Sauder & Stoltzfus Blog

Preface: “It used to be that we imagined that our mobile phones would be for us to talk to each other. Now, our mobile phones are there to talk to us.” ~ Sherry Turkle

Guidance on Employee Use of Cell Phones

The Internal Revenue Service has issued guidance designed to clarify the tax treatment of employer-provided cell phones.

The guidance, issued as an IRS Notice, relates to a provision in the Small Business Jobs Act of 2010 that removed cell phones from the definition of listed property, a category under tax law that normally requires additional recordkeeping by taxpayers.

The guidance on the treatment of employer-provided cell phones as an excludible fringe benefit provides that when an employer provides an employee with a cell phone primarily for non-compensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment.

Simultaneously with the Notice, the IRS announced in a memo to its examiners a similar administrative approach that applies with respect to arrangements common to small businesses that provide cash allowances and reimbursements for work-related use of personally-owned cell phones. Under this approach, employers that require employees, primarily for non-compensatory business reasons, to use their personal cell phones for business purposes may treat reimbursements of the employees’ expenses for reasonable cell phone coverage as nontaxable. This treatment does not apply to reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee’s regular wages.

Under the guidance issued, where employers provide cell phones to their employees or where employers reimburse employees for business use of their personal cell phones, tax-free treatment is available without burdensome recordkeeping requirements. The guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business related; as such arrangements are generally taxable.

If you have any questions regarding the use of cell phones or the tax treatment of other fringe benefits, please call our office at your  convenience.

 

 

Preface: A problem is the chance for you to do your best. – Duke Ellington

Independent Contractors v. Employees – An Update

Worker classification is a hotly contested audit issue that has caused anxiety for business owners all across the country. Whether a worker is classified as an employee or as an independent contractor can mean a substantial difference in the amount of employment taxes that the business pays. In addition, the new health care reform law imposes health care coverage requirements on an employer with more than 50 full-time employees, a fact which may tempt many employers to hire independent contractors instead. It is one thing to legitimately employ an independent contractor. However, an employer who misclassifies his employees either inadvertently or deliberately to minimize its employment tax or health care coverage responsibilities, may become subject to interest, penalties and tax liens. Such measures can bankrupt an otherwise successful business.

A business that is not currently under audit for employment taxes, but that wishes to correct its workers’ classification, may choose to enter the Voluntary Classification Settlement Program (VCSP). The IRS opened the program in 2011, and it is still in effect. Eligible businesses that enter the program are required to pay only 10 percent of the employment taxes that would have otherwise been due for the most recent tax year. In addition, there would be no interest or penalties, and the IRS would not conduct an employment tax audit of the business.

Additionally, the IRS has a voluntary settlement program to resolve worker classification issues called Classification Settlement Program (CSP).  This allows businesses and tax examiners to resolve worker classification cases as early in the administrative process as possible, thereby reducing taxpayer burden. In the CSP, examiners can offer a business under audit a worker classification settlement using a standard closing agreement developed for this purpose. The CSP procedures also ensure that the taxpayer relief provisions are properly applied. The IRS opened the program in March 1996. A taxpayer declining to accept a settlement offer retains all rights to administrative appeal that exist under the Service’s current IRS procedures and all existing rights to judicial review.

In light of the IRS’s predominantly pro-taxpayer initiatives, you may want to re-examine your worker classifications at this time. Even when potential employment tax liabilities are not overwhelming, it’s important to remember that misclassification can also cause pension plan difficulties. If you have discovered a misclassification and wish to determine whether you are eligible to participate in the VCSP, please do not hesitate to call our office for more information.

Preface: Life is really simple, but men insist on making it complicated. – Confucius

2023 Tax Planning: Benefits of Lowering Adjusted Gross Income

Effective tax planning to reduce your income can reduce your overall tax burden. Individual taxpayers may be able to reduce their taxable income through deductions if they meet the qualifications and income limitations. Saving for retirement and for future medical costs is an important way for an individual may achieve financial security and prepare to save for future expenses. This letter focuses on the background and tax benefits on reducing adjusted gross income by contributing to retirement plans, contributing to a health savings account, and opportunities for a student loan interest deduction.

 Traditional IRA. Any individual, regardless of whether or not covered under other qualified retirement plans, can establish an individual retirement account (IRA). Whether an individual is employed or self-employed, they may also take advantage of a variety of employer-sponsored retirement plans. These options not only provide security for the future, but also may provide opportunities for current tax savings. Traditional IRAs allow an individual with earned income to make tax-deductible contributions to a savings plan under which the gains and earnings are not taxed until they are distributed.

