Tax Saving Tips

$80 Billion to the IRS: What It Means for You You may have noticed that the IRS is in a bad way. It has a backlog of millions of unprocessed paper tax returns, and taxpayers can’t get through to the agency on the phone. Congress noticed and took action by passing a massive funding of the IRS in the recently enacted Inflation Reduction Act. Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander The IRS will get an additional $80 billion over the next decade. This includes $35 billion for taxpayer services, operations support, and business systems. Among other things, the IRS plans to use these funds to update its antiquated IT systems (some of which date back to the 1960s), improve phone service, and speed up the processing of paper tax returns. Despite what you may have heard in the media, the IRS will not expand by 87,000 new employees. It will still be smaller than it was 30 years ago. It may grow by 20,000 to 30,000 workers over the next decade, and the number of revenue agents could increase to 17,000 by 2031—over twice as many as today. The IRS will have an additional $45 billion to spend on enforcement. Treasury Secretary Janet Yellen has promised that IRS audit rates will remain at “historical levels” for taxpayers earning less than $400,000 annually. Audit rates will rise for taxpayers earning $400,000 or more per year. If you’re in this group, it’s wise to plan ahead to avoid trouble with a beefed-up IRS. You should keep complete and accurate records and file a timely tax return. Of course, this is something you should be doing anyway. Here are a few special areas of concern: Section 1031 Exchanges vs. Qualified Opportunity Zone Funds Have you sold, or are you planning to sell, commercial or rental property? To avoid immediately paying capital gains tax on your profit, you have options: With a Section 1031 exchange, you sell your property and invest all the proceeds in another like-kind replacement property of equal or greater value. Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander With a qualified opportunity fund, you don’t acquire another property. Instead, you invest in a corporation, partnership, or LLC that pools money from investors to invest in property in areas designated by the government as qualified opportunity zones. Most qualified opportunity funds invest in real estate. Which is better? It depends on your goals. There is no one right answer for everybody. A Section 1031 exchange is preferable to a qualified opportunity fund investment if your goal is to hold the replacement property until death, when your estate will transfer it to your heirs. They’ll get the property with a basis stepped up to current market value, and then they can sell the property immediately, likely tax-free. In contrast, your investment in a qualified opportunity fund requires that you pay your deferred capital gains tax with your 2026 tax return. That’s the bad news (only four years of tax deferral). The good news: if you hold the qualified opportunity fund for 10 years or more, there’s zero tax on the appreciation. In contrast, if you sell your Section 1031 replacement property, you pay capital gains tax on the difference between the original property’s basis and the replacement property’s sale amount. And if you’re looking to avoid the headaches and responsibilities that come with ownership of commercial or rental property, the qualified opportunity fund does that for you. If you’re looking for liquidity, the qualified opportunity fund gives you that because you need to invest only the capital gains to defer the taxes. With the Section 1031 exchange, you must invest the entire sales proceeds in the replacement property to avoid any capital gains tax. Of course, you want your investment to perform. Make sure to do your due diligence, whatever your choice. Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander Use In-Kind RMDs to Avoid Selling Retirement Account Assets Are you 72 or older? If so, you must take a required minimum distribution (RMD) from your traditional IRA, SEP-IRA, or SIMPLE IRA by the end of the year. If you turn 72 this year, you can wait until April 1 of next year to take your first RMD—but you’ll also have to take your second RMD by the end of that year. Your RMD is a percentage of the total value of your retirement accounts based on your age and life expectancy. The older you are, the more you must distribute. But here’s the kicker: your RMD must be based on the value of your retirement accounts as of the end of the prior year—December 31, 2021, in the case of 2022 RMDs. So you may have a high RMD due this year even though the value of your retirement portfolio has declined, perhaps substantially. Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander If your retirement accounts consist primarily of stocks, bonds, or other securities, you don’t have to sell them at their current depressed levels and distribute the cash to yourself to fulfill your RMD. There’s another option: do an in-kind distribution. With an in-kind RMD, you transfer stock, bonds, mutual funds, or other securities directly from your IRA to a taxable account, such as a brokerage account. No selling is involved. The amount of your RMD is the fair market value of the stock or other securities at the time of the transfer. Furthermore, you still have to pay income tax on the distribution at ordinary income rates. To avoid selling any part of the stock or other securities you’ve transferred, you’ll have to come up with the cash to pay the tax from another source, such as a regular bank account. With an in-kind distribution, not only do you avoid selling stocks in a down market, but the transfer may also reduce the taxes due on any future appreciation when you eventually do sell. This is because when you do an in-kind

Year-End General Business Income Tax Deductions The purpose of this letter is to get the IRS to owe you money. Of course, the IRS will not likely cut you a check for this money (although, in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes. Here are six powerful business tax deduction strategies you can easily understand and implement before the end of 2022. Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander You just have to thank the IRS for its tax-deduction safe harbors. IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS. Under this safe harbor, your 2022 prepayments cannot go into 2023. This makes sense because you can prepay only 12 months of qualifying expenses under the safe-harbor rule. For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums. Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Friday, December 30, 2022, you mail a rent check for $36,000 to cover all of your 2023 rent. Your landlord does not receive the payment in the mail until Tuesday, January 3, 2023. Here are the results: You deduct $36,000 in 2022 (the year you paid the money).The landlord reports taxable income of $36,000 in 2023 (the year he received the money). You get what you want—the deduction this year. The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable. Here is one rock-solid, straightforward strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2022. