Tax Planning

important-2022-q2-tax-deadlines-for-businesses-and-employers

Important 2022 Q2 Tax Deadlines for Businesses and Employers
Important 2022 Q2 Tax Deadlines for Businesses and Employers 1600 941 smolinlupinco

Businesses and other employers should take note of these key tax-related deadlines for the second quarter of 2022. 

April 18

  • Calendar-year corporations must use Form 1120 file a 2021 income tax return or use Form 7004 to file for an automatic six-month extension. Any tax due must be paid.
  • Corporations must pay the first installment of their estimated 2022 income taxes.
  • Individuals must use Form 1040 or Form 1040-SR to file their 2021 income tax return or use Form 4868 to file for an automatic six-month extension.
  • Individuals who don’t pay income tax through withholding must use Form 1040-ES to calculate and pay the first installment of their 2022 estimated taxes.

May 2

  • Employers must use Form 941 to report income tax withholding and FICA taxes for the first quarter of 2022. Any tax due must be paid.

May 10

  • If you deposited on time and fully paid all of the associated taxes due, employers must use Form 941 to report income tax withholding and FICA taxes for the first quarter of 2022.

June 15 

  • Corporations must pay the second installment of their 2022 estimated income taxes.

This list isn’t all-inclusive, and it’s worth keeping in mind that there may be other additional deadlines that apply to you. To learn more about filing requirements and ensure that you’re meeting all applicable tax deadlines, contact us.

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tax-deadline-april-18th-file-for-extension

The Tax Deadline Is April 18th: If You Aren’t Ready, File for an Extension
The Tax Deadline Is April 18th: If You Aren’t Ready, File for an Extension 1600 941 smolinlupinco

This year’s tax filing deadline is rapidly approaching—if you don’t have time to gather your tax information and file by April 18th, you can use Form 4868 to file for an extension.

An extension allows you to avoid incurring “failure-to-file” penalties and will give you until October 17 to file. However, you’re still required to pay your taxes by April 18th. If you haven’t paid whatever tax you estimate is owed by that date, you’ll incur steep penalties.

Tax deadline penalties: Failure to pay vs. failure to file

Failing to pay and failing to file incur separate penalties. 

For each month (or part of a month) your payment is late, the failure-to-pay penalty is 0.5%. For example, if payment is due on April 18 and you pay on June 25, the penalty is 1.5% (0.5% times 3 months or partial months). The maximum failure-to-pay penalty is 25%.

The failure-to-pay penalty is calculated based on the amount that is shown as due on your return (less credits for amounts paid via estimated payments or withholding), even if your actual tax bill is higher. However, if your actual tax bill turns out to be lower, the penalty will be based on the lower amount.

By contrast, the failure-to-file penalty runs at a higher rate of 5% for each month (or partial month) you fail to file after the deadline. The maximum failure-to-file penalty is 25%. As mentioned above, filing an extension on Form 4868 doesn’t exempt you from failure-to-pay penalties—however, it will prevent you from filing late unless you also miss the extended due date. 

If both the failure-to-file penalty and the 0.5% failure-to-pay penalty apply, the failure-to-file penalty drops to 4.5% per month (or part of a month), so the combined penalty will be 5%. For the first five months, the maximum combined penalty is 25%. After those five months, the failure-to-pay penalty can continue at 0.5% per month for an additional 45 months—an additional total of 22.5%. The combined penalties can thus reach a maximum total of 47.5%.

Another reason the failure-to-file penalty is more severe is that it’s based on the amount you’re required to show on your return, rather than the amount shown as due. (Credit is given for amounts paid via withholding or estimated payments.) 

For example, if your return is filed five months after the due date showing $5,000 owed (after payment credits), the combined penalties will be 25%, which equals $1,250. But if your actual liability is determined to be an additional $1,000, the failure-to-file penalty will also apply to this amount for an additional $225 in penalties (4.5% × 5 = 22.5%).  If no amount is owed, there’s no penalty for late filing.

If a return is filed more than 60 days late, there’s also a minimum failure-to-file penalty. For returns due through 2022, this minimum penalty is the lesser of $435 or the amount of tax required to be shown on the return.

Additional considerations

If returns are filed late due to “reasonable cause” such as death or serious illness in the immediate family, both penalties may be excused by the IRS.

Apart from and in addition to the above penalties, interest is assessed at a fluctuating rate announced by the government. The late filing penalty can also jump to 15% per month in especially abusive situations involving a fraudulent failure to file, with a 75% maximum.

