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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

Preface: Our rewards in life will always be in direct proportion to our contribution. — Earl Nightingale

Mapped: The Growth in House Prices by Country

Mapped: The Growth in House Prices by Country

Global housing prices rose an average of 6% annually, between Q4 2021 and Q4 2022.

In real terms that take inflation into account, prices actually fell 2% for the first decline in 12 years. Despite a surge in interest rates and mortgage costs, housing markets were noticeably stable. Real prices remain 7% above pre-pandemic levels.

In this graphic, we show the change in residential property prices with data from the Bank for International Settlements …see global visual on above link.

Preface: All who have accomplished great things have had a great aim, have fixed their gaze on a goal which was high, one which seemed sometimes impossible. — Orison Swett Marden

How to Survive a Recession and Thrive Afterward

…………..In their 2010 HBR article “Roaring Out of Recession,” Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen found that during the recessions of 1980, 1990, and 2000, 17% of the 4,700 public companies they studied fared particularly badly: They went bankrupt, went private, or were acquired. But just as striking, 9% of the companies didn’t simply recover in the three years after a recession—they flourished, outperforming competitors by at least 10% in sales and profits growth. A more recent analysis by Bain using data from the Great Recession reinforced that finding. The top 10% of companies in Bain’s analysis saw their earnings climb steadily throughout the period and continue to rise afterward. A third study, by McKinsey, found similar results………….

…….Companies with high levels of debt are especially vulnerable during a recession, studies show. ……. Overall, the more housing prices declined, the more consumer demand fell, driving increased business closures and higher unemployment. But the researchers found that this effect was most pronounced among companies with the highest levels of debt. They divided up companies on the basis of whether they became more or less leveraged in the run-up to the recession, as measured by the change in their debt-to-assets ratio. The vast majority of businesses that shuttered because of falling demand were highly leveraged……https://hbr.org/2019/05/how-to-survive-a-recession-and-thrive-afterward

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Preface: Every street is paved with gold. – Kim Wo-Choong

Equipping Employees with a Company Car

Buying or leasing an auto for the use of your employees ought to be an uncomplicated transaction from the tax viewpoint, but it’s not. The plain fact is that the company auto creates more tax complications than almost any other type of business asset.

That’s why it’s imperative for you to formulate an overall strategy with tax advisor, one that yields the maximum in tax savings, while keeping your paperwork and administrative burden at a minimum. This strategy will take into account the special rules that apply to your deductions for the company auto, the tax consequences of an employee’s personal use of a company auto, and the payroll implications of such personal usage.

As a general rule, your company can claim depreciation deductions for the full cost of a purchased company auto, usually based on a five-year “life” but also limited each year by so-called “luxury auto caps.” Alternatively, if your company leases instead of buys, it can fully deduct its lease cost (again, up to certain “luxury vehicle limits”). In either case, the value of the employee’s personal use of the car is generally treated as fringe benefit compensation income.

The employee’s personal use of the company auto creates a separate category of tax complications. That’s because the value of the employee’s personal mileage must be treated as noncash fringe benefit income that is taxable to the employee, but not deductible by the company (its deductions consist of depreciation or lease deductions and operating costs).

There are four separate ways to value employee personal mileage, and each of them carries its own rules and conditions. Three of the four methods require detailed record keeping of business and personal usage.

The fringe benefit value of personal use of the company auto generally is subject to federal income tax withholding and FICA tax. However, your company can elect not to withhold federal income tax if it properly notifies affected employees of this choice.

Furthermore, the value of an employer-provided vehicle may be excludable as a working condition fringe to the extent the employee would be allowed a deduction for depreciation or as a trade or business expense if the employee paid for the use of the vehicle. In addition, a company can choose to treat the company car as having been used entirely for personal travel. This option will greatly simplify the company’s record keeping burden, but usually will create extra taxable income for your employees.

Although the rules for company autos are complex, we can show you how to minimize their impact on your bottom line, on your payroll department, and on your employees.

Preface: Don’t wish it were easier; wish you were better. Don’t wish for fewer problems; wish for more skills. Don’t wish for less challenges; wish for more wisdom. — Jim Rohn

2023 Tax Planning: Educational Savings Plans

If you are a parent with young children, you are faced with many rewards and challenges. One of which may be saving for the high cost of a college education for them. However, there are two tax-favored options that might be beneficial: a qualified tuition program and a Coverdell education savings account.