 Contributions to a traditional IRA are generally deductible on the taxpayer’s individual income tax return, to the extent that they do not exceed the lesser of the individual’s compensation for the year or the maximum contribution limit for the year and subject to income limits. In addition, nondeductible contributions from after-tax income may be made to traditional IRAs.  For 2023, total contributions to all of a taxpayer’s traditional and Roth IRAs cannot be more than the lesser of $6,500 ($7,500 if they are age 50 or older) or their taxable compensation for the year. The prior maximum age limitation of 70 ½ to contribute to an IRA ended effective for contributions after December 31, 2019.

 SEP Plan. A SEP is a type of IRA for small business owners or self-employed individuals. A SEP IRA allows the employer to make contributions to the accounts set up for employees. Self-employed individuals choosing a SEP must include all employees who satisfy the following requirements: at least 21 years of age; were employed during any three of the preceding five years; and earned at least $750 in the current year.

 Contributions to a SEP plan are tax-deductible and earnings are not taxable until withdrawal. One advantage of the SEP IRA is the higher contribution limit. For 2023, employers can contribute the lesser of up to 25% of income (limited to $330,000) or $66,000.

 SIMPLE Plan. Any employer that had no more than 100 employees with $5,000 or more in compensation during the preceding calendar year can establish a SIMPLE IRA plan. Self-employed individuals who received earned income from the taxpayer and leased employees are taken into account for purposes of the 100-employee limitation.

Employers must also make contributions whether or not an employee elects to defer a portion of their income to the plan. Contributions are tax deductible and investments grow tax deferred until the owner is ready to make withdrawals in retirement. For 2023 an employee may defer up to $15,500. If the individual age 50 or over, there is a $3,500 catch up contribution allowed, for a total of $19,000.

 Health Savings Account (HSA). Health savings accounts (HSAs) are available for individuals who have a high deductible health plan and may be funded by the individual or the individual’s employer. The benefits of an HSA include:

• • • • taxpayers can claim a tax deduction for contributions you or someone other than your employer make to your HSA,

• • • • contributions to your HSA made by your employer may be excludable from income, and

• • • • the contributions remain in your account until you use them.

 For 2023, the maximum contribution to an HSA is the lesser of: the annual deductible under the individual’s high deductible health plan; or $3,850 for an individual with self-only coverage and $7,750 for an individual with family coverage.

Student loan interest deduction. Interest paid by an individual taxpayer during the tax year on any qualified education loan is deductible from gross income in calculating adjusted gross income. The student loan must be incurred by the taxpayer solely to pay qualified higher education expenses. The maximum deductible amount of interest is $2,500, but the deduction is phased out or reduced based on the taxpayer’s modified adjusted gross income.

If you’d like to evaluate the tax advantages of retirement plans, health savings account, or education benefits could apply to your individual income tax situation – please call us at your earliest convenience to review potential tax plans for you to reduce your 2023 taxable income or tax liability.

Preface: The man who is a pessimist before 48 knows too much; if he is an optimist after it, he knows too little. — Mark Twain

Famous Twain Quotes 

Sam Clemens was never at a loss for words. Here you’ll find some of his most famous quotes‚ including the ones we inscribed on the walls of our museum center. While we continue to build our database‚ you can also check out twainquotes.com‚ a site lovingly created by Twain House friend Barbara Schmidt. Here‚ you’ll not only find quotes‚ but also hundreds of primary materials on Mark Twain‚ such as interviews and articles from newspapers and other media of the era.

Famous Twain Quotes

Preface: “You must welcome change as the rule, but not as your ruler.” – Denis Waitley

The Four Principles of Change Management

No organization can afford to stand still. There are always new challenges to meet, and better ways of doing things. However, every change you need to make should be planned and implemented with care, otherwise it could end up doing more harm than good!

That’s where change management comes in. It’s a structured approach that ensures changes are implemented thoroughly and smoothly – and have the desired impact.

In this article, we explain how you can enact positive and productive change in your organization using four core principles of successful change management.

Leadership Workshop September 27th | In Tides of Change Management, Don’t Forget Your OARS!

Sauder & Stoltzfus and Koble Systems invite you to join Steve Erb, MBA, and McKenzie Walker, Psy.D. from True Edge Performance Solutions on September 27th. Get ready to enhance your leadership skills! Learn how to reduce conflict, have more effective discussions and move your transformation initiatives forward!

