Monthly Archives: July 2023

Tax Implications of Student Loan Forgiveness

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Article Highlights:

Background
Court Battle
Forgiveness Under Income-Driven Repayment (IDR) Plans
Debt Relief Income
American Rescue Plan Act
General Welfare Exception
Insolvent Taxpayer Exclusion
Employer-Provided Educational Assistance
Sec 529 Plans

Back in August of 2022, President Biden issued an executive order that would forgive federal student loan debt for lower income individuals.The program would have provided up to$20,000 in loan relief to borrowers with loans held by the Department of Education (DOE) whose individual income is less than $125,000 ($250,000 for married couples) and who received a Pell Grant. Borrowers who meet those income standards but did not receive a Pell Grant in college would have received up to $10,000 in loan relief.
However, this program subsequently hit a snag when two court cases put a hold on the plan, which was one of Biden’s campaign promises.Those who brought the suits, as well as others, contend the President does not have the authority to forgive the debt, that it is the sole prerogative of Congress.The issue wound up at the Supreme Court which ruled against the plan at the end of June 2023.
The Biden administration has since turned toward forgiveness under the income-driven repayment (IDR) plans where under the Higher Education Act and the DOE’s regulations, a borrower is eligible for forgiveness after making 240 or 300 monthly payments—the equivalent of 20 or 25 years—on an IDR plan or the standard repayment plan, with the number of required payments varying based upon when a borrower first took out the loans, the type of loans they borrowed, and the IDR payment plan in which the borrower is enrolled. Inaccurate payment counts over the years have resulted in borrowers losing progress toward loan forgiveness, so as part of the new arrangement the records have been cleaned up. This action also addresses concerns about practices by loan servicers that put borrowers into forbearance in violation of Department rules. Under this Biden plan, $39 billions of student debt would be wiped away for approximately 804,000 borrowers in the very near future.
So, if your student loan debt is forgiven, what are the tax consequences? The Internal Revenue Code Section 61, says that all kinds of income, including earned, found, or won, is income for tax purposes unless specifically excluded. Taking that to extremes, if you find, for example, a $20 bill on the sidewalk while out for your morning walk that is technically income.
However, the American Rescue Plan Act (ARPA) passed in 2021 included a provision thatmakes student loan forgiveness free from federal income tax for 2021 through 2025if the loan was one of the following.

A loan for postsecondary educational expenses from the federal or a state government or most educational organizations.
A private education loan made expressly for postsecondary educational expenses.
A loan from an educational organization that maintains a regular faculty and curriculum and normally has a regularly enrolled student body at its facility.
A loan from an organization exempt from tax–for example, charitable, religious and educational organizations–to refinance a student loan.

So, in most cases if your loan is forgiven before 2026 you don’t have any debt forgiveness income to be concerned about for federal purposes.
But what happens after that? The exclusion could be extended, or it could be allowed to lapse (sunset in tax lingo), which would mean the amount forgiven would be taxable income in the year forgiven, and the tax would be your top marginal rate times the forgiven amount. However, there are a couple of other options that might be available to exclude the income.

General Welfare Exception (GWE) – The first is a little-known administrative exception, called the general welfare exception (GWE), which allows some payments to be excluded from income. The IRS has consistently concluded that payments to individuals by government units, under legislatively provided social benefit programs, for the promotion of the general welfare, are not includible in a recipient’s income.Typically, to be excluded, these payments must be to pay or reimburse expenses for essential items such as food, medical, housing or heating costs.However, what any individual taxpayer ‘needs’ is a subjective determination, and the IRS has applied the GWE to many different contexts, including education assistance.
Insolvent Taxpayer Exclusion – Another option, if the student loan debt exceeds the taxpayer’s assets, just preceding the forgiveness, the insolvent taxpayer exclusion allows a taxpayer to exclude debt relief to the extent the taxpayer’s debts exceed their assets.

In addition there are also state tax issues that can come into play where the taxpayer is a resident of a state with income tax. While most states will conform to federal law, there are those that may not, as detailed in a Tax Foundation report.
With all that said there are other tax provisions that can help a taxpayer pay off their student loan debt.

Employer-Provided Educational Assistance – If the taxpayer’s employer has an employer-provided educational assistance plan, that plan can pay tax free to the employee up to $5,250 per year towards the employee’s student loan debt. This provision is available through 2025.
Sec 529 Plans – Distributions from a 529 plan of up to $10,000 – a lifetime limit – may be used to pay the principal and interest on qualified higher education loans of the designated beneficiary or a sibling of the designated beneficiary.
Employer Matching Contributions – Traditionally, employer retirement plans such as 401(k) and 403(b) plans permit the employer to match employee contributions to the plan based on the employee contributions or elective deferrals. For plan years beginning after 2023, employers may treat qualified student loan payments as elective deferrals for purposes of making matching contributions. Meaning employers can make matching contributions based on their employee’s student loan payments, rather than on amounts that are contributed to the plan.