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.) Customers, clients, and insurance companies generally don’t pay until billed. Not billing customers and clients is a time-tested tax-planning strategy that business owners have used successfully for years. Example. Jake, a dentist, usually bills his patients and the insurance companies at the end of each week. This year, however, he sends no bills in December. Instead, he gathers up those bills and mails them the first week of January. Presto! He postponed paying taxes on his December 2022 income by moving that income to 2023. With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31 and get a deduction for 100 percent of the cost in 2022. Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles). If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities. If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation. But suppose you operate your business as a corporation and are the personal owner of the credit card. In that case, the corporation must reimburse you if you want the corporation to realize the tax deduction, which happens on the reimbursement date. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31. If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL. If you are starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing successful business. You used to be able to carry back your NOL two years and get immediate tax refunds from prior years, but the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year. What does this all mean? Never stop documenting your deductions, and always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss. In the CARES Act, Congress finally fixed the qualified improvement property (QIP) error that it made when enacting the TCJA. QIP is any improvement made by you to the interior portion of a building you own that is non-residential real property (think office buildings, retail stores, and shopping centers)—if you place the improvement in service after the date you place the building in service. The big deal: QIP is not real property that you depreciate over 39 years. QIP is 15-year property, eligible for immediate deduction using either 100 percent bonus depreciation or Section 179 expensing. To get the QIP deduction in 2022, you must place the QIP in service on or before December 31, 2022. Planning note. If you have QIP property on an already filed 2019 return that you did not amend, it’s on that return as 39-year property. You need to fix that—and likely add some cash to your bank account by making the fix. Last-Minute Year-End Tax Strategies for Your Stock Portfolio When you take advantage of the tax code’s offset game, your stock market portfolio can represent a little gold mine of opportunities to reduce your 2022 income taxes. The tax code

Say Goodbye to 100 Percent Bonus Depreciation All good things must come to an end. On December 31, 2022, one of the best tax deductions ever for businesses will end: 100 percent bonus depreciation. Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander Since late 2017, businesses have used bonus depreciation to deduct 100 percent of the cost of most types of property other than real property. But starting in 2023, bonus depreciation is scheduled to decline 20 percent each year until it reaches zero in 2027. For example, if you purchase $100,000 in equipment for your business and place it in service in 2022, you can deduct $100,000 using 100 percent bonus depreciation. If you wait until 2023, you’ll be able to deduct only $80,000 (80 percent). Does this mean you should rush out and purchase business property before 2022 ends to take advantage of the 100 percent bonus depreciation? Not necessarily. For many businesses, an alternative is not going away: IRC Section 179 expensing. Both IRC Section 179 expensing and bonus depreciation allow business owners to deduct in one year the cost of most types of tangible personal property, plus off-the-shelf computer software. Both can be used for new and used property acquired by purchase from an unrelated party. Both also can be used to deduct various non-structural improvements to non-residential buildings after they are placed in service. Moreover, the two deductions aren’t mutually exclusive. You can apply Section 179 expensing to qualifying property up to the annual limit and then claim bonus depreciation for any remaining basis. Starting in 2023, when bonus depreciation will be less than 100 percent, any basis left after applying Section 179 and bonus depreciation will be deducted with regular depreciation over several years. But there are some significant differences between the two deductions: – Section 179 expensing is subject to annual dollar limits that don’t apply to bonus depreciation. But the limits are so large that they don’t affect most smaller businesses.– Section 179 expensing requires more than 50 percent business use to qualify for and retain the Section 179 deduction. For bonus depreciation, you face the more than 50 percent business use requirement only for vehicles and other listed property.– Unlike bonus depreciation, Section 179 expensing is limited to your net taxable business income (not counting the Section 179 deduction) and cannot result in a loss for the year.– The 2022 Section 179 deduction is limited to $27,000 for SUVs. There is no such limit on bonus depreciation.– You can use bonus depreciation to deduct land improvements with a 15-year class life, such as sidewalks, fences, driveways, landscaping, and swimming pools. Generally, there is no great need to purchase and place the property in service by the end of 2022 to take advantage of 100 percent bonus depreciation. But there can be exceptions. For example, if you own a rental property and want to make substantial landscaping or other land improvements, you’ll get a larger one-year depreciation deduction using 100 percent bonus depreciation in 2022 than if you wait until 2023, when the bonus will be only 80 percent. Avoid These Mistakes When Converting to an S Corporation At first glance, the corporate tax rules for forming an S corporation appear simple. They are not. Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander Basic Requirements Here is what your business must look like when it operates as an S corporation: – The S corporation must be a domestic corporation.– The S corporation must have fewer than 100 shareholders.– The S corporation shareholders can be only people, estates, and certain types of trusts.– All stockholders must be U.S. residents.– The S corporation can have only one class of stock. Simple, right? But what often appears simple on the surface is not so simple at all. Don’t Forget Your Spouse If you live in a community property state, your spouse by reason of community property law may be an owner of your corporation. This can be true whether or not your spouse has stock in his or her own name. If your spouse is an owner, your spouse has to meet all the same qualification requirements you do. This can raise two issues: – If your spouse does not consent to the S corporation election on Form 2553, your S corporation is not valid.