IRS Offers Disaster Protection Tips
Salvage current tax relief
So far this year, we have witnessed disasters caused by storms, tornados, wildfires and other forces of nature. And the year is only half over. Do not think that you are immune from danger.
Saving grace: If you suffer a personal loss in a federally-designated disaster area, at least you may be able to claim a casualty loss deduction. Although the Tax Cuts and Jobs Act (TCJA) generally suspends deductions for casualty losses from 2018 through 2025, you can still deduct disaster-area losses, subject to limits. Only the excess above 10% of adjusted gross income (AGI) is deductible after subtracting $100 per casualty.
Business losses may also be deductible without regard to these limits. The TCJA did not affect business casualty losses.
Recently, the IRS posted five tips to help you protect important financial and tax information as part of a comprehensive plan.
1. Keep key documents safe. Original documents such as tax returns, Social Security cards, birth certificates and deeds should be placed inside a waterproof container in a safe space. You are encouraged to make copies of these important documents and store them in another location such as a safe deposit box or with a trusted person who lives in a different area. Also, scanned documents can be stored on a flash drive for easy portability.
2. Create a record of valuables and equipment. All property, especially high-value items, should be recorded. A simple list with current photos or videos may also help support claims for insurance or tax benefits after a disaster.
3. Reconstruct records. Reconstructing or replacing records after a disaster may be required for tax purposes, claiming federal assistance or insurance reimbursement. The more accurate the loss estimate, the more loan and grant money may be available.
4. Employers should check fiduciary bonds. Employers using payroll service providers should check if the provider has a fiduciary bond in place that can protect the employer in the event of default by the payroll service provider. The IRS reminds employers to rely on expert professionals.
5. Take advantage of postponements. After a major disaster or an emergency measure has been declared, the IRS frequently postpones tax filing and payment deadlines for taxpayers who reside in or have a business in certain counties affected by the disaster. The IRS also provides details on states and counties that have been issued relief on its disaster relief page.
You can find more valuable information relating to natural disaster losses in IRS publications, including worksheets for various purposes. Visit the IRS website, www.irs.gov, for more details.
Finally, be aware of this special tax relief. If you suffer a disaster-area loss in 2023, you do not have to wait until you file your 2023 return—in 2024—to realize the tax benefits. You can claim the loss on the return for the year preceding the year the casualty event occurs, subject to the usual limits. This may require you to file an amended 2022 return.
Consult with your professional tax advisors concerning your personal situation.
Investigating the R&D Tax Credit
Rules benefit qualified businesses
How can your business separate itself from the pack in today’s competitive environment? It helps to be on the cutting-edge of the latest technology. To this end, your company may conduct research activities to improve existing products and cultivate new ones. Furthermore, if certain requirements are met, the business may qualify for a sizeable research and development (R&D) tax credit for its expenditures.
Background: The R&D credit is generally equal to 20% of the amount of qualified research expenses for the year exceeding a base amount. The base amount is a fixed-base percentage (not to exceed 16%) of average annual receipts for the prior four years. In no case, however, can it amount to less than 50% of the annual qualified research expenses.
Alternatively, a business can elect to use a simplified credit based on 14% of the amount by which qualified expenses exceed 50% of the average for the three previous tax years.
However, the R&D credit is not automatic. The following three requirements must be met to claim the credit.
• The expense must qualify as a “research and experimentation expenditure” under Section 174 of the tax code. Such expenses include in-house wages and supplies attributable to qualified research; certain time-sharing costs for computer use in qualified research; and 65% of contract research expenses (i.e., amounts paid to outside contractors in the U.S. for conducting qualified research).
• The expense must relate to research undertaken for the purpose of discovering information that is technological in nature and the application of which is intended to be useful in developing a new or improved business component.
• Substantially all of the activities of the research constitute elements of a process of experimentation that relates to a new or improved function, performance, reliability or quality.
Note that the same or similar expenses may qualify for tax benefits under Section 174. Prior to recent legislation, a business could claim a current deduction for expenses not allocated to the R&D credit. Beginning in 2023, Section 174 expenses must be capitalized and amortized over a five-year period.
Special rule: A qualified small business can make a credit election against up to $500,000 of payroll taxes if it had less than $5 million in gross receipts over the last five years and zero gross receipts before the five-year period. Essentially, this limits the payroll tax break to start-ups or businesses that have been around for less than five years.
Previously, the maximum allowable offset was $250,000, but the Inflation Reduction Act (IRA) doubled it to $500,000, beginning in 2023.
When a business makes the election, it applies the credit amount against the Social Security tax component of federal payroll tax. For 2023, the employer’s share of Social Security tax is 6.2% of each employee’s wages up to the $160,200 wage base.
Finally, a business may also qualify for tax breaks for research activities on a state tax level.
In summary: The R&D tax credit is an important incentive for businesses of all sizes. Coordinate your efforts to maximize the tax benefits available under current law. Your professional tax advisors can provide assistance.
Q’s and A’s Before Retirement
Answer these key questions first
Are you nearing retirement or contemplating calling it quits early? In either event, this requires a thorough analysis of your situation. Although everyone’s circumstances are different, here are several key questions you should be asking yourself—and answering.
Q. Can I afford to retire?
A. This is often the ultimate question, but it should likely be addressed first. Retirement planning is complex, but things often boil down to whether you have enough income, after subtracting your living expenses, to live comfortably. Take the time now to project future costs such as housing, entertainment and travel, health care, taxes and so on. Add up estimated amounts to be generated by assets such as investments in securities and real estate, retirement plan accounts and IRAs, Social Security benefits and others. Clearly, if your expenses will significantly outpace your income, you are not in the best position to retire.