If you have any questions related to the foregoing, please give this office a call.

Posted in Tax

Employee or Independent Contractor – A Primer for Employers and Employees

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Article Highlights:

Distinguishing Employee and Independent Contractor
State Legislation
Federal Guidelines
Partners
Advantages of Independent Contractor Status
Form SS-8
SE Tax
Form 8919
Penalties for Misclassifying Workers
IRS’ Voluntary Classification Settlement Program

It is not uncommon for employers to misclassify employees as independent contractors, either to intentionally avoid their withholding and tax responsibilities or because they are not aware of the laws regarding the issue. Misclassifying a worker can have significant ramifications for both the employer and the worker in terms of how much each pays in income, Social Security, and Medicare taxes, among others. Worker misclassification is a perennial issue for the Internal Revenue Service and state taxing authorities due to the perception that many employers are not properly classifying their workers. This article looks at several issues regarding this matter.
The general distinction, of course, is that an employee is an individual who works under the direction and control of an employer, and an independent contractor is a business owner or contractor who provides services to others.
Whether an individual is an employee or an independent contractor is governed by both federal law and state law. It has always been a complicated issue at both the federal and state levels, and the state and federal guidelines often differ. However, because of the significant payroll tax revenues involved, the states are generally more aggressive in classifying workers as employees.
In recent years several states, including California, Massachusetts and New Jersey, have adopted the so-called ABC test, which is a broad means of determining a worker’s status as either an employee or a contractor by considering three factors. If a worker passes all three, then he or she is an independent contractor. The tests are:

(A) That the worker is free from the hirer’s control and direction, in connection with the performance of the work, both under the contract for the performance of such work and in fact;
(B) That the worker performs work outside the usual course of the hiring entity’s business; and
(C) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

To determine whether a worker is an independent contractor or an employee, the IRS examines the relationship between the worker and the business and considers all evidence regarding control and independence. This evidence falls into the following three categories:

(1) Behavioral control covers whether the business has the right to direct or control how the work is done through instructions, training, or other means. Employees are generally given instructions on when and where to work, what tools to use, where to purchase supplies, what order to follow, and so on.
(2) Financial control covers whether the business has the right to control the financial and business aspects of the worker’s job. This includes the extent to which the worker has unreimbursed business expenses; the extent of his or her investment in the facilities being used; the extent to which his or her services are made available to the relevant market; how he or she is paid; and the extent to which he or she can realize a profit or incur a loss.
(3) Type of relationship includes any written contracts that describe the relationship the parties intended to create; the extent to which the worker is available to perform services for other, similar businesses; whether the business provides the worker with employee-type benefits, such as insurance, a retirement plan, vacation pay, or sick pay; the permanency of the relationship; and the extent to which the worker’s services are a key aspect of the company’s regular business.

If the business has the right to not only control or direct what is to be done but also how it is to be done, then the workers are most likely employees. On the other hand, if the company can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then the workers are probably independent contractors.
One situation for which there is no uncertainty as to classification relates to a partner in a partnership. The IRS has long held that a bona fide member of a partnership is not an employee of the partnership, and a partner who devotes time and energy to conducting the partnership’s trade or business, or who provides services to the partnership as an independent contractor, is considered self-employed and is not an employee.
The obvious advantages for a business to treat an individual as an independent contractor is to avoid paying minimum wages, overtime, payroll taxes, worker’s compensation insurance, unemployment tax, Social Security and Medicare contributions, health benefits, paid leave, 401(k) contributions, and unpaid leave under the Federal Family and Medical Leave Act.
Workers also have some tax-related benefits to being considered independent contractors, such as the ability to deduct certain business expenses that are not available to employees, the eligibility to set up their own retirement plans, and the fact that they are not subject to withholding. Of course, many workers want to be considered employees so they can get the benefits available to employees, such as vacation pay, overtime pay, and health insurance coverage.
When a worker’s status is in doubt, Form SS-8 (Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding) can be used. This form may be completed by an employer or a worker; it asks the IRS to determine whether the worker is an employee or an independent contractor for federal tax purposes. Form SS-8 is filed separately from the requestor’s tax return. The IRS does not issue determinations for proposed employment arrangements or hypothetical situations, and it will only issue a determination if the statute of limitations for the year at issue hasn’t expired.
An independent contractor will need to pay self-employment (SE) tax on their net self-employment earnings. The SE tax is the individual’s Social Security and Medicare tax contributions. For an employee, the employer pays half of these taxes and the employee pays the other half through their payroll withholding, while a self-employed individual pays 100% of these taxes with their 1040 return using Schedule SE.An individual who is self-employed will not have income tax withheld from the income they receive as an independent contractor and will usually need to make estimated tax payments during the year to cover their income and SE tax liabilities.
If an individual has filed Form SS-8 and the IRS has determined he is an employee, or if an individual believes he or she was misclassified as an independent contractor and wants to avoid paying self-employment tax on 1099-NEC or 1099-MISC income – or when he or she has filed an SS-8 but has not received a response – that individual can file Form 8919, which only requires payment of what would have been withheld if the worker had been treated as an employee. Form 8919 requires the employee to choose one of these codes:

