Shareholders of S-Corporations, as We Move Into December, There Are Two Things You Need to Do
Self-Employment Health Insurance Deduction
Shareholders who own more than 2% of the shares in the S-corporation are required to report health insurance premiums paid on their behalf by the business on their W-2. This is a valuable deduction and must be reported correctly to take advantage of it. Attribution rules apply so premiums paid on behalf of family members who are not shareholders must be reported on their W-2 as well. You cannot take the health insurance deduction on the corporate return without it coming through the shareholders’ W-2.
The insurance policy that provides your insurance can either be in the name of the S-corporation or in the name of the shareholder. The premiums can be paid by the shareholder or the corporation. However, where the policy is in the shareholder’s name
(you individually), the corporation must reimburse you before year-end (12/31) if you personally paid the premiums.
CAUTION: Health insurance reimbursement plans where the employer reimburses the employee’s cost of health insurance do not comply with the ACA rules. There are limited exceptions for group health plans with fewer than two current employees.
Premium amounts are a “deemed wage” and are reported in Box 1 of your Form W-2. This “deemed wage” from payment of health insurance premiums is not subject to FICA or FUTA taxes.
In summary, the corporation deducts the health insurance premium paid on your behalf as an expense, you report this as income on your W-2, and you deduct the same amount on Form 1040 as self-employed health insurance premium. The IRS can deny your Form 1040 self-employment health insurance deduction if you do not report the premiums as part of Box 1 wages on Form W-2.
Personal Use of Company Owned Autos
The value of using a company auto for personal purposes is a fringe benefit that is taxable to the employee and to the shareholder. This benefit is treated as compensation and is subject to payroll taxes including FICA and FUTA tax.
There are several different methods to compute the value of personal use of company autos. If you would like any assistance with this calculation, please contact our office. Once the amount is determined, it is added to the gross wages of the individual receiving the benefit.
If you use a payroll service to prepare your payroll and W-2s, you will need to notify them of the shareholder insurance amount and auto fringe benefit amount before the final payroll processing in December. Often, the final payroll processing date is mid-December so now is a good time to gather this information.
Fringe benefits like the shareholder health insurance and personal use of company autos are considered wages and are included in the Form 941 and 940 wages as well as added to W-2s. These issues are complex. Please contact us for assistance in calculations or if you have any questions.
These issues are complex. Please contact us for assistance in calculations or if you have any questions.
End of Year Tax Planning Considerations
We’re approaching the end of the year, which means it’s time to think about things you can do to reduce your federal tax bill. No significant tax legislation has been passed by Congress so far in 2023 and prospects for such during the remainder of the year appear slim. Most of the individual tax provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire after 2025 and there have been discussions around extending or modifying these provisions, however it is unlikely that real action will occur before the 2024 elections. There appears to be broad support to reinstate the deductibility for R&D costs as opposed to subjecting them to amortization over a five-year period, however reaching a bi-partisan agreement by year-end given the contentious environment around budget negotiations is uncertain.
Starting January 1, 2024, a significant number of businesses will be required to comply with the Corporate Transparency Act (“CTA), which requires the disclosure of the beneficial ownership information (otherwise known as “BOI”) of certain entities from people who own or control a company. The CTA is not a part of the tax code and BOI reports will not be filed with the IRS, but with the Financial Crimes Enforcement Network (FinCEN). Be on the lookout for additional information on these new requirements.
Here are some things to think about doing before the end of 2023:
Planning Ideas for Individuals
- Look for Ways to Defer Taxable Income. Deferring taxable income (which includes accelerating deductions) when it makes sense is a good idea in an inflationary environment. You may have to make or increase your 2024 estimated tax payments to cover income or gains that you defer until 2024. But, you can base your 2024 tax payments (estimated taxes and withholding) on the lesser of (1) your 2023 tax liability [110% of that amount if your 2023 AGI is more than $150,000 ($75,000 if you file MFS)] or (2) 90% of your 2024 tax. So, if you can base your 2024 payments on your 2023 tax amount, you can postpone the tax on deferred gains or large income amounts recognized in 2024 to 4/15/25.
- Evaluate Your Investment Assets with an Eye Toward Selling. Look at your investment portfolio to see if selling before year-end makes tax sense. If you have recognized capital losses this year (or have capital loss carryovers from previous years), you can use those losses to shelter 2023 capital gains. So, you can sell some winners before year-end without increasing your 2023 liability. Triggering short-term (held one year or less) capital gains that can be sheltered with capital losses is tax-smart because net short-term gains would otherwise be taxed at higher ordinary income tax rates. If you have some investments that have declined in value, you could sell them before year-end to take the resulting capital losses this year. Those losses would shelter capital gains, including high-taxed short-term gains, from other 2023 sales. Even if you don’t have capital gains to shelter this year, selling some losers could make sense, especially if you think they will continue to decline in value. The result would be a net capital loss for the year, which can be used to shelter up to $3,000 ($1,500 if you file MFS) of 2023 income from salaries, bonuses, self-employment income, interest income, etc. Any excess net capital loss from this year is carried forward indefinitely.
