In this Edition
November 22, 2022
2023 Limits for Businesses That Have HSAs - or Want to Establish Them
PODCAST: Can I Claim a Casualty Loss?
Limitations on Casualty Losses
Computer Software Costs: How Does Your Business Deduct Them?
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2023 Limits for Businesses That Have HSAs - or Want to Establish Them |
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No one needs to remind business owners that the cost of employee health care benefits keeps going up. One way to provide some of these benefits is 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 Key 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 and 2023 Contribution Limits
To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2023, a “high deductible health plan” will be one with an annual deductible of at least $1,500 for self-only coverage, or at least $3,000 for family coverage. (These amounts in 2022 were $1,400 and $2,800, respectively.) For self-only coverage, the 2023 limit on deductible contributions will be $3,850 (up from $3,650 in 2022). For family coverage, the 2023 limit on deductible contributions will be $7,750 (up from $7,300 in 2022). Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits for 2023 will not be able to exceed $7,500 for self-only coverage or $15,000 for family coverage (up from $7,050 and $14,100, respectively, in 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 2023 of up to $1,000 (unchanged from the 2022 amount).
Employer Contributions
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.
Making Withdrawals
HSA withdrawals (or 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 have questions or would like to discuss offering HSAs to your employees.
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Art Raak, CPA
D 507.252.6670
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Can I Claim a Casualty Loss?
Have you ever wondered what happens if your vacation home experiences a natural disaster in a federally declared disaster area? This podcast covers the tax impact of personal casualties, disasters, and theft. We cover personal losses only. Business or income-producing losses have different rules.
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Limitations on Casualty Losses |
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For tax years 2018 through 2025, personal casualty and theft losses may be deductible when:
- They are attributable to a federal disaster (see Disaster Losses); or
- They do not exceed personal casualty gains (see Nonbusiness Casualty Gains).
For tax years before 2018 and after 2025, personal casualty and theft losses may be deductible even if they are not attributable to a federal disaster. See Nonbusiness Casualty and Theft Losses.
Regardless of the tax year, an individual taxpayer's nonbusiness casualty or theft loss generally is deductible only to the extent that:
- The loss exceeds $100, and
- The losses for the year exceed 10 percent of adjusted gross income (AGI).
$100 Floor
Each nonbusiness casualty and theft loss is generally deductible only to the extent that it exceeds $100. The $100 floor applies separately to each casualty or theft. The $100 floor for each casualty is increased to $500 for a net disaster loss from certain federally declared disasters, as discussed at Disaster Losses.
The $100 floor applies to personal casualty losses for tax years 2018 through 2025, as well as personal casualty losses for tax years before 2018 and after 2025.
Whether damage to property results from one casualty or from multiple casualties depends upon the facts of each case. Events closely related in origin usually give rise to a single casualty. For example, damage from a storm to a house and a car parked in its driveway is the result of a single casualty, as is wind and flood damage caused by a hurricane. Similarly, when an owner’s residential properties in two different counties were damaged by the same storm, only one $100 floor applied to the casualty loss deduction. If a single casualty causes losses in more than one year, only a single $100 floor applies to the losses.
If losses to the same property can be traced to different events, however, there is more than one casualty. Therefore, the loss from each casualty must be reduced by the $100 floor. For example, when damage to a building was caused by separate acts of vandalism, the damage caused by each act of vandalism was reduced by $100.
If a single casualty damages property that is owned by more than one taxpayer, the $100 floor applies separately to each taxpayer. For example, if two brothers jointly own a house that is damaged by a storm, each brother must separately reduce his loss by the $100 floor.
$100 Casualty Loss Floor for Married Taxpayers
Married taxpayers who file a joint return are considered one taxpayer and are subject to only one $100 limit for each casualty or theft loss, regardless of whether the property was jointly or separately owned. However, if married taxpayers file separate returns, each spouse is subject to the $100 limitation for each casualty.
If spouses file a joint return for the first year of a casualty that is sustained in two or more years, the taxpayers are treated as one individual for purposes of the $100 limit for all years in which the casualty is sustained, even if they file separate returns in subsequent years.
If married taxpayers file jointly for the first loss year but separately in a later year, any unused portion of the $100 limitation is allocated equally between them in the later year. If married taxpayers file separately in the first loss year, and the same casualty continues in a subsequent year, the taxpayers are treated as separate taxpayers in the subsequent year in applying the $100 limitation. The unused part of the $100 limit from the first tax year is applied toward losses from the same casualty in subsequent years.
10% of AGI Limit
Nonbusiness casualty and theft losses are generally deductible only to the extent they exceed 10 percent of adjusted gross income (AGI). The AGI floor is based on AGI for the year the deduction is taken, rather than the year of the loss. The 10-percent-of-AGI limit is waived for a net disaster loss from certain federally declared disasters, as discussed at Disaster Losses.