Code A. I filed Form SS-8 and received a determination letter stating that I am an employee of this firm.
Code C. I received other correspondence from the IRS that states I am an employee.
Code G. I filed Form SS-8 with the IRS but have not received a reply.
Code H. I received a Form W-2 and a 1099-NEC or 1099-MISC from this firm for the same tax year. The amount on Form 1099-NEC or 1099-MISC should have been included as wages on the Form W-2.

If using Code H, an SS-8 should not be filed. Here are some examples of amounts that are sometimes erroneously included (but not necessarily deliberately misclassified) on Form 1099-NEC or 1099-MISC and that should have been reported as wages on Form W-2: employee bonuses, awards, travel expense reimbursements not paid under an accountable plan, scholarships, and signing bonuses.
If Code G on Form 8819 is used, both the worker and the firm that paid the worker may be contacted for additional information. Use of this code is not a guarantee that the IRS will agree with the worker’s opinion as to his or her status. If the IRS does not agree that the worker is an employee, the worker may be billed an additional amount for the employment tax, as well as penalties and interest resulting from the change in the worker’s status.
If the IRS determination is for multiple open years, the employee can amend returns for open years to recover a portion of the self-employment tax paid.
A business that misclassifies an employee can be held liable for employment taxes for that worker, as well as owe various penalties, and if the employer willfully misclassified the individual, additional penalties apply and possibly prison time. More penalties could be piled on by the state where the business operates and the misclassified employee could be entitled to back wages for overtime, mandated work breaks, retirement benefits, and more. Misclassifying a worker can be very costly to the employer.
The IRS offers an optional Voluntary Classification Settlement Program that gives businesses an opportunity to reclassify their workers as employees for future employment tax purposes, and offers partial relief from federal employment taxes for eligible businesses who agree to prospectively treat their workers as employees. Businesses must meet certain eligibility requirements and apply by filing Form 8952, Application for Voluntary Classification Settlement Program (VCSP), and enter into a closing agreement with the IRS.
If you have questions about worker status as an employee or independent contractor, please contact this office for assistance.

What You Should Know About the Chart of Accounts in QuickBooks Online

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It works in the background as a critical element of QuickBooks Online. Understanding the role of the Chart of Accounts
There are still many millions of small businesses that won’t use accounting software. Expenses may be an issue for some of them, as well as hesitation to change the way they manage their money. The number one reason for this reticence, though, maybe the mistaken notion that you have to have a good understanding of the accounting process in order to use an online solution.
If you’ve already been using QuickBooks Online, you know this isn’t true. The site was designed for businesspeople, not accountants. It does all of the official bookkeeping in the background while you work with familiar language and processes. Still, there are a few elements that may be foreign to you.
The Chart of Accounts is one of these. You don’t have to do anything with it—in fact, we suggest that you don’t—but you’ll encounter it when you work with some transactions and records and reports.
Your Accounting Backbone
The Chart of Accounts is simply a list of financial categories that is used to track your company’s financial data. QuickBooks Online creates one for you that’s based on the business type and industry you chose when you were setting up your company data file. You can access it through an icon on your home page or by clicking the gear icon in the upper right of the page.

A section of QuickBooks Online’s Chart of Accounts

Some people call the Chart of Accounts the ‘backbone’ of your accounting system. We think it’s more like the nervous system. When you feel a pain in your big toe, for example, you can identify the nerve that’s involved. And when an account is assigned to a record or transaction, you can trace it to a specific element of your overall financial picture. So when you create an invoice, for example, you know you can find it in your accounts receivable (A/R) register. Inventory items are actually assigned to multiple accounts by default.
QuickBooks Online knows where to route data that you’ve entered. Please don’t change these accounts without checking with us first.
What’s In the Chart of Accounts?
As you can see in the above image, your chart of accounts contains columns for Name, Account Type, and Detail Type. Accounts feed into one of two QuickBooks Online financial reports, either Balance Sheet or Profit & Loss. These are reports that the site can generate automatically, but we recommend you let us create and interpret them for you. They’re not as easy to understand as an accounts payable aging report, for example.
QuickBooks Online automatically determines which Account Type should be assigned to an account. Balance Sheet accounts have opening balances. They include:

Assets (checking and savings accounts, accounts receivable, inventory assets, etc.)
Liabilities (unpaid bills and outstanding credit card balances, sales taxes owed, loans, etc.)
Equity (owners’ financial contributions)

You can view the registers for some individual accounts from the QuickBooks Online Chart of Accounts.

