March 5, 2024

Smart Ways to Detect Internal Fraud

Filed under: Newsletters — rufert.guinto@brainstormtech.io @ 2:32 pm

Internal fraud is difficult to detect, which is understandable given the wide variety of techniques that range from stealing cash and supplies, to falsifying expense reports and benefit claims, embezzling funds, and accepting kickbacks from vendors, contractors, and suppliers. But catching dishonest employees isn’t impossible if you focus on the task, take a strong stand against fraud and shake things up a bit.

Here are three relatively straightforward methods that can help your company detect internal fraud:

1. Scrutinize Expenses. When employees feel that expense claims aren’t stringently reviewed, they may pad their reports with inflated or nonexistent expenses. Depending on the employee’s rank, these padded expenses can mount up quickly.

Case in Point: The COO of a paper company routinely submitted monthly expense claims of more than $10,000. On the face of it, the charges all seemed legitimate.

But in reality the executive was claiming full-fare airline tickets to destinations unrelated to the company’s business. He would then refund the tickets to his credit card without reimbursing the company. In addition, he was claiming $3,000 a month in non-existent lodging and car-rental costs, and then using the money to build and maintain his wine collection. The deceptions weren’t discovered until a routine audit, which found that those responsible for overseeing expense accounts were careless.

Expense account fraud represents a greater threat because employees become comfortable with it and move on to submitting claims for even higher expenses or switching to more complex and damaging fraud schemes. Be certain that those who check expense reports are rigorous in their reviews and that everyone from the top down at your business knows that expense claims will be scrutinized.

2. Shake Up Routines. Fraudsters tend to develop habits based on a company’s regular schedules. For example, they know when monthly audits are due and take steps to suspend the fraud and hide evidence until the audits are complete.

Case in Point: A company’s warehouse manager was taking kickbacks from vendors in return for preferential treatment during contract bids. One day, the auditors turned up for an unannounced inventory count. When they arrived, the manager was sharing a bottle of scotch with one of the vendors and the kickback payment was in plain view on his desk.

If an out-of-sequence audit uncovers fraud at your company, be sure to publicize it. And be certain that everyone in the organization knows that unexpected reviews should regularly be expected.

3. Periodically Review Controls. Even if audits are conducted on a routine basis, you should still occasionally review the mechanisms aimed at deterring fraud. Criminally inclined employees spend time and effort learning how to circumvent controls. When they are successful, the company managers may think the controls are doing their job when, in fact, the business may be losing thousands of dollars.

Case in Point: A senior bank teller and her manager regularly stole large sums from the vault of a small community bank branch where they worked. Each month, just before the scheduled branch audit, the teller would replace the missing cash with bundles of blank paper. Her manager would “count” the cash and certify that the amount was correct.

After some cuts in the audit department, the bank trimmed the number of audits and required the auditor to make the actual count. But to save time and meet audit quotas, the auditor would count the stacks rather than the individual notes. The fraud remained undetected and wasn’t discovered until the manager was fired. Had the auditing process been reviewed, the company would likely have noticed the flaws in the controls and discovered the fraud much sooner.

The “perception of detection” is a crucial element in fighting fraud. You can help deter fraud with methods that heighten employees’ concerns about being caught. Consult a professional for advice about systems and controls that will work effectively at your organization, and consider setting up an anonymous hotline for reporting suspected fraud.

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March 1, 2024

Social Security Tax Update: How High Can It Go?

Filed under: Newsletters — rufert.guinto@brainstormtech.io @ 3:06 pm

Employees, self-employed individuals and employers all pay the Social Security tax, and the bite the Social Security tax takes gets bigger every year. Here’s what you should know — and why you should be concerned.

Social Security Tax on Employee Wages

As an employee, your wages are hit with the 12.4% Social Security tax up to the annual wage ceiling. Half the Social Security tax bill (6.2%) is withheld from your paychecks. The other half (6.2%) is paid by your employer, so you never actually see the second half. Unless you understand how the Social Security tax works and closely examine your pay statements, you may be unaware of how much the tax costs.