If you have further questions about filing for an extension or possible IRS penalties, contact us.

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using-crummey-trusts-take-advantage-annual-gift-tax-exclusion

Using Crummey Trusts to Take Advantage of the Annual Gift Tax Exclusion
Using Crummey Trusts to Take Advantage of the Annual Gift Tax Exclusion 1600 941 smolinlupinco

For 2022, the unified gift and estate tax exemption is set at $12.06 million, adjusted for inflation, up from $11.7 million for 2021. For many families, this means estate tax liability won’t be a concern. However, others may still benefit from using the annual gift tax exclusion as an estate planning strategy, especially since future tax law changes may lower the gift and estate tax exemption. 

For this reason, a Crummey trust can still serve as an important part of your estate planning strategy.

Limitations on the annual gift tax exclusion

For 2022, the annual gift tax exclusion allows you to give gifts valued up to $16,000 per recipient without incurring any gift tax. This $16,000 amount is indexed for inflation, but only in $1,000 increments.

For instance, this means that if you have four adult children and six grandchildren, you can gift each of them $16,000 this year (for a total of $160,000) without paying any gift tax. Since this exclusion is per donor, the amount is doubled for married couples.

However, when giving outright gifts, there is always the risk that the money or property could be wasted, especially if you’re giving to a recipient who may be young or irresponsible. 

As an alternative, you can transfer assets to a trust that names your child (or another recipient) as a beneficiary. This setup allows your designated trustee to manage the assets until the recipient reaches a specified age.

But this strategy comes with a catch, because gifts must be a transfer of a “present interest” to qualify for the annual exclusion. In this context, a “present interest” means the recipient has an unrestricted right to the immediate use, possession, or enjoyment of the income or property included in the gift. 

Because of this, a gift made to a trust won’t qualify as a gift of a present interest unless certain provisions are made in the trust language. Instead, it will be considered a gift of a “future interest” and won’t be eligible for the annual gift tax exclusion.

How a Crummey trust can help

A Crummey trust can offer a solution here. Crummey trusts satisfy the rules for gifts of a present interest but don’t require the trustee to distribute the assets to the beneficiary.

In a Crummey trust, periodic contributions of assets can be coordinated with an immediate power that gives the beneficiary the right to withdraw the contribution for a limited time. The expectation of the donor, however, is that the power won’t be exercised. (This cannot be expressly provided for in the trust document.)

These gifts will not be treated as a gift of a present interest due to the beneficiary’s limited withdrawal right, allowing gifts to the trust to qualify for the annual gift tax exclusion. Note that the tax outcome is determined by the existence of the legal power and not the exercise of it.

Additional requirements

To ensure your Crummey trust will hold up under IRS scrutiny, you must give the beneficiary actual notice of the withdrawal right, as well as a reasonable period (typically at least 30 days) to exercise it. 

If you have further questions regarding the use of a Crummey trust, contact us.

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audits-related-party-transactions

Audits and Related-Party Transactions
Audits and Related-Party Transactions 1600 941 smolinlupinco

Business transactions involving related parties—including parent companies, subsidiaries, affiliated entities, relatives, and friends—sometimes occur at above- or below-market rates. This can cause your company’s financial statements to become misleading to the people who rely on them, since undisclosed related-party transactions can skew their understanding of the company’s true financial results.

Auditors and related parties

Because there’s a strong possibility of double-dealing with related parties, auditors place significant focus on hunting for undisclosed related-party transactions.

To uncover these transactions, auditors may use all of the following documents and data sources:

  • Lists of a company’s current related parties and associated transactions
  • Disclosures from board members and senior executives regarding their previous employment history, ownership of other entities, or participation on additional boards
  • Press releases announcing significant business transactions with related parties
  • Minutes from board of directors’ meetings, especially any discussion of significant business transactions
  • Bank statements, particularly for transactions that involve intercompany wires, check payments, and automated clearing house (ACH) transfers

In assessing these documents, auditors will pay particular attention to contracts for goods or services that are priced at higher (or lower) rates than goods and services purchased or sold in similar transactions between unrelated third parties.

For example, in order to reduce its taxable income in the United States, a manufacturer might buy goods from its subsidiary at artificially high prices in a low-tax country. Similarly, an auto dealership might pay the child of the owner an above-market salary with benefits that aren’t available to unrelated employees. Or a spinoff business might lease office space at below-market rates from its parent company. 

