In this Edition
December 13, 2022

What's Your Taxpayer Filing Status?

PODCAST: 2023 Inflation Adjustments

The Pros and Cons of NQDC Plans

Is Your Business Closing? Make Sure You Know Your Responsibilities

Intangible Assets: How Must the Costs Incurred Be Capitalized?
What's Your Taxpayer Filing Status?
For many people, December 31 means a New Year’s Eve celebration. However, from a tax perspective, it means thinking about the filing status you’ll use when filing your tax return for the year. The one you use depends partly on whether you’re married on that date.

The Five Statuses

When you file your federal tax return, you do so with one of five filing statuses. First, there’s “single” status, which is generally used if you’re unmarried, divorced or legally separated. A second status, “married filing jointly,” is for married couples who file a tax return together. If your spouse passes away, you can usually still file a joint return for that year. A third status, “married filing separately,” is for married couples who choose to file separate returns. In some cases, doing so may result in less tax owed.

“Head of household” is a fourth status. Certain unmarried taxpayers qualify to use it and potentially pay less tax. Finally, there’s a fifth status: “qualifying widow(er) with a dependent child.” It may be used if your spouse died during one of the previous two years and you have a dependent child. (Other conditions apply.)

Head of Household

Let’s focus on head-of-household status because it’s often misunderstood and can be more favorable than filing as a single taxpayer. To qualify, you must “maintain a household” that, for more than half the year, is the principal home of a “qualifying child” or other relative that you can claim as a dependent.

A qualifying child is defined as someone who lives in your home for more than half the year and is your child, stepchild, foster child, sibling, stepsibling or a descendant of any of these. A qualifying child must also be under 19 years old (or a full-time student under age 24) and be unable to provide over half of his or her own support for the year.

Different rules may apply if a child’s parents are divorced. Also, a child isn’t a qualifying child if he or she is married and files jointly or isn’t a U.S. citizen or resident.

For head-of-household filing status, you’re considered to maintain a household if you live in it for the tax year and pay more than half the cost of running it. This includes property taxes, mortgage interest, rent, utilities, property insurance, repairs, upkeep and food consumed in the home. Medical care, clothing, education, life insurance and transportation aren’t included.

Under a special rule, you can qualify as head of household if you maintain a home for a parent even if you don’t live with the parent. To qualify, you must be able to claim the parent as your dependent.

Not Always Obvious

Filing status may seem obvious, but there can be situations when it warrants careful consideration. If you have questions about yours, contact us.

Nicole Malueg, CPA
D 920.684.2523
PODCAST
2023 Inflation Adjustments

Inflation over the past year has affected everyone and there are some hidden tax savings to help offset its affect. This podcast discusses the tax rate and other tax changes for 2023 that are directly tied to inflation.
The Pros and Cons of NQDC Plans
Nonqualified deferred compensation (NQDC) plans allow participants to set aside large amounts of tax-deferred compensation while enjoying the flexibility to schedule distributions to align with their financial goals. However, the plans aren’t without risks so before you jump in, consider the pros and the cons. 

What Makes an NQDC Plan Different?

NQDC plans differ significantly from qualified defined contribution plans. The latter allows employers to contribute on their employees’ behalf and employees to direct a portion of their salaries into segregated accounts held in trust.

In addition, qualified defined contribution plans generally allow participants to direct their  investments among the plan’s available options. The plans are subject to the applicable requirements of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. This includes annual contribution limits, early withdrawal penalties, required minimum distributions and nondiscrimination rules.

By contrast, an NQDC plan is simply an agreement with your employer to defer a portion of your compensation to a future date or dates. Many NQDC plans provide for matching or other employer contributions, while some permit only employer contributions. Such contributions may be subject to a vesting schedule based on years of service, performance or the occurrence of an event (such as a sale).

To avoid current taxation, NQDC plans must not be “funded,” and they can’t escape your employer’s creditors. The plan is secured only by your employer’s promise to pay. It’s possible to secure funds in a special trust, but they remain subject to creditors’ claims.

What Are the Pros?

Like qualified plans, NQDC plans allow you to defer income taxes on compensation until you receive it — although you may have to pay FICA taxes in the year the compensation is earned. NQDC plans also offer some advantages over qualified plans. That is, they may have no contribution limits.  Participants may enjoy greater flexibility to schedule distributions to fund financial goals such as retirement, without penalty for distributions before age 59½ or required distributions at a certain age.

From an employer’s perspective, NQDC plans are attractive because they can be limited to highly compensated employees and they don’t require compliance with ERISA’s reporting and administrative specifications. However, unlike contributions to qualified plans, deferred compensation isn’t deductible by the employer until it’s paid.

And the Cons?

The biggest disadvantage of NQDC plans for participants is that deferred compensation isn’t shielded from the claims of the employer’s creditors, possible bankruptcy or insolvency. Also, you may not be able to take loans from the plan and can’t roll over distributions into an IRA, qualified plan or other retirement account. What’s more, there are limitations on the timing of deferral elections.

Is It Right for You?

An NQDC plan offers attractive benefits, but it can be risky. Contact our firm to discuss how such a plan might affect your financial situation or whether it’s right for your company.