- Bunch Itemized Deductions to Maximize Their Value. You can deduct the greater of your itemized deductions (mortgage interest, charitable contributions, medical expenses, and taxes) or the standard deduction. For 2023, the standard deduction is $27,700 for joint filers, $20,800 for HOH, and $13,850 for single taxpayers (including married taxpayers filing separately). So, a lot of taxpayers get little or no benefit from their itemized deductions. If your total annual itemizable deductions for 2023 will be close to your standard deduction amount, consider bunching your expenditures so that they exceed the standard deduction in one year, and then use the standard deduction in the following year. For example, assume your filing status is MFJ and your itemized deductions are fairly steady at around $25,000 per year. In that case, you would end up claiming the standard deduction each year. But, if you can bunch expenditures so that you have itemized deductions of $30,000 in 2023 and $20,000 in 2024, you could itemize in 2023 and get a $30,000 deduction versus a $27,700 standard deduction. In 2024, your itemized deductions would be below the standard deduction (which will be $29,200) so for that year, you would claim the standard deduction. If you manage to exceed the standard deduction every other year, you’ll be better off than if you just settle for the standard deduction each year.
- Make Your Charitable Giving Plans. A donor-advised fund can help maximize the tax benefit of your charitable giving. Donor-advised funds allow donors to make a charitable contribution to a specific public charity or community foundation that uses the assets to establish a separate fund to receive grant requests from charities seeking distributions from the advised fund. Donors can suggest which grant requests should be honored. Taxpayers can claim the charitable tax deduction in the year they contribute to the donor-advised fund, even though the funds may not be transferred to charities until future years. Another tax-advantaged way to support your charitable causes is to donate appreciated assets that were held for over a year. If you give such assets to a public charity, you can deduct the full fair market value of the donated asset while avoiding the tax you would have paid had you sold the asset and donated the cash to the charity. If you are age 72 or older, consider a direct transfer from your IRA to a charity [known as a Qualified Charitable Distribution (QCD)]. While you will not be able to claim a charitable donation for the amount transferred to the charity, the QCD does count toward your Required Minimum Distribution (RMD). So, you do receive a tax benefit since the deemed RMD is not included in income. For taxpayers who don’t itemize, that’s clearly better than taking a fully taxable RMD and then donating the amount to charity.
- Evaluate Intrafamily Loans. You can lend money to relatives without any tax consequences if you charge interest at least equal to the Applicable Federal Rate (AFR), which is published by the IRS each month. The AFR is typically lower than what commercial lenders offer, thus allowing the borrower to save money on interest expense. Interest rates have been historically low for some time, but now are heading up. If you have loaned any money to family members, be sure that the rate you are charging is still at least equal to the AFR if you want to avoid making a taxable gift. Making intrafamily loans is still an attractive opportunity for those interested in assisting family members financially and transferring assets in a tax-efficient manner, but it’s important to be sure you are charging a rate that won’t create a taxable gift, unless that is your intention.
- Take Advantage of the Annual Gift Tax Exclusion. The basic estate, gift, and generation skipping transfer tax exclusion is scheduled to fall from $12.92 million ($25.85 million for married couples) in 2023 to $5 million ($10 million for married couples) in 2026. Those amounts will be adjusted for inflation, but the long and short of it is that many estates that would escape taxation before 2026 will be subject to estate tax after 2025. If you think your estate may be taxable, annual exclusion gifts (perhaps to children or grandchildren) are an easy way to reduce your estate. The annual gift exclusion allows for tax-free gifts that don’t count toward your lifetime gifting exemption. For 2023, you can make annual exclusion gifts up to $17,000 per donee, with no limit on the number of donees. If you are married, you and your spouse can elect to gift split, so that a gift that either one of you makes is treated as if it were made one half by each spouse.
Year-end Planning Moves for Small Businesses
- Maximize Retirement Plan Contributions. If your business doesn’t already have a retirement plan, now’s a good time to consider one. You can make deductible contributions to several types of retirement plans, while earnings in the plan accumulate tax-free until they are withdrawn. For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $66,000 for 2023. If you’re employed by your own corporation, up to 25% of your salary can be contributed with a maximum contribution of $66,000. Other small business retirement plan options include the 401(k) plan (which can be set up for just one person), the defined benefit pension plan, and the SIMPLE-IRA. Depending on your circumstances, these other types of plans may allow bigger deductible contributions. Be aware that if your business has employees, you may have to cover them too.
- Plan Your Business Asset Purchases. Starting in 2023, the bonus depreciation phase out begins. The bonus depreciation rate is now incrementally dropping 20% per year until it is completely phased out by 2027. For 2023, the amount of the deduction is 80% of the cost of qualified property placed in service. Placing a qualified asset in service by the end of 2023, rather than waiting until 2024, can have a big impact since you will be able to deduct a higher amount. If you wait until 2024, 60% of the asset’s cost will be deductible as bonus depreciation, with the remaining 40% written off over the asset’s recovery period, which depending on the asset, can be up to 20 years. Some assets that don’t qualify for bonus depreciation are eligible for Section 179 expensing. For qualifying property placed in service in tax years beginning in 2023, the maximum Section 179 deduction is $1.16 million. The Section 179 deduction begins to phase-out when the cost of Section 179-eligible property placed in service during the year exceeds$2.89 million. This means that you could possibly write off the entire cost of business asset purchases in 2023. Given that, you might consider purchasing additional assets before year-end.