Targeting related-party transactions

Auditors use all of the following procedures to target undisclosed related-party transactions:

  • Interviewing the accounting personnel who report related-party transactions in the company’s financial statements
  • Looking at the company’s enterprise resource planning (ERP) system and testing how related-party transactions are identified and coded
  • Analyzing how related-party transactions are presented in the company’s financial statements

Robust internal controls are needed to ensure accurate, complete reporting of these transactions. Your company’s vendor approval process should include clear guidelines to help accounting personnel identify related parties and mark them in the ERP system accordingly. Companies that don’t have these measures in place may inadvertently fail to disclose related-party transactions.

Communicating with auditors

Communication is key when it comes to related-party transactions. You should always tell your auditors if you have any known related-party transactions—and don’t be afraid to ask for assistance disclosing and reporting these transactions in accordance with U.S. Generally Accepted Accounting Principles.

Defined-Value Gifts Avoid Gift Taxes

How to Use Defined-Value Gifts to Avoid Unexpected Gift Taxes
How to Use Defined-Value Gifts to Avoid Unexpected Gift Taxes 850 500 smolinlupinco

For 2022, U.S. taxpayers may transfer up to $12.06 million by gift or bequest without triggering federal transfer taxes, thanks to the highest gift and estate tax exemption in history. 

However, this historically high exemption may not last forever. Unless Congress chooses to pass further legislation, the exemption amount is currently scheduled to drop to $5 million, adjusted for inflation, in 2026. 

If you’re like many taxpayers, you may be thinking about making a substantial gift to take advantage of the current exemption before it expires. However, many commonly gifted assets like family limited partnerships (FLPs) and closely held businesses can be risky because they are difficult to value. 

To avoid unexpected tax liabilities, you may want to consider a defined-value gift.

Defined-value gifts

To put it simply, a defined-value gift consists of assets that are valued at a specific dollar amount (as opposed to a specified percentage of a business entity, FLP units, or a certain number of stock shares).

Properly structured defined-value gifts are useful because they don’t run the risk of triggering an assessment of gift taxes. In order to properly implement this strategy, the defined-value language in the transfer document must be drafted as a “formula” clause and not as a “savings” clause.

While a savings clause provides for a portion of the gift to be returned to the donor if it is ultimately found to be taxable, a formula clause will transfer a fixed dollar amount that is subject to adjustment in the number of units or shares necessary to equal that dollar amount. This adjustment will be based on the final value determined for those units or shares for federal gift and estate tax purposes.

Using the right language

It’s vitally important to use certain specific, precise language in the transfer documents for defined-value gifts. Otherwise, the gift may be rejected as a defined-value gift by the U.S. Tax Court. 

Take, for example, a recent court case involving an intended defined-value gift of FLP interests. In this case, the Tax court decided to uphold the IRS’s assessment of gift taxes based on percentage interests, despite the donor’s intent to structure the gift as defined-value. 

The Court’s reasoning? The transfer documents had called for the FLP interests to be transferred with a defined fair market value “as determined by a qualified appraiser.” However, the documents made no provision to adjust the number of FLP units if their value was “finally determined for federal gift tax purposes to exceed the amount described.” 

As a result, the court ruled that a defined-value gift had not been achieved.

We can help you make a defined-value gift

As you can see, an effective defined-value gift requires carefully and precisely worded transfer documents. If you plan to make a substantial gift of hard-to-value assets, contact us for assistance. We can work with you to help you avoid unexpected tax consequences from your gift.

Startup Businesses Research Tax Credit Payroll Taxes

Startup Businesses May Be Able to Apply the Research Tax Credit Against Payroll Taxes
Startup Businesses May Be Able to Apply the Research Tax Credit Against Payroll Taxes 850 500 smolinlupinco

If your business has increased research activities, you may be eligible to claim a valuable tax credit often referred to as the research and development (R&D) credit. Although claiming the R&D tax credit requires complex calculations, we can help take care of these calculations for you.

In addition to the tax credit itself, you should also be aware of two features that are especially advantageous to small businesses:

  1. Small businesses with $50 million or less in gross receipts are eligible to claim the R&D credit against alternative minimum tax (AMT) liability
  2. Certain startup businesses may claim the credit against the employer’s Social Security payroll tax liability

It’s worth taking a closer look at this second feature.

If your business is eligible, your business can elect to apply some or all of the research tax credit you earn against your payroll taxes, rather than your income tax. With this payroll tax election in mind, some small startup businesses may wish to undertake or increase their research activities. And if your business is already engaged in or is planning to undertake research activities, you should be aware that some tax relief may be available to you.

