The 2022 mid-term election has shifted the scales in Washington, D.C., with the Democrats no longer controlling both houses of Congress. While it remains to be seen if — and when — any tax-related legislation can muster the requisite bipartisan support, a review of certain provisions in existing laws may provide an indication of the many areas ripe for action in the next two years.

Retirement catch-ups at risk

The SECURE 2.0 Act, enacted at the tail end of 2022, reportedly includes a technical drafting error that jeopardizes the abilities of taxpayers to make catch-up contributions to their pre-tax or Roth retirement accounts. According to the American Association of Pension Professionals and Actuaries, under the existing statutory language, no participants will be able to make such contributions beginning in 2024.

The American Retirement Association has brought the issue to the attention of the U.S. Department of Treasury and the Joint Committee on Taxation (JCT), a nonpartisan congressional committee that assists with federal tax legislation. While the JCT has apparently acknowledged that the language does appear to be a drafting error, a timely correction is far from guaranteed.

Indeed, such “technical corrections” legislation once passed Congress routinely. However, it has proven more challenging in the political climate of the last decade or so. For example, it took three years for Congress to pass minor corrections to the first SECURE Act. And a glitch in the Tax Cuts and Jobs Act of 2017 (TCJA) affecting eligibility for bonus depreciation wasn’t corrected until the CARES Act became law in 2020.

Expiring tax provisions

Tax-related legislation often includes so-called “sunset” dates — the dates tax provisions will expire, absent congressional action. For example, the Consolidated Appropriations Act, enacted in 2021, boosted the allowable deduction for business meals from 50% to 100% for 2021 and 2022. In 2023, the deduction limit returned to 50%.

A JCT report released in January 2023 highlights numerous significant provisions that are scheduled to expire in coming years without congressional action to extend them. For example, several tax credits related to renewable and alternative energy will expire at the end of 2024.

But 2026 is the year when some of the most wide-reaching and particularly valuable provisions — many of them created or modified by the TCJA — are set to disappear. They include:

• Lower individual tax rates,
• Enhancements to the Child Tax Credit (CTC),
• Health insurance premium tax credit enhancements,
• The New Markets Tax Credit,
• The employer credit for paid family and medical leave,
• The Work Opportunity Tax Credit,
• The increase in the exemption amount and phaseout threshold for the alternative minimum tax,
• The increase in the standard deduction,
• The suspension of the miscellaneous itemized deduction,
• The suspension of the limit on itemized deductions,
• The income exclusion for employer payments of student loans,
• The suspension of the deduction for personal exemptions,
• The limit on the deduction for qualified residence interest,
• The suspension of the deduction for home equity interest,
• The limit on the deduction for state and local taxes,
• The qualified business income deduction,
• The deduction percentages for foreign-derived intangible income and global intangible low-taxed income,
• Empowerment zone tax incentives, and
• The increase in the federal gift and estate tax exemption.

At the end of 2026, bonus depreciation also is slated for elimination. In fact, the allowable deduction already has dropped from 100% to 80% of the cost of qualified assets in 2023. The limit will drop by 20% each year until vanishing in 2027.

Expired tax provisions

Several notable provisions expired or changed at the end of 2021, despite chatter in Washington about the possibility of extensions. For example, as of 2022, taxpayers can no longer deduct Section 174 research and experimentation expenses, including software development costs, in the year incurred. Rather, they must amortize these expenses over five years (or 15 years if incurred outside of the United States). In addition, the calculation of adjusted taxable income for purposes of the limit on the business interest deduction has changed, potentially reducing the allowable deduction for some taxpayers.

Individuals also saw the end of several tax provisions at the end of 2021, including the:

• CTC expansions created by the American Rescue Plan for some taxpayers,
• Expanded child and dependent care credit,
• Increased income exclusion for employer-provided dependent care assistance,
• Treatment of mortgage insurance premiums as deductible mortgage interest,
• Charitable contribution deduction for non-itemizers, and
• Increased percentage limits for charitable contributions of cash.