Q. Do I have any debt?
A. If you are overburdened by debt, reducing or eliminating this obligation should be one of your top priorities. Ongoing debts could significantly erode your retirement savings if you are not careful. In some cases, it might adversely affect your living conditions. If you cannot pay off debts soon, consider a consolidation that enables you to benefit from a reasonable interest rate over time.
Q. What is my investment allocation?
A. The time to begin shifting assets to meet your retirement goals is before you actually retire. Develop an overall plan designed to provide sufficient retirement income without incurring more risk than you would like to assume. This requires a careful balancing act with the assistance of your financial advisors. Review the plan periodically to ensure it continues to meet your needs and make any adjustments that are necessary.
Q. When should I apply for Social Security?
A. This is a tricky proposition and usually requires a thorough analysis. Generally, you can begin collecting benefits at age 62, but at a reduced amount from what you would receive at “full retirement age” (FRA). FRA varies according to your date of birth. For example, it is 67 years old for someone turning age 62 in 2023. Alternatively, you can receive a bigger benefit if you postpone your application until age 70. Crunch the numbers for your situation.
Q. What will I do in retirement?
A. This can be a “wild card” in retirement planning and leads back to the first question. Do you intend to travel extensively or enjoy other expensive pursuits? What about downsizing your home and/or moving to a different climate? Do you expect to transfer part of your wealth to the younger generation? Your vision of what your retirement will be can have a significant impact on your decision to retire and when.
Q. Should I meet with my financial and tax advisors?
A. For most people, the answer is an unequivocal “yes.” Your professional advisors can help you set your objectives, fine-tune your plans and help with important decisions involving taxes, retirement account options, investments and the like. Do not delay.
The Basic Tools of Estate Planning
How to address your personal needs
It is a common misconception that estate planning only applies to extremely wealthy people. That simply is not true. If you take time to add up the value of your personal assets, you may be surprised at what you want to protect for your heirs.
Fortunately, proper planning can reduce or eliminate estate tax, while addressing any special needs. Here are some of the basic estate planning tools you may utilize.
Simple will: A simple will gives most of your property to one or two persons (e.g., your spouse or your parents) and makes some smaller bequests to some others. At the very least, you should have a simple will so that you can decide how your assets will be transferred at your death. If you do not have a will, state law generally controls who receives your property.
Complex will: As the name implies, a complex will involves more complicated matters while offering greater flexibility than a simple will. For example if your children are minors (or one or more child is disabled), a complex will may be used to establish a trust for their benefit. The trustee pays out funds to the beneficiaries as needed for healthcare expenses, education, etc. Similarly, a complex will may also be used to make charitable bequests.
Living trust: A living trust allows you to pass assets to your beneficiaries without going through the probate process. This may save time and money. If you do implement a living trust, you may arrange to have assets passing under your will “pour over” into the trust.
Irrevocable life insurance trust (ILIT): If properly structured, this trust enables you to transfer vast amounts of wealth free of estate or gift tax. Simply put, you transfer a life insurance policy to the trust. Each year you put money in the ILIT to pay the premiums. Result: The proceeds are not subject to federal estate tax upon your death (unless you die within three years of the transfer of the policy to the trust).
Other trusts: You may design other trusts to take advantage of the current generous estate and gift tax provisions in the law. For example, the unified estate and gift tax exemption for a decedent dying in 2023 is $12.92 million (but is scheduled to drop to $5 million after 2025). In addition, trusts may be used for various other purposes, such as shielding assets from creditors or an ex-spouse. Consult with an experienced estate planning expert.
Power of attorney: A power of attorney can be established for someone to act on your behalf if you are incapacitated. A “durable” power of attorney remains intact if you are incapacitated. This document should be coordinated with a living will and other health care directives that can provide guidance in medical emergencies.
Finally, remember that these are just brief descriptions. Have your situation analyzed to determine which estate planning devices should be included in your toolbox.
Beware of False ERC Claims
The IRS is targeting false claims made for the Employee Retention Credit (ERC) initially offered during the pandemic. Specifically, it has announced is stepping up efforts to audit employers as aggressive promoters continue to offer fraudulent refunds. This type of scheme was recently named to the list of the Dirty Dozen tax scams for 2023.
Typically, promoters charge a large upfront fee or one that is based on the amount of the reputed refund. Also, they may not inform you that wage deductions on the federal income tax return for the business must be reduced by the credit amount.
Seek advice from an experienced and reputable firm as to whether your business is entitled to an ERC refund or if it faces exposure to an audit.
Facts and Figures
Timely points of particular interest
IRS Funding—The Inflation Reduction Act (IRA) signed into law last year allocates $80 billion in funding over ten year to the IRS for enforcement activities. But the new debt ceiling agreement in June takes back $1.4 billion right away, among other changes. The exact nature of the rollback has not been specified, but it will not affect IRS efforts to modernize or improve taxpayer services. Watch out for future developments in this area.
What’s in a Name?—If you are changing the name of your small business, you must notify the IRS. The specific steps required may depend on several factors. For example, if your Employer Identification Number (EIN) was recently assigned and filing liability has yet to be determined, you must send the name change request to the IRS address where the return is filed. In some cases, you may need a new EIN. Your professional tax advisors can provide assistance.