How To Be Ready To Secure a Business Bad Debt Deduction on Your 2023 Tax Return

Is your business having trouble collecting payments from clients or vendors? You might be able to claim a bad debt deduction on your tax return. But if you hope to take the deduction on your 2023 return, you’ll have to get busy, because you must be able to show that you’ve made a “reasonable” effort to collect the debt.

First, a cash-basis taxpayer may claim a business bad debt deduction only if the amount that’s owed was previously included in gross income. Second, a business must establish that the debt is legitimate and can’t be recovered from the debtor. To this end, as mentioned, you must make a reasonable effort to collect the amount that’s due.

This doesn’t necessarily mean you have to file a lawsuit against the debtor. But you can’t just make a single phone call either. Give it your best shot. You might actually be able to collect the debt! But if you can’t, you’ll have put yourself in a position to potentially claim a bad debt deduction.

Partially or Totally Worthless

Often, the specific charge-off method (also called the direct write-off method) is used for writing off bad debts. In this case, you can deduct business bad debts that became either partially or totally worthless during the year.

For tax purposes, partially and totally worthless are defined as follows:

Partially worthless. The deduction is limited to the amount charged off on your books. You don’t have to charge off and deduct your partially worthless debts annually, so you can postpone this to a later year. However, you can’t deduct any part of a debt after the year it becomes totally worthless.

Totally worthless. If a debt becomes totally worthless in the current tax year, you can deduct the entire amount (less any amount deducted in an earlier tax year when the debt was partially worthless).

Note that you don’t have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. But if you don’t record a charge-off and the IRS later rules the debt is only partially worthless, you won’t be allowed a deduction for the debt in that tax year. Reason: A deduction of a partially worthless bad debt is limited to the amount actually charged off.

Time Is Short

If you haven’t started your collection efforts yet but hope to claim a business bad debt deduction for 2023, time is short. So, spring into action now. For instance, you might start collection efforts through phone and email contacts. If that doesn’t work, you may want to follow up with a series of letters or even hire a collection agency. Finally, if all else fails, contact the office about the prospects of claiming a business bad debt deduction on your 2023 return.

(408) 252-1800

Withdrawing ERC Claims

Recently, the IRS halted processing of claims for the Employee Retention Credit (ERC), due to a high volume of fraudulent claims. The moratorium is through at least the end of 2023. ERC claims that were already filed are now subject to longer processing, including heightened scrutiny to weed out fraud.

Now the IRS is creating a path for businesses that are concerned they may be victims of aggressive ERC marketing schemes. Eligible businesses can opt to withdraw unprocessed claims that they now believe may be invalid. Among other things, to be eligible, the business must have made the claim on an adjusted employment return that included no other adjustments and must want to withdraw the entire amount of the ERC claim.

Withdrawing a claim can allow the business to avoid receiving a refund for which it’s ineligible (and that would have to be repaid) as well as interest and penalties. Businesses that aren’t eligible to use the withdrawal process may be able to reduce or eliminate their ERC claim by filing an amended return.

Follow IRS Rules to Nail Down a Charitable Tax Deduction

Donating cash and property to your favorite charity is beneficial to the charity, but also to you in the form of a tax deduction if you itemize. However, to be deductible, your donation must meet certain IRS criteria.

First, the charity you’re donating to must be a qualified charitable organization, with tax-exempt status. The Exempt Organizations Search tool on the IRS website allows users to search for a specific organization and check its federal tax-exempt status.

Second, contributions must be actually paid, not simply pledged. So, if you pledge $5,000 in 2023 but have paid only $1,500 by Dec. 31, 2023, you can deduct only $1,500 on your 2023 tax return.

Third, substantiation rules apply, and they vary based on the type and amount of the donation. For example, some donated property may require you to obtain a professional appraisal of value.

Many additional rules and limits apply to the charitable donation deduction. Contact the office to learn more.

