Axley & Rode, LLP

The April tax filing deadline has passed, but that doesn’t mean you should push your taxes out of your mind until next year. Here are three tax-related actions that you should consider taking in the near term (if you filed on time and didn’t file for an extension). Retain the requisite records Depending on the specific issue, the IRS has years to audit your tax return so it’s critical to maintain the records you may need to defend yourself. You generally need to keep the documents that support your income, deductions and credits for at least three years after the tax-filing deadline. (Note that no time limit applies to how long the IRS has to pursue taxpayers who don’t file or file fraudulent returns.) Essential documentation to retain may include: Form W-2, “Wage and Tax Statement,” Form 1099-NEC, “Nonemployee Compensation,” 1099-MISC, “M...

The IRS recently released guidance providing the 2023 inflation-adjusted amounts for Health Savings Accounts (HSAs). High inflation rates will result in next year’s amounts being increased more than they have been in recent years. HSA basics An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance). A high deductible health plan (HDHP) is generally a plan with an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage. In addition, the sum of the annual deductible ...

If you donate valuable items to charity, you may be required to get an appraisal. The IRS requires donors and charitable organizations to supply certain information to prove their right to deduct charitable contributions. If you donate an item of property (or a group of similar items) worth more than $5,000, certain appraisal requirements apply. You must: Get a “qualified appraisal,” Receive the qualified appraisal before your tax return is due, Attach an “appraisal summary” to the first tax return on which the deduction is claimed, Include other information with the return, and Maintain certain records. Keep these definitions in mind. A qualified appraisal is a complex and detailed document. It must be prepared and signed by a qualified appraiser. An appraisal summary ...

The IRS has begun mailing notices to businesses, financial institutions and other payers that filed certain returns with information that doesn’t match the agency’s records. These CP2100 and CP2100A notices are sent by the IRS twice a year to payers who filed information returns that are missing a Taxpayer Identification Number (TIN), have an incorrect name or have a combination of both. Each notice has a list of persons who received payments from the business with identified TIN issues. If you receive one of these notices, you need to compare the accounts listed on the notice with your records and correct or update your records, if necessary. This can also include correcting backup withholding on payments made to payees. Which returns are involved? Businesses, financial institutions and other payers are required to file with the IRS various information retu...

Taking care of an elderly parent or grandparent may provide more than just personal satisfaction. You could also be eligible for tax breaks. Here’s a rundown of some of them. 1. Medical expenses. If the individual qualifies as your “medical dependent,” and you itemize deductions on your tax return, you can include any medical expenses you incur for the individual along with your own when determining your medical deduction. The test for determining whether an individual qualifies as your “medical dependent” is less stringent than that used to determine whether an individual is your “dependent,” which is discussed below. In general, an individual qualifies as a medical dependent if you provide over 50% of his or her support, including medical costs. However, bear in mind that medical expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income (AGI). The cos...

When you see the word “arbitration,” you might think of a business dispute, divorce proceeding or perhaps a big-league ballplayer at odds with his team about that season’s salary. But retirement plans that must comply with the Employee Retirement Income Security Act (ERISA) might also be subject to arbitration — if they include an enforceable provision for this purpose. A recent court case, Holmes v. Baptist Health South Florida , provides some insight. Participants’ allegations In Holmes , former and current participants in a 403(b) plan filed a lawsuit claiming that the plan’s fiduciaries violated their ERISA fiduciary duties in selecting and reviewing the plan’s investment funds. In response, the fiduciaries asked the court to require that the dispute be arbitrated — pointing to a plan provision requiring that ...

Like many people, you may have dreamed of turning a hobby into a regular business. You won’t have any tax headaches if your new business is profitable. But what if the new enterprise consistently generates losses (your deductions exceed income) and you claim them on your tax return? You can generally deduct losses for expenses incurred in a bona fide business. However, the IRS may step in and say the venture is a hobby — an activity not engaged in for profit — rather than a business. Then you’ll be unable to deduct losses. By contrast, if the new enterprise isn’t affected by the hobby loss rules because it’s profitable, all otherwise allowable expenses are deductible on Schedule C, even if they exceed income from the enterprise. Note: Before 2018, deductible hobby expenses had to be claimed as miscellaneous itemized deductions subject to a 2%-of-AGI “floor.” However, because miscellaneous deductions aren’t allowed from 201...

There are many rules that can potentially apply to the sale of business property. Thus, to simplify discussion, let’s assume that the property you want to sell is land or depreciable property used in your business, and has been held by you for more than a year. (There are different rules for property held primarily for sale to customers in the ordinary course of business; intellectual property; low-income housing; property that involves farming or livestock; and other types of property.) General rules Under the Internal Revenue Code, your gains and losses from sales of business property are netted against each other. The net gain or loss qualifies for tax treatment as follows: 1) If the netting of gains and losses results in a net gain, then long-term capital gain treatment results, subject to “recapture” rules discussed below. Long-term capital gain treatment is generally more favorable th...

Adding a new partner in a partnership has several financial and legal implications. Let’s say you and your partners are planning to admit a new partner. The new partner will acquire a one-third interest in the partnership by making a cash contribution to it. Let’s further assume that your bases in your partnership interests are sufficient so that the decrease in your portions of the partnership’s liabilities because of the new partner’s entry won’t reduce your bases to zero. Not as simple as it seems Although the entry of a new partner appears to be a simple matter, it’s necessary to plan the new person’s entry properly in order to avoid various tax problems. Here are two issues to consider: First, if there’s a change in the partners’ interests in unrealized receivables and substantially appreciated inventory items, the change is treated as a sale of those items, with the result that the cu...

Form I-9, “Employment Eligibility Verification,” is used to verify the identity and employment authorization of individuals hired for employment in the United States. As you’re no doubt aware, all U.S. employers must properly complete a Form I-9 for everyone hired, including citizens and noncitizens. Both employees and employers (or authorized representatives of an employer) need to fill out portions of the form. On March 30, 2022, the U.S. Department of Homeland Security (DHS) published a notice in the Federal Register to invite public comments on its proposed extension and revisions to Form I-9. Here’s what employers should know about this important development. Purpose and responsibilities As mentioned, the purpose of Form I-9 is to document the “employment authorization” of new hires — that is, employees must verify that they’re legally eligible to work in the Un...

In some cases, homeowners decide to move to new residences, but keep their present homes and rent them out. If you’re thinking of doing this, you’re probably aware of the financial risks and rewards. However, you also should know that renting out your home carries potential tax benefits and pitfalls. You’re generally treated as a regular real estate landlord once you begin renting your home. That means you must report rental income on your tax return, but also are entitled to offsetting landlord deductions for the money you spend on utilities, operating expenses, incidental repairs and maintenance (for example, fixing a leak in the roof). Additionally, you can claim depreciation deductions for the home. You can fully offset rental income with otherwise allowable landlord deductions. Passive activity rules However, under the passive activity loss (PAL) rules, you may not be able to currently...

Employee performance reviews don’t always get the respect they deserve. Although many employers carry out a thorough and diligent annual or semiannual process, others let performance reviews slip into a brief formality or even neglect to do them altogether. If your organization’s commitment to this often-stressful ritual ever starts to falter, remind yourself and your supervisors of its importance. Why they’re critical There’s no doubt that performance reviews consume a substantial amount of time and resources. However, they’re mission critical for virtually every kind of employer for several reasons. First, reviews are designed to provide feedback and counseling to employees about how the organization perceives their respective job performances. When staff members feel undervalued or ignored, they’re much more likely to leave. Second, reviews enable supervi...

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%. ...