Be aware that POD accounts can backfire unless they’ve been coordinated carefully with your estate plan. For example, suppose Jack divides his assets equally among his three children in his will. He also sets up a POD account leaving $50,000 to his oldest child. That creates a conflict that may have to be resolved in court.
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Generally, the IRS has three years to audit a tax return, from the later of the due date of the return or the date you file. You can also file an amended return within this time frame if you overlooked something.
Here’s what you need to know about keeping financial records involved in your tax returns.
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Businesses shut down for many reasons. Examples include an owner’s retirement, a lease expiration, staffing shortages, partner conflicts and increased supply costs. If you’ve decided to close your business, you might need assistance with some steps in the process, including handling various tax obligations.
A final income tax return and related forms must be filed for the year of closing. The correct return to file depends on the type of business.
Here’s a rundown of the requirements.
You must file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year of closing. You may also need to report self-employment tax.
A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year of closing and report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedules K-1, “Partner’s Share of Income, Deductions, Credits, etc.”
Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.
File Form 1120, “U.S. Corporate Income Tax Return,” for the year of closing. Report capital gains and losses on Schedule D. Indicate this is the final return.
File Form 1120-S, “U.S. Income Tax Return for an S Corporation” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.
If you sell your business, other forms may need to be filed to report the sales.
Businesses with employees must pay the final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit all employment taxes due can result in severe penalties.
Generally, payments of $600 or more to contractors during the calendar year of closure must be reported on Form 1099-NEC, “Nonemployee Compensation.”
The list of tax issues related to closing a business is long and often complex, and you may need to be guided through the steps. For example, a business that has an employee retirement plan will need to terminate the plan and distribute the benefits to participants. Flexible Spending Accounts and Health Savings Accounts must also be terminated.
There may be debt cancellation issues to wrestle with. Other possibilities include dealing with net operating losses, passive activity losses, depreciation recapture and possible bankruptcy issues.
You need to be aware of how long to retain business records. And finally, you may need to know how to navigate payment options if your business is unable to pay the remaining taxes owed.
Closing a business typically brings up a lot of questions. Contact the office for answers.
408-252-1800
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If you’re a business owner or manager who is seeking to hire, you should be aware of the details of a valuable tax credit for hiring individuals from one or more targeted groups. Employers can qualify for the Work Opportunity Tax Credit (WOTC), which is worth as much as $2,400 for most eligible employees (higher or lower for certain employees). The credit is limited to eligible employees who begin work for an employer before January 1, 2026.
Generally, an employer is eligible for the WOTC only for qualified wages paid to members of a targeted group. These groups are:
To claim the WOTC, an employer must first get certification that the person hired is a member of one of the targeted groups above. An employer can do so by submitting Form 8850, Pre-Screening Notice and Certification Request for the WOTC, to their state agency within 28 days after the eligible worker begins work.
There are several requirements to qualify for the credit. For example, each employee must have completed a specific number of hours of service for the employer. Also, the credit isn’t available for employees who are related to or who previously worked for the employer.
There are different rules and credit amounts for certain employees. The maximum credit available for first-year wages generally is $2,400 per employee. But it’s $4,000 for long-term family assistance recipients, and it’s $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000.
For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth employees is $1,200 per employee.
An eligible employer claims the WOTC on its federal income tax return. The credit value is limited to the business’s income tax liability.
There are additional rules and requirements. In some cases, employers may elect not to claim the WOTC. And in limited circumstances, the rules may prohibit the credit or require an allocation of it. However, for most employers hiring from targeted groups, the credit can be worthwhile. Contact the office with questions or for more information about your situation.
408-252-1800
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With a little planning, you may be able to boost your itemized medical expense deduction when you file your 2024 tax return next year. Only eligible expenses exceeding 7.5% of your adjusted gross income are deductible. It’s not an easy hurdle to clear, short of a major medical disaster, which, of course, you want to avoid. But you can use a strategy called “bunching” medical expenses to exceed the 7.5% threshold.
Say, for example, that you’ve already scheduled surgery that will involve out-of-pocket expenses but you still fall short of the deductible threshold. Think about scheduling elective procedures, such as dental work or Lasik surgery, and making qualified purchases [Topic no. 502, Medical and dental expenses | Internal Revenue Service (irs.gov)] that will push you over the threshold for the year.
Remember, only the expenses over that amount and that aren’t covered by insurance or paid through a tax-advantaged account will be deductible. Contact the office for help running the numbers.
408-252-1800
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By Michael Sands
With the conclusion of tax year 2023, you may wish to check if your HSA contributions for tax year 2023 exceeded allowed limits and make corrective distributions, if needed.