In addition, you might also want to invest in U.S. savings bonds that allow you to exclude the interest income in the year you pay the higher education expenses. Each of these options has their benefits and limitations, but the sooner you choose to make the investment in your child’s future, the greater the tax savings.

Qualified Tuition Program (QTP). A qualified tuition program (also known as a 529 plan for the section of the Tax Code that governs them) may be a state plan or a private plan. A state plan is a program established and maintained by a state that allows taxpayers to either prepay or contribute to an account for paying a student’s qualified higher education expenses. Similarly, private plans, provided by colleges and groups of colleges allow taxpayers to prepay a student’s qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors. 

529 plan distributions are tax-free as long as they are used to pay qualified education expenses for a designated beneficiary. As much as $10,000 of distributions may be used for enrollment at a public, private, or religious elementary or secondary school. Qualified higher education expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualifies as higher education expense.

For any distribution made after 2018, qualified education expenses of 529 plan include certain expenses associated with registered apprenticeship programs and qualified student loans. Apprenticeship program expenses includes expenses for fees, books, supplies, and equipment required for the participation of the designated beneficiary in an apprenticeship program registered and certified with the Department of Labor. Qualified education expenses of 529 plans include up to $10,000 of principal or interest on any qualified student loan of the designated beneficiary or a sibling (brother, sister, stepbrother, or stepsister).

Under the SECURE Act 2.0 of 2022, beginning in 2024 the amounts held in a 529 plan of a designated beneficiary at least 15 years may be rolled over to a Roth IRA of the same beneficiary and excluded from gross income. The distribution cannot exceed the aggregate amount contributed to the 529 account (including earnings) made in the previous five years. Also, there is an aggregate lifetime limit of $35,000 on such rollover distributions with respect to the designated beneficiary. The rollover distribution counts toward the annual Roth IRA contribution limit ($6,500 for an individual under age 50 in 2023). 

Coverdell education savings accounts. Coverdell education savings are custodial accounts similar to IRAs. Funds in a Coverdell ESA can be used for K-12 and related expenses, as well as higher education expense. The maximum annual Coverdell ESA contribution is limited to $2,000 per beneficiary, regardless of the number of contributors. Excess contributions are subject to an excise tax.

Entities such as corporations, partnerships, and trusts, as well as individuals can contribute to one or several ESAs. However, contributions by individual taxpayers are subject to phase-out depending on their adjusted gross income. The annual contribution starts to phase out for married couples filing jointly with modified AGI at or above $190,000 and less than $220,000 and at or above $95,000 and less than $110,000 for single individuals. 

Contributions are not deductible by the donor and distributions are not included in the beneficiary’s income as long as they are used to pay for qualified education expenses. Earnings accumulate tax-free. Contributions generally must stop when the beneficiary turns age 18, except for individuals with special needs. Parents can maximize benefits, however, by transferring the older siblings’ account balance to a younger brother, sister or first cousin, thereby extending the tax-free growth period. 

U.S. Savings Bonds. If you redeem qualified U.S. savings bonds and pay higher education expenses during the same tax year, you may be able to exclude some of the interest from income. Qualified bonds are EE savings bonds issued after 1989, and Series I bonds (first available in 1998). The tax advantages are minimized unless the redemption of the bonds is delayed a number of years, therefore some planning is required.

The exclusion is available only for an individual who is at least 24 years of age before the issue date of the bond, and is the sole owner, or joint owner with a spouse. Therefore, bonds purchased by children or bonds purchased by parents and later transferred to their children, are not eligible for the exclusion. However, bonds purchased by a parent and later used by the parent to pay a dependent child’s expenses are eligible. The exclusion is, however, phased out and eventually eliminated for high-income taxpayers.

Educational assistance. Payments made by an employer after March 27, 2020 and before January 1, 2026, to either an employee or a lender to be applied toward an employee’s student loans are excludable. The payments can be of principal or interest on any qualified education loan. An employer may pay up to $5,250 each tax year toward an employee’s student loans, and that amount would be excludable from the employee’s income. The $5,250 cap applies to the new benefit for student loan repayment assistance and other educational assistance already provided, such as for tuition, fees, and books. Any excess of benefits is subject to income and employment taxes.