Jared Ystad
D 715.384.1975
Tax Tip Tuesday - Video Short
401k Contribution Updates for 2023

This week, Dakota explains the 401k contribution updates for year 2023.
Is Your Business Closing? Here Are Your Final Tax Responsibilities
Businesses shut down for many reasons. Some of the reasons that businesses shutter their doors:

  • An owner retirement
  • A lease expiration
  • Staffing shortages
  • Partner conflicts
  • Increased supply costs

If you’ve decided to close your business, we’re here to assist you in any way we can, including taking care of the various tax obligations that must be met.

For example, a business must file a final income tax return and some other related forms for the year it closes. The type of return to be filed depends on the type of business you have. Here’s a rundown of the basic requirements.

Sole Proprietorships

You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year you close the business. You may also need to report self-employment tax.

Partnerships

A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedules K-1, “Partner’s Share of Income, Deductions, Credits, Etc.”

All Corporations

Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.

C Corporations

File Form 1120, “U.S. Corporate Income Tax Return,” for the year you close. Report capital gains and losses on Schedule D. Indicate this is the final return.

S Corporations

File Form 1120-S, “U.S. Income Tax Return for an S Corporation” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.

All Businesses

Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.

Duties Involving Workers

If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.

If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

More Tax Issues to Consider

If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees.

We can assist you with many other complicated tax issues related to closing your business, including debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture and possible bankruptcy issues.

We can advise you on the length of time you need to keep business records. You also must cancel your Employer Identification Number (EIN) and close your IRS business account.

If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these issues and get answers to any questions. 

Chris Felton, CPA
D 262.404.2114
Intangible Assets: How Must the Costs Incurred Be Capitalized?
These days, most businesses have some intangible assets. The tax treatment of these assets can be complex.

What Makes Intangibles So Complicated?

IRS regulations require the capitalization of costs to:

  • Acquire or create an intangible asset,
  • Create or enhance a separate, distinct intangible asset,
  • Create or enhance a “future benefit” identified in IRS guidance as capitalizable, or 
  • “Facilitate” the acquisition or creation of an intangible asset.

Capitalized costs can’t be deducted in the year paid or incurred. If they’re deductible at all, they must be ratably deducted over the life of the asset (or, for some assets, over periods specified by the tax code or under regulations). However, capitalization generally isn't required for costs not exceeding $5,000 and for amounts paid to create or facilitate the creation of any right or benefit that doesn’t extend beyond the earlier of 1) 12 months after the first date on which the taxpayer realizes the right or benefit or 2) the end of the tax year following the tax year in which the payment is made.

What’s an Intangible?

The term “intangibles” covers many items. It may not always be simple to determine whether an intangible asset or benefit has been acquired or created. Intangibles include debt instruments, prepaid expenses, non-functional currencies, financial derivatives (including, but not limited to options, forward or futures contracts, and foreign currency contracts), leases, licenses, memberships, patents, copyrights, franchises, trademarks, trade names, goodwill, annuity contracts, insurance contracts, endowment contracts, customer lists, ownership interests in any business entity (for example, corporations, partnerships, LLCs, trusts, and estates) and other rights, assets, instruments and agreements.

Here are just a few examples of expenses to acquire or create intangibles that are subject to the capitalization rules:

  • Amounts paid to obtain, renew, renegotiate or upgrade a business or professional license;
  • Amounts paid to modify certain contract rights (such as a lease agreement);
  • Amounts paid to defend or perfect title to intangible property (such as a patent); and
  • Amounts paid to terminate certain agreements, including, but not limited to, leases of the taxpayer’s tangible property, exclusive licenses to acquire or use the taxpayer’s property, and certain non-competition agreements.

The IRS regulations generally characterize an amount as paid to “facilitate” the acquisition or creation of an intangible if it is paid in the process of investigating or pursuing a transaction. The facilitation rules can affect any type of business, and many ordinary business transactions. Examples of costs that facilitate acquisition or creation of an intangible include payments to:

  • Outside counsel to draft and negotiate a lease agreement;
  • Attorneys, accountants and appraisers to establish the value of a corporation's stock in a buyout of a minority shareholder;
  • Outside consultants to investigate competitors in preparing a contract bid; and
  • Outside counsel for preparation and filing of trademark, copyright and license applications.

Are There Any Exceptions?

Like most tax rules, these capitalization rules have exceptions. There are also certain elections taxpayers can make to capitalize items that aren’t ordinarily required to be capitalized. The above examples aren’t all-inclusive, and given the length and complexity of the regulations, any transaction involving intangibles and related costs should be analyzed to determine the tax implications.

Need Help or Have Questions?

Contact us to discuss the capitalization rules to see if any costs you’ve paid or incurred must be capitalized or whether your business has entered into transactions that may trigger these rules. You can also contact us if you have any questions. 

Lance Campbell, CPA
D 507.252.6674
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2023 Limits for Businesses That Have HSAs


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Computer Software Costs: How Does Your Business Deduct Them?

The tax treatment of computer software costs can be more complicated than you might think. Here are the basic rules.
Inflation Means You and Your Employees Can Save More for Retirement in 2023

The tax-advantaged retirement plan contribution amounts will be much higher next year than they’ve been in recent years. The reason? Inflation. Find out how much can be saved in 401(k)s, SEP plans, IRAs and more.