The remainder of the accounts in QuickBooks Online’s Chart of Accounts are used in the Profit & Loss report (or, Income Statement). They include:

Income (product sales, etc.)
Expenses (job expenses, payroll expenses, etc.)
Cost of Goods Sold (labor, shipping, materials and supplies, etc.)
Other Income and Other Expenses

What’s So Important About the Chart of Accounts?
It’s absolutely critical that the Chart of Accounts is comprehensive and correct. This means that you shouldn’t alter what QuickBooks Online has prepared for you on your own. If you feel that your Chart of Accounts needs changing, please contact us. The best thing to do is understand it, but leave it alone.
There are several reason why this lengthy list of accounts is so important, but it all boils down to registers and reports. You want your account registers to be accurate, containing only the correct entries. And your Chart of Accounts produces the reports that you’ll need when you:
Prepare income taxes. Your reportable income and deductible expenses will be incorrect if your account assignments are off.
Seek funding. Your numbers must be pristine if you’re planning to apply for a loan or take on investors or sell your company.
Monitor your finances. A flawed Chart of Accounts will not present a true representation of your income and expenses. This makes it difficult to analyze your company’s financial health and plan for a prosperous future.
To recap, remember these three things:

An accurate Chart of Accounts is essential.
It’s unlikely that you’ll ever have to do anything to change it.
Let QuickBooks Online handle this critical foundation for your accounting data.

We provided this brief explanation of QuickBooks Online’s Chart of Accounts because we wanted you to have a basic understanding of this feature when you spot it during your daily work. If anything we’ve said isn’t clear, or if you have a question about your own accounting setup, please do let us know.

August 2023 Business Due Dates

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August 10 – Social Security, Medicare, and Withheld Income Tax
File Form 941 for the second quarter of 2023. This due date applies only if you deposited the tax for the quarter in full and on time.
August 15 – Social Security, Medicare, and Withheld Income Tax
If the monthly deposit rule applies, deposit the tax for payments in July.
August 15 – Nonpayroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in July.
Weekends & Holidays:
If a due date falls on a Saturday, Sunday or legal holiday, the due date is automatically extended until the next business day that is not itself a legal holiday.
Disaster Area Extensions:Please note that when a geographical area is designated as a disaster area, due dates will be extended. For more information whether an area has been designated a disaster area and the filing extension dates visit the following websites:
FEMA: https://www.fema.gov/disaster/declarationsIRS: https://www.irs.gov/newsroom/tax-relief-in-disaster-situationsFor example, disaster-area taxpayers in most of California and parts of Alabama and Georgia now have until Oct. 16, 2023, to file various federal individual and business tax returns and make tax payments.

Posted in Tax

August 2023 Individual Due Dates

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August 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during July, you are required to report them to your employer on IRS Form 4070 no later than August 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 8 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
Weekends & Holidays:
If a due date falls on a Saturday, Sunday or legal holiday, the due date is automatically extended until the next business day that is not itself a legal holiday.
Disaster Area Extensions:Please note that when a geographical area is designated as a disaster area, due dates will be extended. For more information whether an area has been designated a disaster area and the filing extension dates visit the following websites:
FEMA: https://www.fema.gov/disaster/declarationsIRS: https://www.irs.gov/newsroom/tax-relief-in-disaster-situationsFor example, disaster-area taxpayers in most of California and parts of Alabama and Georgia now have until Oct. 16, 2023, to file various federal individual and business tax returns and make tax payments.

Posted in Tax

Is Hobby Income Taxable? Are Hobby Losses Deductible?

