Member of Russell Bedford International, a global network of independent professional service firms.
Member of Russell Bedford International, a global network of independent professional service firms.
If you’ve been thinking about ways to save on medical expenses, now may be the perfect time to open a Health Savings Account (HSA). Thanks to persistent inflation, the IRS recently announced historic bumps to contribution limits for HSAs, making planning for health savings more beneficial than ever.
Established in 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act, Health Savings Accounts (HSAs) are a type of medical savings account with tax advantages. Individuals contribute pre-tax income to savings accounts that may be used to pay for qualified medical expenses. Funds in an HSA roll over from year to year, meaning it is possible to establish significant reserves for future medical costs while saving money by lowering your taxable income.
HSA funds can be used for a variety of qualified medical expenses, including office visits, dental care, eyeglasses, over-the-counter medications, and more. Funds may even be used for costs related to healthcare, like transportation expenses.
HSAs are available to those enrolled in High-Deductible Health Plans (HDHP). HDHPs are defined as a plan where the deductible is higher than the average, as determined by the IRS. For 2024, an HDHP includes any plan “with an annual deductible that is not less than $1,600 for self-only coverage or $3,200 for family coverage, and for which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $8,050 for self-only coverage or $16,100 for family coverage.”
In addition to being enrolled in an HDHP, you may not be enrolled in Medicare and must not be claimed as dependent on someone else’s tax return.
For 2024, the IRS has raised the contribution limit for an individual to $4,150, an increase of $300 from the previous year, and $8,300 for family coverage, an increase of $550 from 2023. These amounts represent the largest yearly adjustments since the accounts’ inception and reflect rising healthcare-related expenses due to ongoing inflation.
HSAs can provide advantages in both the short term, by lowering your taxable income, and in the long term, by helping establish a cushion for future medical expenses. Increased contribution limits make HSAs more beneficial than ever. If you have any questions about HSAs or tax-advantaged medical savings accounts, please call Cray Kaiser at (630) 953-4900 or contact us here.
We’ve talked previously about opportunities to reduce the tax bite from capital gains. For example, the 2017 Tax Act brought us opportunity zones; by investing in these programs, the capital gains tax exposure can be minimized or even eliminated. You are also likely familiar with tax-deferred exchanges, commonly referred to as 1031 exchanges. But there are other provisions that are sometimes overlooked by investors.
Internal Revenue Code Section 1244 benefits investors that take the risk of starting a small business that fails. Section 1244 provides special tax treatment to the disposition of certain qualifying stocks of small businesses. It essentially allows losses up to $50,000 ($100,000 for married taxpayers filing jointly) to be subject to the more favorable ordinary loss treatment. Why is this beneficial? The loss is all deductible in the year of the loss rather than being treated as a capital loss limited to a per-year loss of $3,000 ($1,500 for married taxpayers filing separately). In addition, Sec 1244 stock losses are allowed for net operating loss purposes without being limited by non-business income.
Congress originally created this benefit to encourage investment in small business enterprises. It may also be a factor in determining the choice of entity when originally initiating a business. In addition to the benefits provided by Sec 1244, another part of the Internal Revenue Code, Sec 1202, allows gain from C corporation stock to be excluded from income where the aggregate gross assets of the corporation immediately after the issuance (determined by considering amounts received in the issuance) does not exceed $50 Million, the corporation meets an active business requirement, and the stock is held more than 5 years. The maximum excludable gain under Sec 1202 can’t exceed $10 million ($5 million, if married filing separately).
Section 1202 stock has been a hot topic in the tax planning world. In particular, start-up companies have been keen to organize the entity in such a way that investors will qualify for the Section 1202 gain exclusion.
1244 Stock – In general the term 1244 stock means stock in a domestic corporation if at the time such stock is issued:
Taxpayers taking advantage of the Section 1244 stock rules should document the factors that allow them to qualify. This could include corporate minutes and resolutions, accounting and bank records, and even operational records.