For nonbusiness casualty loss deduction before 2018 and after 2025, deductible personal casualty losses must exceed the sum of (1) the excess of personal casualty gains (as discussed at Nonbusiness Casualty Gains) over personal casualty losses, plus (2) 10 percent of AGI. For tax years from 2018 through 2025, nonbusiness casualty losses that exceed casualty gains are not deductible unless attributable to a federally declared disaster.
In applying the 10 percent limit, married taxpayers filing a joint return are treated as one taxpayer. It does not matter if the spouses own the property jointly or separately. If married taxpayers file separate returns, then the 10 percent limit applies to each return. Similarly, if two or more individuals (other than spouses filing a joint return) have a loss on property that is owned jointly, the 10 percent rule applies separately to each. An estate or trust computes its AGI in the same manner as an individual, except that it may deduct costs paid or incurred in connection with the estate or trust administration in determining AGI. See Casualty and Theft Losses of Estates and Trusts.
If the taxpayer has more than one casualty or theft loss during your tax year, each loss is first reduced by $100 floor and any reimbursement. The taxpayer’s casualty loss deduction is then reduced by 10 percent of AGI.
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Ryan Laughlin, CPA, MST, JD, AEP
D 920.337.4525
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Tax Tip Tuesday - Video Short |
Taxpayer Bill of Rights
This week, Cole explains what you should know about your rights as a taxpayer.
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Computer Software Costs: How Does Your Business Deduct Them? |
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These days, most businesses buy or lease computer software to use in their operations. Or perhaps your business develops computer software to use in your products or services or sells or leases software to others. In any of these situations, you should be aware of the complex rules that determine the tax treatment of the expenses of buying, leasing or developing computer software.
Software You Buy
Some software costs are deemed to be costs of “purchased” software, meaning it’s either:
- Non-customized software available to the general public under a nonexclusive license, or
- Acquired from a contractor who is at economic risk should the software not perform.
The entire cost of purchased software can be deducted in the year that it’s placed into service. The cases in which the costs are ineligible for this immediate write-off are the few instances in which 100% bonus depreciation or Section 179 small business expensing isn’t allowed, or when a taxpayer has elected out of 100% bonus depreciation and hasn’t made the election to apply Sec. 179 expensing. In those cases, the costs are amortized over the three-year period beginning with the month in which the software is placed in service. Note that the bonus depreciation rate will begin to be phased down for property placed in service after calendar year 2022.
If you buy the software as part of a hardware purchase in which the price of the software isn’t separately stated, you must treat the software cost as part of the hardware cost. Therefore, you must depreciate the software under the same method and over the same period of years that you depreciate the hardware. Additionally, if you buy the software as part of your purchase of all or a substantial part of a business, the software must generally be amortized over 15 years.
Software That’s Leased
You must deduct amounts you pay to rent leased software in the tax year they’re paid, if you’re a cash-method taxpayer, or the tax year for which the rentals are accrued, if you’re an accrual-method taxpayer. However, deductions aren’t generally permitted before the years to which the rentals are allocable. Also, if a lease involves total rentals of more than $250,000, special rules may apply.
Software That’s Developed
Some software is deemed to be “developed” (designed in-house or by a contractor who isn’t at risk if the software doesn’t perform). For tax years beginning before calendar year 2022, bonus depreciation applies to developed software to the extent described above. If bonus depreciation doesn’t apply, the taxpayer can either deduct the development costs in the year paid or incurred, or choose one of several alternative amortization periods over which to deduct the costs. For tax years beginning after calendar year 2021, generally the only allowable treatment is to amortize the costs over the five-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred.
If following any of the above rules requires you to change your treatment of software costs, it will usually be necessary for you to obtain IRS consent to the change.
We Can Help
Contact us with questions or for assistance in applying the tax rules for treating computer software costs in the way that is most advantageous for you.
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Tina Krugler, RTRP
D 715.384.1974
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More Resources from CPA-HQ |
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Payroll & Year-End Reporting Webinar
As an employer, you know that year-end payroll processing and reporting is a complex undertaking that adds to the stress of closing the books for the year. To help ensure a smooth, error-free year and get the latest information register for this webinar with Accounting Services Manager Debbie Denny.
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Year-End Gifts and the Gift Tax Annual Exclusion
Many people want to make gifts of cash and stocks to loved ones during the holidays and at year-end. If properly used, the annual exclusion allows you to give to family members and loved ones and reduce the size of your taxable estate, within limits. This article provides details.
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Selling Business Property? Know the Tax Effects
The sale of business or trade property can be subject to many rules, depending on the details. Factors that affect the taxability of the sale include the type of property, the primary use and how long the property was held. This article gives a rundown of the rules.
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