For 2024, the Social Security tax wage ceiling is $168,600 (up from $160,200 for 2023, an increase of 5.2%). If your wages meet or exceed the 2024 ceiling, the Social Security tax hit for this year will be $20,906 (12.4% times $168,600), half of which comes out of your paychecks. Your employer pays the other half.

The wage ceiling is projected to rise to $174,900 next year. (See “Projected Security Tax Ceilings,” at right.)

Social Security Tax on Self-Employment Income

Self-employed people, including sole proprietors, partners and limited liability company members, are well aware of the full magnitude of the Social Security tax. That’s because they must pay the entire 12.4% Social Security tax hit out of their own pockets, based on their net self-employment income. The fact that companies don’t owe any Social Security tax on amounts paid to independent contractors is a big reason why they often prefer to engage independent contractors instead of hiring employees.

For 2024, the Social Security tax self-employment income ceiling is $168,600 (the same as the wage ceiling for employees). So, if your 2024 net self-employment income is $168,600 or more, your income will incur the maximum $20,906 Social Security tax hit (12.4% times $168,600).

Social Security Tax Ceiling Increases vs. Social Security Benefit Increases

Most people don’t realize that there’s a disconnect between annual increases in the Social Security tax ceiling and annual increases in Social Security benefits. Common sense dictates that they should be linked, but they aren’t.

For example, the 2024 Social Security tax ceiling is 5.2% higher than the 2023 ceiling, as noted earlier. But Social Security benefits went up by only 3.2% in 2024 compared to 2023. The reason for the discrepancy is that different inflation measures are used for the two calculations. The annual increase in the Social Security tax ceiling is supposedly based on the increase in average wages while the annual increase in benefits is based on a measure of general inflation.  

Is There a Social Security Benefit Account with Your Name on It?

Some people mistakenly believe that the government has an account with their name on it to hold the money to pay for their future Social Security benefits. After all, that must be where all those Social Security taxes on wages and self-employment income go, right? Unfortunately, there are no individual accounts. All you have is an unsecured promise from the government.

In addition, the Social Security system is currently on shaky financial ground. Politicians have known this fact for years, and efforts to address the issue have gone nowhere. The Social Security Administration now projects that the Social Security trust fund will become insolvent in 2034. Previously this projected insolvency date was 2035, so it’s creeping closer. So, additional Social Security tax hikes in the form of higher rates or some tax-law reconfiguration that effectively implements higher ceilings (or both) are probable.

Some politicians have floated a tax-law change that would restart the 12.4% Social Security tax on wages and net self-employment income above $400,000. This is the so-called “donut hole” approach to increasing the Social Security tax. Over the years, the donut hole would gradually close as the lower edge of the hole is adjusted upward for inflation while the $400,000 upper edge of the hole remains fixed.

Don’t Bank on Social Security Benefits Alone

The Social Security tax hits on many individuals will continue to increase under current law. And when it’s time for you to retire, there’s no guarantee that you’ll receive the benefits you’ve been promised. So it’s important to save your own nest egg to supplement the Social Security benefits you’ll receive. Contact your financial advisor to develop a retirement savings strategy that’s right for your situation.

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February 27, 2024

Follow Detailed Recordkeeping Rules for Vehicle Expense Deductions

Filed under: Newsletters — rufert.guinto@brainstormtech.io @ 6:25 pm

Many business owners fail to follow the strict tax rules for substantiating vehicle expenses. But if your business is audited, the IRS will most likely ask for mileage logs if you deducted vehicle expenses — and it tends to be especially critical of the amount deducted if you’re self-employed or you employ relatives. While the basics seem simple, there are numerous exceptions.

Mileage Logs

Taxpayers can deduct actual vehicle expenses, including depreciation, gas, maintenance, insurance and other vehicle operating costs. Or they can use the standard mileage method, which allows a deduction based on the standard rate for each mile the vehicle is driven for business purposes. For example, the standard mileage rate is 65.5 cents a mile for 2024 (up from 65.5 cents per mile in 2023). If you drive 1,000 miles for business purposes in 2024, you could deduct $670.00 under the standard mileage method.