It’s possible that some of these could be included in any “extender” legislation Congress might consider this year or next.

The FairTax Act

Unlikely to see much progress, however, is the proposed FairTax Act. Although it has the support of a group of U.S. House Republicans, GOP House Speaker Kevin McCarthy has stated that he doesn’t support the legislation.

The bill would eliminate most federal taxes — including individual and corporate income, capital gains, payroll and estate taxes — as well as the IRS. It would replace the taxes with a 23% federal sales tax on goods and services, which couldn’t be offset by deductions or tax credits. The plan has been around for two decades and has yet to garner a floor vote, an indicator of its odds this time around — especially with Democrats in control of the U.S. Senate.

Ear to the ground

Congress may not feel a sense of urgency to address tax provisions that aren’t set to expire for three years, but the catch-up contribution error would have substantial repercussions for many taxpayers in less than a year. We’ll let you know if lawmakers take action on this or any other important tax matters that could affect you.

© 2023

Merger and acquisition activity dropped dramatically last year due to rising interest rates and a slowing economy. The total value of M&A transactions in North America in 2022 was down 41.4% from 2021, according to S&P Global Market Intelligence.

But some analysts expect 2023 to see increased M&A activity in certain industries. If you’re considering buying or selling a business, it’s important to understand the tax implications.

Two approaches

Under current tax law, a transaction can basically be structured in two ways:

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive. That’s because the corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The current individual federal tax rates have also made ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also is taxed at lower rates on a buyer’s personal tax return. However, individual rate cuts are scheduled to expire at the end of 2025.

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

What buyers want

For several reasons, buyers usually prefer to buy assets rather than ownership interests. In general, a buyer’s primary goal is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after a transaction closes.

A buyer can step up (or increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

What sellers want

In general, sellers prefer stock sales for tax and nontax reasons. One of their objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock, or partnership or LLC interests) as opposed to selling assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Seek advice before a transaction

Be aware that other issues, such as employee benefits, can also cause tax issues in M&A transactions. Buying or selling a business may be the largest transaction you’ll ever make, so it’s important to seek professional assistance before finalizing a deal. After a transaction is complete, it may be too late to get the best tax results. Contact us about how to proceed.

© 2023

Merger and acquisition activity dropped dramatically last year due to rising interest rates and a slowing economy. The total value of M&A transactions in North America in 2022 was down 41.4% from 2021, according to S&P Global Market Intelligence.

But some analysts expect 2023 to see increased M&A activity in certain industries. If you’re considering buying or selling a business, it’s important to understand the tax implications.

Two approaches

Under current tax law, a transaction can basically be structured in two ways:

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive. That’s because the corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The current individual federal tax rates have also made ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also is taxed at lower rates on a buyer’s personal tax return. However, individual rate cuts are scheduled to expire at the end of 2025.

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

What buyers want

For several reasons, buyers usually prefer to buy assets rather than ownership interests. In general, a buyer’s primary goal is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after a transaction closes.

A buyer can step up (or increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

What sellers want

In general, sellers prefer stock sales for tax and nontax reasons. One of their objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock, or partnership or LLC interests) as opposed to selling assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Seek advice before a transaction

Be aware that other issues, such as employee benefits, can also cause tax issues in M&A transactions. Buying or selling a business may be the largest transaction you’ll ever make, so it’s important to seek professional assistance before finalizing a deal. After a transaction is complete, it may be too late to get the best tax results. Contact us about how to proceed.

© 2023

An array of tax-related limits that affect businesses are indexed annually, and due to high inflation, many have increased more than usual for 2023. Here are some that may be important to you and your business.

Social Security tax

The amount of employees’ earnings that are subject to Social Security tax is capped for 2023 at $160,200 (up from $147,000 for 2022).