Of course, in planning for higher-education costs, parents may also choose to use funds from an individual retirement account or a traditional form of savings. In addition, higher education costs may be supplemented with scholarships, loans and grants. However, having a viable plan as early as possible in a child’s life will make maximum use of a family’s financial resources and may provide some tax benefit. If you would like to explore how these opportunities can work for you and have us fully evaluate your situation, please do not hesitate to call.

Preface: Life will always be to large extent what we ourselves make it. – Samuel Smiles

Selling Investment Property – Like-Kind Exchanges

A well known, but sometimes overlooked, way to transfer investment holdings without paying tax at the time of the transaction is through the use of “like-kind” exchanges. In a like-kind exchange, investment real property is traded for other investment real property. The person transferring one piece of property receives different property, and the basis in the original property generally carries over to the new property. That way, the gain is deferred while other tax attributes are preserved.

Of particular interest are the flexible features that make a like-kind exchange an especially useful technique. First, properties do not have to be of identical type to qualify as like-kind. To take a few examples, commercial buildings have been exchanged for unimproved lots, farm land for city lots, and even cooperative housing stock carrying occupancy rights for a condominium interest in the same property. However, only real property qualifies for a like-kind exchange.

Second, properties do not have to be exchanged at the same time. Therefore, it is not necessary to have already located the exchange property to make a like-kind exchange (an important consideration if the end of a tax year is looming). It is sufficient that the exchange property be identified within 45 days after the relinquished property is given up, and that the identified property be received within 180 days. (However, if the tax return due date for the original transfer year occurs before the end of the 180-day period, the identified property must be received on or before the tax return due date).

 To illustrate how these exchanges can work, consider the following example:

 Fred owns an interest in an office building. He bought it years ago for $10,000, but today it’s worth at least $100,000. Fred has decided to move to Florida and convert his office building interest into an ownership share in a Florida apartment building. Allison wants to buy Fred’s office building interest, and for tax reasons she wants to own the building interest by December 31. Fred wants to avoid the high tax he would have to pay after a cash sale.

 A solution is a deferred like-kind exchange. Fred transfers his building interest to Allison on December 31. Allison agrees to locate and buy a Florida apartment building interest of equal value suitable to Fred. (Fred can even insist that Allison put the purchase price in escrow, so long as Fred has no independent right to the cash). After Allison finds and buys the Florida property, she transfers it to Fred, and the like-kind exchange is completed. Provided the 45/180 day rules along with other requirements are satisfied, Fred receives the Florida property tax-free, with the same basis and holding period he had in the office building.

 As you can see, a like-kind exchange can be an excellent tool that can be used to achieve investment goals. Even in situations where it is impractical to arrange a completely tax-free transaction, like-kind exchanges may still reduce the immediate tax consequences of altering your investment holdings. Any transaction must be carefully structured. 

If you have investment property that may qualify for a like-kind exchange, it is advised to discuss qualifying tax attributes with your tax advisor.

Preface: Give me a stock clerk with a goal and I will give a man who will make history. Give me a man without a goal and I will give a stock clerk – J.C. Penny

What is Really Bugging the Banks

……The problem is banks cannot pay depositors anything close to what they can now receive from a risk-free T-bill yield. Otherwise, they would be paying depositors more than they are currently receiving from a good percentage of their assets, and their profit margins would disappear. However, if banks don’t begin offering much better rates to their customers’ liquid deposits, it will lead to more money fleeing the banking system, which is a drain on reserves and curbs banks’ ability to lend. This exacerbates the drain on reserves already occurring from the Fed’s ongoing QT program. Banks are then forced to sell assets to meet liquidity requirements, which then puts further downward price pressure on these same assets and attenuates banking reserves further…….…..In other words, we have yet to see the recession become manifest, which is so very clearly predicted by the National Federation of Independent Business’ small business survey, the Index of Leading Economic Indicators, plunging money supply growth rates, the soaring net percentage of banks that are tightening lending standards, and inverted yield curves. The Fed’s additional 25bp rate hike after the May FOMC meeting will serve to exacerbate and expedite the coming recession. And, once that economic contraction finally does arrive, we can expect the stress in the banking system to greatly intensify……..

