Federal Tax News for Businesses and Individuals

For Business

Reporting by Third-Party Settlement Organizations Is Changing

If you run a business and receive payments through third-party settlement organizations (TPSOs), expect significant changes in 2022. To improve voluntary tax compliance, the American Rescue Plan Act (ARPA) now requires TPSOs to significantly increase reporting of financial transactions for goods and services. TPSOs such as Zelle, Paypal and Venmo must report transactions paid to your business when they exceed $600 within the year.

Reporting is done by filing a Form 1099-K (Payment Card and Third-Party Network Transactions). Previously, Forms 1099-K were required when transaction totals exceeded $20,000 and the total transactions exceeded 200.

Business or Hobby? Tax Court Rules in 3 New Cases

The tax code allows a taxpayer to deduct ordinary and necessary expenses paid or incurred in carrying on a trade or business. However, the activity must be conducted in a businesslike manner and other requirements must be met. Recently, three different taxpayers have battled with the IRS and the U.S. Tax Court over business expenses and losses. One of the taxpayers prevailed. Here are quick summaries of the cases:

  • A married couple deducted more than $25,000 in expenses related to an organic farming venture, including startup costs and amortization. They bought acreage and planned to procure USDA certification for organic farming and divide the land into farming rental property. The U.S. Court disallowed deductions related to the farming venture determining that it wasn't an active trade or business. Although the taxpayers had a business plan for a farming venture, they didn't complete any of the steps in the plan during the tax year in question. (TC Memo 2021-138)
  • The U.S. Tax Court ruled that a taxpayer's horse breeding enterprise wasn't engaged in for profit. Therefore, the related deductions and net operating losses couldn't be claimed. The taxpayer's farm produces Standardbred horses, a breed used in competitive harness racing. The court found the taxpayer was intent on having a high-quality horse operation, spent significant amounts of money on it and had voluminous records. However, the records had large gaps or inconsistencies, the taxpayer had an out-of-date business plan, the enterprise was "insensitive to costs," and the activity blended business with personal elements. Thus, it wasn't conducted in a businesslike manner. (TC Memo 2021-139)
  • Finally, the U.S. Tax Court ruled that a married couple's miniature donkey breeding activity was conducted with a profit motive. The IRS had earlier determined it was a hobby and the couple was liable for taxes and penalties for the two tax years in which they claimed losses of more than $130,000. However, the court found the couple had a business plan, kept separate records and conducted the activity in a businesslike manner. The couple operated the venture with the intent of turning it over to their adult daughter to help supplement her income. The court stated they were "engaged in the breeding activity with an actual and honest objective of making a profit." (TC Memo 2021-140

A Tax Deduction for Businesses Is More Valuable — Temporarily

Generally, businesses can deduct only 50% of the cost of business meals and beverages. The 2020 Taxpayer Certainty and Disaster Relief Act increased that deduction to 100% for meals purchased from a restaurant in 2022 (and 2021).

The IRS recently announced that use of that temporary full deduction has been expanded. Employers and self-employed persons who use per diem allowances to account for business-related travel may deduct 100% of the meal portion of the per diem allowance paid or incurred in 2021 and 2022. (Notice 2021-63) Here's the announcement.

Deadline Coming Up for 1099-NEC Forms for 2021

Businesses should use Form 1099-NEC, "Nonemployee Compensation," to report payments of $600 or more to nonemployees during 2021. Be aware that such payments could be subject to backup withholding in certain cases. Payers of nonemployee compensation during 2021 generally are required to file these forms by January 31, 2022.

Backup withholding could apply if the recipient of compensation hasn't provided a Taxpayer Identification Number (TIN) to the payer or if the IRS notifies a payer that a TIN doesn't match the name in IRS records. A TIN can be a Social Security, employer identification or individual taxpayer identification number. Click here to learn more from the IRS.

Could Your Business Qualify for a Disabled Access Tax Credit?

If your business makes structural adaptations or other accommodations for employees or customers with disabilities, you may be eligible for federal tax breaks. For example, there's a (non-refundable) disabled access tax credit for small businesses that have expenses for providing access to persons with disabilities.

An eligible small business is one that earned $1 million or less or had no more than 30 full-time employees the previous year. There's also an architectural barrier removal tax deduction. Businesses may claim a deduction of up to $15,000 a year for qualified expenses on items that normally must be capitalized. Click here for more details from the IRS.

For Individuals

Did You Know There Are 5 Filing Statuses for Federal Tax Returns?

Your status for filing a federal tax return generally depends on your marital status as of December 31. However, more than one filing status may apply in certain situations. If this is the case, taxpayers can usually choose the filing status that allows them to pay the least amount of tax.

The statuses are single, married filing jointly, married filing separately, head of household and qualifying widow or widower with a dependent child. In general, head of household status is 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 your dependent.