Deductions

• Section 179 expensing:
  • Limit: $1.16 million (up from $1.08 million)
  • Phaseout: $2.89 million (up from $2.7 million)
• Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
  • Married filing jointly: $364,200 (up from $340,100)
  • Other filers: $182,100 (up from $170,050)

Retirement plans

• Employee contributions to 401(k) plans: $22,500 (up from $20,500)
• Catch-up contributions to 401(k) plans: $7,500 (up from $6,500)
• Employee contributions to SIMPLEs: $15,500 (up from $14,000)
• Catch-up contributions to SIMPLEs: $3,500 (up from $3,000)
• Combined employer/employee contributions to defined contribution plans (not including catch-ups): $66,000 (up from $61,000)
• Maximum compensation used to determine contributions: $330,000 (up from $305,000)
• Annual benefit for defined benefit plans: $265,000 (up from $245,000)
• Compensation defining a highly compensated employee: $150,000 (up from $135,000)
• Compensation defining a “key” employee: $215,000 (up from $200,000)

Other employee benefits

• Qualified transportation fringe-benefits employee income exclusion: $300 per month (up from $280)
• Health Savings Account contributions:
  • Individual coverage: $3,850 (up from $3,650)
  • Family coverage: $7,750 (up from $7,300)
  • Catch-up contribution: $1,000 (no change)
• Flexible Spending Account contributions:
  • Health care: $3,050 (up from $2,850)
  • Dependent care: $5,000 (no change)

These are only some of the tax limits and deductions that may affect your business and additional rules may apply. Contact us if you have questions.

© 2023

An array of tax-related limits that affect businesses are indexed annually, and due to high inflation, many have increased more than usual for 2023. Here are some that may be important to you and your business.

Social Security tax

The amount of employees’ earnings that are subject to Social Security tax is capped for 2023 at $160,200 (up from $147,000 for 2022).

Deductions

• Section 179 expensing:
  • Limit: $1.16 million (up from $1.08 million)
  • Phaseout: $2.89 million (up from $2.7 million)
• Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
  • Married filing jointly: $364,200 (up from $340,100)
  • Other filers: $182,100 (up from $170,050)

Retirement plans

• Employee contributions to 401(k) plans: $22,500 (up from $20,500)
• Catch-up contributions to 401(k) plans: $7,500 (up from $6,500)
• Employee contributions to SIMPLEs: $15,500 (up from $14,000)
• Catch-up contributions to SIMPLEs: $3,500 (up from $3,000)
• Combined employer/employee contributions to defined contribution plans (not including catch-ups): $66,000 (up from $61,000)
• Maximum compensation used to determine contributions: $330,000 (up from $305,000)
• Annual benefit for defined benefit plans: $265,000 (up from $245,000)
• Compensation defining a highly compensated employee: $150,000 (up from $135,000)
• Compensation defining a “key” employee: $215,000 (up from $200,000)

Other employee benefits

• Qualified transportation fringe-benefits employee income exclusion: $300 per month (up from $280)
• Health Savings Account contributions:
  • Individual coverage: $3,850 (up from $3,650)
  • Family coverage: $7,750 (up from $7,300)
  • Catch-up contribution: $1,000 (no change)
• Flexible Spending Account contributions:
  • Health care: $3,050 (up from $2,850)
  • Dependent care: $5,000 (no change)

These are only some of the tax limits and deductions that may affect your business and additional rules may apply. Contact us if you have questions.

© 2023

Many people are more concerned about their 2022 tax bills right now than they are about their 2023 tax situations. That’s understandable because your 2022 individual tax return is due to be filed in 10 weeks (unless you file an extension).

However, it’s a good time to familiarize yourself with tax amounts that may have changed for 2023. Due to inflation, many amounts have been raised more than in past years. Below are some Q&As about tax limits for this year.

Note: Not all tax figures are adjusted annually for inflation and some amounts only change when new laws are enacted.

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2023?

In 2017, a law was enacted that eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2023, the standard deduction amount is $27,700 for married couples filing jointly (up from $25,900). For single filers, the amount is $13,850 (up from $12,950) and for heads of households, it’s $20,800 (up from $19,400). If the amount of your itemized deductions (including mortgage interest) is less than the applicable standard deduction amount, you won’t itemize for 2023.