Regardless of the method used, the recordkeeping requirements for mileage are the same. They’re also the same whether you’re the only employee who uses a vehicle, you employ others who use company vehicles, or an employee uses his or her own vehicle and is reimbursed by the company.

Vehicle logs must provide the following information for each business trip:

Employees who use their own vehicles must provide these details to their employer. If an employer reimburses an employee without the required documentation, the reimbursement is taxable income. If an employee uses a company vehicle, the IRS considers any usage that’s unaccounted for as personal use and the value of unaccounted usage should be included in the employee’s income for the employer to secure a deduction.

The IRS requires “contemporaneous” recordkeeping for mileage. That means a recording at or near the time of the trip. You can record the mileage at the time of the trip and enter the business purpose at the end of the week. But waiting much longer could raise suspicion about the validity of the vehicle log and potentially jeopardize your entire vehicle deduction.

The tax agency requires varying levels of detail, depending on the circumstances. For example, you might be able to list only the customer’s name if you visit someone regularly to demonstrate new products, provide service and take orders. But cold calls to prospective customers may require a more detailed write-up in your vehicle log. A single entry may be enough for visits to several customers in the same day, but you may need to log any detours taken for personal reasons, such as personal errands or lunch with your spouse.

In some cases you may be able to avoid recordkeeping if your company maintains a formal policy forbidding employees from using company vehicles for personal reasons. However, the exception has numerous rules and restrictions. For instance, the policy must be written and meet six conditions, and the exception applies to only employees who aren’t “control” employees, such as:

Exceptions to the Rules

We’ve used the term “vehicle,” because the recordkeeping rules apply to more than just cars. Technically, every vehicle is subject to the rules. But the IRS permits specific exceptions for the following vehicles that are unlikely to have more than a minimum amount of personal use:

Not listed above are more obvious exceptions, such as cement mixers, combines and bucket trucks. In addition, the IRS permits exceptions for trucks or vans that have been specially modified so that they aren’t likely to be used more than a de minimis amount for personal purposes. An example is a van that has only a front bench for seating, has permanent shelving that fills most of the cargo area, constantly carries equipment and has been custom painted with the company’s name and logo.

Simplified Recordkeeping

Complying with the IRS mileage recordkeeping rules can be tedious, especially for workers who drive significant distances for business purposes. Here are some ways you can simplify the process:

Use technology. Mileage logs don’t have to be kept in a written diary or day planner — you can download an app to your tablet or cell phone to track mileage. These apps typically allow you to take a picture of the odometer for the beginning and ending mileage. If you allow this method, require workers to back up their electronic mileage logs regularly to prevent loss of mileage records. Alternatively, you might use GPS tracking of company vehicles to help document mileage.

Apply sampling methods. The IRS allows taxpayers to use the mileage for regular routes — for example, if you visit the same customers on a fixed weekly schedule — and extrapolate the sample mileage over the entire tax year. This can save time, but you’ll have to show that the sample is valid. And if the route changes midyear, you’ll have to show how you updated the sample.

The easiest way to simplify recordkeeping for vehicle expenses is to use the standard mileage rate, rather than tracking actual expenses. Doing so eliminates the need to save gas receipts and maintenance records. But the downside is that this method tends to understate expenses, particularly if you drive an expensive gas guzzler or pay above-average insurance premiums. If a vehicle’s business use is high but its total use is low, actual fixed costs — such as insurance and depreciation — are likely to be higher on a per-mile basis than with the standard mileage rate.

Ongoing Attention

Vehicle expenses can quickly add up for businesses — as well as for individuals who are tracking mileage for itemized medical or charitable deductions, or supplemental business activities such as managing investments in local businesses or rental properties. But as easily as they add up, so too can vehicle deductions vanish in an IRS inquiry.

