In this Edition
February 7, 2023

Many Tax Limits Affecting Businesses Have Increased for 2023

PODCAST: Where Is My Refund?

Have Employees Who Receive Tips? Here Are the Tax Implications

Protect Your Business With Meticulous Records

Qualifying for the Home Office Deduction
Many Tax Limits Affecting Businesses Have Increased for 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.

Jay Kramer, CPA, MST
D 920.337.4551
PODCAST
Where Is My Refund?

After you have filed your 2022 tax return, the IRS states that 9 out of 10 refunds will be issued within less than 21 days; that is if you e-file with direct deposit.

In this episode, Jeff Dvorachek, a tax partner, breaks down how fast your refund will arrive depending on the filing and the refund method chosen.
Have Employees Who Receive Tips? Here Are the Tax Implications
Many businesses in certain industries employ individuals who receive tips as part of their compensation. These businesses include restaurants, hotels and salons.

Tip Definition

Tips are optional payments that customers make to employees who perform services. They can be cash or noncash. Cash tips include those received directly from customers, electronically paid tips distributed to employees by employers and tips received from other employees under tip-sharing arrangements. Generally, workers must report cash tips to their employers. Noncash tips are items of value other than cash. They may include tickets, passes or other items that customers give employees. Workers don’t have to report noncash tips to employers.

For tax purposes, four factors determine whether a payment qualifies as a tip:

  • The customer voluntarily makes the payment,
  • The customer has the unrestricted right to determine the amount,
  • The payment isn’t negotiated with, or dictated by, employer policy, and
  • The customer generally has the right to determine who receives the payment.

Tips can also be direct or indirect. A direct tip occurs when an employee receives it directly from a customer, even as part of a tip pool. Directly tipped employees include wait staff, bartenders and hairstylists. An indirect tip occurs when an employee who normally doesn’t receive tips receives one. Indirectly tipped employees include bussers, service bartenders, cooks and salon shampooers.

Daily Tip Records

Tipped workers must keep daily records of the cash tips they receive. To keep track of them, they can use Form 4070A, Employee’s Daily Record of Tips. It is found in IRS Publication 1244.

Workers should also keep records of the dates and value of noncash tips. Although the IRS doesn’t require workers to report noncash tips to employers, they must report them on their tax returns.

Reporting to Employers

Employees must report tips to employers by the 10th of the month following the month they were received. The IRS doesn’t require workers to use a particular form to report tips. However, a worker’s tip report generally should include:

  • The employee’s name, address, Social Security number and signature,
  • The employer’s name and address,
  • The month or period covered, and
  • Total tips received during the period.

Note: Employees whose monthly tips are less than $20 don’t need to report them to their employers but must include them as income on their tax returns.

Employer Requirements

Employers should send each employee a Form W-2 that includes reported tips. Employers also must:

  • Keep their employees’ tip reports.
  • Withhold taxes, including income taxes and the employee’s share of Social Security tax and Medicare tax, based on employees’ wages and reported tip income.
  • Pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as reported tip income.
  • Report this information to the IRS on Form 941, Employer’s Quarterly Federal Tax Return.
  • Deposit withheld taxes in accordance with federal tax deposit requirements.

In addition, “large” food or beverage establishments must file an annual report disclosing receipts and tips on Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.

Tip Tax Credit

If you’re an employer with tipped workers providing food and beverages, you may qualify for a federal tax credit involving the Social Security and Medicare taxes that you pay on employees’ tip income. The tip tax credit may be valuable to you. If you have any questions about the tax implications of tips, don’t hesitate to contact us.

Marcus Klemm
D 715.748.1352
Tax Tip Tuesday - Video Short
3 Reasons Why Your Refund Is Not As Strong As Last Year

This week, Kyle Hundt, EA breaks down 3 reasons why your refund is not as strong as last year. 
Protect Your Business With Meticulous Records
If you run a business, you know that you need to support expenses with detailed records. To be deductible, every expense on your tax return might have to be defended if your company is subject to an audit. Plus, failing to operate in a businesslike manner, complete with good records, might lead the IRS to deem the activity a hobby rather than a business — and your expenses may be limited or disallowed.  