To refresh, an HSA is a tax-advantaged savings account that allows you to pay medical expenses with tax-free dollars. The benefits of an HSA include:
Most deductible medical expenses will qualify as HSA medical expenses. Medical insurance premiums may not qualify, except:
HSA distributions may be taken to pay for medical costs of the HSA account owner, their spouse, or for dependents that have been claimed on tax returns. Medical expenses should not be deducted on Schedule A to the extent they are paid with tax-free distributions from HSA accounts.
To qualify to make HSA contributions, you must be covered under a high-deductible health (HDHP) plan for any months in which contributions are made. High-deductible health plans have higher annual deductibles that other health plans and must have a maximum limit for total annual deductible and out-of-pocket expenses for covered costs. Also, dependents who can be claimed by another person do not qualify to make HSA contributions.
There are two types of HSA accounts: self-only coverage and family coverage. Self-only coverage refers to an HSA account used by one eligible individual only and family coverage refers to an HSA account used by one eligible individual and at least one other individual (whether or not they qualify as an eligible individual).
Every year, IRS sets maximum limits for contributions that individuals may make to their HSA accounts. In 2023, for self-only coverage, the maximum contribution was $3,850. For family coverage, the maximum contribution was $7,750. If you had the same type of coverage throughout the year, you can make any contribution up to the maximum annual amount allowed. Persons who are 55 and older may make an additional $1,000 catch-up contribution for the year.
If your HSA coverage changed during the year, or if you did not have HDHP coverage the entire year, you may still make the maximum annual contribution allowed for the year under the “Last Month Rule”, as long as you had high-deductible health insurance as of the first day of the last month of the year. If you elect to make the full contribution under the “Last Month Rule”, you will be required to maintain HDHP coverage for a testing period of at least one year, or the deduction may be recaptured.
If you discontinued HDHP coverage during the year, or if you started Medicare coverage, your allowed HSA contributions may be limited to less than the maximum annual contribution. Please let us know if this happens so we can determine what the allowed HSA contribution and assist you with any needed withdrawal of excess contributions.
Excess HSA contributions can occur for a variety of reasons, including making regular contributions in an amount that is too high for the number of periods made, contributions by the employer that have not been accounted for, other contributions made by family, or administrative errors.
Excess HSA contributions are any HSA contributions made in excess of allowed annual limits. Excess contributions may be subject to a 6% excise tax if they are not withdrawn by the filing date for the tax year (generally April 15 of the following year, or October 15 if an extension has been filed). This 6% excise tax may be assessed for every year the excess contribution is not withdrawn.
There are two methods to correct excess HSA contributions. The first is taking a distribution to withdraw the excess contribution, including any earnings on the distribution, by the regular or extended due date for the tax year. Form 1099-SA will be issued showing the corrective distribution with a code “2”. The employer may issue a corrected W-2 to include excess contributions in wages; if not, the excess contribution should be included as other income when filing your tax returns.
The second method is to apply the excess HSA contribution as a contribution for the subsequent tax year. Only excess contributions may be applied, and any applied will count toward the annual limit for the subsequent year. If there are earnings on the excess contributions applied, this method may involve greater complexity than the first method and Form 5329 may need to be filed with your tax returns.
Either method will avoid the 6% excise tax if withdrawn by the regular or extended due date for the tax year. You may wish to consider filing a tax extension if you need additional time to make corrective distributions.
Please let us know if you think you made excess HSA contributions for tax year 2023 and we will provide any assistance needed.
408-252-1800
As part of our commitment to keeping you informed about important tax matters, we want to bring your attention to the upcoming deadline related to the 65-day rule for distributions from complex trusts.
The 65-day rule allows trustees of complex trusts to make certain tax decisions, specifically regarding the distribution of income, within the first 65 days of the new tax year. This rule provides an opportunity for trustees to allocate income earned in 2023 to beneficiaries rather than the trust itself by making a distribution within the first 65 days of the subsequent tax year.
Please note this special rule only applies to trustees of “complex” trusts that file their own trust income tax return. This rule does not apply to a standard revocable living trust or other “grantor” style trusts where income is already reported on your individual income tax return.
The deadline for making decisions under the 65-day rule is fast approaching. Distributions must be “paid or credited” by March 5th, 2024 in order for 2023 taxable income to be passed out to beneficiaries.
Trusts have compressed tax brackets and reach the maximum tax bracket at $14,450 of taxable income. Beneficiaries are often in lower tax brackets so by taking advantage of the 65 day rule and distributing income to the beneficiary it may result in a lower overall tax burden if the beneficiary is not in the maximum tax bracket.
