In this Edition
November 16, 2021

One-Time Thing: IRA to HSA Transfers

PODCAST: Form 1099s

Fourth Quarter 2021 ERC Gets the Axe with Passing of Infrastructure Bill

Giving Bad Debts the Business

Payroll & Year-End Reporting Webinar

Would You Like to Establish a Health Savings Account For Your Small Business?

Many Factors Are Involved When Choosing a Business Entity
One-Time Thing: IRA to HSA Transfers
Did you know that you can transfer funds directly from your IRA to a Health Savings Account (HSA) without taxes or penalties? According to the IRS, you’re permitted to make one such “qualified HSA funding distribution” during your lifetime.

Ordinarily, if you have an IRA and an HSA, it’s typically a good idea to contribute as much as possible to both to make the most of their tax benefits. But if you’re hit with high medical expenses and have an insufficient balance in your HSA, transferring funds from your IRA may be a solution.

Calling in the Cavalry

An HSA is a savings account that can be used to pay qualified medical expenses with pre-tax dollars. It’s generally available to individuals with eligible high-deductible health plans. Currently, the annual limit on tax-deductible contributions to an HSA is $3,600 for individuals with self-only coverage and $7,200 for individuals with family coverage. If you’re 55 or older, the limits are $4,600 and $8,200, respectively. Those same limits apply to an IRA-to-HSA transfer, reduced by any contributions already made to the HSA during the year.

Here’s an example illustrating the potential benefits of a qualified HSA funding distribution from an IRA: Joe is 58 years old, with a self-only, high-deductible health plan. In 2021, he needs surgery for which he incurs $5,000 in out-of-pocket costs. Joe is strapped for cash and only has $500 left in his HSA, but he does have a $50,000 balance in his traditional IRA. Joe may move up to $4,600 from his IRA to his HSA tax and penalty-free.

Considering Other Factors

If you decide to transfer funds from your IRA to your HSA, keep in mind that the distribution must be made directly by the IRA trustee to the HSA trustee, and the transfer counts toward your maximum annual HSA contribution.

Also, funds transferred to the HSA, in this case, aren’t tax deductible but, because the IRA distribution is excluded from your income, the effect is the same (at least for federal tax purposes).

Exploring the Opportunity

IRA-to-HSA transfers are literally a once-in-a-lifetime opportunity, but that doesn’t mean they’re the right move for everyone. If you’re interested, our firm can help you explore the concept in the context of your distinctive tax and financial circumstances.
Colleen Scherpereel

Colleen Scherpereel
D 262.404.2115
PODCAST
Podcast: Self Employment Tax

If you operate your own business, whether it be with Etsy, Uber, Eat Street or any business, you might be surprised to find out that there are additional taxes that you may have to pay on your income.
Fourth Quarter 2021 ERC Gets the Axe with Passing of Infrastructure Bill
The Infrastructure Investment and Jobs Act was recently signed into law by President Biden. Included in the 1,039 page Bill are plans for federal highway, transit and safety programs, the nation’s broadband system, and climate change initiatives sprinkled amongst a litany of other matters. The Bill is partially paid for by shifting funds set aside for The Employee Retention Credit (ERC) resurrected under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Sec 80604 of the Infrastructure Bill prematurely terminates ERC for qualified employers as of September 30, 2021. ERC is still available for 2020 and the first three quarters of 2021 to businesses that kept employees on payroll through the worst of COVID-19 times.

For those that braved opening commerce during tumultuous economic conditions, Congress did leave one exception to the early termination ruling: recovery startup businesses. An employer that began carrying on a trade or business after February 15, 2020, subject to certain limitations, is considered to be a recovery startup business and can seek the benefit of ERC to the maximum of $50,000 for third and fourth quarter 2021.

Although ERC will end early, the program has provided significant benefits to those businesses and not-for-profits that have been impacted by COVID-19 by means of governmental shutdown or a gross receipts test.

