Axley & Rode, LLP

By now, many employers have chosen to offer employees a high-deductible health plan (HDHP) along with a Health Savings Account (HSA). One interesting issue that’s arisen is, at some organizations, employees have asked whether they can make pretax HSA contributions. Doing so would enable them to save on income taxes every pay period rather than wait to enjoy those savings when they file their tax returns. What’s more, both employees and employers could save on their respective shares of FICA (Social Security and Medicare) taxes. The question is, can an employer simply set up pretax payroll deductions for employees without having a Section 125 cafeteria plan in place? Constructive receipt doctrine The answer is a resounding “no.” Employees can’t make pretax HSA contributions unless the employer offers a Sec. 125 cafeteria plan because of the constr...

Operating as an S corporation may help reduce federal employment taxes for small businesses in the right circumstances. Although S corporations may provide tax advantages over C corporations, there are some potentially costly tax issues that you should assess before making a decision to switch. Here’s a quick rundown of the most important issues to consider when converting from a C corporation to an S corporation: Built-in gains tax Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective, if those gains are recognized within 5 years after the corporation becomes an S corporation. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in g...

The tax filing deadline for 2021 tax returns is April 18 this year. After your 2021 tax return has been successfully filed with the IRS, there may still be some issues to bear in mind. Here are three considerations: 1. You can throw some tax records away now You should hang onto tax records related to your return for as long as the IRS can audit your return or assess additional taxes. The statute of limitations is generally three years after you file your return. So you can generally get rid of most records related to tax returns for 2018 and earlier years. (If you filed an extension for your 2018 return, hold on to your records until at least three years from when you filed the extended return.) However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%. You should keep certain tax-related records longer. For e...

The federal government is helping to pick up the tab for certain business meals. Under a provision that’s part of one of the COVID-19 relief laws, the usual deduction for 50% of the cost of business meals is doubled to 100% for food and beverages provided by restaurants in 2022 (and 2021). So, you can take a customer out for a business meal or order take-out for your team and temporarily write off the entire cost — including the tip, sales tax and any delivery charges. Basic rules Despite eliminating deductions for business entertainment expenses in the Tax Cuts and Jobs Act (TCJA), a business taxpayer could still deduct 50% of the cost of qualified business meals, including meals incurred while traveling away from home on business. (The TCJA generally eliminated the 50% deduction for business entertainment expenses incurred after 2017 on a permanent basis.) To help struggli...

If you’re an investor in mutual funds or you’re interested in putting some money into them, you’re not alone. According to the Investment Company Institute, a survey found 58.7 million households owned mutual funds in mid-2020. But despite their popularity, the tax rules involved in selling mutual fund shares can be complex. What are the basic tax rules? Let’s say you sell appreciated mutual fund shares that you’ve owned for more than one year, the resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax. However, most taxpayers will pay a tax rate of only 15%. When a mutual fund investor sells shares, gain or loss is measured by the difference between the amount realized from the sale and the investor’s basis in the shares. One challenge is that certain m...

In Compliance Assistance Release No. 2022-01, the U.S. Department of Labor (DOL) recently expressed “serious concerns” about the prudence of offering cryptocurrency investments to 401(k) plan participants. The agency advised fiduciaries to use “extreme care” before they consider adding such an option. The release explains that fiduciaries can be held personally liable for breaching their duties under the Employee Retirement Income Security Act, which includes selecting and retaining only prudent investments. It also points out that the U.S. Supreme Court’s recent decision in Hughes v. Northwestern University has indicated that just because participants may choose other investments from a plan’s menu doesn’t mean fiduciaries are safe from liability for including imprudent options. 5 risk factors In the release, the DOL identifies five factors that contri...

