Tax+Business Alert
May 23, 2023
Maximizing Tax Relief for Business Losses: Navigating the Net Operating Loss (NOL) Deduction and Tax Law Changes
Partner Video Feature: Jeff Dvorachek, CPA
Avoiding Costly Tax Mistakes: Understanding Worker Classification for Small Businesses
PODCAST: Don't Panic: What You Need to Know When Facing a Tax Audit
Tax Implications of Bartering Services: Two Real-Life Scenarios and Maximizing Your Bartering Potential for Tax Savings
2023 Mileage Rate Updates: Deducting Vehicle Expenses for Businesses and Individuals
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Maximizing Tax Relief for Business Losses: Navigating the Net Operating Loss (NOL) Deduction and Tax Law Changes |
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Whether you’re operating a new company or an established business, losses can happen. The federal tax code may help soften the blow by allowing businesses to apply losses to offset taxable income in future years, subject to certain limitations.
Understanding the Net Operating Loss (NOL) Deduction for Business Losses
The net operating loss (NOL) deduction addresses the tax inequities that can exist between businesses with stable income and those with fluctuating income. It essentially lets the latter average out their income and losses over the years and pay tax accordingly.
You may be eligible for the NOL deduction if your deductions for the tax year are greater than your income. The loss generally must be caused by deductions related to your:
- Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
- Casualty and theft losses from a federally declared disaster, or
- Rental property (Schedule E).
The following generally aren’t allowed when determining your NOL:
- Capital losses that exceed capital gains,
- The exclusion for gains from the sale or exchange of qualified small business stock,
- Nonbusiness deductions that exceed nonbusiness income,
- The NOL deduction itself, and
- The Section 199A qualified business income deduction.
Individuals and C corporations are eligible to claim the NOL deduction. Partnerships and S corporations generally aren’t eligible, but partners and shareholders can use their separate shares of the business’s income and deductions to calculate individual NOLs.
NOL Deduction: Qualifying for Tax Relief on Business Losses
The Tax Cuts and Jobs Act (TCJA) made significant changes to the NOL rules. Previously, taxpayers could carry back NOLs for two years, and carry forward the losses 20 years. They also could apply NOLs against 100% of their taxable income.
The TCJA limits the NOL deduction to 80% of taxable income for the year and eliminates the carryback of NOLs (except for certain farming losses). However, it does allow NOLs to be carried forward indefinitely.
A COVID-19 relief law temporarily loosened the TCJA restrictions. It allowed NOLs arising in 2018, 2019 or 2020 to be carried back five years and removed the taxable income limitation for years beginning before 2021. As a result, NOLs could completely offset income. However, these provisions have expired.
If your NOL carryforward is more than your taxable income for the year to which you carry it, you may have an NOL carryover. The carryover will be the excess of the NOL deduction over your modified taxable income for the carryforward year. If your NOL deduction includes multiple NOLs, you must apply them against your modified taxable income in the same order you incurred them, beginning with the earliest.
Tax Law Changes: Limitations on NOL Deductions Explained
The TCJA established an “excess business loss” limitation, which took effect in 2021. For partnerships or S corporations, this limitation is applied at the partner or shareholder level, after the outside basis, at-risk and passive activity loss limitations have been applied.
Under the rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus an inflation-adjusted threshold. For 2023, that threshold is $289,000 ($578,000 if married filing jointly). Remaining losses are treated as an NOL carryforward to the next tax year. In other words, you can’t fully deduct them because they become subject to the 80% income limitation on NOLs, reducing their tax value.
Under the Inflation Reduction Act, the excess business loss limitation applies to tax years beginning before January 1, 2029. Under the TCJA, it had been scheduled to expire after December 31, 2026.
Planning Ahead: Navigating Tax Rules for Business Losses with NOLs
The tax rules regarding business losses are complex, especially when accounting for how NOLs can interact with other potential tax breaks. We can help you chart the best course forward.
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Dave Fochs, CPA
D 507.252.6688
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Jeff Dvorachek, CPA
Get to know Jeff Dvorachek a partner in our Manitowoc, WI, office. In this video, he shares some helpful financial tips.
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Avoiding Costly Tax Mistakes: Understanding Worker Classification for Small Businesses |
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Many businesses use independent contractors to help keep their costs down — especially in these times of staff shortages and inflationary pressures. If you’re among them, be careful that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be an expensive mistake.
The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, your company must withhold federal income and payroll taxes and pay the employer’s share of FICA taxes on the wages, plus FUTA tax. A business may also provide the worker with fringe benefits if it makes them available to other employees. In addition, there may be state tax obligations.
On the other hand, if a worker is an independent contractor, these obligations don’t apply. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if it’s $600 or more).
