Month: July 2023

Preface: There is nothing new in the world except the history you do not know. – Harry S. Truman

History of F.W. Woolworths Stores

The F. W. Woolworth Company (often referred to as Woolworth’s or simply Woolworth) was a retail company and one of the pioneers of the five-and-dime store. It was among the most successful American and international five-and-dime businesses, setting trends and creating the modern retail model that stores follow worldwide today.

The first Woolworth store was opened by Frank Winfield Woolworth on February 22, 1879, as “Woolworth’s Great Five Cent Store” in Utica, New York. Though it initially appeared to be successful, the store soon failed.

Starting again….

When Woolworth searched for a new location, a friend suggested Lancaster, Pennsylvania. Using the sign from the Utica store, Woolworth opened his first successful “Woolworth’s Great Five Cent Store” on June 21, 1879, in Lancaster, PA.

https://en.wikipedia.org/wiki/F._W._Woolworth_Company

Learning lessons from history — In just 41 days from normal stock trading activities on Wall Street, after 99 years and two months at the heart of the High Street, The Woolworth stores closed their doors for the last time as the Great Recession began in 2008………

Read the F.W. Woolworth Business History here.

Preface: People show what they are by what they do with what they have – Anonymous

Check 21 – Proving Tax Deductions Without Cancelled Checks

You likely have noticed the growing trend towards remote deposit of checks. Owing to the increasing sophistication of smartphones, you can now photograph a customer check written out to you and digitally send it to your bank for deposit in your bank account.

All this and more became possible after the Check Clearing for the 21st Century Act (Check 21) became effective several years ago. What it meant for most consumers then is that most banks discontinued the practice of retaining a paper version or copy of your checks. Check 21 allowed banks to truncate each of your checks, create a new electronic negotiable instrument called a substitute check, and then destroy the originals.

This industry change has important tax consequences for taxpayers who previously used checks to substantiate their expenses or charitable contributions. But the bottom line is that Check 21 allows you to use a substitute check as proof of payment because it is legally the same as the original check. The IRS, therefore, must accept your substitute check as proof of payment.

 Banking Online

Many of you may have switched to online banking. If so the IRS will accept image statements of substitute checks as proof of payment. If, however, an IRS auditor is suspicious that the image statement is not genuine, you may still be requested to order the actual substitute check from your bank. This will be a rare instance, however, and will likely occur only if you are audited.

As an additional precaution, we suggest that you download and print out your bank statements at the end of the year. That way, even if you are audited several years from now, you’ll have a record that’s easy to access.

If you still rely on paper bank statements and paper copies of your checks, keep them in good order. The IRS will still accept bank statements that contain images of cancelled checks and/or substitute checks. To be used as proof, an account statement must show check number, amount, payee’s name, and the date the check was posted.

In order to keep track of your payments more easily for tax purposes, you should also continue to or begin to maintain a careful check register. That way, you’ll know on which bank statement to look if you are ever audited.

Preface:  “Friends and neighbors complain that taxes are indeed very heavy, and if those laid on by the government were the only ones we had to pay, we might the more easily discharge them; but we have many others, and much more grievous to some of us. We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly.”   –Benjamin Franklin:

The Changing Scenes of Taxes

Credit: Jacob M. Dietz, CPA

Tax laws and regulations come and go. If a taxpayer earned the same income five years in a row, he might not pay the same taxes each year. What does the future hold for taxes?

Some of the changes are hard to predict. Congress and the president can change tax laws, and they can even make changes retroactive. Currently the presidency and Senate are controlled by one political party, and the House of Representatives is controlled by another political party. Since the parties often disagree, that makes it unlikely, but not impossible, for major new tax legislation to pass while the government is divided.

Even without major new legislation, however, they might pass minor legislation that changes the code. Also, there are some changes that are already scheduled to happen without requiring new legislation.

