In this Edition
August 9, 2022

The Tax Obligations If Your Business Closes Its Doors

PODCAST: Roth IRA Conversions

Three Tax Breaks for Small Businesses

When is Employer-Provided Life Insurance Taxable?

Should You Digitize Your Tax and Financial Records?
The Tax Obligations If Your Business Closes Its Doors
Sadly, many businesses have been forced to shut down recently due to the pandemic and the economy. If this is your situation, we can assist you, including taking care of the various tax responsibilities that must be met.

Of course, a business must file a final income tax return and some other related forms for the year it closes its doors. The type of return to be filed depends on the type of business you have. Here’s a rundown of the basic requirements.

  • Sole proprietorships. You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year you close the business. Report gains and losses from assets sales on Form 4797 or Schedule D as required. You may also need to report self-employment tax.

  • Partnerships. A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must Report gains and losses from assets sales on Form 4797 or Schedule D as required. Indicate that this is the final return and do the same on Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.”

  • All corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.

  • C corporations. File Form 1120, “U.S. Corporation Income Tax Return,” for the year you close. Report gains and losses from assets sales on Form 4797 or Schedule D as required. Indicate this is the final return.

  • S corporations. File Form 1120-S, “U.S. Income Tax Return for an S Corporation,” for the year of closing. Report gains and losses from assets sales on Form 4797 or Schedule D as required. The “final return” box must be checked on Schedule K-1.

  • All businesses. Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.

Employees and Contract Workers

If you have employees, you must pay them final wages and compensation owed, make final federal and state tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.

If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

Other Tax Issues

If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees.

We can assist you with many other complicated tax issues related to closing your business, including debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.

We can advise you on the length of time you need to keep business records. You also must cancel your Employer Identification Number (EIN) and close your IRS business account.

If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these issues and get answers to any questions.

Matt Eckelberg, CPA
D 715.384.1995
PODCAST
Roth IRA Conversions
In this podcast, we discuss Roth IRA conversions and why you may want to at least consider this move as part of your overall financial plan.

Ryan Laughlin covers some basic terminology, rules, and also misconceptions about Roth IRA conversions.
Three Tax Breaks for Small Businesses
Sometimes, bigger isn’t better: Your small- or medium-sized business may be eligible for some tax breaks that aren’t available to larger businesses. Here are some examples.

1. QBI Deduction

For 2018 through 2025, the qualified business income (QBI) deduction is available to eligible individuals, trusts and estates. But it’s not available to C corporations or their shareholders.

The QBI deduction can be up to 20% of:

  • QBI earned from a sole proprietorship or single-member limited liability company (LLC) that’s treated as a sole proprietorship for federal income tax purposes, plus
  • QBI passed through from a pass-through business entity, meaning a partnership, LLC classified as a partnership for federal income tax purposes or S corporation.

Pass-through business entities report tax items to their owners, who then take them into account on their owner-level returns. The QBI deduction rules are complicated, and the deduction can be phased out at higher income levels.

2. Eligibility for Cash-Method Accounting

Businesses that are eligible to use the cash method of accounting for tax purposes have the ability to fine-tune annual taxable income. This is accomplished by timing the year in which you recognize taxable income and claim deductions.

Under the cash method, you generally don’t have to recognize taxable income until you’re paid in cash. And you can generally write off deductible expenses when you pay them in cash or with a credit card.

Only “small” businesses are potentially eligible for the cash method. For this purpose under current law, a small business includes one that has no more than $25 million of average annual gross receipts, based on the preceding three tax years. This limit is adjusted annually for inflation. For tax years beginning in 2022, the limit is $27 million.

3. Section 179 Deduction

The Sec. 179 first-year depreciation deduction potentially allows you to write off some (or all) of your qualified asset additions in the first year they’re placed in service. It's available for both new and used property.

For qualified property placed in service in tax years 2018 and beyond, the deduction rules are much more favorable than under prior law. Enhancements include:

Higher deduction. The Sec. 179 deduction has been permanently increased to $1 million with annual inflation adjustments. For qualified assets placed in service in 2022, the maximum is $1.08 million.

Liberalized phase-out. The threshold above which the maximum Sec. 179 deduction begins to be phased out is $2.5 million with annual inflation adjustments. For qualified assets placed in service in 2022, the phase-out begins at $2.7 million.

The phase-out rule kicks in only if your additions of assets that are eligible for the deduction for the year exceed the threshold for that year. If they exceed the threshold, your maximum deduction is reduced dollar-for-dollar by the excess. Sec. 179 deductions are also subject to other limitations.

Bonus Depreciation

While Sec. 179 deductions may be limited, those limitations don’t apply to first-year bonus depreciation deductions. For qualified assets placed in service in 2022, 100% first-year bonus depreciation is available. After this year, the first-year bonus depreciation percentages are scheduled to start going down to 80% for qualified assets placed in service in 2023. They will continue to be reduced until they reach 0% for 2028 and later years.