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Article Highlights:

Hobby Income
Form 1099-K
Hobby Expenses
Hobby Losses
Hobby Tax Reporting
Not-for-Profit Rules
Determining Factors
Trade or Business Presumption
Self-Employment Tax

Are you involved in a hobby that you not only enjoy but that produces income? If so, you may have wondered whether the income is taxable, how the tax law treats hobby-related expenses, and if a net loss is tax deductible. Also to consider is if there’s a net profit, has your hobby now become a business?
Most individuals don’t get involved in a hobby intending to make money from it. But if they do, the tax law says that the hobby income must be reported on their tax return. The IRS has depended on the honesty of hobbyists to include the income on their income tax returns. However, it was relatively easy for individuals to avoid including miscellaneous income from hobbies when their only sources of sales of their products were word-of-mouth sales, flea market sales and such – generally cash transactions with no paper trail.
Nowadays, many individuals sell the merchandise they make as a hobby through online e-commerce sites such as Etsy, eBay, Amazon and others. Congress decided that to rein in unreported income, these sites and third-party payers such as credit and debit card issuers, PayPal, and similar companies should report to the IRS the income received by the selling individuals each year. After a delay implementation of the new rules, IRS has said that starting with tax year 2023, Form 1099-K is to be used to report sales of $600 or more, regardless of the number of transactions. Hobbyists will need to be sure the income shown on the 1099-K is included on Schedule 1 of Form 1040, or otherwise explain why the income isn’t taxable.
Expenses related to a hobby are considered personal expenses which aren’t tax deductible. (Prior to changes included in the Tax Cuts and Jobs Act of 2017, hobbyists were able to deduct expenses up to the amount of their hobby income as a miscellaneous itemized deduction on Schedule A, but this deduction isn’t allowed through 2025.) Thus, hobby income is reported on Schedule 1 of the hobbyist’s 1040 and no expenses are deductible.
Some hobbyists try to get a tax deduction for their hobby expenses by treating their hobby as a trade or a business. By disguising hobbies as a trade or business, and if the hobby expenses exceed the hobby income, they think they can report a deductible business loss. But the tax code includes rules that do not permit losses for not-for-profit activities such as hobbies.
So, what distinguishes a business from a hobby? The IRS considers a number of factors when making the judgment. No single factor is decisive, but all must be considered together in determining whether an activity is for profit. These factors are:

(1) Is the activity carried out in a businesslike manner? Maintaining complete and accurate records for the activity is a definite plus for a taxpayer, as is a business plan that formally lays out the taxpayer’s goals and describes how the taxpayer realistically expects to meet those expectations.
(2) How much time and effort does the taxpayer spend on the activity? The IRS looks favorably at substantial amounts of time spent on the activity, especially if the activity has no great recreational aspects. Full-time work in another activity is not always a detriment if a taxpayer can show that the activity is regular; time spent by a qualified person hired by the taxpayer can also count in the taxpayer’s favor.
(3) Does the taxpayer depend on the activity as a source of income? This test is easiest to meet when a taxpayer has little income or capital from other sources (i.e., the taxpayer could not afford to have this operation fail).
(4) Are losses from the activity the result of sources beyond the taxpayer’s control? Losses from unforeseen circumstances like drought, disease, and fire are legitimate reasons for not making a profit. The extent of the losses during the start-up phase of a business also needs to be looked at in the context of the kind of activity involved.
(5) Has the taxpayer changed business methods in an attempt to improve profitability? The taxpayer’s efforts to turn the activity into a profit-making venture should be documented.
(6) What is the taxpayer’s expertise in the field? Extensive study of this field’s accepted business, economic, and scientific practices by the taxpayer before entering into the activity is a good sign that profit intent exists.
(7) What success has the taxpayer had in similar operations? Documentation on how the taxpayer turned a similar operation into a profit-making venture in the past is helpful.
(8) What is the possibility of profit? Even though losses might be shown for several years, the taxpayer should try to show that there is realistic hope of a good profit.
(9) Will there be a possibility of profit from asset appreciation? Although profit may not be derived from an activity’s current operations, asset appreciation could mean that the activity will realize a large profit when the assets are disposed of in the future. However, the appreciation argument may mean nothing without the taxpayer’s positive action to make the activity profitable in the present.

Because making a determination using these factors is so subjective, the IRS regulations provide that the taxpayer has a presumption of profit motive if an activity shows a profit for any three or more years during a period of five consecutive years. However, if the activity involves breeding, training, showing or racing horses, then the period is two out of seven consecutive years.
Making the proper determination is important because of the differences in tax treatment for hobbies versus trades or businesses. If an activity is determined to be a trade or business in which the owner materially participates, then the owner can deduct a loss on his or her tax return, and it is not uncommon for a business to show a loss in the startup years.
Those with a profit who are truly operating a trade or business will usually be eligible for the Qualified Business Income (QBI) deduction (through 2025) that is generally 20% of the net profit of the business and is deductible in addition to the expenses claimed when figuring the net profit. This deduction, which is allowed without having to itemize deductions, is not permitted if the income is from a hobby.
Another concern for hobbyists who are reporting income from their hobby on their 1040 is whether that income is subject to self-employment (SE) tax. The SE tax is the Social Security and Medicare tax paid by those with a trade or business operated as a sole proprietor. Partners in some types of partnerships also pay SE tax. Luckily, there is an exception for sporadic or one-shot deals and hobbies, which are not subject to self-employment tax.
If you have tax questions related to your hobby activity and how the not-for-profit rules may apply, please give this office a call.

