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June 2023 Question and Answer

QUESTION:

What is the U.S. debt ceiling?

ANSWER:

The debt ceiling is the maximum amount of money the United States can borrow cumulatively by issuing bonds.

If the national debt levels bump up against the ceiling, the Treasury Department must resort to other extraordinary measures to pay government obligations and expenditures until the ceiling is raised again. This can result in government shutdowns, as we saw in 2018 and 2019.

The debt ceiling has been raised or suspended numerous times over the years to avoid the worst-case scenario:
a default by the U.S. government on its debt.

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Ordinary and Necessary Business Expenses

All businesses can deduct ordinary and necessary business expenses from their tax return. But be careful — it’s not black and white.

ONE SIZE DOESN’T FIT ALL

Deductible business expenses aren’t uniform. An ordinary business expense for a dog walking business certainly wouldn’t be ordinary for a bakery.

Think of it like this. What expenses are unequivocally needed to run your business? A dog walker needs dog treats and leashes. But a bakery doesn’t.

BEWARE OF THE GRAY AREA

Several types of expenses tend to occupy the gray areas. These include business meals, automobile expenses, travel, and capital expenditures. Without clear-cut rules, don’t blur the lines between what’s deductible and what’s not. A lunch with a customer is a business expense. But lunch with your spouse or child likely isn’t. Travel to an industry conference is an ordinary expense. However, a trip to the Maldives, where you spend a few hours planning your company’s future, doesn’t count.

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Claiming Life Insurance Benefits

Life insurance is the ultimate safety net for your family. The first step that your personal representative (executor) should take is to file a claim for the benefits.

CHECK ALL POLICIES

With any luck, you’re already aware of the deceased’s life insurance policy and where it’s located. Ideally, it will be stored safely in a metal filing cabinet or fireproof lockbox.

And don’t forget to check for other policies. Travel accident insurance, if applicable, Social Security survivor benefits, or military benefits may be in place and available.

GET COPIES

You’ll need a certified copy of the person’s death certificate to file the insurance claim — and just about everything else you’ll need to do. Usually, there is a small fee for this. Also, request a claim form from the insurance agent or company and complete it.

CHOICES

There may be several options to receive benefits. Most likely, choices will include regular installments or a lump sum, which may be a good option if you need to pay immediate expenses. Generally, life insurance proceeds aren’t taxable.

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June 2023 Client Profile

Gary started receiving short-term disability insurance proceeds for an injury he sustained while playing sports. Will he owe income tax on the benefit amount he receives?

Disability insurance payments may or may not be taxable. It largely depends on who paid for the plan. Any disability payments Gary receives from a plan paid for entirely by his employer are considered taxable income. But if Gary paid for 100% of the disability insurance premiums, generally, the payments he receives while disabled are not taxable to Gary.

If Gary and his employer shared the cost of the premiums, only the percentage of income he receives that’s due to his employer’s contributions is reported as income. So, if Gary paid 50% and his employer paid the other 50%, then 50% of the disability payments he receives are taxable.

Also, if he itemizes, Gary could deduct out-of-pocket medical expenses greater
than any reimbursement he received.

Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.

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What is Bonus Depreciation?

Bonus depreciation is a valuable tax-saving tool for businesses. It allows your business to take an immediate first-year deduction on the purchase of eligible business property.

HOW IT WORKS

Bonus depreciation is a method of accelerated depreciation that allows a business to take an additional deduction of 80% of the cost of qualifying property in the first year it is put into service. You can take the deduction for new or new-to-you equipment.

Before 2023, you could deduct 100% of the cost. Now, 80% is deductible in the first year. The remaining 20% gets deducted over the asset’s life.

This special deduction allowance is an additional deduction you can take after you take the Section 179 deduction and before you figure regular depreciation for the year.

QUALIFICATIONS AND RESTRICTIONS

To qualify, the deduction must be first used in the year you are claiming the first depreciation deduction.

Only certain types of property may be eligible for bonus depreciation. The item must be:

  • Owned by the business
  • Used in your business or income-producing activity
  • Usable for a determinable lifespan (generally less than 20 years)
  • Expected to last more than a year

Also, if you choose bonus depreciation for one of your company vehicles, you’ll need to claim it for all your vehicles. Unlike Section 179 depreciation, you cannot be selective.

WHAT IT MEANS FOR BUSINESS

Claiming bonus depreciation for your business can help lower your taxable income. You may even create a taxable loss by claiming bonus depreciation (unlike Section 179 depreciation).

