Tax+Business Alert
June 6, 2023
Traditional vs. Roth: Choosing the Right Retirement Account for Tax Optimization
Employee Video Feature: Aaron Boettcher
Closing Your Business: Navigating Tax Obligations and Employee Payments
PODCAST: Don't Panic: What You Need to Know When Facing a Tax Audit
Mastering HSA Fundamentals: Inflation Adjustments, Advantages, and Contribution Limits for 2024
Decoding Business Expense Substantiation: Key Insights from Recent Tax Court Case
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Traditional vs. Roth: Choosing the Right Retirement Account for Tax Optimization |
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The volatility in the stock market may have caused the value of your retirement account to decrease. But if you have a traditional IRA invested in stocks, a decline may provide a valuable opportunity by allowing you to convert your traditional IRA to a Roth IRA at a lower tax cost.
Traditional vs. Roth IRA: Which is Better for Tax Optimization?
Here are some key differences between these two types of accounts:
Traditional IRA: Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you (or your spouse) participate in a qualified retirement plan, such as a 401(k). Funds in the account grow tax-deferred.
However, you generally must pay income tax on withdrawals. You’ll also face a penalty if you withdraw funds before age 59½ — unless you qualify for an exception. And you’ll face an even larger penalty if you don’t take your required minimum distributions (RMDs) when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).
Roth IRA: Roth IRA contributions aren’t deductible. But withdrawals — including earnings — are tax-free as long as you are age 59½ or older and the account has been open at least five years. Plus, you’re allowed to withdraw contributions at any time tax- and penalty-free and you aren’t subject to RMDs.
However, the ability to contribute to a Roth IRA is subject to limits based on your MAGI. Fortunately, no matter how high your income, you’re eligible to convert a traditional IRA to a Roth, but you’ll have to pay income tax on the amount converted.
Reduce Your Tax Bill with a Roth IRA Conversion
If your traditional IRA has lost value, converting to a Roth now instead of waiting could minimize your tax hit. You’ll also avoid tax on future appreciation if the value of your account goes back up.
Before converting, take time to think through the details. Here are some key issues to consider:
Money to Pay the Tax Bill: If you don’t have the cash on hand to cover the taxes owed on the conversion, you may have to dip into your retirement funds, eroding your nest egg. The more money you convert and the higher your tax bracket, the bigger the tax hit.
Your Retirement Plans: Typically, you wouldn’t convert a traditional IRA to a Roth IRA if you expect to retire soon and will start drawing down on the account right away. Usually, the goal is to allow the funds to grow and compound over time without any tax erosion.
There are also other issues that need to be considered before executing a Roth IRA conversion. If this sounds like something you’re interested in, contact us to discuss whether a conversion is right for you.
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Jill Wrensch, EA
D 715.384.1989
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Aaron Boettcher, CPA
Get to know Aaron Boettcher a Senior Tax Manager in our Green Bay, WI, office. In this video, he shares some helpful financial tips.
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Closing Your Business: Navigating Tax Obligations and Employee Payments |
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Sadly, many businesses have been forced to shut down recently due to the challenges of the economy, including the supply chain. If this is your situation, we can help you meet the various tax responsibilities that go with closing a business.
Of course, a business must file a final income tax return and some other related forms for the year it closes its doors. The type of return to be filed depends on the type of business you have. Here’s a rundown of the basic requirements.
Sole Proprietorships. You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year you close the business. 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 it closes. You also must report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedule 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 you close. 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. Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.
Closing Your Business: Essential Tax Obligations and Filing Final Returns
If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.
If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”
Employee Payments and Contractors: Managing Tax Responsibilities During Business Closure
If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notices, funding, timing and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees.
We can assist you with many other complicated tax issues related to closing your business, including debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.
We can also advise you on the length of time you need to keep business records. You also must cancel your Employer Identification Number (EIN) and close your IRS business account.
If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these issues and get answers to any questions.
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Jared Ystad
D 715.384.1974
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Don't Panic: What You Need to Know When Facing a Tax Audit
In this episode, Jeff Dvorachek, a tax partner with years of experience in the field, sheds light on the audit process. He shares valuable insights on the factors that could lead to an audit, the types of items the IRS typically investigates, and important things to keep in mind if you've received a notice from the IRS that your tax return is being audited.
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Mastering HSA Fundamentals: Inflation Adjustments, Advantages, and Contribution Limits for 2024 |
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The IRS recently released guidance providing the 2024 inflation-adjusted amounts for Health Savings Accounts (HSAs).