Tax Brackets and Standard Deductions

One example of a change that happens without major legislation is that the tax brackets change. The federal income tax uses different percentages for income you earn. The lowest taxable amount is taxed at 10%, then the next amount is taxed at 12%, then 22%, then some other percentages all the way up to 37%. Even a taxpayer that earns enough to pay the 37% top tax rate will still have some of his income taxed at the lower 10% amount.

Those tax brackets have increased for 2023 from 2022. Taxpayers can pay the lower tax percentages on a higher amount of earnings. For example, in 2022 a single person was taxed 10% on their first $10,275 of taxable income after deductions. For 2023, that 10% bracket extends up to $11,000. A married filing jointly couple in 2022 would encounter the 37% bracket at $647,850 or more of taxable income. For 2023, a married filing jointly couple will not pay the 37% tax until their taxable income is $693,750 or more.

The standard deduction for taxpayers that do not itemize their deductions also increased for 2023. Married filing jointly taxpayers may now shield $27,700 of their income from taxes using the standard deduction instead of $25,900. Single taxpayers may shield $13,850 instead of $12,950.
Fortunately, there is no pop quiz for you to answer at the end of this article regarding these dollar amounts. Just remember that with these bracket and standard deduction increases, a taxpayer that earned the exact same amount of money in 2023 as 2022 could end up paying less federal tax.

Ticking Tax Trap

Have you ever set a ticking alarm clock in the evening to wake you up in the morning? If so, then you may know the experience of setting in motion something that will happen in the future, then blissfully ignoring it until you get a rude awakening.

Sometimes the tax code includes ticking tax traps. One such “trap” was included in the Tax Cuts and Jobs Act, which was signed in December 2017. That bill scheduled a provision to take effect in 2022. The provision prohibits taxpayers from immediately deducting research and experimental expenses but instead requires them to capitalize and then amortize (expense) the research and experimental expenditures over 5 or 15 years, depending on the details. At the time of this writing there is still a slight possibility that Congress will pass a law to throw this alarm clock out the window and allow immediate expense, but as time goes on it is unlikely that this will happen retroactively for 2022.

Some people after waking up to an alarm try to lessen the challenge of waking up by consuming coffee. I don’t know that drinking coffee will help much with the tax bill that some taxpayers will face by capitalizing and amortizing research and experimental expenses. What may be more effective, however, for taxpayers that encounter this tax trap is a conversation with their tax accountant about the research and development credit. That credit can reduce taxes.

Sunsetting Provisions

Sometimes tax code changes have sunsetting provisions. The change is only to last for a certain amount of time, and then it expires. 2025 is a big year for sunsets, with over 40 provisions set to expire.

Although we just covered a tax increase that was listed in the Tax Cuts and Jobs Act, there were also some significant taxpayer advantages included in that act. One huge tax cut in it was the 20% Qualified Business Income Deduction (QBID). That tax cut is scheduled to sunset at the end of 2025. Congress and the president could act to keep the 20% QBID, but absent action there could be a built-in tax increase as the 20% QBID sunsets.
The complexities and full details of the 20% QBID are beyond the scope of this writing. In a nutshell, it allows business owners to protect 20% of their business income from taxes. If that provision is allowed to expire, business owners might see a significant tax increase even if they make the same amount of money.

If you are a business owner that is currently taking advantage of the 20% QBID, you may want to start having conversations with your tax accountant about how to plan for the scheduled sunset of this deduction.
Some other sunset provisions that could increase taxes at the end of 2025 are changes to the child tax credit and changes to the alternative minimum tax (AMT.)

Climbing Down the Ladder

Bonus depreciation allows taxpayers to accelerate their depreciation on certain asset purchases. For various years, including 2022, bonus depreciation was 100%. Taxpayers could completely expense through bonus depreciation certain asset purchases.

There is a ladder that taxpayers climb down each year reducing it by 20% until it hits zero. In 2023 bonus is 80%, in 2024 it drops to 60%, in 2025 it goes to 40%, in 2026 it falls to 20% and in 2027 the bottom of the ladder touches the earth and there is no more bonus.

It’s possible that the president and Congress will increase bonus in the future. Taxpayers may also still use 179 expense on qualifying items to get the immediate deduction.

