In this Edition
June 15, 2022
Can You Deduct the Costs of a Self-Managed Portfolio?
PODCAST: Accounting Software Packages
IRS Increases Mileage Rate for Remainder of 2022
How Start-up Costs of a New Business Affect Your Tax Return
Calculating Corporate Estimated Tax
Help When Needed: Apply the Research Credit Against Payroll Taxes
|
|
|
Can You Deduct the Costs of a Self-Managed Portfolio? |
|
Do you have significant investment-related expenses, including payment for financial service subscriptions, home office maintenance and clerical support? Under current tax law — specifically the 2017 Tax Cuts and Jobs Act — these expenses aren’t deductible through 2025 if they’re considered investment expenses to produce income. But they are deductible if they’re considered trade or business expenses.
For years before 2018, production-of-income expenses were deductible, but they were included in miscellaneous itemized deductions, which were subject to a 2%-of-adjusted-gross-income floor. (Unless Congress acts to extend them, these rules are scheduled to return after 2025.) If you do a significant amount of trading, you should know which category your investment expenses fall into, because qualifying for trade or business expense treatment is more advantageous now.
To be able to deduct your investment-related expenses as business expenses, you must be engaged in a trade or business. The U.S. Supreme Court held many years ago that an individual taxpayer isn’t engaged in a trade or business merely because the individual manages his or her own securities investments — regardless of the amount or the extent of the work required.
A Trader vs. An Investor
However, if you can show that your investment activities rise to the level of carrying on a trade or business, you may be considered a trader, who is engaged in a trade or business, rather than an investor, who isn’t. As a trader, you’re entitled to deduct your investment-related expenses as business expenses. A trader is also entitled to deduct home office expenses if the home office is used exclusively on a regular basis as the trader’s principal place of business. An investor, on the other hand, isn’t entitled to home office deductions since the investment activities aren’t a trade or business.
Since the Supreme Court decision, there has been extensive litigation on the issue of whether a taxpayer is a trader or investor. The U.S. Tax Court has developed a two-part test, both parts of which must be satisfied for a taxpayer to be considered a trader.
- The taxpayer’s trading is substantial (in other words, sporadic trading isn’t considered a trade or business), and
- The taxpayer seeks to profit from short-term market swings, rather than from long-term holding of investments.
Again, to pass this test, a taxpayer’s investment activities are considered a trade or business only if both parts one and two are satisfied.
Contact us if you have questions or would like to figure out whether you’re an investor or a trader for tax purposes.
|
|
|
|
Vince Schamber, CPA
D 920.337.4548
|
|
|
|
Accounting Software Packages
When a business is just starting, the owner is trying to juggle a lot of different things. One of the things that can be pushed to the background is the accounting. Many times, business owners are really good at running their business, but they are not as comfortable with the accounting part. A good accounting system can give the owner a lot of good and critical information.
|
|
IRS Increases Mileage Rate for Remainder of 2022 |
|
The IRS has announced an increase in the optional standard mileage rate for the final 6 months of 2022. Taxpayers may use the optional standard mileage rates to calculate the deductible costs of operating an automobile for business and certain other purposes.
For the final 6 months of 2022, the standard mileage rate for business travel will be 62.5 cents per mile, up 4 cents from the rate effective at the start of the year. The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents for the remainder of 2022, up 4 cents from the rate effective at the start of 2022. These new rates become effective July 1, 2022. The IRS provided legal guidance on the new rates in Announcement 2022-13.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022. The IRS normally updates the mileage rates once a year in the fall for the next calendar year. For travel from Jan. 1 through June 30, 2022, taxpayers should use the rates set forth in Notice 2022-03.
While fuel costs are a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.
The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute.
Midyear increases in the optional mileage rates are rare, the last time the IRS made such an increase was in 2011.
|
|
|
|
Rates 1/1 through 6/30/2022 |
|
Rates 7/1 through 12/31/2022 |
|
How Start-up Costs of a New Business Affect Your Tax Return |
|
Despite the COVID-19 pandemic, government officials are seeing a large increase in the number of new businesses being launched. The latest data available from the U.S. Census Bureau shows that for the period of June 2020 through June 2021, business applications were up 18.6%. The Bureau measures this by the number of businesses applying for an employer identification number.
Entrepreneurs often don’t know that many of the expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your federal tax bill.
How to Treat Expenses for Tax Purposes
If you’re starting or planning to launch a new business, keep these three rules in mind:
- Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
- Under the tax code, taxpayers can make a special election to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t go very far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
- No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to start earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity commence?
Be sure to keep detailed records and receipts for these costs, so that nothing falls through the cracks.
Eligible Expenses
In general, start-up expenses are those you make to:
- Investigate the creation or acquisition of a business,
- Create a business, or
- Engage in a for-profit activity in anticipation of that activity becoming an active business.
To qualify for a special election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.
To be eligible as an “organization expense,” an expense must be related to establishing a corporation or partnership. Examples of organization expenses include legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.