Hawkins Ash CPAs has prepared several ERC’s for clients harvesting millions of dollars in refunds to date and counting. A common misconception is the credit is not worthwhile if the employer received funds from other COVID-19 programs such as Payroll Protection Program (PPP) loan forgiveness. Hawkins Ash CPAs is finding this misconception untrue as a majority of clients benefiting from ERC have also received PPP loans. While each client’s unique circumstances vary, the benefits of ERC deserve serious consideration and a phone call to your Hawkins Ash CPAs representative.

ERC can still be claimed on amended federal payroll tax form 941-X as long as the statute of limitations remains open which is three years from the date of filing or two years from the date of payment, whichever is later. All quarterly 941’s are considered filed on April 15 of the succeeding year.

Please contact your local Hawkins Ash CPAs office to learn more about pursuing the ERC. 

Jessica Raymond, CPA
D 608.793.3128
Giving Bad Debts the Business
When one of your company’s customers can’t pay up, you may be able to give that debt “the business.” That is, you may be able to claim a tax deduction under Internal Revenue Code Section 166. To successfully do so, however, you’ll need to know how the tax code defines a partially or wholly worthless “bad debt.”

A deductible bad debt can generally be defined as a loss arising from the worthlessness of a debt that was created or acquired in your trade or business, or that was closely related to your trade or business when it became partly or totally worthless. The most common bad debts involve credit sales to customers for goods or services.

Other examples include loans to customers or suppliers that are made for business reasons and have become uncollectible, and business-related guarantees of debts that have become worthless. Debts attributable to an insolvent partner may also qualify.

The IRS will scrutinize loans to be sure they’re legitimate. For example, it might deny a bad debt deduction if it determines that a loan to a corporation was actually a contribution to capital.

There’s no standard test or formula for determining whether a debt is a bad debt; it depends on the facts and circumstances of each case. To qualify for the deduction, you simply must show that you’ve taken reasonable steps to collect the debt and there’s little likelihood it will be paid. Our firm can look at your potentially bad debts and tell you for sure whether they’re deductible.

Vince Schamber, CPA
D 920.337.4548
Payroll & Year-End Reporting Webinar
December 2, 2021
12:00 PM - 2:00 PM

As an employer, you know year-end payroll processing and reporting is a complex duty that adds to the stress of closing the books for the year. To ensure a smooth, error-free year, please join us for our Payroll and Year-End Reporting Webinar. This webinar is offered to bookkeepers, business owners and payroll professionals free of charge.

We will address compliance issues of year-end payroll processing and reporting and bring you up to date on the latest changes that affect the close of 2021 and beginning of 2022.
Would You Like to Establish a Health Savings Account For Your Small Business?
With the increasing cost of employee health care benefits, your business may be interested in providing some of these benefits through an employer-sponsored Health Savings Account (HSA). For eligible individuals, an HSA offers a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs.

Here are the important tax benefits:

  • Contributions that participants make to an HSA are deductible, within limits.
  • Contributions that employers make aren’t taxed to participants.
  • Earnings on the funds in an HSA aren’t taxed, so the money can accumulate tax-free year after year.
  • Distributions from HSAs to cover qualified medical expenses aren’t taxed.
  • Employers don’t have to pay payroll taxes on HSA contributions made by employees through payroll deductions.

Eligibility Rules

To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2021, a “high deductible health plan” is one with an annual deductible of at least $1,400 for self-only coverage, or at least $2,800 for family coverage. (These amounts will remain the same for 2022.) For self-only coverage, the 2021 limit on deductible contributions is $3,600 (increasing to $3,650 for 2022). For family coverage, the 2021 limit on deductible contributions is $7,200 (increasing to $7,300 for 2022). Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits for 2021 cannot exceed $7,000 for self-only coverage or $14,000 for family coverage (increasing to $7,050 and $14,100, respectively, for 2022).

An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2021 and 2022 of up to $1,000.

Contributions From an Employer

If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan. It’s also excludable from an employee’s gross income up to the deduction limitation. Funds can be built up for years because there’s no “use-it-or-lose-it” provision. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.