Your filing status can affect the amount of tax you owe, and it may even determine if you have to file a tax return at all. We'll help determine which filing status is best for you when we prepare your tax return.

The IRS Announces 2022 Cost-of-Living Adjustments for 60+ Provisions

Each year, the IRS adjusts the amounts for certain tax breaks based on inflation. The 2022 adjustments that were recently announced generally apply to tax returns to be filed in 2023. A few highlights: the standard deduction increases $800 to $25,900 for married couples filing jointly; up $400 to $12,950 for single taxpayers and married individuals filing separately; and up $600 to $19,400 for heads of households. The 2022 alternative minimum tax exemption increases by $2,300 to $75,900 and begins to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption begins to phase out at $1,079,800). Click here for a list of all the annual inflation numbers.

The federal gift and estate tax exemption will be increasing to $12,060,000 for an individual dying in 2022 (from $11,700,000 in 2021). The Tax Cuts and Jobs Act doubled the exemption base amount from $5 million to $10 million, with the amount indexed for inflation. Be aware that the doubled amount will continue to be adjusted annually for inflation, but it expires after 2025. Without further legislation, the gift and estate tax exemption will return to an inflation-adjusted $5 million in 2026. For 2022, the annual gift tax exclusion will increase to $16,000 per recipient (from $15,000 in 2021).

And the IRS has also issued the 2022 long-term capital gains rate bracket numbers. The maximum income required to qualify for the 0% bracket will be $41,675 for single taxpayers, $83,350 for married taxpayers filing jointly and $55,800 for heads of households. For the 15% bracket, the maximum income for 2022 will be $459,750 for single filers, $517,200 for joint filers and $488,500 for heads of households. Taxpayers with income over the amounts for the 15% rate bracket will fall into the 20% bracket. In the case of an estate or trust, the amount will be $2,800 to qualify for the 0% rate and $13,700 for the 15% rate. Contact your tax advisor with any questions.

Filing Your 2021 Tax Return Can Be Easier with a Little Preparation

There are some steps that you can take now to make filing in 2022 less stressful. Create a file of tax forms as you receive them, such as W-2 Wage and Tax Statements, Forms 1099 for Misc. Income and Form 1099-G for unemployment compensation. If you received Economic Impact Payments or Advance Child Tax Credit payments, add the accompanying notices to your file. Also add documentation for deductible expenses incurred during the year. If you've moved, avoid delays by ensuring the IRS has your new contact information. Click here for an IRS link with more details.

If you received Economic Impact Payments (EIPs) or advance Child Tax Credit (CTC) payments in 2021, expect to hear from the IRS in January. Letters will be mailed, listing the total EIPs or CTC payments you received. Keep the letters with your tax records. Depending on your eligibility, you may be able to claim an additional EIP, called a Recovery Rebate Credit, on your 2021 tax return (even if you don't usually file). If you received advance CTC payments, compare the amount received with the total you qualify to claim. If you were overpaid or underpaid, you may have to repay the excess on your return or claim a credit for the difference. Click here for more information.

Educators: Some Out-of-Pocket Expenses May Be Deductible

Educators who qualify will see an increased deduction for certain classroom expenses. For 2022, the deduction for these expenses that educations aren't reimbursed for rises to $300 (up from $250 for 2021). Married couples who are both eligible educators and who file jointly may claim up to $600.

Eligible educators generally include teachers, counselors, principals and aides in kindergarten through grade 12. To be eligible, they must also have worked at least 900 hours during a school year in a school that provides education under state law.

Qualifying expenses include professional development course fees, books, certain supplies, computer equipment, software and COVID-19 protective items. Contact your HK tax advisor with questions.

The Value of Collectible Coins Are Included in an IRA Owner's Income

A self-directed IRA owner can direct how assets are invested without forfeiting the tax benefits. However, an IRA owner can't have "unfettered control" over a self-directed IRA's assets.

In one case, a taxpayer had a self-directed IRA that invested in an LLC that purchased collectible coins. The U.S. Tax Court ruled that she received a taxable distribution when she took possession of the coins. The court found the taxpayer had unfettered control over the assets because she had physical possession of them. Therefore, she had a taxable distribution from her self-directed IRA. The court stated a third-party fiduciary is "fundamentally important" to IRAs.

The court stated: "When coins or bullion are in the physical possession of the IRA owner (in whatever capacity the owner may be acting), there is no independent oversight that could prevent the owner from invading her retirement funds. This lack of oversight is clearly inconsistent with the statutory scheme. Personal control over the IRA assets by the IRA owner is against the very nature of an IRA." (McNulty, 157 TC No. 10, Nov. 18, 2021)

 

Categories: January 2022, Monthly Bulletins
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