(408) 252-1800

New Per Diem Rates for Business Travel

The IRS has announced the per diem rates for ordinary and necessary business travel expenses in fiscal year 2023-24:

  • When using the high-low substantiation method, the rate for travel to high-cost localities is $309 per day and the rate for all other continental United States (CONUS) localities is $214 per day.
  • For meals, the rate is $74 (high) and $64 (all other) per day.
  • The rate for incidental expenses when traveling in or outside the CONUS is $5 per day.

These rates are effective beginning Oct. 1, 2023. Questions about per diem rates or other options for deducting business travel expenses? Contact the office.

(408) 252-1800

Is Disability Income Taxable?

If you may be eligible for disability income should you become disabled, it’s important to know whether that income will be taxable. As is often the case with tax questions, the answer is “it depends.”

Photo by Kaboompics from Freerange Stock

Key Factor

The key factor is who paid it. If your employer will directly pay the disability income to you, it will be taxable to you as ordinary salary and wages would be. Taxable benefits are also subject to federal income tax withholding, though, depending on the disability plan, disability benefits sometimes aren’t subject to Social Security tax.

Frequently, the payments aren’t made by an employer but by an insurer under a policy providing disability coverage or under an arrangement having the effect of accident or health insurance. In such cases, the tax treatment depends on who paid for the coverage. If your employer paid for it, the disability income will be taxed to you, as if paid directly to you by the employer. But if you paid for the policy, the payments you receive under it won’t be taxable.

Even if your employer arranges for the coverage (in other words, it’s a policy made available to you at work), the benefits won’t be taxed to you as long as you paid the premiums. For these purposes, if the premiums were paid by your employer but the amount paid was included as part of your taxable income from work, the premiums will also be treated as paid by you and the benefits won’t be taxable.

2 Examples

For simplicity, let’s say your salary is $1,000 a week ($52,000 a year). Under a disability insurance arrangement made available to you by your employer, $10 a week ($520 for the year) is paid on your behalf by your employer to an insurance company. You include $52,520 in income as your wages for the year: the $52,000 paid to you plus the $520 in disability insurance premiums. In this case, the insurance is treated as paid for by you. If you become disabled and receive benefits, they won’t be taxable income to you.

Now, let’s look at an example with the same facts as above, except that the amount paid for the insurance coverage qualifies as excludable under the rules for employer-provided health and accident plans. In this case, you include only $52,000 in income as your wages for the year because the insurance is treated as paid for by your employer. So, if you become disabled and receive benefits, they will be taxable income to you.

Note: There are special rules in the case of a permanent loss (or loss of the use) of a part or function of the body, or a permanent disfigurement.

How Much Coverage Is Needed

In deciding how much disability coverage you need to protect yourself and your family, take tax treatment into consideration. If you’re buying the policy, you need to replace only your after-tax, “take-home” income because your benefits won’t be taxed. On the other hand, if your employer pays for the benefit, you’ll lose a percentage to taxes.

If your current coverage is insufficient, you may wish to supplement an employer benefit with a policy you take out personally.

Any Questions?

This discussion doesn’t cover the tax treatment of Social Security disability benefits, which may be taxed under different rules. Contact the office to discuss this further or if you have questions about regular disability income.

(408) 252-1800

12th Annual DAM-CANCER Golf Classic

On Friday, September 15, Wheeler Accountants sent representatives to compete in the 12th annual DAM-CANCER Golf Classic in beautiful Sonoma County at the Foxtail Golf Course.

This tournament is hosted by the David Andrew “Pooh” Maddan Foundation (or DAM-CANCER), a 501(c)(3) charitable organization established in honor of Dave Maddan, whose life was cut much too short as a result of complications related to the treatment of osteosarcoma (cancer of the bone). Their mission is to provide financial assistance to young adults diagnosed with cancer and to fund innovative cancer treatments and research.

Nick Satterfield (tax manager) carried the Wheeler team, according to Michael Gurr (partner), and he also won longest drive. Wheeler came in second place overall. Congratulations, team!

In addition to the golf tournament, there was a reception, dinner and exciting auction, including a presentation by our own Matt Wheeler, a co-founder of the DAM-CANCER Foundation.