Today’s employers operate in a highly competitive hiring environment. One notion that might spring to mind is making what’s sometimes referred to as an “exploding offer.” Under this approach, the employer makes a job offer to a candidate but attaches a strict time limit to the employment proposal. The time limit could be as long as five business days or as short as 24 hours. The strategy made a little more sense years ago — well before “the Great Resignation” — when employers held more of the upper hand in the hiring power dynamic. These days, making an exploding offer might seem like a bold move from a “do the opposite” perspective. Maybe you catch the best job candidates off-guard and win a few of them over with a high-pressure sales pitch. However, the approach has largely fizzled out … and for good reason. More down than up If an exploding offer seems counterintuitiv...

The clock is ticking down to the April 18 tax filing deadline. Sometimes, it’s not possible to gather your tax information and file by the due date. If you need more time, you should file for an extension on Form 4868. An extension will give you until October 17 to file and allows you to avoid incurring “failure-to-file” penalties. However, it only provides extra time to file, not to pay. Whatever tax you estimate is owed must still be sent by April 18, or you’ll incur penalties — and as you’ll see below, they can be steep. Failure to file vs. failure to pay Separate penalties apply for failing to pay and failing to file. The failure-to-pay penalty runs at 0.5% for each month (or part of a month) the payment is late. For example, if payment is due April 18 and is made May 25, the penalty is 1% (0.5% times 2 months or partial months). The maximum penalty is 25%. ...

The IRS has announced additional relief for pass-through entities required to file two new tax forms — Schedules K-2 and K-3 — for the 2021 tax year. Certain domestic partnerships and S corporations won’t be required to file the schedules, which are intended to make it easier for partners and shareholders to find information related to “items of international tax relevance” that they need to file their own returns. In 2021, the IRS released guidance providing penalty relief for filers who made “good faith efforts” to adopt the new schedules. The IRS has indicated that its latest, more sweeping move comes in response to continued concern and feedback from the tax community and other stakeholders. A tough tax season for the IRS The announcement of additional relief comes as IRS Commissioner Charles Rettig has acknowledged that the agency faces “enormous challenges” this tax season. F...

Typically, businesses want to delay recognition of taxable income into future years and accelerate deductions into the current year. But when is it prudent to do the opposite? And why would you want to? One reason might be tax law changes that raise tax rates. There have been discussions in Washington about raising the corporate federal income tax rate from its current flat 21%. Another reason may be because you expect your noncorporate pass-through entity business to pay taxes at higher rates in the future, because the pass-through income will be taxed on your personal return. There have also been discussions in Washington about raising individual federal income tax rates. If you believe your business income could be subject to tax rate increases, you might want to accelerate income recognition into the current tax year to benefit from the current lower tax rates. At the same time, you may want to postpone deductions...

Summer is just around the corner. If you’re fortunate enough to own a vacation home, you may wonder about the tax consequences of renting it out for part of the year. The tax treatment depends on how many days it’s rented and your level of personal use. Personal use includes vacation use by your relatives (even if you charge them market rate rent) and use by nonrelatives if a market rate rent isn’t charged. If you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all. In the right circumstances, this can produce significant tax benefits. Any rent you receive isn’t included in your income for tax purposes (no matter how substantial). On the other hand, you can only deduct property taxes and mortgage interest — no other operating costs and no depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.) ...

If your business doesn’t already have a retirement plan, now might be a good time to take the plunge. Current retirement plan rules allow for significant tax-deductible contributions. For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $61,000 for 2022. If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $61,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2022 by a whopping $19,520 (32% times $61,000).  More options Other small business retirement plan options include: 401(k) plans, which can even be set up for just one person (also called solo 401(k)s), Defined benefit pension plans, an...

Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. April 18 If you’re a calendar-year corporation, file a 2021 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due. Corporations pay the first installment of 2022 estimated income taxes. For individuals, file a 2021 income tax return (Form 1040 or Form 1040-SR) or file for an automatic six-month extension (Form 4868) and paying any tax due. (See June 15 for an exception for certain taxpayers.) For individuals, pay the first installment of 2022 es...