Discovering a Mistake After Your Tax Return Is Filed

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Did you file your 2023 tax return and then realize you’d made a mistake? Perhaps you completed your return yourself and made an error in math or neglected to include a schedule that should’ve been attached. Or maybe you recently remembered some large, potentially deductible, charitable donations you’d made in early 2023 that you’d forgotten to tell your tax professional about. Now you may be wondering if you need to file an amended return.

Taxpayers usually don’t need to file amended returns for certain issues. For example, the IRS will correct any math errors while processing tax returns and notify the taxpayers. And if a form or schedule is missing, the tax agency will send a letter requesting it. Certain other changes, however, require an amended return to be filed. They include: a change of filing status, missing income, incorrect deductions or credits, and an inaccurate tax liability. Contact the office for help filing an amended return.

408-252-1800

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Is Your Business Closing? Here Are Your Final Tax Responsibilities

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.

Tax Return and Forms

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.

Sole proprietorships:

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.

Partnerships:

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.”

All corporations:

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.

C corporations:

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.

S corporations:

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.

All businesses:

If you sell your business, other forms may need to be filed to report the sales.

Worker-Related Duties

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.”

More Tax Issues to Consider

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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Hiring? How to Benefit from the Work Opportunity Tax Credit

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.

Who is Eligible?

Generally, an employer is eligible for the WOTC only for qualified wages paid to members of a targeted group. These groups are:

  1. Qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program,
  2. Qualified veterans,
  3. Qualified ex-felons,
  4. Designated community residents,
  5. Vocational rehabilitation referrals,
  6. Qualified summer youth employees,
  7. Qualified members of families in the Supplemental Nutritional Assistance Program (SNAP),
  8. Qualified Supplemental Security Income recipients,
  9. Long-term family assistance recipients, and
  10. Long-term unemployed individuals.

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.

You Must Meet Certain Requirements

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.

A Valuable Credit

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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A Strategy to Raise Your Medical Expense Deduction

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.

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65 Day Rule for Complex Trusts

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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. 

Complex Trusts Only:

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.

Deadline Approaching:

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.

Tax Implications:

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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Deductions vs. Credits: What’s the Difference?

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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How to Secure a Tax Benefit with the QBI Deduction

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.

How It Works

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:

  • For 2023, the thresholds are $182,100 for single filers and $364,200 for joint filers.
  • For 2024, the thresholds are $191,950 for single filers and $383,900 for joint filers.

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:

  • For 2023, these upper limits are $232,100 for single filers and $464,200 for joint filers.
  • For 2024, these upper limits are $241,950 for single filers and $483,900 for joint filers.

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.

Available for a Limited Time

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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