Read Complete Article here…..

Michael Pento is the President and Founder of Pento Portfolio Strategies with more than 30 years of professional investment experience. He worked on the floor of the NYSE during the mid-’90s. Pento served as an economist for both Delta Global and EuroPacific Capital.

Disclaimer: This blog is for educational purposes only and is not to be construed nor used as investment, tax or legal advice. Contact your advisors to discuss your specific situation.

Preface: Patience is a necessary ingredient of genius. – Benjamin Disraeli

Paying the IRS – Planning to Pay Individual Estimated Tax

Some individuals have to pay estimated taxes or face a tax penalty in the form of interest on the amount of tax underpaid. Self-employed persons, retirees and non-working individuals most often must pay estimated tax to avoid the penalty. But an employee may need to pay them if the amount of tax withheld from W-2 wages is not sufficient to cover the tax on other income. The potential tax owed on investment income also may increase the need for paying estimated taxes, even among wage earners.

 The trick with estimated taxes is to pay a sufficient amount of estimated tax to avoid a penalty but not to overpay. That’s because while the IRS will refund the overpayment when you file your return, it won’t pay you interest on it. Individual estimated tax payments are generally made in four installments. For the typical individual who uses a calendar tax year, payments generally are due on April 15, June 15, and September 15 of the tax year, and January 15 of the following year (or the following business day when it falls on a weekend or other holiday).

 Generally, you must pay estimated taxes if (1) you expect to owe at least $1,000 in tax after subtracting tax withholding (if you have any) and (2) you expect that your withholding and credits to be less than the smaller of 90 percent of your current year taxes or 100 percent of the tax on your prior year return.

There are special rules for higher income individuals. If your adjusted gross income (AGI) for your prior year exceeded $150,000, you must pay either 110 percent of the prior year tax or 90 percent of the current year tax to avoid the estimated tax penalty. For married filing separately, the higher payments apply at $75,000.

Estimated tax is not limited to income tax. In figuring your installments, you must also take into account other taxes such as the alternative minimum tax, penalties for early withdrawals from an IRA or other retirement plan, and self-employment tax, which is the equivalent of social security taxes for the self-employed.

Suppose you owe only a relatively small amount of tax? There is no penalty if the tax underpayment for the year is less than $1,000. However, once an underpayment exceeds $1,000, the penalty applies to the full amount of the underpayment.

What if you realize you have miscalculated before the year ends? An employee may be able to avoid the penalty by getting the employer to increase withholding in an amount needed to cover the shortfall. The IRS will treat the withheld tax as being paid proportionately over the course of the year, even though a greater amount was withheld at year-end. The proportionate treatment could prevent penalties on installments paid earlier in the year.

What else can you do? If you receive income unevenly over the course of the year, you may benefit from using the annualized income installment method of paying estimated tax. Under this method, your adjusted gross income, self-employment income and alternative minimum taxable income at the end of each quarterly tax payment period are projected forward for the entire year. Estimated tax is paid based on these annualized amounts if the payment is lower than the regular estimated payment. Any decrease in the amount of an estimated tax payment caused by using the annualized installment method must be added back to the next regular estimated tax payment.

As you can see from this blog, figuring out estimated taxes can be rather complex for individual tax planning. Please call our office if you would like more details on managing estimated income tax payments.

Preface: There is always enough time to get those things done that God wants you to do. – Jim Collins

SECURE Act 2.0: Employer-Provided Retirement Plans

The SECURE 2.0 Act of 2022 (SECURE Act 2.0) is designed to build upon the provisions of the original SECURE Act to increase participation and boost retirement savings. The SECURE Act 2.0 does this by expanding upon automatic enrollment programs, helping to ensure that small employers can easily and efficiently sponsor plans for employees, and enhancing various credits to make saving for retirement beneficial to both plan participants and plan sponsors.