State Taxes

In addition to federal taxes, most states have their own income tax. State taxes do not need to follow federal rules. I will mention two notable changes that are occurring in Pennsylvania taxes. If you are not from Pennsylvania, you can ask your accountant if there are notable changes in your state.
Starting in 2023, Pennsylvania’s personal income tax rules will follow federal rules for section 179 expense, which allows for the immediate expensing of qualified business assets. In the past, Pennsylvania allowed 179 expense but significantly limited it. Also effective in 2023, Pennsylvania now allows the like kind exchange deferral.

New Every Morning

Tax rules change. Sometimes taxes go up, sometimes they go down. Prudent accountants watch these changes and sometimes take action to try to reduce taxes based on the changes in the law. Regardless of the tax rate when the alarm goes off in the morning, the Lord is still merciful.

Lamentations 3:22-23
22 It is of the LORD’s mercies that we are not consumed, because his compassions fail not.
23 They are new every morning: great is thy faithfulness.

Preface: “Life is either a daring adventure or nothing at all.” —Helen Keller

Tax Deductions For Company-Sponsored Employee Gatherings

Retreats and company meetings are an important component of a successful business. They are opportunities for employees and managers to gather together, discuss business strategies, develop new product ideas, and plan future activities. Retreats and other off-site meetings are increasingly an annual ritual of corporate culture. They are also expensive and businesses seek to deduct as many of the costs as possible.

Traditionally, the IRS has taken a very strict approach to the deductibility of expenses from company meetings. If the meeting is deemed extravagant, the costs of holding the meeting will not be deductible as ordinary business expenses and may be treated as income to the employees. The IRS takes special interest in business meetings that are held at resorts, on cruise ships and outside the U.S. It is very good at denying these costs as excessive and taxpayers do not have a good track record of prevailing in the courts.

A few years ago, however, an encouraging tax case was handed down that continues to guide tax courts and taxpayers in determining the ability of taxpayers to effectively mix business with pleasure and deduct both. There, a federal appeals court found that a company-sponsored fishing trip to a five-star resort in a Canada province was a legitimate cost of doing business. The IRS had determined otherwise and a federal district court agreed. Undeterred, the company appealed and won.

The fishing trips were a longtime company tradition. For more than 20 years, the company brought managers, sales people and factory workers from across the country to its home office for a three-day meeting. At the end of the meeting, almost all of the participants traveled, on the company dime, to a resort in Canada for three days of fishing.

Fishing was not the only thing on the agenda. The company showed that over the three days, the participants discussed the business’ performance, its sales, activities of competitors, and brainstormed ideas for new products. Testimony also revealed that while employees were not required to attend the fishing trips, they were strongly encouraged to attend by their managers and many felt it would be disloyal to the company not to go. Some employees testified they did not like fishing.

The appeals court was convinced that the fishing trips were not corporate junkets. Even though they were all-expense paid trips to a five-star resort, employees viewed them more as mandatory company meetings than as vacations. The court allowed the company to deduct the full cost of the trips.

Of course, some of the facts were unique to the company. The appellate court even took time to note its admiration of the company’s pro-employee business philosophy. Not all employers might fit that bill. However, the decision does break with the traditional IRS approach and opens the door to challenging adverse determinations.

We can help you anticipate what expenses will be deductible and which expenses may be challenged. Careful planning also avoids the risk of having the costs of the meeting treated as income to your employees. So before you pack your bags, give us a call.

Preface: “Life is 10% what happens to us and 90% how we react to it.” —Charles R. Swindoll

Mr. Singer and his Sewing Machine

Isaac Merritt Singer (1811-1875) had a dream: to become a great actor on the stage, performing Shakespeare to accolades.  For almost the first forty years of his life, he failed to achieve any success in this pursuit.  Continually tinkering with machines, he just wanted to be rich.  He finally struck gold with a workable sewing machine in the 1850s, in large part due to the efforts of the partner he hated.  The machine, one of the most important inventions of the century, changed lives around the globe.  

For more on the business history of the Singer Company