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Small Business: Deducting Startup Costs

If you've recently started a business - or are thinking about starting a business - you should know that as an owner, all eligible costs incurred before you began operating the business are treated as capital expenditures. As such, they are part of the cost basis for the business.

Generally, the business can recover costs for assets through depreciation deductions. Businesses with costs paid or incurred after September 8, 2008, can deduct a limited amount of start-up and organizational costs enabling business owners to recover the costs they cannot deduct currently over a 180-month period. This recovery period starts with the month the business begins to operate active trade or as a business.

Business Start-up Costs

Start-up costs are amounts the business paid or incurred for creating an active trade or business or investigating the creation or acquisition of an active trade or business. Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for-profit and to produce income in anticipation of the activity becoming an active trade or business.

Examples of start-up costs include amounts paid for the following:

• An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
• Advertisements for the opening of the business.
• Salaries and wages for employees who are being trained and their instructors.
• Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
• Salaries and fees for executives, consultants, or similar professional services.

Qualifying Costs

A start-up cost is recoverable if it meets both of the following requirements:

• It's a cost a business could deduct if they paid or incurred it to operate an existing active trade or business in the same field as the one entered into by the business.
• It's a cost a business pays or incurs before the day their active trade or business begins.

Nonqualifying Costs

Start-up costs don't include deductible interest, taxes, or research and experimental costs.

Purchasing an Active Trade or Business

Recoverable start-up costs for purchasing an active trade or business include only investigative costs incurred during a general search for or preliminary investigation of the business. These are costs that help in deciding whether to purchase a business. Costs incurred to purchase a specific business are considered capital expenses and cannot be amortized.

Disposition of business

If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business.

Questions about deducting start-up costs for your small business? Help is just a phone call away.

What Is the Saver's Credit?

The Retirement Savings Contributions Credit, also known as the Saver's Credit, is a special tax credit for low-and moderate-income workers. In tax year 2020, the most recent year for which complete figures are available, Saver's Credits totaling more than $1.7 billion were claimed on about 9.4 million individual income tax returns. That's an average of about $186 per eligible return.

Income Limits Apply

Income limits, based on a taxpayer's adjusted gross income and marital or filing status, apply to the Saver's Credit. Due to inflation, the limits will increase significantly in 2023, and taxpayers should take note. As a result, the Saver's Credit can be claimed by:

• Married couples filing jointly with incomes up to $68,000 in 2022 or $73,000 in 2023.
• Heads of household with incomes up to $51,000 in 2022 or $54,750 in 2023.
• Married individuals filing separately and singles with incomes up to $34,000 in 2022 or $36,500 in 2023.

The credit helps offset part of the first $2,000 workers voluntarily contribute to Individual Retirement Arrangements, 401(k) plans, and similar workplace retirement programs. The credit also helps any eligible person with a disability who is the designated beneficiary of an Achieving a Better Life Experience (ABLE) account to contribute to that account.

The Saver's Credit is available in addition to any other tax savings that apply. Like other tax credits, the Saver's Credit can increase a taxpayer's refund or reduce the tax owed. Though the maximum Saver's Credit is $1,000 ($2,000 for married couples), the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

It supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

There's Still time to Make a Contribution for 2022

Eligible workers still have time to make qualifying retirement contributions and get the Saver's Credit on their 2022 tax return. Taxpayers have until April 18, 2023 - the due date for filing their 2022 return - to set up a new IRA or add money to an existing IRA for 2022. Both Roth and traditional IRAs qualify.

A taxpayer's credit amount is based on their filing status, adjusted gross income, tax liability, and amount contributed to qualifying retirement programs or ABLE accounts. Taxpayers should use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the Saver's Credit.

Other special rules that apply to the saver's credit include:

• Eligible taxpayers must be at least 18 years of age.
• Anyone claimed as a dependent on someone else's return cannot take the credit.
• A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

Any distributions from a retirement plan or ABLE account reduce the contribution amount used to figure the credit. For 2022, this rule applies to distributions received after 2019 and before the due date, including extensions of the 2022 return. Form 8880 and its instructions have details on making this computation.

Please call if you have any questions about this or other tax credits.

Unemployment Tax Break Refunds Issued for 2020

Final corrections for taxpayers who overpaid their taxes on unemployment compensation received in 2020 have been completed by the IRS. Approximately 14 million returns were corrected, resulting in nearly 12 million refunds totaling $14.8 billion.

Background

The American Rescue Plan Act of 2021, which became law in March 2021, allowed taxpayers to exclude up to $10,200 in 2020 unemployment compensation from taxable income calculations (up to $10,200 for each spouse if married filing jointly). The exclusion applied to individuals and married couples whose modified adjusted gross income was less than $150,000.

To ease the burden on taxpayers, the IRS reviewed Forms 1040 and 1040-SR that were filed prior to the law's enactment to identify taxpayers who had already reported unemployment compensation as income and were eligible for the correction. The IRS determined the correct taxable amount of unemployment compensation and tax.