Contact us to determine if you’re taking advantage of all available tax breaks, including those that are available to small and large businesses alike.

Art Raak, CPA
D 507.252.6670
Should You Digitize Your Tax and Financial Records?
Traditionally, important tax and financial records have been stored as hard copies in desk drawers, filing cabinets and safe deposit boxes. These days, however, it’s become increasingly popular and easy to digitize documents and store them electronically. Is this the right move for you?

The Case for Going Digital

One of the biggest advantages of digital documents is a drastic reduction in the amount of paper that you must sort, organize and store. Also, digital documents are generally more protected from damage than paper files — assuming they’re stored properly. After all, paper records are subject to damage or loss by fire, theft, mold and sprinklers. These risks can be easily mitigated with good electronic storage practices.

Digitized records improve productivity. For example, documents can be efficiently searched for (and searched through) using keywords. But paper files that are misplaced or misfiled may require hours of rifling through file cabinets and paper folders.

Electronic documents can also be digitally date-stamped, which helps ensure that you’re accessing the most recent versions. You can track edits to electronic files, monitor who’s been viewing them and restrict access to sensitive documents, too.

Options for Electronic Storage and Some Risks

To digitize paper documents, you need only a scanner. Scanners are widely available for purchase or rent. After digitization you can reduce your paper files by shredding many of them, though you may need to retain paper versions of some legal documents. (Consult an attorney about which ones.)
When it comes to storage, you essentially have two options:

  1. A Self-Hosted System. Here, you buy a dedicated hard drive (or several high-quality thumb drives) on which to store your digital records. It’s best not to keep these files on your home computer because, if it crashes or gets hacked, your sensitive data will be exposed. Hackers can’t get to self-hosted files because they’re not on the internet, and you can limit your drive’s exposure to natural disasters or accidental damage by keeping it in a fire-proof safe.
  2. The Cloud. You’ve likely heard of, and may even use, internet-based storage for photos or other items. You can do this for tax and financial records as well, but you’ve got to be careful. Choose a reputable and stable provider that encrypts everything. The upside is you’ll have instant access to your files anywhere in the world — as long as you have a secure internet connection. The downside: You’ll lose access during internet outages and no cloud system is 100% guaranteed secure.

Document Security Is Peace of Mind

For many people, the right approach to secure document storage might be using both paper and electronic to some extent. Retain paper files of certain documents for a recommended period and digitize everything else. We can help you find the best way to keep your tax and financial records organized and safe.

Matt Cantlon, CPA
D 507.252.6672
Tax Tip Tuesday - Video Short
Understanding Your Form 1099-K

This week, Steve explains why your business or side-hustle, which is accepting payments through Paypal, Venmo, or other third-party payment networks, might be receiving a form 1099-K next January.
When Is Employer-Provided Life Insurance Taxable?
If your company benefits include group term life insurance paid by your employer, a portion of the premiums paid for the coverage may be taxable. Depending on the amount of coverage you’re provided, some of it may create undesirable income tax consequences for you.

The cost of the first $50,000 of group term life insurance coverage that your employer pays for is excluded from taxable income and doesn't add anything to your income tax bill. That’s good news. But the employer-paid cost of group term coverage over $50,000 is taxable income to you. That means it will be included in the taxable wages reported on your Form W-2 — even if you never actually receive it. In other words, it’s “phantom income.”  

Have You Reviewed Your W-2?

What should you do if you think the tax cost of employer-provided group term life insurance is too high? First, you should establish if this is actually the case. If a specific dollar amount appears in Box 12 of your Form W-2 (with code “C”), that dollar amount represents your employer’s cost to provide you with group-term life insurance coverage of more than $50,000, minus any amount you paid for the coverage. You’re responsible for federal, state and local taxes on the amount that appears in Box 12 and for the associated Social Security and Medicare taxes as well.

But keep in mind that the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2.  It’s the amount in Box 1 that is reported on your tax return.

What Are Your Options?

If you decide that the tax cost is too high for the benefit you're getting in return, you should find out whether your employer has a “carve-out” plan. That’s a plan that allows selected employees to carve out from the group term coverage. If your employer’s plan doesn’t offer a carve-out, ask if they’d be willing to create one.

There are several different types of carve-out plans that employers can offer to their employees. For example, the employer can continue to provide $50,000 of group term insurance (since there's no tax cost for the first $50,000 of coverage). Then, the employer can either provide the employee with an individual policy for the balance of the coverage or give the employee the amount the employer would have spent for the excess coverage as a cash bonus that the employee can use to pay the premiums on an individual policy.

You may have questions about this important topic, such as how much your group term life insurance benefit is adding to your income. Contact us for help with this and other questions.

Aaron Boettcher, CPA
D 920.337.4523
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