The key to preserving your deductions is maintaining up-to-date mileage records. Too often, taxpayers assume they can put together a mileage log the night before the IRS visits. That rarely works. For example, the IRS questioned a situation in which the taxpayer used the same pen over a two-year period. In another case, the IRS noticed that the taxpayer claimed to be at the post office and an hour later was at a client 110 miles away. In cases where there are more than a few discrepancies, the IRS often denies all vehicle expense deductions, claiming the mileage log wasn’t credible. On top of losing your deduction, you also might face penalties and interest for underpaying your tax liability.

When it comes to the recordkeeping requirements for vehicles, the IRS rarely allows exceptions for its strict rules. Don’t assume you qualify for an exception, check with your tax advisor first. He or she can help you navigate complicated vehicle recordkeeping rules with confidence.

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February 22, 2024

New Twists and Turns Taken by EV Credits

Filed under: Newsletters — rufert.guinto@brainstormtech.io @ 4:39 pm

Did you buy an electric vehicle (EV) in 2023? Under the Inflation Reduction Act (IRA), passed late in 2022, you may be eligible for a new-and-improved tax credit, beginning on your 2023 federal income tax return. But the new law also bars certain high-income taxpayers from claiming the credit.

What’s more, if you’re looking to buy an EV in 2024, you don’t have to wait until you file your 2025 tax return to reap the tax benefit. You may be able to obtain a tax discount at the time of purchase. Here are the details.

Before the IRA Changes Took Effect

Prior to January 1, 2023, you could claim a tax credit for EVs and hybrid plug-ins, up to a maximum of $7,500, if you bought a vehicle meeting certain energy consumption standards. Also, the vehicle had to have a gross vehicle weight rating (GVWR) of less than 14,000 pounds.

Under the old rules, the price of the vehicle didn’t matter. For example, you were able to claim the same $7,500 credit for a Nissan Leaf as a higher-priced Porsche Taycan. The credit was available only to original purchasers of a new vehicle. In other words, no credit was allowed if you acquired a used vehicle from a dealer or through a private resale. Similarly, you weren’t eligible for a credit if you leased an EV from a dealership.

Notably, the credit was subject to a special phaseout rule, based on the manufacturer. The phaseout occurred when a manufacturer sold at least 200,000 qualifying vehicles for domestic use. Back in 2018, Tesla became the first manufacturer to cross this threshold. GM followed soon afterward. This became a critical issue involving some of the most popular EV models.

The credit was claimed in the year you purchased the vehicle. So, if a deal didn’t go through until January, you couldn’t realize any tax benefit until you filed your return the following year. Finally, the credit was nonrefundable. Therefore, if you owed tax of $2,500 and you acquired an EV qualifying for a $7,500 credit, the credit was limited to $2,500 on your return. The $5,000 excess couldn’t be carried forward to subsequent years.

Lane Changes for 2023

The IRA revamps the tax rules for claiming the so-called “clean vehicle credit” on 2023 returns for new EVs and plug-in hybrids purchased in 2023 for domestic use (and not acquired for resale). Generally, the maximum nonrefundable credit remains at $7,500, but other new rules and dollar caps apply through 2032:

Visit the U.S. Department of Energy website to determine if a particular vehicle will qualify for the clean vehicle credit. You can search the website database for the make and model, year and date of delivery. This site also provides updated credit amounts (full or partial) for EVs in 2023 and 2024. 

Credit for Used Vehicles

The IRA also opens up the clean vehicle credit to buyers of used vehicles — not just new ones. However, the credit for used EVs is subject to a separate set of rules. Besides requiring specific energy consumption standards and a GVWR of less than 14,000 pounds, the following restrictions apply:

If you qualify, you can claim a credit of up to $4,000 for the EV, limited to 30% of the cost. The credit for used vehicles is only available to single filers with MAGI of $75,000 or less ($150,000 or less for married couples who file jointly). If you exceed either threshold, you can’t claim any credit. (Note that these income limits are half the size of those for the new clean vehicle credit.)

Accelerating the Credit in 2024

A special tax break kicked in on January 1, 2024: The IRS now gives you the option of transferring the credit to the dealership at the point of sale. In essence, the auto dealer can reduce the purchase price by the amount of the credit, or it may provide you with a cash payment on the spot.