How much can I contribute to an IRA for 2023?

If you’re eligible, you can contribute $6,500 a year to a traditional or Roth IRA, up to 100% of your earned income. (This is up from $6,000 for 2022.) If you’re 50 or older, you can make another $1,000 “catch up” contribution (for 2023 and 2022).

I have a 401(k) plan through my job. How much can I contribute to it?

In 2023, you can contribute up to $22,500 to a 401(k) or 403(b) plan (up from $20,500 in 2022). You can make an additional $7,500 catch-up contribution if you’re age 50 or older (up from $6,500 in 2022).

I periodically hire a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2023, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc. who are independent contractors is $2,600 (up from $2,400 in 2022).

How much do I have to earn in 2023 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $160,200 for this year (up from $147,000 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

If I don’t itemize, can I claim charitable deductions on my 2023 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. For 2020 and 2021, non-itemizers could claim a limited charitable contribution deduction. Unfortunately, this tax break has expired and isn’t available for 2022 or 2023.

How much can I give to one person without triggering a gift tax return in 2023?

The annual gift exclusion for 2023 is $17,000 (up from $16,000 in 2022).

Only the beginning

These are only some of the tax amounts that may apply to you. If you have questions or need more information, contact us.

© 2023

If you made gifts last year you may be wondering if you need to file a gift tax return. The short answer: There are many situations when it’s necessary (or desirable) to file Form 709 — “United States Gift (and Generation-Skipping Transfer) Tax Return” — even if you’re not liable for any gift tax. Let’s take a closer look at the reasons why.

What gifts are considered nontaxable?

The federal gift tax regime begins with the assumption that all transfers of property by gifts (including below-market sales or loans) are taxable. It then sets forth several exceptions. Nontaxable transfers that need not be reported on Form 709 include:

• Gifts of present interests within the annual exclusion amount ($17,000 per donee in 2023, up from $16,000 in 2022),
• Direct payments of qualifying medical or educational expenses on behalf of an individual,
• Gifts to political organizations and certain tax-exempt organizations,
• Deductible charitable gifts,
• Gifts to one’s U.S.-citizen spouse, either outright or to a trust that meets certain requirements, and
• Gifts to one’s noncitizen spouse within a special annual exclusion amount ($175,000 in 2023, up from $164,000 in 2022).

If all your gifts for the year fall into these categories, no gift tax return is required. But gifts that don’t meet these requirements are generally considered taxable — and must be reported on Form 709 — even if they’re shielded from tax by the federal gift and estate tax exemption ($12.92 million in 2023, up from $12.06 million in 2022).

Are there tax traps to be aware of?

If you make gifts during the year, consider whether you’re required to file Form 709. And watch out for these common traps:

Future interests. The $17,000 annual exclusion applies only to present interests, such as outright gifts. Gifts of future interests, such as transfers to a trust for a donee’s benefit, aren’t covered, so you’re required to report them on Form 709 even if they’re less than $17,000 in 2023 ($16,000 in 2022).

Spousal gifts. As previously noted, gifts to a U.S.-citizen spouse need not be reported on Form 709. However, if you make a gift to a trust for your spouse’s benefit, the trust must 1) provide that your spouse is entitled to all the trust’s income for life, payable at least annually, 2) give your spouse a general power of appointment over its assets and 3) not be subject to any other person’s power of appointment. Otherwise, the gift must be reported.

Gift splitting. Spouses may elect to split a gift to a child or other donee, so that each spouse is deemed to have made one-half of the gift, even if one spouse wrote the check. This allows married couples to combine their annual exclusions and give up to $34,000 for 2023 (up from $32,000 for 2022) to each donee. To make the election, the donor spouse must file Form 709, and the other spouse must sign a consent or, in some cases, file a separate gift tax return. Keep in mind that, once you make this election, you and your spouse must split all gifts to third parties during the year.

The deadline to file Form 709 for 2022 is April 18. Please contact us if you’re unsure of whether you need to file a gift tax return this year.