Taking Distributions

HSA distributions can be made to pay for qualified medical expenses, which generally means expenses that would qualify for the medical expense itemized deduction. Among these expenses are doctors’ visits, prescriptions, chiropractic care and premiums for long-term care insurance.

If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65, or in the event of death or disability.

HSAs offer a flexible option for providing health care coverage and they may be an attractive benefit for your business. But the rules are somewhat complex. Contact us if you’d like to discuss offering HSAs to your employees.

Randy Juedes, CPA
D 715.748.1346
Many Factors Are Involved When Choosing a Business Entity
Are you planning to launch a business or thinking about changing your business entity? If so, you need to determine which entity will work best for you — a C corporation or a pass-through entity such as a sole-proprietorship, partnership, limited liability company (LLC) or S corporation. There are many factors to consider and proposed federal tax law changes being considered by Congress may affect your decision.

The corporate federal income tax is currently imposed at a flat 21% rate, while the current individual federal income tax rates begin at 10% and go up to 37%. The difference in rates can be mitigated by the qualified business income (QBI) deduction that’s available to eligible pass-through entity owners that are individuals, estates and trusts.

Note that noncorporate taxpayers with modified adjusted gross income above certain levels are subject to an additional 3.8% tax on net investment income.
Organizing a business as a C corporation instead of as a pass-through entity can reduce the current federal income tax on the business’s income. The corporation can still pay reasonable compensation to the shareholders and pay interest on loans from the shareholders. That income will be taxed at higher individual rates, but the overall rate on the corporation’s income can be lower than if the business was operated as a pass-through entity.

Other Considerations

Other tax-related factors should also be considered. For example:

  • If substantially all the business profits will be distributed to the owners, it may be preferable that the business be operated as a pass-through entity rather than as a C corporation, since the shareholders will be taxed on dividend distributions from the corporation (double taxation). In contrast, owners of a pass-through entity will only be taxed once, at the personal level, on business income. However, the impact of double taxation must be evaluated based on projected income levels for both the business and its owners.
  • If the value of the business’s assets is likely to appreciate, it’s generally preferable to conduct it as a pass-through entity to avoid a corporate tax if the assets are sold or the business is liquidated. Although corporate-level tax will be avoided if the corporation’s shares, rather than its assets, are sold, the buyer may insist on a lower price because the tax basis of appreciated business assets cannot be stepped up to reflect the purchase price. That can result in much lower post-purchase depreciation and amortization deductions for the buyer.
  • If the entity is a pass-through entity, the owners’ bases in their interests in the entity are stepped-up by the entity income that’s allocated to them. That can result in less taxable gain for the owners when their interests in the entity are sold.
  • If the business is expected to incur tax losses for a while, consideration should be given to structuring it as a pass-through entity so the owners can deduct the losses against their other income. Conversely, if the owners of the business have insufficient other income or the losses aren’t usable (for example, because they’re limited by the passive loss rules), it may be preferable for the business to be a C corporation since it’ll be able to offset future income with the losses.
  • If the owners of the business are subject to the alternative minimum tax (AMT), it may be preferable to organize as a C corporation, since corporations aren’t subject to the AMT. Affected individuals are subject to the AMT at 26% or 28% rates. 

These are only some of the many factors involved in operating a business as a certain type of legal entity. For details about how to proceed in your situation, consult with us.

Jill Wrensch, EA
D 715.384.1989
More Resources from CPA-HQ
Is Disability Income Taxable?

Many Americans receive disability income, and the question is often asked: Is it taxable? The short answer is: That depends on who paid for it. This article details how and when taxes may apply. A sidebar discusses how much disability coverage an individual may need.
4 Ways to Withdraw Cash From a Corporation

Owners of closely held corporations often want or need to withdraw cash from the business. The simplest way is to distribute the money as a dividend, but that isn’t tax-efficient. This article suggests several other ways to withdraw cash with generally better tax consequences, such as through capital repayments or compensation.
Employers: The Social Security Wage Base is Increasing in 2022

Business owners and their employees don’t have to pay Social Security tax on all their wages. Amounts above a certain threshold aren’t subject to Social Security tax. The “wage base” for 2022 was recently announced.