Beware that bonus depreciation will phase out to zero effective January 1, 2027. (See the graphic above).

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Roll Over Excess 529 Funds to a Roth IRA

Starting in 2024, 529 educational savings plans will become even more attractive with enhanced tax benefits. If your student receives scholarships or joins the military, there is a new option for handling excess 529 plan funds.

SECURE 2.0

The SECURE Act 2.0, which became law late in 2022, enables 529 beneficiaries to place unused 529 funds into their Roth IRA – without penalty. Understand that the rollover can only be made to the 529 beneficiary’s Roth IRA – not a parent’s Roth IRA.

This new rule can have an incredible impact on the student’s ability to successfully fund a comfortable retirement, thanks to the power of compound interest.

OTHER OPTIONS

You still have the option of changing a 529 plan beneficiary to another qualifying family member. But the funds would have to be used for educational purposes. Alternatively, you could withdraw excess funds and pay a 10% penalty.

OBEY THE RULES

As with most tax laws, numerous rules govern a 529 plan to Roth IRA rollover. Keep these in mind:

  • A max of $35,000 can be rolled over from a 529 plan to a beneficiary’s Roth IRA.
  • Annual Roth IRA contribution limits apply to rollovers. (For example, if this law was already in effect, the 2023 ROTH IRA contribution limit is $6,500, which means it would take six years to convert $35,000 from a 529 plan to a Roth IRA).
  • Conversions can only be made to a beneficiary’s Roth IRA; a parent saving with a 529 plan in a child’s name cannot convert unused funds back into their own retirement account.
  • Rollovers are not allowed until a 529 account has been open for at least 15 years.
  • Funds you convert from 529 plans to Roth IRAs must have been in the account for at least five years.

Consult your tax professional to learn more.

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June 2023 Client Line Newsletter

Roll Over Excess 529 Funds to a Roth IRA – there is a new option for handling excess 529 plan funds.

What is Bonus Depreciation – a valuable tax-saving tool for business.

June 2023 Client Profile

Claiming Life Insurance Benefits – the first step is to file a claim for the benefits.

Ordinary and Necessary Business Expenses – be careful, business deductions are not black and white.

June 2023 Question and Answer

Employee Payroll Deductions

The Shrinking Dollar – inflation makes every dollar worth less.

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Amended Tax Return Tips

If you filed your 2022 tax return already but realized you missed some information, you can amend your return by filing Form 1040-X.

An amended return is necessary for things like, forgetting to claim taxable income, or claiming the wrong tax filing status.

But before filing your return, ensure the IRS has already processed your original return. This will help ensure the IRS doesn’t get your original and amended returns mixed up. Check the status of your return after three weeks at https://www.irs.gov/filing/ wheres-my-amended-return or call 866-464-2050.

Be sure to attach any documents or tax forms that support your changes. And check to see if you have to amend your state return. Contact your tax advisor for assistance.

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May 2023 Question and Answer

QUESTION:

Is my mileage for my volunteer work a tax deduction?

ANSWER:

If you don’t receive compensation or reimbursement for volunteer driving, you can deduct 14 cents per mile in 2023 or actual expenses for gas and oil. You can’t deduct general repairs and maintenance, insurance, or licensing fees.

You can also deduct any parking or tolls incurred while volunteering, whether you use the actual expenses or the standard mileage rate.

Be sure to keep contemporaneous records of all miles you drive while volunteering. If the charity reimburses you for gas and use of your personal vehicle, any amount received above 14 cents per mile is taxable income to you.

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Best Practices for Employee Reimbursements

Using new technology to report and track employee business expenses can be easier and more accurate.

MODERNIZE REPORTING

Instead of using paper to report employee’s expenses you can simplify the process with a virtual expense reporting system that lets employees photograph and submit receipts from an app. This prevents the need for your accounting staff to keep paper files or scan receipts.

ESTABLISH ACCOUNTABILITY

Inform managers and supervisors about the company’s expense policies so they can hold their teams responsible for following them. To ensure high levels of accountability in this area, give managers an easy way to access to approve submitted expenses on their employees’ expense reports.

TIME IS VITAL

No one wants to pay $1,000 in travel costs out-of-pocket for a business trip and then wait for weeks while those expenses are reviewed, approved, and reimbursed. To avoid delays, create service-level timeframes that work for both the company and employees. For example, make clear that associates must submit their expense reports by “X” day of the month, with complete required documentation, to receive reimbursement by “Y” day.