Navigating the Gray Area: No Clear Definition for Employee vs. Independent Contractor
Who’s an “employee?” Unfortunately, there’s no uniform definition of the term.
The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account including who provides tools and who pays expenses.
Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. This protection generally applies only if an employer meets certain requirements. For example, the employer must file all federal returns consistent with its treatment of a worker as a contractor and it must treat all similarly situated workers as contractors.
Note: Section 530 doesn’t apply to certain types of workers.
Think Twice Before Asking the IRS to Determine Working Classification - Here's Why
Be aware that you can ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, you should also be aware that the IRS has a history of classifying workers as employees rather than independent contractors.
Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and it may unintentionally trigger an employment tax audit.
It may be better to properly set up a relationship with workers to treat them as independent contractors so that your business complies with the tax rules.
Workers who want an official determination of their status can also file Form SS-8. Dissatisfied independent contractors may do so because they feel entitled to employee benefits and want to eliminate their self-employment tax liabilities.
If a worker files Form SS-8, the IRS will notify the business with a letter. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.
These are the basic tax rules. Contact us if you’d like to discuss how to classify workers at your business. We can help make sure that your workers are properly classified.
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Matt Cantlon, CPA
D 507.252.6672
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Don't Panic: What You Need to Know When Facing a Tax Audit
In this episode, Jeff Dvorachek, a tax partner with years of experience in the field, sheds light on the audit process. He shares valuable insights on the factors that could lead to an audit, the types of items the IRS typically investigates, and important things to keep in mind if you've received a notice from the IRS that your tax return is being audited.
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Tax Implications of Bartering Services: Two Real-Life Scenarios and Maximizing Your Bartering Potential for Tax Savings |
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During these times of high inflation, many cash-challenged businesses have bartered for goods and services instead of paying dollars for them. If your company gets involved in such transactions, remember that the fair market value of goods that you receive is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.
Tax Implications of Bartering Services: A Look at Two Real-Life Scenarios
Let’s say a computer consultant agrees to exchange services with an advertising agency. Both parties will be taxed on the fair market value of the services received. This is the amount they’d normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless contrary evidence exists.
In addition, if services are exchanged for property, income is realized. Say a construction company does work for a retail business in exchange for unsold inventory. The contractor will incur income equal to the inventory’s fair market value.
Maximizing Your Bartering Potential
Many businesses join barter clubs that facilitate these transactions. Generally, these clubs use a system of “credit units” that are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.
Bartering is generally taxable in the year it occurs. If you participate in a barter club, however, you may be taxed on the value of credit units at the time they’re added to your account — even if you don’t redeem them for actual goods and services until a later year.
By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that they received from exchanges during the previous year. The IRS will also receive this information.
If you join a barter club, expect to provide your Social Security number or employer identification number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club will withhold tax from your bartering income.
Tax Savvy Bartering: How Your Business Can Benefit from Non-Monetary Exchanges
So long as you’re aware of the federal and state tax consequences, business bartering transactions may be beneficial. Contact us if you need assistance or would like more information.
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Dianna Streed, CPA, CGMA
D 507.453.5967
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2023 Mileage Rate Updates: Deducting Vehicle Expenses for Businesses and Individuals |
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It’s not just businesses that can deduct vehicle-related expenses on their tax returns. Individuals also may be able to deduct them in certain circumstances, if they have a business-related purpose. However, under current law, non-military members can no longer deduct expenses for job-related moves and employees can no longer deduct business driving expenses for which they’re not reimbursed. And, due to the high price of gas, the IRS has increased the amount per mile that is deductible for eligible business driving.
Rather than keeping track of your actual vehicle expenses, you can use a standard mileage rate to compute your deductions. Here’s a list of the rates for different types of 2023 driving:
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Business. 65.5 cents per mile (up from 62.5 cents for July 1 to December 31, 2022).
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Medical. 22 cents (unchanged from the second half of 2022).
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Moving for active-duty military. 22 cents (unchanged from the second half of 2022).
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Charitable. 14 cents (unchanged from 2022) if you itemize.
If you’re self-employed, business mileage costs can be deducted from self-employment income. For all types of eligible driving, you may also be able to deduct parking fees and tolls. Keep in mind that the burden of proving mileage that you claim is on you. You’ll need to keep contemporaneous records of trips you want to deduct, the number of miles driven and the business purpose of each trip.
Get Help
Do you have questions about deducting vehicle-related expenses? Contact us. We can help you with your tax planning.
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Jay Kramer, CPA, MST
D 920.337.4551
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At Hawkins Ash CPAs, we hire professionals looking to thrive in their careers and life. We ensure the support and development our professionals need to provide our clients with the best service possible. If you know someone who would fit one of these positions, please encourage them to apply. |
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