Posted in Tax

Relief For Some 2023 IRA RMDs

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Article Highlights:

IRA Owners Turning 72 in 2023.
Required Minimum Distribution Not Required Until April 1, 2025.
60-Day Rollover Period
Rollover Period Extended Until September 30, 2023.

On July 14, 2023, the IRS issued Notice 2023-54 announcing that traditional IRA owners who will attain age 72 in 2023 (that is, individuals born in 1951) will have to take their first required minimum distribution (RMD) by April 1, 2025, rather than April 1, 2024.
This delay in the required beginning date means that these IRA owners (who, prior to enactment in late December 2022 of the SECURE 2.0 Act, would have been required to take minimum distributions from their IRAs for 2023) will have no RMD due from their IRAs for 2023. Thus, the first distribution for these IRA owners that will be treated as an RMD will be a distribution made for 2024, not 2023.
The significance of this for an individual having their 72nd birthday in 2023 is that IRA distributions in 2023 mischaracterized as 2023 RMDs will be eligible to be rolled back into their IRA account. Thus, the portion of the distribution that is redeposited will avoid tax in 2023. Tax law doesn’t allow RMDs to be rolled over, so this is why the IRS is identifying these distributions as mischaracterized RMDs and eligible for rollover.
The normal period allowed for a rollover is 60 days from the time of the distribution. But to accommodate those who would have preferred not to take this mischaracterized distribution in 2023, the IRS extended the 60-day rollover period to September 30, 2023 for IRA owners and IRA owners’ surviving spouses.
There is also a 12-month waiting time between IRA rollovers but for purposes of the extended rollover period for mischaracterized distributions, the rollover is allowed even if the IRA owner or their surviving spouse has rolled over a distribution within the last twelve months. However, making such a rollover of the mischaracterized IRA distribution would prevent the IRA owner or surviving spouse from rolling over another IRA distribution in the next twelve months.
If you have questions, please contact this office.

Posted in Tax

Your Entrepreneur Start-Up Guide: The Best Practices to Help Motivate Success

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Ask any experienced entrepreneur and they will tell you that the difference between running a business and running a successful business is massive. To truly give yourself the best chance of success, and to help achieve your overall goals in the most effective ways possible, there are a number of key best practices you’ll want to keep in mind along the way.
The Importance of a Well-Laid Plan
By far, the number one best practice that all successful entrepreneurs lean into has to do with developing not just a business idea, but a thorough, actionable business plan.
Anybody can come up with a business idea – countless people do it on a daily basis. Let’s say you have an idea for a great new product and there’s nothing really like it in the marketplace right now. Great – what next?
How are you going to procure the materials needed to bring that product to life? What design challenges are you going to need to overcome? How big is your market, who are your current competitors, and what does your ideal potential customer look like? These are all the types of questions that you need to answer before you even think about saying that you “run a business.”
In five years, if your goal is to open a brick-and-mortar retail location, how do you connect where you want to be with where you currently are? How many employees will you need to make that happen? Where will your initial capital investment come from? Forget five years from now – what does the next fiscal quarter look like?
An actionable business plan breaks the entire process down into a series of smaller, more manageable steps and helps you accomplish your goals more organically.

Listen to Your CustomersAnother key thing that early-stage entrepreneurs need to understand in particular has to do with the idea that you should always listen to your customers and your marketplace whenever possible.
If you’re trying to bring a great new product or service into the world, at a certain point the genesis of that idea is out of your hands. It could be an objectively great product but if the market isn’t there, it isn’t going to be a success. But if the market is telling you in unison that “this would be better if you changed X, Y, or Z elements” or that they would buy it if “it had A, B, or C features,” it is absolutely in your best interest to at least take that all into consideration.
Even though you’re an entrepreneur, you are not the ultimate authority on what your business does and how it does it. Your customers have opinions that they are more than willing to share. Being willing to listen to them is often what propels successful entrepreneurs ahead of the pack.

You Are Not the Smartest Person in the Room… Or at Least, You Shouldn’t Be
Finally, know that just because you’re a passionate start-up entrepreneur doesn’t mean you’ll be able to “go it alone” forever. Yes, your “can-do attitude” has already gotten you far. There will come a time when you need to give that up and surround yourself with others.
When that time comes, resist the urge to hire people who will simply tell you what you want to hear. In your effort to become a “Jack of All Trades,” there will be certain skills that you need that you don’t personally have. Surround yourself with smart individuals – preferably those who are smarter than you are – who have those skills.
Likewise, always be proactive about seeking out advice. Participate in networking events and other opportunities to speak to entrepreneurs who have been where you are now. The type of advice they have to offer can be invaluable to understanding what it will take to sustain your vision for the long haul.
Overall, one of the most important things to understand about being an entrepreneur is that everybody’s journey is different. There is no “one size fits all” approach to starting a successful business and what works incredibly well for one person may be woefully inadequate for the next.