Benefits of the election

Many new businesses pay no income tax and won’t pay tax for some time, even if they have a net positive cash flow and/or a book profit. 

Because of this, new businesses typically have no amount to apply business credits, including the research credit, against. However, even a new wage-paying business will have payroll tax liabilities. 

The payroll tax election thus offers new businesses a chance to more quickly use the research credits they earn. Since every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, this election can serve as a major boon to businesses during the start-up phase when help is most needed.

What businesses are eligible?

In order to be eligible for the election, a taxpayer must:

  • Have gross receipts for the election year that are less than $5 million
  • Be no more than five years past the startup period (the period for which it had no receipts)

Only the gross receipts from the taxpayer’s business are taken into account in making these determinations. Other income such as an individual’s salary or investment income aren’t taken into consideration. 

You should also note that an entity or individual can’t choose to make the election for more than six straight years.

Limitations

If an individual chooses to make the payroll tax election, the research credit for which the election is made may only be applied against the Social Security portion of FICA taxes. The credit can’t be applied against the “Medicare” portion of FICA taxes or any FICA taxes that are withheld and remitted to the government on behalf of employees.

In addition, the election can’t be made on research credit amounts in excess of $250,000 annually. For C corporations and individual taxpayers, the election can only be taken for research credits that would have to be carried forward in the absence of an election. This means that C corporations can’t make the election for amounts that the taxpayer could use to reduce their own income tax liabilities.

Identifying and substantiating expenses eligible for the research credit is a complex undertaking, and these are only the basics of the payroll tax election. If you have further questions or believe you may benefit from the payroll tax election, contact us.

IRA Contribution Reduce Tax Bill

IRA Contributions: You May Still Be Able to Reduce Your Tax Bill
IRA Contributions: You May Still Be Able to Reduce Your Tax Bill 850 500 smolinlupinco

If you haven’t filed your 2021 tax return yet, you may still be able to lower your tax bill by making a contribution to an IRA.

Eligible taxpayers can make deductible contributions to a traditional IRA at any time before the filing date on April 18, 2022. Making a deductible contribution now could allow you to save on your 2021 return.

Eligibility requirements

Generally speaking, taxpayers are eligible to make a deductible contribution to a traditional IRA as long as:

  1. They (or their spouse) aren’t an active participant in an employer-sponsored retirement plan, OR
  2. They (or their spouse) are an active participant in an employer plan, but their modified adjusted gross income (AGI) is below specific levels that change from year-to-year by filing status.

For 2021, deductible IRA contribution phases out over $105,000 to $125,000 of modified AGI for joint tax return filers who are covered by an employer plan. This phaseout range is:

  • $66,000 to $76,000 for taxpayers who are single or a head of household
  • $0 to $10,000 for those who are married and filing separately
  • $198,000 to $208,000 for taxpayers aren’t active participants in an employer-sponsored retirement plan but have spouses who are

Although a deductible contribution to a standard IRA will reduce your tax bill for 2021 and earnings within the IRA will be tax deferred, every dollar you take out will be taxed in full. In addition, any amount taken out is subject to a 10% penalty for taxpayers under the age of 59½, unless certain exceptions apply to you.

Even if you don’t work, you may still be able to lessen your tax bill by making a deductible IRA contribution. Generally speaking, taxpayers must have wages or other earned income in order to make deductible contributions to an IRA. However, an exception may apply if your spouse is the primary earner of the home. In this case, you may be able to make a deduction to a spousal IRA.

It’s worth noting that most IRAs are called “traditional IRAs” to differentiate them from Roth IRAs. 

Although you can still contribute to a Roth IRA before April 18, contributions to a Roth IRA aren’t deductible. However, you can make tax-free withdrawals from a Roth IRA as long as you’re age 59½ or older and the account has been open at least five years. (To contribute to a Roth IRA, you will also need to be under certain income limits.)

Contribution Limits

For 2021, eligible taxpayers may make a deductible contribution of up to $6,000 to a traditional IRA (if you’re age 50 or older, this limit is $7,000).

Small business owners may also set up and make contributions to a Simplified Employee Pension (SEP) until the date their return is due, including extensions. The maximum contribution for SEPs is $58,000 for 2021.

If you have questions or need more information about IRAs or SEPs, contact us. We can guide you through your savings options as you consider your tax bill.

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