In this Edition
April 12, 2022

Could You Be Hit With the Trust Fund Recovery Penalty?

PODCAST: S-Corporations

Tax Calendar - 2nd Quarter 2022

Taking Casualty Loss Tax Deductions Is Now Harder

Taking the Opposite Approach: Ways Your Business Can Accelerate Taxable Income and Defer Deductions 

Establish a Tax-Favored Retirement Plan
Could You Be Hit With the Trust Fund Recovery Penalty?
There’s a harsh tax penalty that you could be personally responsible to pay if you own or manage a business with employees. It’s called the Trust Fund Recovery Penalty. It applies to the Social Security and income taxes required to be withheld by a business from the wages of its employees.

Because taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes can be penalized 100% of the taxes due. Accordingly, the amounts the IRS seeks when the penalty is applied are usually substantial, and the IRS is aggressive in enforcing the penalty.

A Wide-Reaching Penalty

The Trust Fund Recovery Penalty is among the more dangerous tax penalties because it applies both to a broad range of actions and to a wide range of people involved in a business.

Here are some questions and answers to help you avoid incurring the penalty. 

What Actions Are Penalized?

The Trust Fund Recovery Penalty applies to willful failures to collect or truthfully account for and pay over Social Security and income taxes required to be withheld from employees’ wages.

Who Is at Risk?

The penalty can be imposed on anyone “responsible” for collection and payment of the tax. This has been broadly defined to include corporate officers, directors and shareholders who are under a duty to collect and pay the tax, and a partnership’s partners or any employee of the business with such a duty. Even voluntary board members of tax-exempt organizations, who are generally exempt from responsibility, may be subject to this penalty under certain circumstances. In some cases, responsibility has even been extended to family members close to the business, and to attorneys and accountants.

According to the IRS, responsibility is a matter of status, duty and authority. Anyone with the power to see that the taxes are (or aren’t) paid may be responsible. There’s often more than one responsible person in a business, but each is at risk for the entire penalty. You may not be directly involved with the payroll tax withholding process in your business. But if you learn of a failure to pay over withheld taxes and you have the power to pay them but instead you make payments to creditors and others, you become a responsible person.

Although a taxpayer held liable can sue other responsible people for contribution, this action must be taken after the penalty is paid, entirely on his or her own. It isn’t part of the IRS collection process.

What Is Considered “Willful?” 

For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bending to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes that are due to the government is willful behavior. The IRS specifically defines “willfully” in this instance as “voluntarily, consciously and intentionally” paying other expenses instead of the withholding taxes.

Just because you delegate these responsibilities to someone else doesn’t necessarily mean you’re off the hook. Your failure to deal with the task yourself can be treated as the willful element.

Never Borrow From Taxes

Under no circumstances should you ever fail to withhold taxes or “borrow” from withheld amounts. All funds that have been withheld from employee paychecks should be paid over to the government in full and on time. Contact us with any questions about making tax payments.

Amanda Farley, CPA
D 920.337.4554
PODCAST
S-Corporations

This time of the year, we get a lot of questions from proprietors as to whether they should change the way they are taxed and whether they should look at becoming an S-Corporation. In this episode, we talk about what you need to know about S-Corporations.
Tax Calendar - 2nd Quarter 2022
April 18 — Last day to file (or extend) your 2021 personal return and pay any tax that is due. 
 
  • First-quarter 2022 estimated tax payments for individuals, trusts and calendar-year corporations are due (the states of Maine and Massachusetts have an April 19 federal deadline). 
  • 2021 returns are due for trusts and calendar-year estates and C corporations.
  • FinCEN Form 114 (“Report of Foreign Bank and Financial Accounts”) is due — but an automatic extension applies to October 15.
  • Any final contribution you plan to make to an IRA or Education Savings Account for 2021 is due.
  • SEP and profit-sharing plan contributions are also due today if your return is not being extended.
May 2 — Employers must file Form 941 (“Employer’s Federal Quarterly Tax Return”) for the first quarter (May 10 if all taxes are deposited in full and on time).  Also, employers must deposit FUTA taxes owed through March if the liability is more than $500.
May 16 — Calendar-year exempt organizations must file (or extend) their 2021 Forms 990, 990-EZ or 990-PF returns.
June 15 — Second quarter 2022 estimated tax payments are due for individuals, calendar-year corporations, estates and trusts.
Taking Casualty Loss Tax Deductions Is Now Harder
Unexpected disasters such as severe storms, flooding and wildfires can happen anywhere, causing damage to your home and personal property. Before the Tax Cuts and Jobs Act (TCJA), eligible casualty loss victims could claim a deduction on their tax returns. But restrictions make it tougher to qualify for these deductions.

What’s considered a casualty for tax purposes? It’s a sudden, unexpected or unusual event, such as a hurricane, tornado, flood, earthquake, fire, act of vandalism or terrorist attack.

Higher Hurdles to Qualify

The TCJA generally eliminates deductions for personal casualty losses through 2025, unless the losses are due to a federally declared disaster. So, victims in several presidentially declared major disaster areas in 2021 would be eligible for casualty loss tax deductions.

Note: An exception to the general rule states that if you receive insurance proceeds that result in a personal casualty gain, you can deduct personal casualty losses up to the amount of the gain, even without a federal disaster declaration.

Special Election

If your casualty loss is due to a federally declared disaster, a special election allows you to deduct the loss on your tax return for the preceding year and claim a refund. If you’ve already filed your taxes for that year, you may file an amended return and elect to claim the deduction for the earlier year. This may help you get extra cash when you need it.

The election must be made no later than six months after the due date (without extensions) for filing your tax return for the year in which the disaster occurs. However, the election itself must be made on an original or amended return for the preceding year.