1202 Small Business Corporation Stock Defined – A corporation is treated as a small business corporation if the aggregate amount of money and other property received by the corporation for stock, as a contribution to capital, and as paid-in surplus, does not exceed $1,000,000. The determination under the preceding sentence is made as of the time of the issuance of the stock in question but also includes amounts received for such stock and for all stock previously issued.
The losses are reported by the individual stockholder; however, individual stockholders do not include trusts or estates.
If you would like to discuss the benefits of either the Section 1244 or Section 1202 stock provisions, call Cray Kaiser at (630) 953-4900 or contact us here.
Illinois shoppers can expect their grocery bill to increase a bit in July. The sales tax holiday on groceries, implemented in July 2022, is set to expire on June 30, 2023. The sales tax holiday was part of a state budget plan to provide residents relief from the rising costs of groceries. The sales tax rate for groceries in Illinois was already low, at 1%, but the State suspended the 1% sales tax rate from July 1, 2022, to June 30, 2023.
What does this mean for your business? Effective July 1, 2023, retailers should resume collection of the 1% grocery tax. Certain products, such as alcohol, candy, and soda, remain subject to the general sales tax rate of 6.25%. Note that the 1% is a state rate and local tax rates may also apply.
According to the U.S. Department of Agriculture, grocery prices are expected to grow more slowly in 2023 than in 2022. However, the increases are still substantial, and consumers are feeling the effect. The Consumer Price Index for food purchases was 7.1% higher in April 2023 compared to April 2022.
Cray Kaiser can assist in ensuring that your business is charging the appropriate sales tax on groceries. Please contact us here or call us at (630) 953-4900 if you have questions.
The most recent Illinois informational bulletin on the grocery tax suspension may be found here.
In Cray Kaiser’s Employee Spotlight series, we highlight a member of the CK team. We couldn’t be prouder of the team we’ve grown and we’re excited for you to get to know them. This month we’re shining our spotlight on Raychel Korn.
Raychel is a staff accountant at Cray Kaiser. Her day is mostly filled with corporate and not-for profit audits, reviews, compilations, and employee benefit plan (401k) audits. When tax season begins, she works on preparing individual tax returns.
During her time at Aurora University, Raychel interned for the winter tax season at CK. Once she graduated, she joined the team as a full-time staff accountant in May 2022.
Raychel was drawn to CK because of the learning environment. She appreciates how all members of the staff, managers, and partners value continuing education and take the time to educate others when needed. It’s no surprise that the two core values that mean the most to her are Education and Care. “At CK, we all care for each other and the clients,” says Raychel. “We are always there for each other even if it is personal or work related.
“To those who are just getting started in the accounting industry, your light bulb moment will come,” says Raychel. She says every project will have its own nuances. But each engagement or project will help you gain more and more knowledge until everything just clicks.
When asked about some of her favorite times with the CK group, Raychel says Saturday games during tax season are always a blast. “We all laugh, have fun, and have team bonding! My favorite games are when it’s Team Tax vs. Team Assurance. Go, Team Assurance!”
I would want to be an expert scuba diver. I think it would be cool to travel and see the different marine life around the world.
I enjoy going to concerts and music festivals with my friends. I enjoy dancing and singing to my favorite artists.
I try to always be positive. My motto is, “Don’t worry, be happy.”
You have heard from us about the benefits of the Employee Retention Credit (ERC). And you have probably received solicitations from third parties on the credit or even seen and heard commercials on the television and radio. The ERC is definitely a hot topic, given the advertised claims of billions of dollars returned to employers.
The Internal Revenue Service (IRS) has heard the chatter as well and is aggressively cracking down on so-called “ERC mills” – promoters of the credit making very misleading claims about the benefits.
The IRS has stepped up audit and criminal investigation work involving these claims. In fact, criminal charges have begun to be filed against the promotors of fraudulent claims. Businesses, tax-exempt organizations and others considering applying for this credit need to carefully review the official requirements for this limited program before applying. Those who improperly claim the credit face follow-up action from the IRS. Additionally, if the credit is overstated, the credit – plus penalty and interest – will need to be repaid.
“The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others,” said IRS Commissioner Danny Werfel. “Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit.”