© 2023

An array of tax-related limits that affect businesses are indexed annually, and due to high inflation, many have increased more than usual for 2023. Here are some that may be important to you and your business.

Social Security tax

The amount of employees’ earnings that are subject to Social Security tax is capped for 2023 at $160,200 (up from $147,000 for 2022).

Deductions

• Section 179 expensing:
  • Limit: $1.16 million (up from $1.08 million)
  • Phaseout: $2.89 million (up from $2.7 million)
• Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
  • Married filing jointly: $364,200 (up from $340,100)
  • Other filers: $182,100 (up from $170,050)

Retirement plans

• Employee contributions to 401(k) plans: $22,500 (up from $20,500)
• Catch-up contributions to 401(k) plans: $7,500 (up from $6,500)
• Employee contributions to SIMPLEs: $15,500 (up from $14,000)
• Catch-up contributions to SIMPLEs: $3,500 (up from $3,000)
• Combined employer/employee contributions to defined contribution plans (not including catch-ups): $66,000 (up from $61,000)
• Maximum compensation used to determine contributions: $330,000 (up from $305,000)
• Annual benefit for defined benefit plans: $265,000 (up from $245,000)
• Compensation defining a highly compensated employee: $150,000 (up from $135,000)
• Compensation defining a “key” employee: $215,000 (up from $200,000)

Other employee benefits

• Qualified transportation fringe-benefits employee income exclusion: $300 per month (up from $280)
• Health Savings Account contributions:
  • Individual coverage: $3,850 (up from $3,650)
  • Family coverage: $7,750 (up from $7,300)
  • Catch-up contribution: $1,000 (no change)
• Flexible Spending Account contributions:
  • Health care: $3,050 (up from $2,850)
  • Dependent care: $5,000 (no change)

These are only some of the tax limits and deductions that may affect your business and additional rules may apply. Contact us if you have questions.

© 2023

An array of tax-related limits that affect businesses are indexed annually, and due to high inflation, many have increased more than usual for 2023. Here are some that may be important to you and your business.

Social Security tax

The amount of employees’ earnings that are subject to Social Security tax is capped for 2023 at $160,200 (up from $147,000 for 2022).

Deductions

• Section 179 expensing:
  • Limit: $1.16 million (up from $1.08 million)
  • Phaseout: $2.89 million (up from $2.7 million)
• Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
  • Married filing jointly: $364,200 (up from $340,100)
  • Other filers: $182,100 (up from $170,050)

Retirement plans

• Employee contributions to 401(k) plans: $22,500 (up from $20,500)
• Catch-up contributions to 401(k) plans: $7,500 (up from $6,500)
• Employee contributions to SIMPLEs: $15,500 (up from $14,000)
• Catch-up contributions to SIMPLEs: $3,500 (up from $3,000)
• Combined employer/employee contributions to defined contribution plans (not including catch-ups): $66,000 (up from $61,000)
• Maximum compensation used to determine contributions: $330,000 (up from $305,000)
• Annual benefit for defined benefit plans: $265,000 (up from $245,000)
• Compensation defining a highly compensated employee: $150,000 (up from $135,000)
• Compensation defining a “key” employee: $215,000 (up from $200,000)

Other employee benefits

• Qualified transportation fringe-benefits employee income exclusion: $300 per month (up from $280)
• Health Savings Account contributions:
  • Individual coverage: $3,850 (up from $3,650)
  • Family coverage: $7,750 (up from $7,300)
  • Catch-up contribution: $1,000 (no change)
• Flexible Spending Account contributions:
  • Health care: $3,050 (up from $2,850)
  • Dependent care: $5,000 (no change)

These are only some of the tax limits and deductions that may affect your business and additional rules may apply. Contact us if you have questions.

© 2023

Are you charitably inclined? If so, you probably know that donations of long-term appreciated assets, such as stocks, have an advantage over cash donations. But in some cases, selling appreciated assets and donating the proceeds may be a better strategy.

That’s because adjusted gross income (AGI) limitations on charitable deductions are higher for cash donations. Plus, if the assets don’t qualify for long-term capital gain treatment, the deduction rules are different.