That is to say, the advice in this list is intended to be exactly that – advice. Find the best practices that generate the results you’re after and lean into them as much as possible. When you encounter a technique that doesn’t work, move on to the next. Part of being an entrepreneur involves a willingness to try just about anything if it can help them get closer to that goal.

Why It’s Never Too Early to Start a Savings Account for Your Children

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Parents – especially new ones – are always looking for new ways to improve the lives of their children. Surprisingly, one of the most effective opportunities that people also often overlook has to do with starting a savings account for that child as early as they’re capable of doing so.
On the one hand, no – it’s probably not a good idea to give a young child in particular unrestricted access to a bank account filled with money. But that’s not the topic under discussion. By starting a savings account for your kids early on in their lives, you put things like compounding interest to work for them (and you). Not only that, but you begin to lay the building blocks of a larger financial education that will serve them well for years to come.

The Impact of Compounding Interest
While terms like “compounding interest” may sound complicated, the idea at the heart of them is anything but. It simply means that any investment you make will generate interest, which means that the investment grows over the next period of time.
For the sake of example, let’s say you open a high-yield savings account for your child when they turn 10 years old. You contribute $60 per month like clockwork or about $15 per week. At an interest rate of 1.5% compounded daily, that account will have $6,205 in it by the time the child turns 18 – all thanks to the magic of compounding interest.
Note that if you open that same account up at birth and make those same contributions, that number climbs to $15,085.
Things get even more impressive if you open a dedicated investment account, which typically has an annual return of about 7%. Here, if you’d made that same $60 per month contribution, the child would have $7,829 by the time they turn 18. Open the same account when they’re born and continue to make the same contribution and that number climbs to $26,337. If you fund it even more the growth is substantial.
All this is because of the major benefits that compounding interest brings with it. When your interest earns its own interest, soon the idea of generating a substantial return on your investment becomes something of a self-fulfilling prophecy. At that point, the momentum of the account should motivate you to keep contributing. It will also represent an excellent educational opportunity for your family to show your child just what can happen when they put the money they’re earning to work for them.

It’s About Building a Foundation
Beyond that, it’s always a good idea to open up something like a Roth IRA for your kids – particularly so that they’re able to start saving for retirement as soon as possible. Unlike older adults, in particular, your kids have literally decades for any contributions that they make to grow. Not only do they grow tax-free, but when you hit retirement age, those contributions can also be withdrawn tax and penalty-free as well.
Truly, it’s a great thing that there are no age limits when it comes to custodial Roth IRAs because “there is no time like the present” to get one started. Your kids will need to have their own earned income (so they need to be legal working age) and they have to obey contribution limits, but all of this can help them understand what saving is and why it matters so much.
The best part of all is that with many financial institutions, opening a custodial Roth IRA can take a half hour or less.
Overall, it’s important to think about many of the financial tips, tricks, and best practices you hear about later in life. When adulthood has set in and you’re actively worried about pesky topics like “paying bills” or “saving for retirement,” you typically always hear two key things:

It’s never too late to start saving for a better future, but

It’s certainly never too early, either.

Most people get to a point where they wish they’d started saving a bit earlier than they really did and now, by setting up a savings account for your children, you have the opportunity to make sure this isn’t something that they spend time stressing about. At the very least, they’ll have a little extra money stashed away for a proverbial “rainy day” that will help out later on.

But in the best-case scenario, you’ll have started them on a critical path to financial literacy that will give them a better shot at making the best possible decisions when it comes to their financial future. The importance of this simply cannot be overstated, regardless of how old they are.

Can a Self-Employed Taxpayer Mix Business and Pleasure During Foreign Travel and Still Get a Tax Deduction?