• What is Change Management, and why is it so important?
• What are the pitfalls, and why is there resistance to change?
• What are techniques to be more effective in leading change and transformation in your organization?

Breakfast is included. Seating is limited.

Click here for details and to register   

Preface: The four most expensive words in the English language are, ‘This time it’s different.’ –Sir John Templeton

The Speculative Risks of the IRS Employee Retention Credit

Credit: Donald J. Sauder, CPA | CVA

The Employee Retention Credit is an IRS tax credit that gives businesses substantial relief measures for Pandemic Era financial business challenges. With the Employee Retention Credit eligibility, employers can obtain up to $26,000 of tax credit per employee. The Employee Retention Credit is also not taxable because it is a credit, making it duly appealing. Although the Employee Retention Credit applies to wages and benefits disbursed between March 2020 and December 2021, the IRS is giving businesses until April 15th, 2025 to submit their tax data for tax credit refunds. Those extra months are raising growing and valid concerns for a Pandemic Era stimulus plan that has generated a staggering amount of misleading marketing to businesses. Who qualifies? Even start-ups.

The ease of obtaining this tax credit has also resulted in some fascinating economic data. According to reports from Danielle DiMartino Booth from Quill Intelligence, who talks with clients and business owners daily, the employee retention credit data research leads to several surprising conclusions. While the Employee Retention Credit has resulted in a cottage industry of consultants marketing services to work on obtaining the $26,000 per employee credit for businesses, most companies who needed the money obtained it quickly previously.

The Employee Retention Credit is the worse kept secret in ongoing American stimulus packages. Employee Retention Credit payments were expected to peak in December of 2022 at $25.0 billion in stimulus for the month. Yet it continues. For June 2023, $29.0 billion was paid out to business owners, and for July 2023 another $33.0 billion. This is the annualized basis of more than $400.0 billion of business stimulus on an annualized basis. So, is this the reason why service spending is strong during the summer of 2023 because business owners are spreading the cheer while bilking Uncle Sam for up to 1.5% of GDP stimulus on an annualized basis?

The IRS is now pleading with the business community to not apply for the ERC unless you qualify.

Quoting Journal of Accountancy -https://www.journalofaccountancy.com/news/2023/jul/irs-commissioner-signals-new-phase-erc-compliance-work.html

The IRS and Treasury are looking at new ways to fight rampant fraud in employee retention credit (ERC) claims, including possible congressional action to move up the claim filing deadline and stricter oversight of tax preparers, IRS Commissioner Danny Werfel said Tuesday at a special roundtable session of tax professionals in Atlanta.

Werfel stated that, having cleared the backlog of valid ERC claims, the agency is intensifying compliance work and putting in place additional procedures to deal with fraud in the program.

According to Werfel, the IRS has increased audit and criminal investigation work on these claims, looking into both promoters and businesses filing dubious claims. The IRS has trained auditors to examine the claims that pose the greatest risk of fraud, and the IRS Criminal Investigation division is identifying promoters of fraudulent claims, he said.

“The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining,” Werfel said. Instead, the IRS is receiving more and more questionable claims, which the IRS is addressing by intensifying its compliance work, he said.

Businesses typically can file claims for the ERC until April 15, 2025. But those extra months are raising concerns for a credit that has generated a staggering amount of misleading marketing, Werfel stated.

Promoters making aggressive marketing claims are likely taking clients from tax professionals who are handling ERC claims correctly, Werfel said. The IRS advises businesses to work with a tax professional rather than rely on the word of promoters.

“Hard-working tax professionals who play by the rules see their clients go elsewhere, lured by false promises and wild exaggerations,” Werfel said.

Further, the chances are rising above 80% that avaricious business owners who have obtained this tax credit have an audit challenge ahead, and should be prepared to repay the entire credit. If you have obtained the employee retention credit, you may want to keep your cash reserves strong for years, because in a moment of greatest financial vulnerability, the IRS could ask for the proceeds back. []

Preface: “Make your vocation your vacation.  That is the secret to success.” – Mark Twain

How Taking a Vacation Improves Your Well-Being

Making sure your employees regularly take time off is key to creating a more sustainable workplace. Research shows that taking time off benefits employees in three ways: 1) Mentally. Taking a vacation provides greater opportunity for rest and better sleep (both quantity and quality), which can help unclutter your mind to boost creativity. 2) Body. Relaxing on vacation can reduce the levels of your stress hormones and allow your immune system to recover, making you less prone to get sick. 3) Soul. While it sounds hokey, answers to life’s big questions — like “What do I really want?” or “What’s most important to me?” — are more likely to come to us when there is some space and stillness………

…………We all know that taking vacation is good for you, but it’s less clear that both employers and employees understand exactly just how good it is for you, given that every year more than half of Americans give up paid time off. According to the U.S. Travel Association, in 2018, this amounted to 768 million days of unused vacation time, with more than 30% of it forfeited completely. Add to this, the fact that over 50% of managers feel burned out, taking vacation (and actually unplugging) has never been more important.