To take advantage of this opportunity, dealerships must participate in the IRS-approved online program. Nevertheless, the buyer is ultimately responsible for ensuring that he or she falls below the MAGI limits for eligibility. If you take a rebate and ultimately exceed the limits, you’ll have to pay the IRS back on your 2024 tax return.

Warning: The list of eligible EVs and plug-ins has decreased significantly from 43 models in 2023 to just 13 in 2024. This reduction is attributable to the stricter battery sourcing and assembly requirements under the IRA.

Proceed with Caution

The new rules for EV credits are complex and dotted with potholes. In addition, be aware that several states offer tax breaks for EVs on the state income tax level. Seek assistance from your tax professional for maximizing the tax benefits on 2023 returns and navigating the rules if you’re planning to pocket a clean vehicle credit for an EV purchase in 2024.

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January 12, 2024

IRS makes changes for reporting 1099s, W-2s and other forms

Filed under: Newsletters — rufert.guinto@brainstormtech.io @ 8:22 pm

Starting for tax year 2023, if you have 10 or more information returns, they must be filed electronically.  This also includes Forms W-2, e-filed with the Social Security Administration. Final e-file regulation details are linked here: https://www.irs.gov/filing/e-file-information-returns

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December 29, 2023

Itemizing Deductions on Your Federal Income Tax Return

Filed under: Newsletters — rufert.guinto@brainstormtech.io @ 4:58 pm

Once the 2023 tax year is over and the numbers are generally set in stone, you can itemize deductions on your federal income tax return if your total allowable itemized write-offs for the year exceeds your standard deduction allowance for the year. Otherwise, for 2023, you will claim the standard deduction, which is relatively high under current tax law.

Since we haven’t yet reached year end, you still have some time to take actions that could increase your total itemized write-offs to the point where they exceed your 2023 standard deduction allowance. However, not everyone has the flexibility to do so. 

Standard Deduction Amounts for 2023

For 2023, the basic inflation-adjusted standard deduction allowances are:

Taxpayers who are age 65 or older or blind are entitled to additional standard deduction allowances. For 2023, the additional amounts are:

Standard Deduction Amounts for 2024

Next year, the basic standard deduction allowances will increase to:

For 2024, the additional standard deduction allowances for those who are 65 or older at the end of the tax year or blind are:

Last-Minute Tips to Increase Itemizable Expenses

If your total itemizable deductions for this year will be close to your standard deduction allowance, you may be able to make enough additional expenditures for itemized deduction items before year end to surpass your standard deduction. Those extra expenditures will allow you to itemize and reduce your 2023 federal income tax bill.

Next year, you may or may not be able to do the same thing. If you can’t, you can claim the 2024 standard deduction. It will increase roughly 5.4% in 2024 thanks to the annual inflation adjustment.   

The easiest itemizable expense to prepay is included in house payments that are due on January 1, 2024, for your primary residence or vacation home. Making that payment before year end will allow you to deduct home mortgage interest expense for 13 months (instead of 12 months) for 2023. Although the Tax Cuts and Jobs Act put stricter limits on home mortgage interest deductions, you may be unaffected. But check with your tax advisor to be sure.

Important: If you took advantage of this strategy in 2022, you’ll have do it again this year to have 12 months’ worth of mortgage interest expense this year. But that only matters if you itemize this year. 

Other options to consider include:

There are a couple limitations to watch out for, however. For example, current tax law limits the maximum amount you can deduct for all state and local taxes combined to $10,000 per year ($5,000 if you’re married and filing separately). In addition, you can deduct medical expenses only to the extent they exceed 7.5% of your adjusted gross income for the year.

Limited-Use Strategy

Not everyone will have the flexibility to take actions that will cause their total itemizable write-offs to exceed their standard deduction allowance. So, itemizing isn’t always a choice for a particular tax year. But when it’s a choice, it usually makes sense to itemize.

If your itemizable write-offs are typically close to your standard deduction allowance, the tax-smart strategy in your situation is to itemize in one year and then claim the relatively generous standard deduction the following year. Over the two-year period, your taxes will be lower.