Plan Now
If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the election described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.
|
|
|
|
Nicole Malueg, CPA
D 920.684.2523
|
|
|
|
Tax Tip Tuesday - Video Short |
Section 121 Exclusion
In 30 seconds, we cover whether you qualify for the section 121 exclusion when you sell your home.
|
|
Calculating Quarterly Estimated Tax Payments |
|
The next quarterly estimated tax payment deadline is June 15 for individuals and businesses so it’s a good time to review the rules for computing corporate federal estimated payments. You want your business to pay the minimum amount of estimated taxes without triggering the penalty for underpayment of estimated tax.
Four Methods
The required installment of estimated tax that a corporation must pay to avoid a penalty is the lowest amount determined under each of the following four methods:
-
Under the current year method, a corporation can avoid the estimated tax underpayment penalty by paying 25% of the tax shown on the current tax year’s return (or, if no return is filed, 25% of the tax for the current year) by each of four installment due dates. The due dates are generally April 15, June 15, September 15 and January 15 of the following year.
-
Under the preceding year method, a corporation can avoid the estimated tax underpayment penalty by paying 25% of the tax shown on the return for the preceding tax year by each of four installment due dates. (Note, however, that for 2022, certain corporations can only use the preceding year method to determine their first required installment payment. This restriction is placed on a corporation with taxable income of $1 million or more in any of the last three tax years.) In addition, this method isn’t available to corporations with a tax return that was for less than 12 months or a corporation that didn’t file a preceding tax year return that showed some tax liability.
-
Under the annualized income method, a corporation can avoid the estimated tax underpayment penalty if it pays its “annualized tax” in quarterly installments. The annualized tax is computed on the basis of the corporation’s taxable income for the months in the tax year ending before the due date of the installment and assuming income will be received at the same rate over the full year.
-
Under the seasonal income method, corporations with recurring seasonal patterns of taxable income can annualize income by assuming income earned in the current year is earned in the same pattern as in preceding years. There’s a somewhat complicated mathematical test that corporations must pass in order to establish that their income is earned seasonally and that they therefore qualify to use this method. If you think your corporation might qualify for this method, don’t hesitate to ask for our assistance in determining if it does.
Also, note that a corporation can switch among the four methods during a given tax year. We can examine whether your corporation’s estimated tax bill can be reduced. Contact us if you’d like to discuss this matter further.
|
|
|
|
Colleen Scherpereel
D 262.404.2115
|
|
Help When Needed: Apply the Research Credit Against Payroll Taxes |
|
Here’s an interesting option if your small company or start-up business is planning to claim the research tax credit. Subject to limits, you can elect to apply all or some of any research tax credits that you earn against your payroll taxes instead of your income tax. This payroll tax election may influence some businesses to undertake or increase their research activities. On the other hand, if you’re engaged in or are planning to engage in research activities without regard to tax consequences, be aware that some tax relief could be in your future.
Here are some answers to questions about the option.
Why Is the Election Important?
Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Therefore, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, a wage-paying business, even a new one, has payroll tax liabilities. The payroll tax election is thus an opportunity to get immediate use out of the research credits that a business earns. Because every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that’s a big help in the start-up phase of a business — the time when help is most needed.
Which Businesses Are Eligible?
To qualify for the election a taxpayer:
- Must have gross receipts for the election year of less than $5 million
- Be no more than five years past the period for which it had no receipts (the start-up period).
In making these determinations, the only gross receipts that an individual taxpayer takes into account are from his or her businesses. An individual’s salary, investment income or other income aren’t taken into account. Also, note that neither an entity nor an individual can make the election for more than six years in a row.
Are There Limits on the Election?
Research credits for which a taxpayer makes the payroll tax election can be applied only against the employer’s old-age, survivors and disability liability — the OASDI or Social Security portion of FICA taxes. So the election can’t be used to lower 1) the employer’s liability for the Medicare portion of FICA taxes or 2) any FICA taxes that the employer withholds and remits to the government on behalf of employees.
The amount of research credit for which the election can be made can’t annually exceed $250,000. Note too that an individual or C corporation can make the election only for those research credits which, in the absence of an election, would have to be carried forward. In other words, a C corporation can’t make the election for research credits that the taxpayer can use to reduce current or past income tax liabilities.
The above Q&As just cover the basics about the payroll tax election. And, as you may have already experienced, identifying and substantiating expenses eligible for the research credit itself is a complex area. Contact us for more information about the payroll tax election and the research credit.
|
|
|
|
Matt Cantlon, CPA
D 507.252.6672
|
|
More Resources from CPA-HQ |
|
Inflation Enhances the 2023 Amounts for Health Savings Accounts
If your business provides Health Savings Accounts to employees, you know they have many benefits. Here are a few of them, along with the inflation-adjusted amounts for 2023. Hint: They’re going up more than they have in recent years due to high inflation.
|
|
To Get an “Early” Refund, Adjust Your Withholding
Everyone loves a juicy tax refund, but why wait to receive the money? By adjusting one’s withholding and/or estimated tax payments, a taxpayer can enjoy that money throughout the year. This article lists some circumstances under which adjustments are particularly advisable and explains how to make changes.
|
|
Businesses May Receive Notices About Information Returns That Don't Match IRS Records
If your business has independent contractors or makes other payments to customers or others, you probably file 1099 forms with the IRS. The tax agency is currently sending out notices about these forms to some taxpayers.
|
|
|
|
|
|
|