Automatic Enrollment

One of the most broadly applicable provisions of the SECURE Act 2.0 requires that, effective for plan years beginning after 2024, 401(k) and 403(b) sponsors automatically enroll employees in plans once they become eligible to participate in the plan. Under the requirement, the amount at which employees are automatically enrolled cannot be any less than three percent and no more than ten percent of salary. The amount of employee contributions is increased by one percent every year after automatic enrollment, increasing to at least 10 percent but not more than 15 percent of salary. Employees can opt out of the automatic enrollment if they choose or have such contributions made at a different percentage. The automatic enrollment provision is effective for plan years beginning after December 31, 2024.

Many employers have taken it upon themselves to automatically enroll employees in 401(k) and 403(b) plans since first allowed to do so more than 20 years ago, and this has, unsurprisingly, led to an increase in plan participation and retirement savings. However, under this provision, automatic enrollment is required. Exceptions to the automatic enrollment requirement are available for businesses with ten or fewer employees, businesses that have been in existence for less than three years, church plans, and government plans.

Catch-Up Limits

The annual amount that can be contributed to a retirement plan is limited, and this limitation amount is generally subject to annual adjustments for inflation. For plan participants aged 50 or older, the contribution limitation is increased (“catch-up contributions”). For 2023, the amount of the catch-up contribution is limited to $7,500 for most retirement plans, and $3,500 for SIMPLE plans, and is subject to inflation increases. Under the SECURE Act 2.0, a second increase in the contribution amount is available for participants aged 60, 61, 62, or 63, effective for tax years after 2024. For most plans, this “second” catch-up limitation is $10,000, and $5,000 for SIMPLE plans. Like the “standard” catch-up amount, these limitations are subject to inflation adjustment.

In addition, the SECURE Act 2.0 requires, effective for tax years beginning after 2023, that all catch-up contributions are subject to Roth (i.e., after-tax) rules, rather than only where allowed by the plan.

Small Employers

Currently, under provisions of the original SECURE Act, a small employer that establishes an eligible plan can claim a credit calculated as a percentage of start-up costs for the first three years. Under the SECURE Act 2.0, effective for tax years beginning after 2022, the length of time for which the credit can be claimed is extended to five years for employers with 50 or fewer employees. Additionally, the amount of the credit is increased for employers with 50 or fewer employees, with a cap of $1,000 per employee. The 100 percent credit amount is phased out for employers with 51 to 100 employees, and drops incrementally to 25 percent in the fifth year.

In addition, the SECURE Act 2.0 retroactively makes the start-up credit available to small employers that join a multiple employer plan (MEP) that is already in existence. Without this fix, the small employer would not be eligible for the credit if the MEP had been in existence for three years. The fix is effective for tax years beginning after 2019.

The SECURE Act 2.0 also provides a credit for small employers that make military spouses immediately eligible to participate in the employer’s retirement plan. The credit is effective for tax years beginning after 2022.

Additional Provisions

The SECURE Act 2.0 includes several other provisions meant to expand participation and boost retirement savings. These additional improvements include:

• • • • Allowing employers to make nonelective contributions of a uniform percentage to a SIMPLE IRA or SIMPLE 401(k) plan up to 10 percent of compensation, with an inflation-adjusted cap of $5,000. Contribution amounts to SIMPLE IRA and 401(k) plans are also increased in the case of certain smaller employers.
      • Allowing employers sponsoring 403(b) plans, which are typically charitable organizations and other non-profits, to participate in MEPs just like sponsors of 401(k) plans (plan years beginning after 2022)
      • Allowing plans to provide participants with the option of receiving matching contributions to a defined contribution plan on a Roth (i.e., after-tax) basis (after date of enactment)
      • Allowing employers to make matching contributions to employee plans for the employee’s student loan payments (plan years beginning after 2023)
      • Allowing employers to give employees de minimis low-cost incentives, like gift cards, to incentivize employee contributions to qualified plans (plan years beginning after 2022)
      • Allowing employers a grace period to correct mistakes without penalty when establishing automatic enrollment and contribution escalation plans (after date of enactment)
      • Reducing SECURE Act length-of-service requirements for part-time participants in sponsored plans from three years to two years (plan years beginning after 2024)
      • Eliminating notification requirements to unenrolled plan participants, but requiring an annual notification to these participants of plan requirements and deadlines to encourage participation (plan years beginning after 2022)

The changes under provisions of the SECURE Act 2.0 may affect the retirement plan options available to your employees. Please call our office if you’d like more information