Looking Ahead Today’s high standard deduction amounts are scheduled to expire after 2025. Without future legislation, the amounts will drop significantly in 2026. If that happens, you’ll have to reassess your tax situation. In the meantime, discuss any questions about itemizing deductions with your tax advisor.

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November 27, 2023

How Municipal Bonds Can Help Investors Manage Tax Exposure

Filed under: Newsletters — rufert.guinto@brainstormtech.io @ 6:49 pm

Municipal bonds (often referred to as “munis”) can be attractive to income-seeking investors because they provide an income stream exempt from federal and, in certain cases, state and local income taxes. Like other fixed-income investments, munis involve risk. But as part of a broadly diversified portfolio, they can offer you an effective way to increase your after-tax earnings.

State and Local Projects

Munis are debt securities issued by state and local governments — or entities on their behalf — to generate funds for various public needs. Examples include toll roads, schools and hospitals, as well as general use bonds of cities, counties and states.

For investors, the main selling point of m3.8nis is that their income is exempt from federal income taxes. What’s more, if you live in the state in which the bonds are issued — or if you buy bonds issued by U.S. territories, such as Puerto Rico or Guam — the securities’ interest payments may also be exempt from state and local taxes. One federal exception is that not all municipal bond income is exempt from the alternative minimum tax.

Benefits For Investors

Munis may be appropriate for investors looking to manage their tax exposure and traditionally have been of greatest use for upper-income taxpayers. In general, the higher your combined federal, state and local income tax rate, the more valuable munis become.

Consider that the top federal income tax rate is 37% (as of 2023) and high-net-worth individuals face an additional 3.8% Medicare tax on net investment income. The bite is even greater for residents of high-tax states. In California, for example, the top state tax bracket is currently 13.3%, meaning that, for every dollar earned over $1 million, you’d potentially face a combined income tax rate of more than 54%.

Consider the Risks

As with any fixed-income product, munis are vulnerable to rising interest rates. They also face credit risk — the threat that a bond issuer won’t be able to repay its debts. In fact, even the idea of a default can cause bond prices to drop — for example, when a major credit agency downgrades a city’s bonds because the city (not the specific project) is having financial problems.

Although credit risk is a real challenge — especially when dealing with lower-rated municipal bonds — it’s worth noting that munis have historically defaulted much less than comparable corporate bonds. This doesn’t mean that corporate bonds are a worse investment. Many corporate bonds offer higher yields as compensation for the increased default potential and higher taxes. But it does suggest that the credit challenges faced by a few states and municipalities in the last decade or so aren’t necessarily representative of the risks involved with tax-exempt debt.

Individual Bonds Vs. Mutual Funds Even though you can buy individual bonds directly from municipal issuers, most investors find it more efficient to gain exposure to this asset class through mutual funds. The latter provide a few significant advantages: They’re more liquid and generally provide better diversification than most investors can achieve on their own buying individual bonds.

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November 17, 2023

Qualified charitable distributions allow eligible IRA owners up to $100,000 in tax-free gifts to charity

Filed under: Newsletters — rufert.guinto@brainstormtech.io @ 2:28 pm

WASHINGTON —The Internal Revenue Service today reminded individual retirement arrangement (IRA) owners age 70½ or over that they can transfer up to $100,000 to charity tax-free each year.

These transfers, known as qualified charitable distributions or QCDs, offer eligible older Americans a great way to easily give to charity before the end of the year. And, for those who are at least 73 years old, QCDs count toward the IRA owner’s required minimum distribution (RMD) for the year.

How to set up a QCD

Any IRA owner who wishes to make a QCD for 2023 should contact their IRA trustee soon so the trustee will have time to complete the transaction before the end of the year.

Normally, distributions from a traditional IRA are taxable when received. With a QCD, however, these distributions become tax-free as long as they’re paid directly from the IRA to an eligible charitable organization.

QCDs must be made directly by the trustee of the IRA to the charity. An IRA distribution, such as an electronic payment made directly to the IRA owner, does not count as a QCD. Likewise, a check made payable to the IRA owner is not a QCD.