– If your spouse is a non-resident alien, your S corporation is not valid. Converting an LLC to an S Corporation Method 1. To convert your LLC to an S corporation for tax purposes, you can use a method we call “check and elect.” It’s easy—just two steps. First, you “check” the box to make your LLC a C corporation. Then, you “elect” for the IRS to tax your C corporation as an S corporation. Here’s how you take the two steps: – File IRS Form 8832 to check the box that converts your LLC to a C corporation.– Then file Form 2553 to convert your C corporation into an S corporation. Method 2. Your LLC can skip the C corporation step and directly elect S corporation status by filing Form 2553. Loans That Terminate S Corporation Status Don’t make a bad loan to your S corporation. With the wrong type of loan, you enable the IRS to treat that loan as a second class of stock that disqualifies your S corporation. Small loans are okay. If the loan is less than $10,000 and the corporation has promised to repay you in a reasonable amount of time, you escape the second-class-of-stock trap. Larger loans are more closely scrutinized. If you have a larger loan, your loan escapes the second-class-of-stock trap if it meets the following requirements: – The loan is in writing.– There is a firm deadline for repayment of the loan.– You cannot convert the loan into stock.– The repayment instrument fixes the interest rate so that the rate is outside your control. Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander Buying an Electric Vehicle? Know

Earn 9.62 Percent Tax-Deferred Interest with Series I Bonds Inflation is seldom a good thing. But when it comes to investing, the U.S. Treasury Department has an inflation opportunity that’s downright amazing. You can buy bonds that pay 9.62 percent interest—tax-deferred—with no downside risk, and with no state or local income taxes when you cash them in. Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander If you buy now, you earn that 9.62 percent for six months, guaranteed. At the end of six months, the Treasury Department – adds the interest you earned to your principal, and– pays interest on your new principal balance at the new rate it will determine this year, on November 1. Example. You buy $10,000 of Series I bonds on September 24. You earn 9.62 percent for six months for a total of $481 ($10,000 x 9.62 percent ÷ 2). On March 24, your principal balance is $10,481 ($10,000 + 481). Let’s say Treasury sets the November 1 interest rate at 9 percent. During the six months from March 24 to September 24, 2023, you earn interest at 9 percent on $10,481. Now, at the end of a full year, you have $10,953 in your TreasuryDirect I bond account. The big deal with an I bond is fourfold: – You can’t lose your principal (e.g., your $10,953 in the example above can’t go down).– Interest rates on I bonds track with the consumer price index inflation rate, which has been high.– You earn tax-deferred compound interest until you cash in.– The interest is exempt from state and local income taxes. You have much to like with the Series I bond. And there’s little to dislike. Perhaps the biggest dislike is the $10,000 limit on I bond purchases, but you can use your business entities, trusts, gifts, and even your living trust to make purchases of I bonds and create a much higher limit than $10,000. With the gifting strategy, you can have more than one gift box per donee, so you have opportunity there too. The biggest deal with the I bond is that it carries no downside risk. It can’t go below its latest redemption value, and the interest rate can’t go below zero. The one thing you need to pay attention to is the interest rate. It changes with inflation. The Fed wants to lower inflation to its target 2 percent. For most people, this means that the I bond could be a short-term investment—say, one to five years. But think in the short term now. Where else can you earn 9.62 percent tax-deferred interest, risk-free? New and Improved Energy Tax Credits for Homeowners The president signed the Inflation Reduction Act into law on August 16, 2022. It contains some valuable tax credits for homeowners. When it comes to taxes, nothing is better than a tax credit since it is a dollar-for-dollar reduction in the taxes you must pay (unlike a tax deduction that only reduces your taxable income). In other words, a $1,000 credit saves you $1,000 in taxes. The new law extends and expands three tax credits intended to encourage homeowners to make their homes more energy efficient and to facilitate the use of electric vehicles. Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander Energy Efficient Home Improvement Credit The new law creates the 2023 Energy Efficient Home Improvement Credit that helps homeowners pay for various types of energy efficiency improvements, including – exterior windows, skylights, and doors;– home insulation;– heat pumps, water heaters, central air conditioners, furnaces, and hot water boilers;– biomass stoves and boilers; and– electric panel upgrades. The old credit contained a tiny $500 lifetime cap. Lifetime caps are gone beginning in 2023. Instead, the new law gives you a $1,200 annual cap along with specific caps on some improvements. But overall, you can perform many energy efficiency projects over several years and collect a credit each year. Residential Clean Energy Credit Most taxpayers earn the Residential Clean Energy Credit by installing solar. Two good things here. First, the new law extends the credit through 2034. Second, the new law increases the credit from 26 percent to 30 percent for eligible property placed in service in 2022 through 2032. There is no annual or lifetime cap on this credit. The average solar project cost on a home is over $20,000, so this credit can save you more than $6,000. You can also apply this credit to the cost of storage batteries, solar water heaters, geothermal heat pumps, small residential wind turbines, and residential fuel cells. Home Electric Vehicle Charger Credit The new law extends through 2032 the tax credit for installing a home electric charger. The amount of credit remains the same: a non-refundable credit equal to 30 percent of the cost of a home charger, capped at $1,000. But starting in 2023, the credit will be available only for homeowners who live in low-income or rural areas. Claiming the ERC When You Own Multiple Entities Do you qualify for the employee retention credit (ERC)? Did you claim it? It’s not too late. You can still amend your 2020 and 2021 payroll tax returns. Remember, this can be worth up to $5,000 per employee in 2020 and up to $7,000 per employee per quarter for the first three quarters of 2021, for a 2021 total of $21,000 ($26,000 per qualifying employee for 2020 and 2021 combined). Example. Let’s say you have 10 employees who fully qualify for the credit. That’s a $260,000 tax credit (think cash): ($5,000 + $7,000 + $7,000 + $7,000) x 10 = $260,000. Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander Who Must Aggregate Businesses? When you own more than one entity, you face special rules when it comes to the ERC. And you don’t have to own the other entity entirely to face the special rules. Here are just a few examples of who has to aggregate businesses for purposes of the ERC: – Howard operates his dental practice