Distributions need to actually occur to meet the requirements of the 65 day rule. If your intent as trustee is not to distribute assets to the beneficiary but rather keep the assets within the trust, you may not want to take advantage of this rule, despite the potentially higher tax burden.
If you have any questions or concerns regarding the 65-day rule or would like assistance in navigating this process, please do not hesitate to contact us. Our team is here to support you in ensuring that your tax strategies align with your goals and objectives.
408-252-1800
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One of the most common misunderstandings about filing an income tax return is the difference between deductions and credits. Deductions reduce the amount of a taxpayer’s income before tax is calculated. For example, on your individual return, you can either take the standard deduction or itemize deductions, if it will reduce your taxable income more. Credits, on the other hand, reduce the actual tax due, dollar-for-dollar, generally making them more valuable than deductions.
For example, the tax savings from a $1,000 deduction would depend on your tax bracket; it would save you $150 if you’re in the 15% tax bracket but it would save you $350 if you’re in the 35% tax bracket. A $1,000 credit, on the other hand would save you $1,000 in taxes regardless of your tax bracket. (These examples assume no income-based phaseout or limit applies to the deduction or credit.)
Some credits, such as the Child Tax Credit, are partially or fully refundable. This means that if a taxpayer’s tax liability is less than the amount of the credit, the taxpayer can possibly receive the difference as a refund.
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QBI may sound like the name of a TV quiz show. But it’s actually the acronym for “qualified business income,” which can trigger a tax deduction for some small business owners or self-employed individuals. The QBI deduction was authorized by the Tax Cuts and Jobs Act (TCJA), and it took effect in 2018.
The deduction is still available to owners of pass-through entities – such as S corporations, partnerships and limited liability companies – as well as self-employed individuals. But it is scheduled to expire after 2025 unless Congress acts to extend it.
The maximum deduction is equal to 20% of QBI. Generally, QBI refers to your net profit, excluding capital gains and losses, dividends and interest income, employee compensation and guaranteed payments to partners. The deduction can be claimed whether or not you itemize.
Notably, the QBI deduction is subject to a phaseout based on your income. If your total taxable income is below the lowest threshold, you may be entitled to the full 20% deduction, although other limitations do apply:
But things get tricky if your income exceeds the applicable threshold. In that case, your ability to claim the QBI deduction depends on the nature of your business.
Specifically, the rules are different for regular business owners of pass-through entities, sole proprietors and those who are in “specified service trades or businesses” (SSTBs). This covers most businesspeople who provide personal services to the public, such as physicians, attorneys, financial planners and accountants. (Engineers and architects are excluded.) Professionals in this group forfeit the QBI deduction entirely if income exceeds another set of limits:
If your income falls between the thresholds stated above, your QBI deduction may be reduced, regardless of whether you’re in an SSTB or not. For taxpayers who are in SSTBs, the deduction is phased out until it disappears at the upper income threshold. For other taxpayers, the deduction is limited to the lesser of 20% of QBI or the greater of 1) 50% of the wages paid to employees on W-2s, or 2) 25% of wages plus 2.5% of the unadjusted basis of the qualified property owned by the business.
The QBI deduction provides a valuable tax break for small business owners, so if it expires, their taxes are likely to go up. It’s unclear at this time what the chance is of the deduction being extended. Contact the office for guidance in determining the best strategy for your personal situation.
408-252-1800
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If you’re preparing to file your 2023 tax return, you may still be able to lower your tax bill – or increase your refund. If you qualify, you can make a deductible contribution to a traditional IRA right up until the original filing deadline, April 15, 2024, and see tax savings on your 2023 return.
For eligible taxpayers, the 2023 contribution limit has increased to $6,500, or $7,500 for taxpayers aged 50 and up on Dec. 31, 2023. If you’re a small business owner, you can establish and contribute to a Simplified Employee Pension (SEP) plan up to the extended due date of your return. The maximum SEP contribution you can make for 2023 is $66,000.
What determines eligibility? To make a fully deductible contribution to a traditional IRA, you (and your spouse, if you’re married) must not be active participants in an employer-sponsored retirement plan or, if you are, your 2023 modified adjusted gross income (MAGI) must not exceed the applicable limits:
For married couples filing separately, where at least one spouse is covered by a workplace plan, the ability to deduct IRA contributions is extremely limited.
Contact the office if you want more information about this important topic to help you save the maximum tax-advantaged amount for retirement.
408-252-1800
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