While there’s no one right way to keep business records, some types of expenses do require more details. For example, records relating to automobile expenses, travel, meals and office-at-home costs are subject to special requirements or limitations. 

To Claim Deductions, an Activity Must Be Engaged in for Profit

For a business expense to be deductible, the taxpayer must establish that the primary objective of the activity is making a profit. The expense must also be substantiated and be an “ordinary and necessary” business expense. In one court case (Gaston v. IRS, 2021), a taxpayer claimed deductions that created a loss, which she used to shelter other income from tax.

She engaged in various activities that included acting in the entertainment industry and selling jewelry. The IRS found her activities were more like hobbies than businesses engaged in for-profit and it disallowed her deductions.

The taxpayer did, however, have some success when she took her case to the U.S. Tax Court. The court found that she was engaged in the business of acting for profit during the years at issue, though not all of the claimed expenses were ordinary and necessary business expenses. The court allowed deductions for expenses including headshots, casting agency fees, and lessons to enhance the taxpayer’s acting skills. But the court disallowed other deductions because it found insufficient evidence “to firmly establish a connection” between the expenses and the business.

In addition, the court found that the taxpayer didn’t prove that she engaged in her jewelry sales activity for profit. She didn’t operate it in a businesslike manner, spend sufficient time on it or seek out expertise in the jewelry industry. Therefore, all deductions related to that activity were disallowed.  

We Can Help

Contact us if you need assistance retaining adequate business records. Taking a meticulous, proactive approach can protect your deductions and prevent the IRS from viewing your business as a hobby.

Matt Cantlon, CPA
D 507.252.6672
Qualifying for the Home Office Deduction
In recent years, many people have pivoted to working from home, and that brings up tax questions. If you’re one of those people, you might wonder, “Can I claim the home office deduction on my 2022 tax return?”

The short answer is: only if you’re self-employed. Employees can’t currently claim home office expenses, and even self-employed taxpayers must follow strict rules to claim deductions.

Numerous Write-Offs

If you qualify, you can deduct the “direct expenses” of a home office. This includes the costs of painting or repairing the home office and depreciation deductions for furniture and fixtures used there. You can also deduct the “indirect” expenses of maintaining the office. This includes the allocable share of utility costs, depreciation and insurance for your home, as well as the allocable share of mortgage interest, real estate taxes and casualty losses.

In addition, if your home office is your “principal place of business,” the eligible costs of traveling between your home office and other work locations are deductible transportation expenses, rather than nondeductible commuting costs.

Tests for Deductibility

You can deduct your expenses if you meet any of these three tests:

  1. Principal place of business. You’re entitled to deductions if you use your home office, exclusively and regularly, as your principal place of business. Your home office is your principal place of business if it satisfies one of two tests. You satisfy the “management or administrative activities test” if you use your home office for administrative or management activities of your business, and you meet certain other requirements. You meet the “relative importance test” if your home office is the most important place where you conduct business, compared with all the other locations where you conduct that business.
  2. Meeting place. You’re entitled to home office deductions if you use your home office, exclusively and regularly, to meet or deal with patients, clients or customers. The patients, clients or customers must physically come to the office.
  3. Separate structure. You’re entitled to home office deductions for a home office, used exclusively and regularly for business, that’s located in a separate unattached structure on the same property as your home. For example, this could be in an unattached garage, artist’s studio or workshop.

You may also be able to deduct the expenses of certain storage space for storing inventory or product samples. If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use to store inventory or product samples.

Know the Limitations

The amount of home office deductions for self-employed taxpayers is subject to various limitations. Proper planning is key to claiming the maximum deduction for your home office expenses. Contact us if you’d like to discuss your situation.

Dianna Streed, CPA, CGMA
D 507.453.5967
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