Each year, an IRA owner age 70½ or over when the distribution is made can exclude from gross income up to $100,000 of these QCDs. For a married couple, if both spouses are age 70½ or over when the distributions are made and both have IRAs, each spouse can exclude up to $100,000 for a total of up to $200,000 per year.

The QCD option is available regardless of whether an eligible IRA owner itemizes deductions on Schedule A. Transferred amounts are not taxable, and no deduction is available for the transfer.

Report correctly

A 2023 QCD must be reported on the 2023 federal income tax return, normally filed during the 2024 tax filing season.

In early 2024, the IRA owner will receive Form 1099-R from their IRA trustee that shows any IRA distributions made during calendar year 2023, including both regular distributions and QCDs. The total distribution is shown in Box 1 on that form. There is no special code for a QCD.

Like other IRA distributions, QCDs are reported on Line 4 of Form 1040 or Form 1040-SR. If part or all of an IRA distribution is a QCD, enter the total amount of the IRA distribution on Line 4a. This is the amount shown in Box 1 on Form 1099-R.

Then, if the full amount of the distribution is a QCD, enter 0 on Line 4b. If only part of it is a QCD, the remaining taxable portion is normally entered on Line 4b.

Either way, be sure to enter “QCD” next to Line 4b. Further details will be in the instructions to the 2023 Form 1040.

Get a receipt

QCDs are not deductible as charitable contributions on Schedule A. But, as with deductible contributions, the donor must get a written acknowledgement of their contribution from the charitable organization before filing their return.

In general, the acknowledgement must state the date and amount of the contribution and indicate whether the donor received anything of value in return. For details, see the Acknowledgement section in Publication 526, Charitable Contributions.

For more information about IRA distributions and QCDs, see Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

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October 10, 2023

Year-End Holiday Parties and Gifts: What’s Taxable?

Filed under: Newsletters — rufert.guinto@brainstormtech.io @ 6:19 pm

The holidays are just around the corner, and now is the time for employers to start thinking about treating their employees with holidays parties or gifts. Such gestures are always a nice idea. Plus in a tight labor market, they can be a smart way to show appreciation and boost retention. But you need to know the tax rules so your well-intentioned efforts don’t backfire on you and your employees.

Holiday Parties

The good news is that holiday parties for employees generally are fully deductible for employers, with no tax implications for employees. Remember, though, that tax-deductible employee social events must primarily be for the benefit of non-highly compensated employees, meaning employees who:

Note, too, that the party must be exclusively for employees (with exceptions for employees’ family members and other guests who aren’t customers). If you also invite clients or customers, your expenses probably will be only partially deductible due to limits on the deductibility of business meals and entertainment. (See “Tax Rules for Client Gifts and Parties” at right).

Employee Gifts

The taxability of gifts to employees is less clear-cut. It largely turns on whether the gift is one the IRS would recognize as a de minimis benefit. If so, the gift isn’t includable in the employee’s gross income for tax purposes, though it’s still deductible for the employer. If a gift is included in an employee’s gross income, it’s subject to both income taxes and payroll taxes.

The IRS defines a de minimis benefit as one — given its value and the frequency with which it’s provided — that’s so small that accounting for it is unreasonable or administratively impractical. An essential element is that a de minimisgift is occasional or unusual in frequency — and it can’t be a form of disguised compensation.

The IRS has provided a list of such items that includes holiday gifts. But the agency has ruled that items with a value exceeding $100 can’t be considered de minimis, even under unusual circumstances.

In addition, the IRS has indicated that gift certificates that are redeemable for general merchandise or have a cash equivalent aren’t de minimis benefits. As such, they’re taxable to employee recipients.

On the other hand, an exception may apply to a certificate that permits an employee to receive a specific item of personal property that’s minimal in value, provided infrequently and administratively impractical to account for. So, if you give coupons to your employees for, say, a holiday ham or turkey, neither of which has a redeemable cash value, the gifts probably won’t be taxable to the employees.

