected by disasters
A mandatory, automatic 60-day extension period applies to qualified taxpayers impacted by federally declared disasters.
Combat-zone filing extension applies to more tax-related filings
Individuals who are in the military are entitled to a period of extension. The period of extension applies to certain tax-related acts (e.g., filing returns, paying tax and filing Tax Court petitions) by taxpayers or by the government.
Tolling of time for filing a petition with the Tax Court
In any case in which a “filing location” is inaccessible or otherwise unavailable to the general public on the date a Tax Court petition is due, the relevant time period for filing that petition is tolled for the number of days within the period of inaccessibility plus an additional 14 days.
Authority to postpone certain tax deadlines by reason of significant fires
The IRS can suspend filing and payment requirements for taxpayers affected by federally declared disasters or terroristic or military actions. The Act amends the code to add “significant fire” to the list of events that allow the IRS to suspend filing and payment requirements.
The Infrastructure Investment and Jobs Act of 2021 (IIJA) was signed into law on Nov. 15, 2021. The IIJA includes IRS information reporting requirements that will require cryptocurrency exchanges to perform intermediary Form 1099 reporting for cryptocurrency transactions. Generally, these rules will apply to digital asset transactions starting in 2023.
Existing reporting rules. As you probably know, if you have a stock brokerage account, then whenever you sell stock or other securities you receive a Form 1099-B at the end of the year. Your broker uses that form to report details of transactions such as sale proceeds, relevant dates, your tax basis for the sale, and the character of gains or losses. Furthermore, if you transfer stock from one broker to another broker, then the old broker is required to furnish a statement with relevant information, such as tax basis, to the new broker.
Digital asset broker reporting. The IIJA expands the definition of brokers who must furnish Forms 1099-B to include businesses that are responsible for regularly providing any service accomplishing transfers of digital assets on behalf of another person (“Crypto Exchanges”). Thus, any platform on which you can buy and sell cryptocurrency will be required to report digital asset transactions to you and the IRS at the end of each year.
As part of the Tax Cuts and Jobs Act of 2017, the deduction for state and local taxes (SALT) was limited to $10,000 for both single and married taxpayers. This limitation had unfavorable consequences for many taxpayers, including many middle-class taxpayers living in high tax states such as California and New York. As part of the budget deal reached for California, the governor signed AB 150 which includes provisions for the elective passthrough entity tax. For tax years 2021 through 2025, qualified S-corporations, partnerships and LLCs that are required to file a California tax return can elect to pay a passthrough entity tax of 9.3% on qualified net income. Owners will claim a nonrefundable credit for the amount of tax paid on their share of the passthrough income. If not utilized, the credit can be carried forward for up to five years.
In case you missed it in our February tax newsletter article entitled IRS Turbocharges the Employee Retention Tax Credit…
Recent changes to the Employee Retention Tax Credit (ERTC) have the potential for a huge refundable payroll tax credit for your business!
New legislation passed now allows even recipients of PPP loans to take the credit retroactively for 2020 (previously not allowed) and has recently further extended the credit through December 31, 2021.
To be eligible for this credit, the business must either:
Have been fully or partially suspended due to orders from a governmental authority or
Suffer a significant decline in quarterly gross revenue as measured against 2019
50% decline for 2020
20% decline for 2021
Below is a summary of the updated payroll tax credit amounts potentially available to your business:
For 2020, there is a maximum credit of $5,000 per eligible employee. The 2020 credit is computed at a rate of 50% of qualified wages paid, up to $10,000 per eligible employee for the year. For Eligible Employers with less than 100 average full-time employees in 2019, the credit is available for all employees receiving wages in 2020.
For 2021, there is a maximum credit of $7,000 per eligible employee, per quarter. The 2021 credit is computed at a rate of 70% of qualified wages paid, up to $10,000 per eligible employee, per quarter. For Eligible Employers with less than 500 average full-time employees in 2019, the credit is available for all employees receiving wages in 2021. Don’t leave money on the table! Please contact us today and we will connect you with a payroll tax credit specialist referral who can review whether you qualify for the Employee Retention Tax Credit and determine the amount of payroll tax credit your business can claim.
The much discussed aid package has been signed into law after significant delay and controversy. We’ll be revisiting this topic in the coming days as the details become clearer. Meanwhile, here are the key takeaways:
A $600 check to many Americans. The phase-out begins for those earning $75,000 annually and disappears at $99,000. The amount is reduced by $5 for every $100 in additional income. If your 2019 income makes you ineligible but you made a lot less in 2020, you still may be eligible for the money in the form of a refundable tax credit.
Additional unemployment benefits of $300 a week, lasting through mid-March.
Additional benefits for freelancers and gig workers.
A tax credit for employers offering paid sick leave.
$284 billion for businesses and revival of the Paycheck Protection Program, which ended some months ago.
Businesses that received PPP loans and had them forgiven faced tax confusion. The new bill will make it clear such businesses will be allowed to deduct the costs covered by those loans.
Breaks for renters and homeowners: $25 billion in rental relief and an extension of the eviction moratorium through Jan. 31, 2021.
A ban on surprise medical bills, which sometimes occur when a patient unexpectedly gets care outside of a network. Going forward, insurance companies will have to work these out with providers.
Additional protections and aid for bankruptcy filers.
Mortgage forbearance–temporarily reducing or pausing payments for 180 days.
One of the smallest provisions is also one of the most divisive: the return of the 100% deduction of the so-called three-martini lunch — that is, an increased tax break for business lunches, which are currently at 50%. This applies to restaurant and takeout meals paid for in 2021 and 2022, according to analysis from Forbes, and is not retroactive.
According to the SHRM, key employer provisions include:
The ability for workers to roll over unused funds in their health and dependent care flexible spending accounts.
The expansion of employer-provided education assistance to include student loan repayment.
Employer tax credits for paid family and medical leave.
An extension of the employee retention tax credit.
Delays in deferred payroll tax payments.
What’s Out
Several heavily debated items are off the table, although they may appear in bills in the near future. Their elimination was part of a series of compromises:
No aid for state and local governments, which Democrats had pushed for.
No liability protections for businesses, which Republicans had wanted.
No checks for adult dependents.
No hazard pay for essential workers.
Although the bill is now law, it may take a while before all the details become clear. The IRS and other government departments will likely offer additional guidance, and again, we will have more on the law’s provisions.
Please contact us today to discuss how this will affect you and your tax situation.
Individuals will be able to claim a $300 above-the-line deduction for cash contributions to qualified public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.
This new deduction is a COVID-related change for 2020 and an effort on the IRS part to reward those who contribute:
“Our nation’s charities are struggling to help those suffering from COVID-19, and many deserving organizations can use all the help they can get,” said IRS Commissioner Chuck Rettig. “The IRS reminds people there’s a new provision that allows for up to $300 in cash donations to qualifying organizations to be deducted from income. We encourage people to explore this option to help deserving tax-exempt organizations – and the people and causes they serve.”
In addition, the percentage limit on charitable contributions has been raised from 60% of modified adjusted gross income (MAGI) to 100% for those itemizing.
Give us a call today to discuss how this will affect your and your family’s tax returns!