Tax Treatment of Cryptocurrency

Questions surrounding the tax treatment of cryptocurrency are complex. According to recent IRS Revenue Ruling 2023-14, the process of verifying ownership of cryptocurrency is called “ staking.” And when a taxpayer has successfully staked his or her units of cryptocurrency, he or she may also receive “ staking rewards” consisting of additional units.

When does the taxpayer have to include those staking rewards in gross income? A cash-basis taxpayer is said to “gain dominion” over staking rewards received when he or she can sell, exchange or dispose of them. In the year that the taxpayer gains dominion over the rewards, the fair market value of the rewards must be included in gross income.

Don’t hesitate to contact us if you have questions.

San Jose: (408) 252-1800
Watsonville: (831) 726-8500

What Exactly Is a “Small Business”?

Although your business may seem big to you, you may wonder how the government classifies it. A recent report by the Joint Committee on Taxation, a nonpartisan committee of the U.S. Congress, discusses what a “small business” is for tax purposes. As the report states, there’s no one definition of a small business. Instead, different definitions apply depending on the context, various criteria and certain thresholds.

Criteria include a business’s gross assets, gross receipts and its number of shareholders and employees. Even if a criterion such as gross receipts is the same across definitions, different thresholds may apply. Also, for some purposes, the tax code might define a small business in more than one way.

IRS Suspends Processing of New ERC Claims

The IRS is continuing to warn businesses about aggressive marketing by nefarious actors involving the Employee Retention Credit (ERC). It has suspended the processing of ERC claims until at least year end because of a spike in the number of fraudulent claims.

The IRS has now issued a series of red flags businesses should bear in mind. Warning signs include:

  • Unsolicited calls mentioning an “easy application process,”
  • Claims that a business qualifies for the ERC even before any discussion of the business’s tax situation, and
  • Large upfront fees and additional fees based on a percentage of the refund claim.

Eligible employers can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021. But there are very specific eligibility requirements; careful review is required to determine eligibility. The IRS recommends businesses work with a trusted tax professional.

Please contact us if you have any questions:

San Jose: (408) 252-1800
Watsonville: (831) 726-8500

Don’t Get Carried Away by a Windfall

Receiving a sudden and sizable influx of cash may seem like a dream come true. It can be, but many people get carried away and end up in worse financial shape. If you’re hit with a financial windfall, here are some points you should know.

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Risky Conditions

You may be tempted to almost immediately make an expensive purchase, such as a luxury car or a vacation home. And friends and family members may expect to share in your bounty, or they may pitch “sure-fire” investment opportunities. Fraudulent charities may also come knocking.

You can avoid these potential pitfalls by stashing your windfall in a bank or money market account as soon as you receive it. Let it sit there until you’ve had some time to think carefully about how to best use the money and you’ve obtained advice from a qualified professional. Waiting at least a month before you touch the money can help prevent impulse buys and other mistakes.

Also, you may owe taxes. Some windfalls, such as lottery winnings and certain legal settlements, are subject to federal tax — as much as 37% federal tax if your windfall pushes you into the top income tax bracket. State and local taxes may apply as well. A tax professional can help you determine what you owe.

Shelter From the Storm

What you eventually decide to do with your windfall will depend on many factors. If you have debt, you’ll probably want to pay it off — especially if it carries a high interest rate and the interest isn’t deductible. Also, establishing or boosting your emergency savings can minimize the need to incur future debt.

Next, consider where you’d like to be five, 10 or 20 years into the future. Develop a plan that will help you move toward your goals — whether that means starting a business, retiring early, or something else. You probably shouldn’t quit your job without having thought it through carefully. Few windfalls are large enough to see you all the way through retirement (depending on your age).Only after those considerations should you contemplate making any major purchases. If using some of the windfall to buy that new car or vacation home now won’t interfere with your financial security and long-term goals, then go for it!

Long-Term Plan

To put a windfall to optimal use, a long-term plan is critical. Contact the office for help assessing the tax and other financial implications of your windfall.

San Jose: (408) 252-1800
Watsonville: (831) 726-8500