Overpayments Refunded or Applied to Tax Due

With an average refund of $1,232, some taxpayers received refunds, while others had the overpayment applied to taxes due or other debts. In some cases, the exclusion only resulted in a reduction in their adjusted gross income. Letters were mailed to these taxpayers to inform them of the corrections. Taxpayers should keep that letter with their tax records.

Many of the adjustments included corrections to the:

• Earned Income Tax Credit
• Recovery Rebate Credit
• Additional Child Tax Credit
• American Opportunity Tax Credit
• Premium Tax Credit
• Advance Premium Tax Credit

Of note is that a taxpayer who is eligible for the unemployment compensation exclusion but whose account was not corrected by the IRS may need to file an amended 2020 tax return. Taxpayers who filed 2020 Forms 1040 and 1040-SR can file Form 1040-X, Amended U.S. Individual Income Tax Return, to claim the exclusion and any applicable non-refundable or refundable credits impacted by the exclusion. Taxpayers should not file an amended return if they previously filed one claiming the exclusion.

Taxpayers that need to file an amended tax return can view their 2020 tax records in their Online Account or request that a 2020 tax account transcript be mailed to them. Please call the office for more information about this topic, including eligibility requirements.

Standard vs. Itemized Deductions

When completing a tax return, taxpayers have two options: take the standard deduction or itemize their deductions. Most taxpayers use the option that gives them the lowest overall tax. Due to all the tax law changes in recent years, including increases to the standard deduction, that means taking the standard deduction - but not always. Let's look at a few details about these two options.

Standard deduction

The standard deduction amount increases slightly every year and varies by filing status. Factors that affect the standard deduction amount include the taxpayer's filing status, whether they are 65 or older or blind, and whether another taxpayer can claim them as a dependent. Taxpayers who are age 65 or older on the last day of the year and don't itemize deductions are entitled to a higher standard deduction.

Most filers who use Form 1040, U.S. Individual Income Tax Return, can find their standard deduction on the first page of the form. For most filers of Form 1040-SR, U.S. Tax Return for Seniors, the standard deduction is on page 4.

Not all taxpayers can take a standard deduction. Those taxpayers include:

• A married individual filing as married filing separately whose spouse itemizes deductions - if one spouse itemizes on a separate return, both must itemize.
• An individual who files a tax return for a period of less than 12 months. This situation is uncommon and could be due to a change in their annual accounting period.
• An individual who was a nonresident alien or a dual-status alien during the year. However, nonresident aliens who are married to a U.S. citizen or resident alien can take the standard deduction in certain situations.

Itemized deductions

Taxpayers who choose to itemize deductions should file Schedule A, Form 1040, Itemized Deductions. Itemized deductions that taxpayers may claim include:

• State and local income or sales taxes
• Real estate and personal property taxes
• Home mortgage interest
• Mortgage insurance premiums on a home mortgage
• Personal casualty and theft losses from a federally declared disaster
• Gifts to a qualified charity
• Unreimbursed medical and dental expenses that exceed 7.5% of adjusted gross income

Some itemized deductions, such as the deduction for taxes, may be limited. Don't hesitate to contact the office for more information on these limitations or any other questions.

What Businesses Need To Know About the Excise Tax

Excise tax is an indirect tax on specific goods, services, and activities. Federal excise tax is usually imposed on the sale of things like fuel, airline tickets, heavy trucks and highway tractors, indoor tanning, tires, tobacco, and other goods and services.

This tax is commonly included in the cost of the product. While the end consumer doesn't usually see the excise tax on their receipt, it may be charged at the time of:

• Import
• Sale by the manufacturer
• Sale by the retailer
• Use by the manufacturer or consumer

Many excise taxes go into trust funds for projects related to the taxed product or service, such as highway and airport improvements. Excise taxes are independent of income taxes. Generally, businesses subject to excise tax must file a Form 720, Quarterly Federal Excise Tax Return to report the tax to the IRS.

Often, the retailer, manufacturer, or importer must pay the excise tax to the IRS and file Form 720. Some excise taxes are collected by a third party. The third party then sends the tax to the IRS and files Form 720. For example, the tax on an airline ticket generally is paid by the purchaser and collected by the airline.

When to file

Businesses must file the form for each quarter of the calendar year. Here are the due dates:

• Quarter 1 – January, February, March: deadline, April 30
• Quarter 2 – April, May, June: deadline, July 31
• Quarter 3 – July, August, September: deadline, October 31
• Quarter 4 – October, November, December: deadline, January 31

If the deadline for filing a tax return falls on a Saturday, Sunday, or legal holiday, the due date is the next business day.

How to file

E-filing excise tax returns is safe, secure, easy, and accurate, and while the IRS does accept paper excise tax returns, electronic filing is strongly encouraged. The contact information for all approved e-file transmitters of excise forms is listed on IRS.gov. Businesses can submit forms online 24 hours a day.