The IRS has identified several other de minimis benefits that can give you nontaxable gift ideas at the holidays. For example, tickets to a one-time theater or sporting event should be nontaxable (but season tickets would be taxable). Flowers, fruit and books “provided under special circumstances” also may pass muster with the IRS.

What about a “holiday” cash bonus paid at year end? The IRS considers that to be taxable supplemental wages, even if it’s not specifically based on work performance or achievements (for example, sales quotas). Further, if you pay the employee’s share of taxes on a bonus, the taxes paid are considered additional wages to the employee and subject to payroll taxes.

Ring In the Holidays

Small gestures can go a long way with your employees, but even seemingly small gifts can lead to unexpected tax consequences. Check with your CPA at Beers, Hamerman, Cohen & Burger, PC. to help ensure your holiday appreciation doesn’t end up giving your workers the “gift” of a higher tax bill down the road.

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October 3, 2023

Will Your Crypto Transactions Be Reported on a Form 1099?

Filed under: Newsletters — rufert.guinto@brainstormtech.io @ 1:47 pm

Some taxpayers may be unaware of all the federal tax reporting requirements for cryptocurrency transactions — especially when it comes to issuing and receiving a Form 1099 for 2023. If you buy something with cryptocurrency, you won’t receive one. However, you may receive a Form 1099 if you receive a crypto payment.

There are several types of Form 1099. You normally receive one or more of them near the beginning of the year following the year in which you receive payment. Here’s an overview of which types of this form you may receive from engaging in cryptocurrency transactions.

Form 1099-MISC

Several cryptocurrency exchanges report gross income from crypto rewards or staking as other income on Form 1099-MISC, “Miscellaneous Income.” The form won’t report individual transactions from rewards or staking, just your total income from them. You should report each transaction, as well as any other crypto transactions, on your personal tax return.

Form 1099-K

You might receive a Form 1099-K, “Payment Card and Third-Party Network Transactions,” which reports the total value of crypto that you bought, sold or traded on the reporting exchange during the year. This form is commonly used by credit card companies and payment processors, such as PayPal and Venmo, to report payment transactions that they’ve processed for third parties.

Form 1099-K is usually sent to U.S. traders that made 200 or more transactions during a year with a volume of at least $20,000. The American Rescue Plan Act of 2021 lowered the reporting threshold to $600, but the IRS has delayed enforcing that unfavorable change. It remains to be seen whether the $600 threshold will be in effect for the 2023 tax year. If it is, it will be reflected in 2023 Forms 1099-K, which will be sent out in early 2024.

Note that the amount on the 1099-K doesn’t represent your total capital gain or loss, and you don’t need to include the amounts on this document on your tax return. Don’t be alarmed if the number on your 1099-K is larger than expected — it represents your total trading volume. If you trade often, you may have a large trading volume but not a large net gain or loss.

Form 1099-B

Form 1099-B, “Proceeds from Broker and Barter Transactions,” is mainly used by brokerage firms and barter exchanges to report capital gains and losses, but some crypto exchanges also use it. Form 1099-B reports gains and losses from individual transactions. Although each gain or loss is calculated separately, the brokerage firm will typically report consolidated numbers — for example your net short-term gain or loss amount.

The Infrastructure Investment and Jobs Act (IIJA), which became law in late 2021, expanded the definition of brokers that are required to report customer gains and losses from the sale of securities on Form 1099-B. Under the IIJA, operators of trading platforms for digital assets, such as cryptocurrency exchanges, will become subject to the same Form 1099-B reporting requirements as traditional securities brokers. The effective date for this change remains to be seen because the IRS hasn’t yet issued regulations on the subject.

Important Reminder

The IRS gets a copy of any Forms 1099 that are sent to you. So don’t assume you can just fly under the radar without detection. If you fail to report crypto transactions on your tax return and get audited, you could face interest and penalties — and even criminal prosecution in extreme cases.

Contact your tax advisor for more information about Form 1099 reporting requirements for cryptocurrency transactions, along with any other questions related to the federal tax rules for this relatively new type of asset. 

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