Tax treatments by type of gift

All things being equal, donating long-term appreciated assets directly to charity is preferable. Not only do you enjoy a charitable deduction equal to the assets’ fair market value on the date of the gift (assuming you itemize deductions on your return), you also avoid capital gains tax on their appreciation in value. If you were to sell the assets and donate the proceeds to charity, the resulting capital gains tax could reduce the tax benefits of your gift.

But all things aren’t equal. Donations of appreciated assets to public charities are generally limited to 30% of AGI, while cash donations are deductible up to 60% of AGI. In either case, excess deductions may be carried forward for up to five years.

Work the math

If you’re contemplating a donation of appreciated assets that’s greater than 30% of your AGI, crunch the numbers first. Then determine whether selling the assets, paying the capital gains tax and donating cash up to 60% of AGI will produce greater tax benefits in the year of the gift and over the following five tax years. The answer will depend on several factors, including the size of your gift, your AGI in the year of the gift, your projected AGI in the following five years and your ability to itemize deductions in each of those years.

Before making charitable donations, discuss your options with us. We can help you make charitable gifts at the lowest tax cost.

© 2023

Many small businesses start out as “lean enterprises,” with costs kept to a minimum to lower risks and maximize cash flow. But there comes a point in the evolution of many companies — particularly in a tight job market — when investing money in employee benefits becomes advisable, if not downright mandatory.

Is now the time for your small business to do so? More specifically, as you compete for top talent and look to retain valued employees, would launching a retirement plan help your case? Quite possibly, and the good news is the federal government is offering some intriguing incentives for eligible smaller companies ready to make the leap.

Late last year, the Consolidated Appropriations Act, 2023 was signed into law. Within this massive spending package lies the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0). Its provisions bring three key improvements to the small employer pension plan start-up cost tax credit, beginning this year:

1. Full coverage for the smallest of small businesses. SECURE 2.0 makes the credit equal to the full amount of creditable plan start-up costs for employers with 50 or fewer employees, up to an annual cap. Previously only 50% of costs were allowed — this limit still applies to employers with 51 to 100 employees.

2. Glitch fixed for multiemployer plans. SECURE 2.0 retroactively fixes a technical glitch that prevented employers who joined multiemployer plans in existence for more than three years from claiming the small employer pension plan start-up cost credit. If your business joined a pre-existing multiemployer plan before this period, contact us about filing amended returns to claim the credit.

3. Enhancement of employer contributions. Perhaps the biggest change wrought by SECURE 2.0 is that certain employer contributions for a plan’s first five years now may qualify for the credit. The credit is increased by a percentage of employer contributions, up to a per-employee cap of $1,000, as follows:

• 100% in the plan’s first and second tax years,
• 75% in the third year,
• 50% in the fourth year, and
• 25% in the fifth year.

For employers with between 51 and 100 employees, the contribution portion of the credit is reduced by 2% times the number of employees above 50.

In addition, no employer contribution credit is allowed for contributions for employees who make more than $100,000 (adjusted for inflation after 2023). The credit for employer contributions is also unavailable for elective deferrals or contributions to defined benefit pension plans.

To be clear, though the name of the tax break is the small employer pension plan start-up cost credit, it also applies to qualified plans such as 401(k)s and SIMPLE IRAs, as well as to Simplified Employee Pensions. Our firm can help you determine whether now is indeed the right time for your small business to launch a retirement plan and, if so, which one.

© 2023

If you own a home and rent it to a relative, you may be surprised to find out there could be tax consequences.

Quick rundown of the rules

Renting out a home or apartment that you own may result in a tax loss for you, even if the rental income is more than your operating costs. You’ll be entitled to a depreciation deduction for your cost of the house or apartment (except for the portion allocated to the land). However, if your tenant is related to you, special rules and limitations may apply. For this purpose, “related” means a spouse, child, grandchild, parent, grandparent or sibling.