The IRS notes the following warning signs of aggressive ERC marketing:
Cray Kaiser continues to be at the forefront of understanding whether you qualify for the ERC. If you would like us to review your situation to determine credit eligibility, please call our office today at (630) 953-4900 or connect with us here.
In Cray Kaiser’s Employee Spotlight series, we highlight a member of the CK team. We couldn’t be prouder of the team we’ve grown and we’re excited for you to get to know them. This month we’re shining our spotlight on Tatyana Jackson.
Tatyana is one of CK’s Accounting Service Specialist/Staff Accountants. Her days are spent calculating monthly transactions on clients’ books. She also performs year-end accounting and tax compilations. During tax season, Tatyana has a hand in preparing business and individual tax returns.
Prior to joining CK, Tatyana was part of a very small accounting company located in Little Rock, Arkansas where her role was similar to the role she holds now at CK. A unique fact about Tatyana is that she immigrated to the United States from Russia in 2016. She spent nearly 7 years living in Arkansas where she received a bachelor’s degree in accounting from the University of Arkansas at Little Rock. Tatyana also holds a master’s degree in education.
Tatyana joined the CK team in July of 2022 and was immediately drawn to the rich culture CK provides. She was also impressed by the strong female presence within CK. When asked which of CK’s core values mean the most and why, Tatyana answered, “Education means the most. I believe in lifetime learning and appreciate that CK provides that to its employees.” Tatyana enjoys working in the accounting department because she has the opportunity to learn from the best– her team everyday. “All CK team members are helpful and always willing to jump in and teach when needed,” says Tatyana.
When asked about her favorite CK group outing, Tatyana answered, “Our bowling event right before tax season was a lot of fun! I enjoy bowling and it was great to have outing prior to the busy season to give us all a boost in energy.”
“The Golden Mean in everything.”
Right now, the #1 place I would love to visit is the Grand Teton National Park in Wyoming. As for an overseas destination, I would love to visit London, UK.
“Ozark” on Netflix!
Master and Margarita by Mikhail Bulgakov.
Many of us have just put our 2022 taxes in the rearview mirror, but it’s still not too early to start planning for 2023. A little thinking ahead now can help you avoid unpleasant year-end surprises with your tax bill. In 2020, the IRS introduced a new format for the W-4 withholding certificate, which is the form you use to tell your employer how much to take out of your paycheck towards your income tax. Because the new W-4 works a bit differently than the old one, this has caused confusion, and many people find that their payroll withholding now falls short of covering their tax liability at the end of the year. Some taxpayers who were used to always breaking even or getting refunds when they filed their returns now find that they owe money.
The nature of this new W-4 requires a little additional planning, and to help with this, the IRS has introduced a withholding calculator to help you estimate what you should be withholding each pay period. Just input your earnings and withholding for the year so far and estimate some of your deductions and credits. Then you’ll get a general idea of whether your withholding will be enough for the year.
Click here to access the IRS estimator.
When completing the estimator, it is recommended that you have your most recent paystub handy (including your spouse’s if married), as well as the previous year’s tax return. Most of the information the estimator asks for will come from your paystub. The calculator also allows you to go into as much detail as you like with credits and deductions. We typically suggest keeping it simple by using the numbers from your prior year’s return. If you used the standard deduction, go with that again. If you itemized, start with the prior year’s numbers and adjust to reflect anything major that might have changed. Unless you expect significant life events like marriage, a new baby, or a child beginning college, most people will get accurate results using numbers from the previous year.
The estimate from the calculator will give you a rough idea of whether the tax you are withholding through your W-2 will cover your tax bill at the end of the year. If the calculator shows you’re likely to owe, you can ask your employer to adjust the amount taken out of your check each pay period. The easiest way to do this is to take the estimated amount owed from the calculator and divide it by the number of pay periods left in the year. Then round that to an even number and ask your employer to withhold that additional amount from each paycheck. The person responsible for HR or payroll at your employer will normally be the one who can provide that form and make the adjustment for you.