Calculating the Deduction

These three steps must be taken to calculate the casualty loss deduction for personal-use property in an area declared a federal disaster:

  1. Subtract any insurance proceeds,
  2. Subtract $100 per casualty event, and
  3. Combine the results from steps 1 and 2, then subtract 10% of your adjusted gross income for the year you claim the loss deduction.

Be aware that another factor that complicates your ability to claim a casualty loss is that you must itemize deductions to do so. The TCJA raised the standard deduction through 2025 (for 2022, it is $12,950 for single filers, $19,400 for heads of household and $25,900 for married couples filing jointly). A higher standard deduction means fewer individuals will itemize deductions. So, even if you qualify for a casualty loss deduction, you might not see a tax benefit if you don’t have enough itemized deductions. 

Contact Us

The rules described here are for personal property. Keep in mind, the rules for business or income-producing property are different. It’s easier to secure a business property casualty loss deduction. If you’re a victim of a disaster — business or personal — we can help you navigate the complex rules.

Jared Ystad
D 715.384.1975
Tax Tip Tuesday - Video Short
Last-Minute Tax Savings Opportunities

In 30 seconds, we cover last-minute tax deduction opportunities that are still available after December 31st.
Taking the Opposite Approach: Ways Your Business Can Accelerate Taxable Income and Defer Deductions 
Typically, businesses want to delay recognition of taxable income into future years and accelerate deductions into the current year. But when is it prudent to do the opposite? And why would you want to?

One reason might be tax law changes that raise tax rates. There have been discussions in Washington about raising the corporate federal income tax rate from its current flat 21%. Another reason may be because you expect your non-corporate pass-through entity business to pay taxes at higher rates in the future because the pass-through income will be taxed on your personal return. There have also been discussions in Washington about raising individual federal income tax rates.

If you believe your business income could be subject to tax rate increases, you might want to accelerate income recognition into the current tax year to benefit from the current lower tax rates. At the same time, you may want to postpone deductions into a later tax year, when rates are higher, and when the deductions will do more tax-saving good.

To Accelerate Income

Consider these options if you want to accelerate revenue recognition into the current tax year:

  • Sell appreciated assets that have capital gains in the current year, rather than waiting until a later year.
  • Review the company’s list of depreciable assets to determine if any fully depreciated assets are in need of replacement. If fully depreciated assets are sold, taxable gains will be triggered in the year of sale.
  • For installment sales of appreciated assets, elect out of installment sale treatment to recognize gain in the year of sale.
  • Instead of using a tax-deferred like-kind Section 1031 exchange, sell real property in a taxable transaction.
  • Consider converting your S corporation into a partnership or LLC treated as a partnership for tax purposes. That will trigger gains from the company’s appreciated assets because the conversion is treated as a taxable liquidation of the S corp. The partnership will have an increased tax basis in the assets.
  • For a construction company, do you have long-term construction contracts previously exempt from the percentage-of-completion method of accounting for long-term contracts? Consider using the percentage-of-completion method to recognize income sooner as compared to the completed contract method, which defers recognition of income until the long-term construction is completed.

To Defer Deductions

Consider the following actions to postpone deductions into a higher-rate tax year, which will maximize their value:

  • Delay purchasing capital equipment and fixed assets, which would give rise to depreciation deductions.
  • Forego claiming big first-year Section 179 deductions or bonus depreciation deductions on new depreciable assets and instead depreciate the assets over a number of years.
  • Determine whether professional fees and employee salaries associated with a long-term project could be capitalized, which would spread out the costs over time and push the related deductions forward into a higher rate tax year.
  • Purchase bonds at a discount this year to increase interest income in future years.
  • If allowed, put off inventory shrinkage or other write-downs until a year with a higher tax rate.
  • Delay charitable contributions into a year with a higher tax rate.
  • If allowed, delay accounts receivable charge-offs to a year with a higher rate.
  • Delay payment of liabilities where the related deduction is based on when the amount is paid.

Contact us to discuss the best tax planning actions in light of your business’s unique tax situation. 

Matt Cantlon, CPA
D 507.252.6672
Establish a Tax-Favored Retirement Plan
If your business doesn’t already have a retirement plan, now might be a good time to take the plunge. Current retirement plan rules allow for significant tax-deductible contributions.

For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $61,000 for 2022. If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $61,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2022 by a whopping $19,520 (32% times $61,000).

More Options

Other small business retirement plan options include:

  • 401(k) plans, which can even be set up for just one person (also called solo 401(k)s)
  • Defined benefit pension plans
  • SIMPLE-IRAs.

Depending on your circumstances, these other types of plans may allow bigger deductible contributions.

Deadlines to Establish and Contribute

Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year.

Important: The SECURE Act provision didn’t change the deadline to establish a SIMPLE-IRA plan. It remains October 1 of the year for which the plan is to take effect. Also, the SECURE Act change doesn’t override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferral contributions (salary-reduction contributions) under a 401(k) plan. The plan must be in existence before such employee elective deferral contributions can be made.

For example, the deadline for the 2021 tax year for setting up a SEP-IRA for a sole proprietorship business that uses the calendar year for tax purposes is October 17, 2022, if you extend your 2021 tax return. The deadline for making the contribution for the 2021 tax year is also October 17, 2022. However, to make a SIMPLE-IRA contribution for the 2021 tax year, you must have set up the plan by October 1, 2021. So, it’s too late to set up a plan for last year.

While you can delay until next year establishing a tax-favored retirement plan for this year (except for a SIMPLE-IRA plan), why wait? Get it done this year as part of your tax planning and start saving for retirement. We can provide more information on small business retirement plan alternatives. Be aware that, if your business has employees, you may have to make contributions for them, too. 

Curt Bach, CPA
D 715.301.7631
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