How Taking a Vacation Improves Your Well-Being

 

Preface: I believe the Bible is the best gift God has ever given to man. – Abraham Lincoln

Estate and Income Tax Planning – Gift Tax Exclusions

Maybe you’re like most people, you don’t like to think about planning your estate. But, it’s an important part of ensuring the financial security of your loved ones. One of the more common tools used in estate planning — and one to which everyone should at least give careful consideration — is a program of making gifts. A carefully planned gift-giving program can reduce the amount of your estate that is subject to tax while still passing on wealth.

The 2017 Tax Cuts and Jobs Act doubles the basic exclusion amount for purposes of federal estate and gift taxes and the exemption amount for purposes of the generation-skipping transfer (GST) tax from $5 million to $10 million, before adjustment for inflation, for the estates of decedents dying and gifts and generation-skipping transfers made after 2017 and before 2026. For the estates of decedents dying and gifts made in 2023, the basic exclusion amount is $12.92 million, with a corresponding applicable credit amount of $5,113,8004. The maximum estate and gift tax rate is 40 percent.

Absent the immediate financial needs of a gift recipient, the main motivation for making large gifts during your lifetime rather than waiting to pass on your wealth at death is to remove the future appreciation from your eventual taxable estate. There is a certain degree of risk in this strategy since your donee receives a tax basis equal to what you paid for the asset while your heirs will receive a stepped-up tax basis equal to the asset’s value at your date of death. As a result, the loss of stepped- up basis and higher future tax rates on capital gains may diminish the benefits of current gift giving. Nevertheless, the planning consensus is that getting future appreciation out of a taxable estate still trumps worries about any potential tax issues for your donees if and when they eventually sell the gifted assets.

You can give away up to an “annual exclusion amount” per recipient per year free of gift tax and free of any future offset against any exclusion amount used to lower future gift or estate taxes. For 2023, the annual exclusion amount is $17,000.

 There is a great deal of flexibility in the types of property that can be gifted. Gifts that qualify for the $17,000 annual exclusion can be made in money, property, such as stocks or bonds, or even a life insurance policy, so long as the recipient has the present right to possess or use the property. The gift may be in trust if the terms of the trust give the recipient the immediate right to the property or income from the property.

 You can give up to $34,000 per recipient per year if you are married and your spouse consents to “split” your gifts. This is useful for spouses who do not own an equal amount of property. The spouse with less property can consent to gifts made by the wealthier spouse, thereby effectively doubling the amount that the wealthier spouse can give away tax free. To take advantage of “gift splitting,” both spouses must be U.S. citizens or residents. The consent must be given on a gift tax return, so a return must be filed even if no gift tax is due. Don’t underestimate how an annual gift-giving plan using only the $34,000 split gift exclusion per donee can facilitate the tax-efficient transfer of family wealth.  

As noted above in discussing large gifts, but equally applicable to smaller gifts, it is important to remember that when you make a gift, the recipient must take your basis in the property. This means that if the recipient sells the property, any gain on the sale will be measured using what you paid for the property, not what the property was worth when he or she received it. In contrast, if property is transferred to another at your death through your estate (and whether or not estate tax is owed), the recipient can use the value of the property at that time to measure any gain on the sale of the property. Consequently, choosing the right property to achieve your goals is an important aspect of any gift-giving program.

Another way to further the financial security of others without incurring gift tax is by payment of medical and educational expenses. You can pay an unlimited amount for these expenses tax free so long as the payments are made on behalf of the done and are paid directly to the medical services provider or educational institution. The person you benefit does not need to qualify as a dependent for tax purposes. Any medical expenses, however, must not be reimbursed by insurance, to either you or to the beneficiary.

If used properly, a program of gift giving can benefit everyone involved. If you have any questions about the best way of using gifts as part of your overall financial plan, please call us for a referral to an estate planning expert. 

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.