It’s important to keep in mind that this is only an estimate. Many events can affect your final tax liability, like a bonus, a raise, a new job, or increased income earned outside of your W-2, like dividends or gig work. If your situation changes during the year, you can always revisit the calculator and adjust again. And of course, you can always connect with your Cray Kaiser advisor with any questions. Give us a call at (630) 953-4900 or connect with us here.
The issue of foreign tax reporting has been in flux for the last few years. For the 2021 tax year, the IRS hastily published regulations without warning, that made it onerous for many passthrough entities, and created more complexity and paperwork than many believe was necessary. These were the K-2 and K-3 schedules, which run about 20 pages per owner, and which many of you might have noticed when you received your 2021 K-1’s from S-Corps or Partnerships.
The goal of these schedules was to provide information on the portion of the income from the S-Corp or Partnership related to foreign activities. However, the implementation by the IRS was heavy-handed and made the process complex which added time and cost to the income tax preparation process.
For the current year, the IRS has bowed to pressure and has provided two exemptions that give relief to most passthrough entities with little or no foreign activity. While in theory, this is good news, the qualifications to utilize the exemption are complicated.
To qualify, passthrough entities must only have direct partners and shareholders who are U.S. citizens, resident aliens, or certain domestic estates and trusts, and any foreign activity is limited to less than $300 of foreign taxes paid or accrued. If these definitions are met, then an election can be made to exclude the K-2 and K-3 schedules.
This is where things get a little convoluted. Before the passthrough entity can file the return with this election, they must provide each owner a K-1 with a disclosure that K-3 will only be provided if the owner specifically requests it. The owner has up to one month before the return is filed to request a K-3. If this is the case, one owner can cause the S-Corp or Partnership to file the return with K-2 and K-3s, and the owner who requested the K-3 will receive it with their K-1. This can hold up filing the S-Corp and Partnership return to much later, causing all owners to file their individual returns later than desired.
Another exemption to the K-2 and K-3 filing requirements is if all owners qualify for the Form 1116 exemption. If so, the S-Corp or Partnership doesn’t have to file K-2 or K-3.
Form 1116 reports foreign income and foreign taxes paid on the individual income tax return. The exemption from filing this form is if an individual receives less than $600 ($300 for single filers). By doing so, the individual return is more simplified. However, it disallows any foreign taxes carried over to be utilized.
This exemption will likely be less often utilized because it requires every owner to disclose their intent and qualification for Form 1116 exemption to the S-Corp or Partnership. In addition, the time frame for notifying the S-Corp or Partnership is much shorter than the first exemption; owners were required to disclose their intention by February 15 of the current year for 2022 tax returns, a month before the S-Corp or Partnership’s unextended due date.
At CK, we are working with our clients directly to ensure that the exceptions to filing the K-2 and K-3 schedules are reviewed and disclosed appropriately. If you have questions about these exemptions and if they apply to your S-Corp, Partnership, or your individual return, please call Cray Kaiser today at 630-953-4900.
Effective for tax years starting in 2022, there is a policy change that will impact how research and development (R&D) is handled for U.S. tax purposes. Rather than being allowed to deduct those costs immediately, companies are now being told that they must spread those costs out over a period of at least five years.
Unsurprisingly, many companies are not thrilled with that change. It has the potential to hurt manufacturers in a number of different ways, all of which are worth exploring.
In a letter that was sent on November 4, 2022, no less than 178 CFOs – primarily those from some of the biggest names in United States manufacturing, like Ford Motor Company, Lockheed Martin, Boeing, and others – outlined why they believe that these aforementioned new rules would lead to what they call a “competitive disadvantage” for American companies. This would likely lead to job losses, harming their ability to innovate over the next decade.
Their point of view was simple: they were asking the current Congress to switch back to a system that allowed them to immediately deduct their costs regarding R&D as soon as the end of the year.
Until January 1, 2022, businesses could deduct 100% of all expenses directly attributed to R&D in the same year they were incurred. This is a major new expense – the tax liabilities of these companies are about to increase exponentially. This makes it more expensive to invest in advancements that will help innovate various sectors like manufacturing and in the growth of these companies.