Claim Your 2020 and 2021 ERC Now (Yes, in 2022) During much of 2020 and 2021, you may have qualified for the Employee Retention Credit (ERC). Lawmakers created this tax credit in response to the COVID-19 pandemic. With the ERC, you found (or could find) tax credits of up to $26,000 per employee. That’s a lot. With 10 employees, that’s $260,000. Key point. If you have not claimed the ERC, you can amend your 2020 and 2021 payroll tax returns for the credit. (Amending the payroll is not difficult—so no sweat on that score.) Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander Three Ways to Qualify – Decline in gross receipts (on a quarterly basis, by more than 50 percent in 2020 compared with 2019, and by more than 20 percent in 2021 compared with 2019)– A COVID-19 government order that caused a full or partial shutdown (think physical space)– A COVID-19 government order that caused more than a nominal effect (think modification of activity) Two Types of ERC Qualifications: Receipts and Government Orders First, if you can qualify for the ERC under the gross receipts test, go that route. It’s easy to prove. And you get the ERC for the full quarter. With the shutdown or modification because of a government order, you get the ERC only for the days that you suffered a full or partial suspension or suffered more than a nominal effect on your business. For example, if you suffered for 27 days, you can qualify for the credit for those 27 days. If you can’t qualify under the 50 percent or 20 percent decline in gross receipts test, your only alternative is the government order. What Government Order Creates the ERC for You? If you can establish that your business was fully or partially suspended because of a COVID-19 federal, state, or local government order, you are eligible on a day-by-day basis for the ERC during those periods of full or partial suspension. Given the possibility of tax credits equal to $5,000 per employee in 2020 and $21,000 per employee in 2021, this is worth pursuing. Remember 2020 and 2021. It’s hard to think that your business did not suffer due to a federal, state, or local government order during this COVID-19 pandemic. Even if you are an essential business, you likely suffered to some degree. Here’s a short list of how a government order could have caused your full or partial shutdown: – You had to limit your hours of operation.– You had to temporarily shut down operations.– You had to close your workplace to some or all of your employees.– Your employees were subject to a curfew and could not work during normal work hours.– Your business had to shut for periodic cleaning and disinfecting.– The government order caused a supply chain disruption that caused you to cut back operations. Full or Partial Shutdown Safe Harbor You likely have no trouble identifying the full shutdown caused by a federal, state, or local government order. One thing to remember, as we mentioned before: when you qualify for the ERC under the full or partial shutdown, you earn the ERC only for the shutdown period. To determine if your business suffered a partial suspension of operations from a government order, you need to have had more than a nominal portion of your business suspended. The question follows: “What is a nominal portion?” Say thanks to the IRS. Rather than rely on facts and circumstances, you can rely on the IRS safe-harbor 10 percent definition of nominal portion. It works like this. The effect of the government order is deemed to constitute more than a nominal portion of your business operations if either – the gross receipts from that portion of the business operations are not less than 10 percent of the total gross receipts (both determined using the gross receipts for the same calendar quarter in 2019), or– the hours of service performed by employees in that portion of the business are not less than 10 percent of the total number of hours of service performed by all employees in the employer’s business (both determined using the number of hours of service performed by employees in the same calendar quarter in 2019). Example. A 2020 government order requires Sam to shut down his bar and restaurant to sit-down service. Sam looks at his 2019 quarterly results and finds that his sit-down service was 73 percent of his gross receipts for that quarter. During the 61 days that Sam was shut down by this government order, he qualifies for the ERC. The full or partial shutdown is about a physical space change. You can also qualify for the ERC if the government order caused a modification to your business. Nominal-Effect Safe Harbor for a Modification to Your Business Unlike the partial shutdown, where you can identify affected operations by physical space, the nominal-effect safe harbor comes into play when there’s a modification required by a federal, state, or local COVID-19 governmental order that has more than a nominal effect on your business operations. For example: – The government order limited your use of the physical space (e.g., keeping people and tables six feet apart).– The government order limited the size of gatherings, which affected your business (e.g., no more than 10 people in the store). Here, you are faced with a facts-and-circumstances situation. But again, you can thank the IRS for another safe harbor. The IRS deems that the federal, state, or local COVID-19 government order had a more-than-nominal effect on your business if it reduced your ability to provide goods or services in the normal course of your business by not less than 10 percent. Example. Linda’s restaurant had to reduce its dining capacity from 100 to 60 patrons because of a government order. For this period, Linda qualifies for the ERC because she suffered more than a 10 percent reduction in the restaurant’s ability to service customers. Earn 9.62 Percent Tax-Deferred with

Self-Employment Tax Basics If you own an unincorporated business, you likely pay at least three different federal taxes. In addition to federal income taxes, you must pay Social Security and Medicare taxes, also called the self-employment tax. Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander Self-employment taxes are not insubstantial. Indeed, many business owners pay more in self-employment taxes than in income tax. The self-employment tax consists of These amount to a 15.3 percent tax, up to the $147,000 Social Security tax ceiling. If your self-employment income is more than $200,000 if you’re single or $250,000 if you’re married filing jointly, you must pay a 0.9 percent additional Medicare tax on self-employment income over the applicable threshold for a total 3.8 percent Medicare tax. You pay the self-employment tax if you earn income from a business you own as a sole proprietor or single-member LLC, or co-own as a general partner in a partnership, an LLC member, or a partner in any other business entity taxed as a partnership. (There is an exemption for limited partners.) You don’t pay self-employment tax on personal investment income or hobby income. For example, you don’t pay self-employment tax on profits you earn from selling stock, your home, or an occasional item on eBay. The tax code bases your self-employment tax on 92.35 percent of your net business income.That means your business deductions are doubly valuable since they reduce both income and self-employment taxes. In contrast, personal itemized deductions and “above-the-line” adjustments to income don’t decrease your self-employment tax. Some types of income are not subject to self-employment tax at all, including You calculate your self-employment taxes on IRS Form SE and pay them with your income taxes, including your quarterly estimated taxes. Self-Employment Taxes for Partners and LLC Members Here’s a question: Does a member of a limited liability company (LLC) or a partner in a partnership have to pay self-employment taxes on the member’s or partner’s share of the entity’s income? Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander Incredibly, the answer is not always clear. If you are a general partner in a general partnership, you must pay self-employment tax on your entire distributive share of the ordinary income earned from the partnership’s business. General partners also must pay self-employment tax on any guaranteed payments for services rendered to the partnership. Partnerships generally are not required to pay guaranteed payments to the partners. Guaranteed payments are like employee salaries; the partnership pays them without considering the partnership’s income. They are often incorrectly called “partner salaries.” If you’re a limited partner in a limited partnership, you don’t pay self-employment tax on your share of the partnership’s profits. But you do pay self-employment tax on any guaranteed payments you receive. That’s all well and good. But what about LLCs? They are the most popular business entity in the U.S. today, with an estimated count of 21 million. It is not always clear when LLC members (owners) pay self-employment tax. LLCs are state law entities not recognized for federal tax purposes. In other words, they are always taxed as something else. The tax code taxes the single-member LLCs as a sole proprietorship unless the owner elects taxation as a corporation (which is rare). Thus, owners of single-member LLCs file Schedule C and pay self-employment tax on their net profit. It couldn’t be simpler. LLCs with multiple members are treated as partnerships for tax purposes unless they elect taxation as a corporation. If a multi-member LLC is taxed as a partnership, should its members be treated as general or limited partners? Under proposed IRS regulations:  Fortunately, you don’t have to follow the proposed regulations. The IRS has not finalized them and says it won’t enforce them. You can look at U.S. Tax Court rulings instead. The leading case says an LLC owner may be treated as a limited partner only if he is a passive investor who does not actively participate in the LLC business. New 62.5 Cents Mileage Rate The IRS noticed that average gas prices across the United States exceeded $5.00 a gallon and took action. Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander Small businesses that qualify to use and do use the standard mileage rate can deduct 62.5 cents per business mile from July 1 through December 31, 2022. That’s up 4 cents a mile. This brings up a practical question: what do you do if you track business mileage using the three-month sample method? Three-Month Sample Basics As a reminder, here are the basics of how the IRS describes the three-month test: According to this IRS regulation, her three-month sample is adequate for this taxpayer to prove her 75 percent business use. Sample-Method Solution to New July 1 Mileage Rate To use the sample rate, you need to prove that your vehicle use is about the same throughout the year. Your invoices and paid bills prove the mileage part, and your appointment book can add creditability to consistent business and personal use. Keep in mind that the sample is just that—a sample—it’s pretty exact for the three months but not that exact for the year, although it must adequately reflect the business mileage for the year. If you have a good three-month sample, you take your business mileage for the year and apply the 58.5 cents to half the mileage and the 62.5 cents to the remaining half to find your deductions. For example, say you drove 20,000 business miles for the year. Your deduction would be $12,100 (10,000 x 58.5 cents + 10,000 x 62.5 cents). Mileage Record for the Full Year If you have a mileage record for the entire year, no problem. Your record gives you the mileage for the first six months and the last six months. Paying Your Child: W-2 or 1099? Here’s a question I received from one of my clients: “I will hire my 15-year-old daughter to work in my single-member LLC business, and I expect to pay her

Alert: A Massive New FinCEN Filing Requirement Is Coming Do you own a corporation, limited liability company (LLC), limited partnership, limited liability partnership, limited liability limited partnership, or business trust? Or are you planning to form one of these entities? If so, be alert. There’s a new federal filing requirement coming. Back in 2021, Congress passed a new law called the Corporate Transparency Act (CTA) that requires corporations, LLCs, and other business entities to provide information about their owners to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), which is a unit separate from the IRS. Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander The CTA is part of a government crackdown on corruption, money laundering, terrorist financing, tax fraud, and other illicit activity. It targets the use of anonymous shell companies that facilitate the flow and sheltering of illicit money in the United States. Businesses subject to the law will have to file a “beneficial owner report” with FinCEN, including each beneficial owner’s full legal name, date of birth, and residential street address, as well as an identifying number from a legal document such as a driver’s license or passport. FinCEN will include the information in a database for use by law enforcement, national security and intelligence agencies, and federal regulators that enforce anti-money-laundering laws. The database will not be publicly accessible. Violations of the CTA can result in a $500-a-day penalty (up to $10,000) and up to two years’ imprisonment. The CTA did not take effect immediately. Rather, Congress gave the FinCEN time to write regulations governing how the CTA should be applied and to give businesses a heads-up about the new law. FinCEN has now issued its proposed regulations, and they take a fairly hard line on how the law will be applied. Here are four things the new regulations make clear. 1. The filing requirement may begin soon. The CTA goes into effect when the proposed regulations become final, which is expected to occur sometime in mid-to-late 2022. As soon as it goes into effect, new corporations, LLCs, and other entities will have to comply with the filing requirement within 14 days of being formed, and existing entities will have one year to comply. 