- Decrease in Deductions for Business Meals. As of January 1, 2023, the temporary incentive for deducting 100% of meals has expired, and the rules have gone back to a 50% deduction for most business meals. Entertainment expenses remain non-deductible in any amount as a permanent ruling from the Tax Cuts & Jobs Act of 2017. If you use the per diem method to reimburse employees for business expenses, the amount is $74 a day for high-cost areas in the continental United States and $64 a day for lower-cost areas.
Shareholders with 2% or more must report health insurance premiums paid on your behalf on your W2. Personal use of vehicles must be computed and reported prior to your final payroll for 2017.
Funding Your HSA
Many taxpayers now have Heath Savings Accounts (HSA’s) in conjunction with a high deductible health plan (HDHP). The IRS code allows taxpayers to fund their HSA by transferring funds from their traditional or Roth IRA account.
- The funds must go directly from the IRA account to the HSA account.
- The distribution is limited to the HSA contribution limits for the year.
- The IRA distribution is not taxed nor reported as a distribution.
- Taxpayers are allowed one qualified HSA funding distribution in their lifetime.
This is an opportunity to fund the HSA with pre-tax dollars and not pay any taxes on the transfer.
For IRA’s (Including SEP and SIMPLE) —You must take your RMD beginning April 1 of the year you will turn 70 ½.
For 401(k), profit sharing, 403(b) or other defined contribution plans you must take your RMD April 1 following the later of the calendar year in which you reached age 70 ½ or retire.
For more information on any of these items contact us or call 253-852-8500.
Beneficial Ownership Information Reporting
Starting on January 1, 2024, certain domestic and foreign entities are required to file Beneficial Ownership Information (BOI) reports with the Financial Crimes Enforcement Network (FinCEN). The reporting will contain information about the entity itself and two categories of individuals (1) the beneficial owners of the entity and (2) company applicants (the individuals who filed an application with a governmental authority to create the entity or register it to do business).
These requirements were enacted as part of the Corporate Transparency Act (CTA) and are expected to affect the majority of small, closely held LLCs and corporations.
Below is some preliminary information to consider as you approach the implementation period for this new reporting requirement. Please note that this information is meant to be general only and may not apply to your specific facts and circumstances.
What Entities Are Required to Comply With the Boi Reporting Requirement?
Entities organized both in the U.S. and outside the U.S. may be subject to the CTA’s reporting requirements. Domestic companies required to report include corporations, limited liability companies (LLCs) or any similar entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.
Domestic entities that are not registered with a secretary of state or similar office are not required to report under the CTA.
Foreign companies required to report under the CTA include corporations, LLCs or any similar entity that is formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by filing a document with a secretary of state or any similar office.
There are 23 specific categories of entities that are exempted from the BOI reporting requirements, including publicly traded companies, banks and credit unions, securities brokers/dealers, public accounting firms, tax-exempt entities and certain inactive entities, among others. Many of these entities are heavily regulated and thus already disclose their BOI to a government authority.
In addition, certain “large operating entities” are exempt from filing.
To qualify for this exemption, the company must:
- Employ more than 20 people in the U.S.
- Have reported gross revenue (or sales) of over $5M on the prior year’s tax return
- Be physically present in the U.S.
When and Where Must Companies File?
- Reports will be accepted starting on January 1, 2024 and have to be filed electronically through a secure filing system available through the FinCEN website
- New entities (created/registered after 12/31/23) — must file within 90 days
- Existing entities (created/registered before 1/1/24) — must file by 1/1/25
- Reports that have changes to previously reported company information, or discover inaccuracies in previously filed reports — must file within 30 days
What Information Is Required to Be Reported?
A reporting company’s initial report has to include:
- The reporting company’s full legal name, including any trade names or “doing business as” (DBA) names
- The current street address of the entity’s principal place of business in the U.S.
- The jurisdiction of formation or registration
- Its taxpayer identification number
- The legal name, date of birth, and current address of all beneficial owners and/or company applicants of the entity, along with a unique identifying number from an acceptable identification document (e.g., a passport or driver’s license)
- An image of the document from which the unique identifying number in item #5 is taken
Who Is a Benefictial Owner?
Any individual who, directly or indirectly, either:
- Exercises “substantial control” over a reporting company, or
- Owns or controls at least 25 percent of the ownership interests of a reporting company
An individual has substantial control of a reporting company if they direct, determine or exercise substantial influence over important decisions of the reporting company. This includes any senior officers of the reporting company, regardless of formal title or if they have no ownership interest in the reporting company.
Risk of Non-compliance
Penalties for willfully not complying with the BOI reporting requirement can result in criminal and civil penalties of $500 per day and up to $10,000 with up to two years of jail time.
FinCEN has published different tools and resources to assist small businesses with the new rules. It is important that all business owners review this information to ensure compliance as there are substantial penalties, potentially criminal and civil, for willful failure to file or provide false information. Below are links to some of these resources.