HSA Fundamentals: Exploring Benefits, Contribution Limits, and Inflation Adjustments
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).
Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contributions to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.
Unveiling 2024 Inflation Adjustments for HSAs: Stay Ahead of the Curve
In Revenue Procedure 2023-23, the IRS released the 2024 inflation-adjusted figures for contributions to HSAs, which are as follows:
Annual Contribution Limitation: For calendar year 2024, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $4,150. For an individual with family coverage, the amount will be $8,300. This is up from $3,850 and $7,750, respectively, in 2023.
There is an additional $1,000 “catch-up” contribution amount for those age 55 and older in 2024 (and 2023).
High-Deductible Health Plan Defined: For calendar year 2024, an HDHP will be a health plan with an annual deductible that isn’t less than $1,600 for self-only coverage or $3,200 for family coverage (up from $1,500 and $3,000, respectively, in 2023). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $8,050 for self-only coverage or $16,100 for family coverage (up from $7,500 and $15,000, respectively, in 2023).
Unlocking the Advantages of HSAs: Tax Benefits and Portability Explained
There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Contact your employee benefits and tax advisors if you have questions about HSAs at your business.
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Curt Bach, CPA
D 715.301.7631
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Decoding Business Expense Substantiation: Key Insights from Recent Tax Court Case |
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If you’re claiming deductions for business meals or auto expenses, expect the IRS to closely review them. In some cases, taxpayers have incomplete documentation or try to create records months (or years) later. In doing so, they fail to meet the strict substantiation requirements set forth under tax law. Tax auditors are adept at rooting out inconsistencies, omissions and errors in taxpayers’ records, as illustrated by one recent U.S. Tax Court case.
Unveiling the Facts: Recent Tax Court Case Highlights Importance of Business Expense Substantiation
In the case, a married couple claimed $13,596 in car and truck expenses, supported only by mileage logs that weren’t kept contemporaneously and were made using estimates rather than odometer readings. The court disallowed the entire deduction, stating that “subsequently prepared mileage records do not have the same high degree of credibility as those made at or near the time the vehicle was used and supported by documentary evidence.”
The court noted that it appeared the taxpayers attempted to deduct their commuting costs. However, it stated that “expenses a taxpayer incurs traveling between his or her home and place of business generally constitute commuting expenses, which … are nondeductible.”
A taxpayer isn’t relieved of the obligation to substantiate business mileage, even if he or she opts to use the standard mileage rate (65.5 cents per business mile in 2023), rather than keep track of actual expenses.
The court also ruled the couple wasn’t entitled to deduct $5,233 of travel, meal and entertainment expenses because they didn’t meet the strict substantiation requirements of the tax code. (TC Memo 2022-113)
Stay on the Right Track: Essential Tips for IRS-Compliant Business Expense Records
This case is an example of why it’s critical to maintain meticulous records to support business expenses for vehicle and meal deductions. Here’s a list of “DOs and DON’Ts” to help meet the strict IRS and tax law substantiation requirements for these items:
DO keep detailed, accurate records. For each expense, record the amount, the time and place, the business purpose, and the business relationship of any person to whom you provided a meal. If you have employees who you reimburse for meals and auto expenses, make sure they’re complying with all the rules.
DON’T reconstruct expense logs at year-end or wait until you receive a notice from the IRS. Take a moment to record the details in a log or diary or on a receipt at the time of the event or soon after. Require employees to submit monthly expense reports.
DO respect the fine line between personal and business expenses. Be careful about combining business and pleasure. Your business checking account shouldn’t be used for personal expenses.
DON’T be surprised if the IRS asks you to prove your deductions. Vehicle and meal expenses are a magnet for attention. Be prepared for a challenge.
With organization and guidance from us, your tax records can stand up to inspection from the IRS. There may be ways to substantiate your deductions that you haven’t thought of, and there may be a way to estimate certain deductions (called “the Cohan rule”), if your records are lost due to a fire, theft, flood or other disaster.
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Holly Pett, CPA, EA
D 262.404.2109
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At Hawkins Ash CPAs, we hire professionals looking to thrive in their careers and life. We ensure the support and development our professionals need to provide our clients with the best service possible. If you know someone who would fit one of these positions, please encourage them to apply. |
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DIRECTOR OF INFORMATION TECHNOLOGY |
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Avoiding Costly Tax Mistakes: Understanding Worker Classification for Small Businesses
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