2. Millions of small businesses are affected. The reporting requirements will apply to almost every small business that is not a sole proprietorship or general partnership, including corporations, LLCs, limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships—over 30 million in all. Larger companies with more than 20 full-time employees and $5 million in gross receipts are exempt. 3. There will be many beneficial owners. The proposed regulations make it clear that a company can have multiple beneficial owners, and it may not always be easy to identify them all. There are two broad categories of beneficial owners: any individual who owns 25 percent or more of the company, and any individual who, directly or indirectly, exercises substantial control over the company. 4. Law and accounting firms are not exempt. Neither the CTA nor the proposed regulations contain any exemption for legal or accounting firms, except for the relatively few public accounting firms registered under Section 102 of the Sarbanes-Oxley Act of 2002. Thus, any law or accounting firm that is a professional corporation or an LLC will have to file a beneficial owner report unless it has more than 20 employees and $5 million in annual income. Deduct a Cruise to Mexico Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander You may not have thought of this, but taking a cruise ship to Mexico for a business meeting is acceptable as a deductible form of transportation. Because Mexico is in the tax law–defined North American area, the law says that you need no stronger business reason to deduct your trip to Mexico than you need to deduct a trip to Chicago, Illinois, or Scottsdale, Arizona. Less-than-one-week rule. If your trip is outside the 50 states but inside the North American area and if the trip is for seven or fewer days (excluding the day of departure), then the law allows you to deduct the entire cost of travel to and from this business destination. Mexico fits this location rule. Cruise ship transportation. The law authorizes any type of transportation to and from your travel destination, so long as it is not lavish or extravagant. The cruise ship cost is not a lavish or extravagant expense, as the law precludes this possibility by placing luxury water limits on this type of travel. The daily luxury water limit is twice the highest federal per diem rate allowable at the time of your travel. Example. Say you are going to travel by cruise ship during September 2022. The $433 maximum federal per diem rate for September 2022 comes from Nantucket, Massachusetts. Your daily luxury water limit is $866 (2 x $433). Thus, for you and your spouse, two business travelers, the daily limit is $1,732. On a six-night cruise, that’s a cruise-ship cost ceiling of $10,392. If you spend $12,000, your deduction is limited to $10,392. If you spend $8,000, you deduct $8,000. Are Self-Directed IRAs for Real Estate a Good Idea? Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander The stock market is tanking while real estate continues to skyrocket. If your retirement savings have taken a hit, you may be wondering if this is the time to invest in real estate through your IRA, Roth IRA, or SEP-IRA. You can’t invest in real estate with a traditional IRA or Roth IRA (or SEP-IRA) you establish with a bank, brokerage, or trust company. These types of IRA custodians typically limit you to a narrow range of investments, such as publicly traded stocks, bonds, mutual funds, ETFs, and CDs. But you can invest in real estate if you establish a self-directed IRA with a custodian that allows self-directed investments. There are dozens of such IRA custodians. Real estate is the single most popular investment

Donor-Advised Funds: A Tax Planning Tool for Church and Charity Donations Do you give money to 501(c)(3) charities? Do you get a tax benefit from those donations? Recent changes in the tax code have done much to destroy your benefits from church and other tax-deductible 501(c)(3) donations. But there’s a way to donate the way you want, get revenge on the tax code, and realize the tax benefits you deserve. This get-even tool is the donor-advised fund, an increasingly popular way to donate to your church and other 501(c)(3) organizations. Indeed, donor-advised funds have exploded over the past few years, with over one million donor-advised fund accounts in existence as of 2020. Example. You donate $100,000 to the fund today. You get the $100,000 deduction now. From the fund, you donate $10,000 a year to a charitable organization (probably more as your money in the fund grows tax-free). National investment firms such as Fidelity, Schwab, and Vanguard have all created donor-advised funds. These “commercial” donor-advised funds hire an affiliated for-profit investment firm to manage the assets in the accounts for a fee that varies based on the account balance. You can also establish a donor-advised fund account with a community foundation that has a local orientation; a single-issue non-profit, such as a university or an environmental charity like the Sierra Club; or an independent, non-commercial organization such as the American Endowment Foundation, National Philanthropic Trust, or United Charitable. You can always donate cash, including money in IRAs and 401(k)s, to your donor-advised fund account. But many donor-advised funds also accept non-cash donations, including stocks, bonds, and mutual fund shares, real estate, privately owned company stock, LLC and limited partnership interests, Bitcoin and other cryptocurrency, and life insurance. Donating stock or mutual fund shares that have appreciated is a great tax strategy. Here’s why: If you owned the stock for more than one year, you get a deduction equal to its fair market value at the time of the donation. And you don’t pay any capital gains tax on the appreciated value of the stock. Example. Dennis owns 1,000 shares of Evergreen stock that’s publicly traded on NASDAQ. He paid $10,000 for the stock back in 2010, and the shares are worth $100,000 today. He establishes a donor-advised fund in 2022 and donates the stock. He gets a $100,000 charitable deduction for 2022. He pays no federal tax on his $90,000 gain. As you can see, there are many benefits to donor-advised funds for the charitably inclined, and few drawbacks. Transferring Your Home to Your Adult Child Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander With today’s home prices and the crazy real estate market, it’s likely difficult for your children to buy a home. And it’s conceivable that you are ready to move on from your existing home. If this is true, consider the three options below. Option 1: Make an Outright Gift Say you’re feeling so generous that you might just simply give your home to your adult child. What a deal for the kid! Tax-wise, if you make the gift this year, it will reduce your $12.06 million unified federal gift and estate tax exemption. To calculate the impact, reduce the fair market value of the home you would be giving away by the annual federal gift tax exclusion, which is $16,000 for 2022. The remainder is the amount that would reduce your unified federal exemption. If you’re married, your spouse has a separate $12.06 million unified federal exemption. If you and your spouse make a joint gift of the home, each of your unified federal exemptions