No limitations apply if:

• You rent a home to a relative who uses it as his or her principal residence (that is, not just as a second or vacation home) for the year, and
• The home is rented at a fair market rent amount (not at a discount).

In these cases, you can deduct all the normal rental expenses, even if they result in a rental loss for the year. (If you have a loss, however, it’s a “passive” loss, which may be subject to a different set of limitations.)

Below fair market rent

Problems arise if you set the rent below the fair market rental value. The reason is this then becomes a rental property that you’re treated as using personally. So you’d have to allocate the expenses between the personal and rental portions of the year. Even more seriously, however, since all of the rental days (at a bargain rate to a relative) are treated as personal days, the rental portion would be zero. Thus, you’d have to report all of the rent you receive in income, but none of your expenses for the home would be deductible. (You’d still be able to deduct the mortgage interest, assuming it otherwise qualifies as deductible, and property taxes. These items are deductible even for nonrental homes.)

Given the above problems, it’s important to set the rent at a fair rate. Factors to look at include comparable rentals in the area and whether you made any “side” gifts to your relative (to help pay the rent) that could reasonably be interpreted to be a bargain element.

Contact us if you have any questions or would like to discuss any of these matters in more detail.

© 2022

If you have a child or grandchild in college — congratulations! To help pay for the expenses, many parents and grandparents saved for years in tax-favored accounts, such as 529 plans. But there are also a number of tax breaks that you may be able to claim once your child begins attending college or post-secondary school.

Tuition tax credits

You can take the American Opportunity Tax Credit (AOTC) of up to $2,500 per student for the first four years of college — a 100% credit for the first $2,000 in tuition, fees, and books, and a 25% credit for the second $2,000. You can take a Lifetime Learning Credit (LLC) of up to $2,000 per family for every additional year of college or graduate school — a 20% credit for up to $10,000 in tuition and fees.

The AOTC is 40% refundable up to $1,000 (meaning you can get a refund if the credit amount is greater than your tax liability). Both credits are phased out for married couples filing jointly with modified adjusted gross income (MAGI) between $160,000 and $180,000, and for singles with MAGI between $80,000 and $90,000.

Only one credit can be claimed per eligible student in any given year. To claim the education tax credits, a taxpayer must receive a Form 1098-T statement from the school. Other rules may apply.

Scholarships

Scholarships are exempt from income tax if certain conditions are satisfied. The most important is that the scholarship generally can’t be compensation for services, and it must be used for tuition, fees, books and supplies (not for room and board).

However, a tax-free scholarship reduces the amount of expenses that may be taken into account in computing the AOTC and LLC and may reduce or eliminate those credits.

Employer educational assistance

If your employer pays your child’s college expenses, the payment is a fringe benefit, and is taxable to you as compensation, unless it’s part of a scholarship program that’s “outside of the pattern of employment.” Then, the payment will be treated as a scholarship (if the requirements for scholarships are satisfied).

Tuition payments by grandparents and others

If someone gives you money to pay your child’s college expenses, the person is generally subject to gift tax, to the extent the payments exceed the annual exclusion of $17,000 per recipient for 2023. Married donors who split gifts may exclude gifts of up to $34,000 for 2023.

However, if the person (say, a grandparent) pays your child’s tuition directly to an educational institution, there’s an unlimited exclusion from gift tax for the payment. This unlimited gift tax exclusion applies only to direct tuition costs (not room and board, books, supplies, etc.).

Retirement account withdrawals

You can take money out of your IRA or Roth IRA any time to pay college costs without incurring the 10% early withdrawal penalty that usually applies to distributions before age 59½. However, the distributions are subject to tax under the usual IRA rules.

You also may be able to borrow against your employer retirement plan or take withdrawals from it to pay for college. But before you do so, make sure you understand the tax implications, including any penalties that you may incur.

Plan ahead

Not all of the above breaks may be used in the same year, and some of them reduce the amounts that qualify for other breaks. So it takes planning to determine which should be used in any given situation. Contact us if you’d like to discuss any of the above options, or other alternatives.

© 2023