Monthly Archives: October 2022

ABLE Accounts And Individuals With Disabilities

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Article Highlights:

Asset limitations when receiving Medicaid or federal Supplemental Security Income
Annual Contribution Limits
$100,000 Account Limit
Qualified Expenses
ABLE Account Beneficiary Compensation
Saver’s Credit
Sec 529 Plan Rollovers

Congress created Achieving Better Life Experience (ABLE) accounts in 2014. Prior to the creation of the ABLE accounts, individuals with disabilities who were eligible for Medicaid or federal Supplemental Security Income were limited to a maximum of $2,000 in assets, such as bank savings accounts. Now, disabled people are allowed to have up to $100,000 in one of these special accounts without jeopardizing their Medicaid or Supplemental Security Income. ABLE accounts are available to individuals who became disabled before the age of 26. Once an account is established, anyone can contribute to it, provided that the sum of the contributions for the year does not exceed the annual gift tax exclusion, which is currently $16,000. These accounts are a less-expensive substitute for special needs trusts, which have significant administration costs. If contributions will exceed the annual gifting limit and $100,000 overall, a special needs trust will be required. Each state must enact its own legislation to make ABLE accounts available in that particular state. As of August, 2022, only four states (Idaho, North Dakota, South Dakota, and Wisconsin) haven’t established ABLE programs. Even so, many states allow nonresidents to participate in their program, while some states only allow their own residents to participate in their ABLE account program. ABLE accounts are fashioned after qualified state tuition programs, sometimes referred to as Section 529 plans. Although there is no tax benefit associated with contributions to the accounts, the earnings in the accounts accumulate tax-free and are also tax-free if used for qualified expenses such as:

Health care,
Education,
Employment training and support,
Assistive technology,
Personal support services,
Housing, and
Transportation expenses.

As a note of caution, qualified expenses do not include food, entertainment or vacations. Only one account can be established for each beneficiary. The maximum annual contribution to an ABLE account is equal to the annual gift tax exemption amount, which for 2022 is $16,000. Certain ABLE account beneficiaries who are employed may make an additional contribution to their ABLE account up to the lesser of:

The account beneficiary’s compensation for the tax year, or
The poverty line for a one-person household. For 2022, this amount is $12,880 in the continental U.S., $16,090 in Alaska, and $14,820 in Hawaii.

Working ABLE account beneficiaries will only be able to take advantage of making additional contributions to their accounts through 2025. ABLE accounts are designed so that certain employed ABLE account beneficiaries may be eligible to claim the nonrefundable saver’s credit for a percentage of their contribution. To claim the saver’s credit, an individual must:

Be at least 18 years old at the end of the tax year
Not be a dependent or a full-time student, and
Meet the income requirements.

The saver’s credit is phased out for higher income taxpayers. Families of a person with a disability may roll over funds from a 529 plan to the individual’s ABLE account. Such rollovers count toward the annual contribution limit. For example, the $16,000 annual contribution limit would be met by parents contributing $10,000 to their child’s ABLE account and rolling over $6,000 from a 529 plan to the same ABLE account. If you have questions related to ABLE account contributions, the saver’s credit, or rollovers from qualified tuition plans, please give this office a call.

Posted in Tax

Research Credit Potentially Doubled By The Inflation Reduction Act

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Article Highlights:

Inflation Reduction Act
Research Credit Payroll Tax Option
Research Credit
Qualified Research
Qualified Small Business

The Inflation Reduction Act that President Biden signed into law back in August, has a lesser-known provision that could benefit many small business startups, allowing them to potentially double the amount of the research and development tax credit they can claim from $250,000 to $500,000 per year against payroll taxes.
This little-known tax benefit for new, qualified small businesses is the ability to apply a portion of their research credit – up to $500,000 after December 31, 2022, to pay the employer’s share of their employees’ FICA withholding requirement (the 6.2% payroll tax). This is double the amount allowed under prior law. This can be quite a benefit, as in their early years, start-up companies generally do not have any taxable profits for the research credit to offset; quite often, it is in these early years when companies make expenditures that qualify for the research credit. This can substantially help these young companies’ cash flow.
Research Credit – The research credit is equal to 20% of qualified research expenditures in excess of the established base amount. If using the simplified method, the research credit is equal to 14% of qualified research expenditures in excess of 50% of the company’s average research expenditures in the prior three years.
Qualified Research – Research expenditures that qualify for the credit generally include spending on research that is undertaken for the purpose of discovering technological information. This information is intended to be useful in the development of a new or improved business component for the taxpayer relating to new or improved functionality, performance, reliability or quality.
Qualified Small Business (QSB)– To apply the research credit to payroll taxes, a company must be aQSB and must not be a tax-exempt organization. A QSB for purposes of this credit is a corporation or partnership with these criteria:

The entity does not have gross receipts in any year before the fourth preceding year. Thus, the payroll credit can only be taken in the first 5 years of the entity’s existence. However, this rule does not require a business to have been in existence for at least 5 years.
The entity’s gross receipts for the year when the credit is elected must be less than $5 million.

Anyperson (other than a corporation or partnership) is a QSBif thatperson meets the two requirements above after taking into account the person’s aggregate gross receipts received for all the person’s tradesor businesses.
Example – The taxpayer is a calendar-year individual with one business that operates as a sole proprietorship. The taxpayer had gross receipts of $4 million in 2022. For the years 2018, 2019, 2020 and 2021, the taxpayer had gross receipts of $1 million, $7 million, $4 million, and $3 million, respectively; the taxpayer did not have gross receipts for any taxable year prior to 2018. The taxpayer is a qualified small business for 2022 because he had less than $5 million in gross receipts for 2022 and did not have gross receipts before 2018 (the beginning of the 5-taxable-year period that ends in 2022). The taxpayer’s gross receipts in the years 2018-2021 are not relevant in determining whether he is a qualified small business in taxable year 2022.Because the taxpayer had gross receipts in 2018, the taxpayer will not be a qualified small business for 2023, regardless of his gross receipts in that year.
The research credit must first be accrued back to the preceding year, where it must be used to offset any tax liability for that year. Then, the excess, up to $500,000 maximum, (up from a maximum of $250,000 in years before January 2023) can be used to offset the 6.2% employer payroll tax. Any amount not used is carried forward to the next year.
This expanded R&D tax credit won’t show up on tax returns until 2024 since it can first be claimed for tax year 2023.
If you have questions related to the research credit or if your business could benefit from using the credit to offset payroll taxes, please give this office a call.