will be reduced. To calculate the impact, take half of the fair market value of the home minus the $16,000 annual exclusion. The remainder is the amount by which you would reduce your unified federal exemption. Ditto for your spouse’s separate exemption. If your child is married and you give the home to your child and his or her spouse, you can claim a separate $16,000 annual exclusion for your child’s spouse. If you expect the home to continue to appreciate (seemingly a pretty good bet), getting it out of your estate by giving it away is a good estate-tax-avoidance strategy. Option 2: Arrange a Bargain Sale Say you’re feeling generous, but not so generous that you want to simply give away your home. Fair enough. Consider selling the home to your child for less than fair market value. For federal gift tax purposes, this is treated as a gift of the difference between the home’s fair market value and the bargain sale price. Tax-wise, this can work out okay. Warning. Do not make a bargain sale or an outright gift of the home if you intend to continue living there until you die. In these scenarios, expect the IRS to argue that the home’s full date-of-death fair market value must be included in your estate for federal estate tax purposes, even if you were paying fair market rent to your child. Option 3: Arrange Full-Price Sale with Seller Financing from You The idea of giving your child a free house might be unappealing to you. Very well. Consider selling the home to your child for its current fair market value with you taking back a note for a big part of the purchase price. Assume you’re feeling charitable. If so, you can charge the lowest interest rate the IRS allows without any weird tax consequences. That’s called the “applicable federal rate” (AFR). AFRs change monthly in response to bond market conditions and are generally well below commercial rates. In May 2022, the long-term AFR, for loans of more than nine years, is only 2.66 percent (assuming annual compounding). The mid-term AFR, for loans of more than three years but not more than nine years, is only 2.51 percent (assuming annual compounding). As this was written, the going rate nationally for a 30-year fixed-rate commercial mortgage was around 6.1 percent, while the rate for a 15-year loan was around

Health Savings Accounts: The Ultimate Retirement Account It isn’t easy to make predictions, especially about the future. But there is one prediction we’re confident in making: you will have substantial out-of-pocket expenses for health care after you retire. Personal finance experts estimate that an average retired couple age 65 will need at least $300,000 to cover health care expenses in retirement. You may need more. The time to save for these expenses is before you reach age 65. And the best way to do it may be a Health Savings Account (HSA). After several years, you could have a fat HSA balance that will help pave your way to a comfortable retirement. Not everyone can have an HSA. But you can if you’re self-employed or your employer doesn’t provide health benefits. Some employers offer, as an employee fringe benefit, either HSAs alone or HSAs combined with high-deductible health plans. An HSA is much like an IRA for health care. It must be paired with a high-deductible health plan with a minimum annual deductible of $1,400 for self-only coverage ($2,800 for family coverage). The maximum annual deductible must be no more than $7,050 for self-only coverage ($14,100 for family coverage). An HSA can provide you with three tax benefits: You or your employer can deduct the contributions, up to the annual limits. The money in the account grows tax-free (and you can invest it in many ways). Distributions are tax-free if used for medical expenses. No other tax-advantaged account gives you all three of these benefits. You also have complete flexibility in how to use the account. You may take distributions from your HSA at any time. But unlike with a traditional IRA or 401(k), you do not have to take annual required minimum distributions from the account after you turn age 72. Indeed, you need never take any distributions at all from your HSA. If you name your spouse the designated beneficiary of your HSA, the tax code treats it as your spouse’s HSA when you die (no taxes are due). If you maximize your contributions and take few distributions over many years, the HSA will grow to a tidy sum. Partnership with Multiple Partners: The Good and the Bad Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander The generally favorable federal income tax rules for partnerships are a common reason for choosing to operate as a partnership with multiple partners instead of as a corporation with multiple shareholders. The most important partnership tax benefit rules can be summarized as follows: You get pass-through taxation. You can deduct partnership losses (within limits). You may be eligible for the Section 199A tax deduction. You get basis from partnership debts. You get basis step-up for purchased interests. You can make tax-free asset transfers with the partnership. You can make special tax allocations. Partnership taxation is not all good stuff. There are a few important disadvantages and complications to consider: Exposure to self-employment tax Complicated Section 704(c) tax allocation rules Tricky disguised sale rules Unfavorable fringe benefit tax rules Limited partnerships are obviously treated as partnerships for federal income tax purposes, with the generally favorable partnership taxation rules mentioned above. Limited partners generally are not exposed to liabilities related to the partnership or its operations. So, you generally cannot lose more than what you’ve invested in a limited partnership—unless you guarantee partnership debt. So far, so good. But you must also consider the following disadvantages for limited partners: Limited partners usually get no basis from partnership liabilities. Limited partners can lose their liability protection. You need a general partner. On the plus side, limited partners have a self-employment tax advantage. Since your partnership will have multiple partners, multiple issues can come into play. You’ll need a carefully drafted partnership agreement to handle potential issues even if you don’t expect them to arise. For instance, you may want to include a partnership interest buy-sell agreement to cover partner exits; a non-compete agreement (for obvious reasons); an explanation of how tax allocations will be calculated in compliance with IRS regulations; an explanation of how distributions will be calculated and when they will be paid (for instance, you may want to call for cash distributions to be made annually in early April to cover partners’ tax liabilities from their shares of partnership income for the previous year); guidelines for how the divorce, bankruptcy, or death of a partner will be handled; and so on. Key point. No type of entity (including a limited partnership in which you are a limited partner) will protect your personal assets from exposure to liabilities related to your own professional malpractice or your own tortious acts. Send Tax Documents Correctly to Avoid IRS