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Article Highlights:

100% Business
Primarily Vacation
Primarily Business
Special Circumstances
Foreign Conventions, Seminars, and Meetings
Cruise Ships
Spousal Travel Expenses

Note: the business expenses discussed in this article – both foreign and domestic – are not deductible by employees during years 2018 through 2025. However, they are available to self-employed individuals.
When a self-employed individual makes a business trip outside of the U.S. and the trip is 100% devoted to business, all of the ordinary and necessary business travel expenses are deductible, just as if the business trip were within the U.S.
On the other hand, if the trip also incorporates a vacation, then special rules determine the deductibility of the travel expenses to and from the destination; when the other business travel expenses, such as lodging, meals, local travel, and incidentals can be deducted; and when they must be allocated. So, whether you are just visiting Canada, Mexico, a Caribbean island or traveling to Europe or even more exotic locales, here are some travel tax pointers:

Primarily Vacation – If your travel is primarily for vacation and you spend only a few hours attending professional seminars or meeting with foreign business colleagues, then none of the expenses you incurred in traveling to and from the general business location are deductible. Other travel expenses must be allocated on a day-by-day basis, and only the business portion is deductible.
Primarily Business – If your trip is primarily for business and meets one of the conditions listed below, then the expenses incurred in traveling to and from the foreign business destination are deductible in full (same as for travel within the U.S.).
(1) The travel outside the U.S. is for a period of one week or less (seven consecutive days, excluding the departure day but including the day of return). In addition, all other ordinary and necessary travel expenses are fully deductible.
(2) Less than 25% of your total time outside the U.S. is spent on non-business activities. In addition, all other ordinary and necessary travel expenses are fully deductible. (If 25% or more of the total time is spent on non-business activities, then a day-by-day allocation of all travel expenses between personal and business activities is necessary, and only the business portion is deductible.)
(3 ) You can establish that a personal vacation or holiday was not a major consideration. In addition, all other ordinary and necessary travel expenses are fully deductible.
(4) You did not have ‘substantial control’ over arranging the trip. In addition, all other ordinary and necessary travel expenses are fully deductible.Since a self-employed person generally has substantial control over arranging business trips, self-employed individuals usually won’t be able to meet this condition.

When determining what constitutes business and non-business time, business days include days en route to or from the business destination by a reasonably direct route without interruption; days when actual business is transacted; weekends or standby days that fall between business days; and days when business was to have been transacted but was canceled due to unforeseen circumstances.
Nonbusiness days are days you spent on nonbusiness activities as well as weekends, holidays, and other standby days that fall at the end of the business activity, if you remained at the business destination for personal reasons.
Foreign Conventions, Seminars, or Meetings – No deduction for your travel expenses to attend a convention, seminar, or similar meeting held outside of the North American area is allowed unless you establish that:

1. The meeting is directly related to the active conduct of your trade or business and
2. It is ‘as reasonable’ for the meeting to be held outside of North America as it is withinthe North American area.

The IRS defines ‘North American area’ quite broadly and includes not just the U.S., Canada, and Mexico, as you would expect, but also several countries in the Caribbean basin, U.S. possessions, a few Pacific island nations, and some Central American countries as well. In addition to the USA and the following list of locations, the North American area also includes U.S. islands, cays and reefs that are territories of the U.S. and not part of the 50 states or the District of Columbia.

American Samoa
Jamaica

Antigua and Barbuda
Jarvis Island

Aruba
Johnston Island

Bahamas
Marshall Islands

Baker Island
Mexico

Barbados
Micronesia

Canada
Midway Islands

Costa Rica
Northern Mariana Islands

Curaçao
Palau

Dominica
Palmyra Atoll

Dominican Republic
Panama

Grenada
Puerto Rico

Guam
Saint Lucia

Guyana
Trinidad and Tobago

Honduras
U.S. Virgin Islands

Howland Island
Wake Island

Cruise Ship Conventions –To deduct the cost of attending a convention related to your trade or business on a cruise ship, the ship must be a U.S. flagship, and all of the ports of call must be within the U.S. or its possessions. In addition, the maximum deduction is limited to $2,000 per attendee. The substantiation requirements include certain signed statements by the both you and an officer of the convention sponsor.
Spousal* Travel Expenses – Generally, deductions are denied to a business for the travel expenses of a business owner’s spouse, a dependent, or employee accompanying the business owner on a business trip, unless:

The spouse, etc., is an employee of the taxpayer; and
The travel of the spouse, etc., is for a bona fide business purpose; and
The expenses would otherwise be a deductible business travel expense for the spouse, etc.

*These rules also apply to a dependent or employee of the taxpayer.
However, the law allows a deduction for the single rate of lodging on qualified business trips, and frequently, there is no rate difference between one and two occupants. Thus, virtually the entire lodging expenses for an accompanying spouse will be deductible. When traveling by car, the law does not require any allocation because the spouse is also traveling in the vehicle. Thus, if traveling by vehicle, the entire cost of the business-related transportation would be deductible. This would generally also apply to taxis and ride-share vehicles (Uber, Lyft) at the destination.
As you can see, determining the tax deduction for a foreign business trip that is combined with a vacation can be complicated. If you need additional tax guidance when planning such a trip, please give this office a call.