One company that is particularly worried about the implications of this change is Miltec UV. However, company leadership believes that an exciting new opportunity is within reach. They have spent years developing new technology for lithium-ion batteries – otherwise known as the rechargeable batteries found in countless devices like your smartphones or tablets. This new technology could potentially be used for next-generation electric vehicles.
Miltec UV has poured at least 11 years of development into manufacturing the electrodes used in these batteries. They’ve spent countless amounts of money on prototyping. Various proof of concepts have been developed to indicate that these microbes can do what the company thinks they can. There has been testing. On top of it all, there is the cost of manufacturing the batteries. Officials agree that they are very close to the point where they can commercialize the batteries and begin to sell them, but with these new rule changes, they will have to pay more taxes than they previously thought they would.
For smaller businesses than Miltec UV, how do you know if you will be affected? The first clue is to look at your financial statements or recent tax return – do you have “R&D expenses”? Or have you claimed the R&D credit in the past? If either of these are true, you will likely be affected by the new law.
But you’ll need to do an even deeper dive. That’s because how R&D expenses are defined for credit purposes differs from expenses affected by the new law. The nuances of the differences are beyond the scope of this article, but needless to say that those companies with significant R&D would benefit from an R&D study to ensure that the least amount of costs are categorized as R&D.
Those companies will also need to look at where the development is performed. Believe it or not, the law is even worse for those with international development costs; these are written off over not a five-year period but a fifteen-year period. Either way, the “half-year” convention determines the write-off.
To summarize the write-off of R&D expenses:
Pre-2022: 100% write-off
2023 and forward – domestic R&D: 10% write-off in year one, 20% in years two through four, 10% in year five
2023 and forward – international R&D: 3.33% write-off in year one, 6.66% in years two through fourteen, 3.33% in year fifteen
Many businesses are hopeful that Congress will reverse these rules. But until then, large and small taxpayers need to address their R&D costs and the effect on 2022 tax liabilities. If you have questions about how these changes to the R&D tax policy will affect your business, please contact Cray Kaiser at (630) 953-4900.
By now, you are familiar with the Tax Cuts and Jobs Act (TCJA) passed a few years ago and likely recall that it lowered regular corporate taxes to 21%. In response to the lower corporate tax rate, there was a provision to lower overall taxes on the individual level using the Qualified Business Income. This allowed S-corporations (flow-through entities) to benefit from lower business taxes without converting to a C-corporation.
However, there might be other considerations to converting your S-Corporation to a C-Corporation. You can voluntarily convert your S-Corporation to a C-Corporation almost any time, but once you do, there is a five-year hold where you cannot convert back.
There are a few scenarios in which it would make sense to convert from an S-Corporation to a C-Corporation:
Once most shareholders who own the business agree to conversion and sign the Statement of Consent, the process with the IRS is quite simple. Any CPA can prepare the proper forms for the IRS so that the Company can convert to a C-Corporation. However, you must note that the process must be done by March 15th of the year you want to convert. Otherwise, the conversion will occur during the tax year, which will cause you to have to prepare and file two short-period tax returns. You can elect to convert to a C-Corporation beginning January 1st of the following year, which would allow you to submit the application any time during the year before conversion.
The biggest downside of a C-Corporation is double taxation. The corporation pays the federal income tax on its profit, usually at 21%. Any qualified dividends paid to investors are taxed again at the individual level at rates between 15% – 23.8%. For S-Corporations, the flow-through income is taxed once at the individual owner’s level, ranging anywhere from 10% – 37%. Assuming there is sufficient undistributed corporate income, the S-corporation distribution to owners would not be taxed again.
The other point to consider is that once you apply to convert to a C Corporation, you have a limited time to distribute the undistributed S-corporation earnings to the shareholders (which is tax-free) before it’s considered a dividend (and taxed between 15% – 23.8% on the shareholders’ personal return).
Converting from an S-Corp to a C-Corp has its benefits, but there are also long-term implications that you need to be aware of. Therefore, before you start the process of changing your tax status, speak with a CPA to review any pitfalls that might occur based on your unique situation.
If you have questions about the conversion and if it’s a good fit for your business, please call Cray Kaiser at 630-953-4900.