Trouble Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander You have heard the horror stories about mail sent to the IRS that remains unanswered for months. Reportedly, the IRS has mountains of unanswered mail pieces in storage trailers, waiting for IRS employees to process them. Because the understaffed IRS is having so much trouble processing all the documents it receives, you need to protect yourself when you send an important tax filing due by a specific deadline. If you can file a document electronically, do so. The IRS deems such filings as filed on the date of the electronic postmark. If you must file a physical document with the IRS, don’t use regular U.S. mail, Priority Mail, or Express Mail. Why not? When you mail a document with these methods, the IRS considers it filed on the postmark date, but only if the IRS receives it. What if the U.S. Postal Service doesn’t deliver it or the IRS loses it? You’ll have no way to prove the IRS got it—and the IRS and most courts won’t accept your testimony that it was timely mailed. Don’t take this chance. Instead, file physical documents by certified or registered U.S. mail, or use an IRS-approved private delivery service (generally, two-day or better service from FedEx, UPS, or DHL

New Hope for Restoring and Fixing the Employee Retention Credit As you may remember, two bad things happened to the Employee Retention Credit (ERC): On November 15, 2021, Congress retroactively repealed the ERC for the fourth quarter of 2021 (except for start-up businesses). On August 4, 2021, the IRS issued the clearly irrational Notice 2021-49, stating that a corporate owner with certain living relatives does not qualify for the ERC. Hope in the House Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander On December 7, 2021, Rep. Carol D. Miller (R-WV-3) and three co-sponsors offered H.R. 6161, the Employee Retention Tax Credit Reinstatement Act, which would reinstate the ERC for the fourth quarter. On the day it was presented, the House referred the bill to its Committee on Ways and Means—a good thing. Today, there are 54 bipartisan co-sponsors. The bill has some legs. Hope in the Senate On February 10, 2022, Sen. Margaret Wood Hassan (D-NH) along with four co-sponsors introduced S. 3625 (identical to H.R. 6161) in the Senate, where it was read twice and referred to the Senate Committee on Finance. The bill now has seven co-sponsors. Sen. Hassan and three of the co-sponsors are on the Senate Committee on Finance—a good sign. Your Turn Now is a good time to call your congressional representatives and ask them to both support H.R. 6161 or S. 3625 to reinstate the ERC for the fourth quarter of 2021, and override IRS Notice 2021-49 and allow the ERC on the wages paid to corporate owner-employees. Clarity on this is important to everyone, including the IRS. How to Do It Make as many phone calls as you can. Start with the tax law writers, your senators, and your congressional representative. Here’s contact information for them: Richard Neal, Chairman, Committee on Ways and Means, United States House of Representatives (telephone: 1-202-225-5601; fax: 1-202-225-8112; for email and other contact info, click here) Kevin Brady, Ranking Member, Committee on Ways and Means, United States House of Representatives (telephone: 1-202-225-4901; fax: 1-202-225-5524; for email and other contact info, click here) Ron Wyden, Chairman, Committee on Finance, United States Senate (telephone: 1-202-224-5244; fax: 1-202-228-2717; for email and other contact info, click here) Mike Crapo, Ranking Member, Committee on Finance, United States Senate (telephone: 1-202-224-6142; fax: 1-202-228-1375; for email and other contact info, click here) Your congressional representative (telephone: 1-202-224-3121; for other contact info, click here) Your two senators (telephone: 1-202-224-3121; for email and other contact info, click here) Please note that when you reach out in this way, it often feels as though you are communicating with a black hole and your message is not getting any attention. That’s wrong. Senators and congressional representatives log everything. You are being heard. IRAs for Kids Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander Working at a tender age is an American tradition. What isn’t so traditional is the notion of kids contributing to their own IRA, especially a Roth IRA. But it should be a tradition, because it’s a really good idea. Here’s what you need to know about IRAs for kids. Let’s start with the Roth IRA option. Roth IRA Contribution Basics The only federal-income-tax-law requirement for a child to make an annual Roth IRA contribution is to have enough earned income during the year to cover the contribution. Age is completely irrelevant. So if a child earns some cash from a summer job or part-time work after school, he or she is entitled to make a Roth contribution for that year. For both the 2021 and 2022 tax years, your working child can contribute the lesser of his or her earned income for the year, or $6,000. While the same $6,000 contribution limit applies equally to Roth IRAs and traditional IRAs, the Roth option is usually better for kids. Key point. A contribution for your child’s 2021 tax year can be made as late as April 15, 2022. So, there’s still time for that. Modest Contributions to Child’s Roth IRA Can Amount to Big Bucks by Retirement Age By making Roth contributions for a few years during the teenage years, your kid can potentially accumulate quite a bit of money by retirement age. But realistically, most kids won’t be willing to contribute the $6,000 annual maximum even when they have enough earnings to do so. Say the child contributes $2,500 at the end of each year for four years. Assuming a 5 percent annual rate of return, the Roth account would be worth about $82,000 in 45 years. Assuming a more optimistic 8 percent return, the account value jumps to a whopping $259,000. Wow! You get the idea. With relatively modest annual contributions for just a few years, Roth IRAs can be worth eye-popping amounts by the time your “kid” approaches retirement age. Vacation Home Rental—What’s Best for You: Schedule C or E? Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander Do you have a beach or mountain home that you rent out? If the average period of rental is less than 30 days, you likely have a choice—either claim the income and expenses on Schedule C, or claim the income and expenses on Schedule E. When Is Schedule C a Good Choice? If you show a tax loss on your rental property, Schedule C is a great choice because it allows you to deduct your rental losses against all other income (assuming you materially participate in the rental property). If you show taxable income on the rental property, Schedule C is not good because it causes you to pay self-employment taxes. When Is Schedule E a Good Choice? If you show taxable income on the transient rental, Schedule E is best because you don’t pay any self-employment taxes on Schedule E income. If you show a loss on your transient rental and you materially participate, you can deduct your losses against all other income, but those Schedule E losses do not reduce self-employment income. Okay, now you know how to play