When businesses e-file, they get confirmation that the IRS received their form. Also, e-filing reduces processing time and errors. To electronically file, business taxpayers will have to pay the provider's fee for online submission.

The excise tax forms available for electronic filing include:

• Form 720, Quarterly Federal Excise Tax Return
• Form 2290, Heavy Highway Vehicle Use Tax
• Form 8849, Claim for Refund of Excise Taxes, Schedules 1, 2, 3, 5, 6 and 8

Please call the office if you have any questions or want more information about federal or state excise taxes.

How Filing Status Affects Your Tax Return

A taxpayer's filing status defines the type of tax return form they should use when filing their taxes. Filing status can affect the amount of tax they owe, and it may even determine whether they need to file a tax return at all. As taxpayers get ready for the upcoming filing season, let's take a closer look at how filing status affects a tax return.

Taxpayers can choose from five different filing statuses when filing their returns:

• Single. Normally, this status is for taxpayers who are unmarried, divorced, or legally separated under a divorce or separate maintenance decree governed by state law.
• Married filing jointly. A taxpayer can file a joint tax return with their spouse if a taxpayer is married. When a spouse passes away, the widowed spouse can usually file a joint return for that year.
• Married filing separately. Married couples can choose to file separate tax returns. Doing so may result in less tax owed than filing a joint tax return.
• Head of household. Unmarried taxpayers may be able to file using this status, but special rules apply. For example, the taxpayer must have paid more than half the cost of keeping up a home for themselves and a qualifying person living in the home for half the year.
• Qualifying widow(er) with dependent child. This status may apply to a taxpayer if their spouse died during one of the previous two years and they have a dependent child. Other conditions also apply.
  

When preparing and filing a tax return, filing status affects:

• If the taxpayer is required to file a federal tax return
• If they should file a return to receive a refund
• Their standard deduction amount
• If they can claim certain credits
• The amount of tax they should pay
  

Filing status generally depends on the taxpayer's marital status as of December 31 of the filing tax year (e.g., 2022). 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.

Not sure which filing status you should use this year? Help is just a phone call away.

Tax Due Dates for February 2023

February 10

Employees - who work for tips. If you received $20 or more in tips during January, report them to your employer. You can use Form 4070.

Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2022. This due date applies only if you deposited the tax for the quarter in full and on time.

Farm Employers - File Form 943 to report Social Security and Medicare taxes and withheld income tax for 2022. This due date applies only if you deposited the tax for the year in full and on time.

Certain Small Employers - File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2022. This tax due date applies only if you deposited the tax for the year in full and on time.

Employers - Nonpayroll taxes. File Form 945 to report income tax withheld for 2022 on all nonpayroll items. This due date applies only if you deposited the tax for the year in full and on time.

Employers - Federal unemployment tax. File Form 940 for 2022. This due date applies only if you deposited the tax for the year in full and on time.

February 15

Individuals - If you claimed exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year.

Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in January.

Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in January.

All businesses. Give annual information statements to recipients of certain payments made during 2022. You can use the appropriate version of Form 1099 or other information return. This due date applies only to payments reported on Form 1099-B, Form 1099-S, and substitute payments reported in Box 8 or gross proceeds paid to an attorney reported in Box 10 of Form 1099-MISC.

February 16

Employers - Begin withholding income tax from the pay of any employee who claimed exemption from withholding in 2022, but did not give you a new Form W-4 to continue the exemption this year.

February 28

Businesses - File information returns (for example, certain Forms 1099) for certain payments you made during 2022. However, Form 1099-NEC reporting nonemployee compensation must be filed by January 31. There are different forms for different types of payments. Use a separate Form 1096 to summarize and transmit the forms for each type of payment. See the General Instructions for Certain Information Returns for information on what payments are covered, how much the payment must be before a return is required, what form to use, and extensions of time to file.

If you file Forms 1097, 1098, 1099 (except a Form 1099-NEC reporting nonemployee compensation), 3921, 3922 or W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms generally remains January 31.

Payers of Gambling Winnings - File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2022. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms remains January 31.

Health Coverage Reporting - If you are an Applicable Large Employer, file paper Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 1095-C with the IRS. For all other providers of minimum essential coverage, file paper Forms 1094-B, Transmittal of Health Coverage Information Returns, and 1095-B with the IRS. If you are filing any of these forms with the IRS electronically, your due date for filing them will be extended to March 31.

Large Food and Beverage Establishment Employers - with employees who work for tips. File Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer's Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically your due date for filing them with the IRS will be extended to March 31.

March 1

Farmers and Fisherman - File your 2022 income tax return (Form 1040 or Form 1040-SR) and pay any tax due. However, you have until April 18 to file if you paid your 2022 estimated tax by January 17, 2023.

March 2

Health Coverage Reporting - If you are an Applicable Large Employer, provide Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, to full-time employees. For all other providers of minimum essential coverage, provide Form 1095-B, Health Coverage, to responsible individuals.