Month: November 2023

The clock continues to tick. Your retirement is one year closer.

You have time before December 31 to take steps that will help you fund the retirement you desire. Here are five things to consider.

1. Establish Your 2023 Retirement Plan

First, a question: Do you have your (or your corporation’s) retirement plan in place? 

If not, and if you have some cash you can put into a retirement plan, get busy and put that retirement plan in place so you can obtain a tax deduction for 2023.

For most defined contribution plans, such as 401(k) plans, you (the owner-employee) are both an employee and the employer, whether you operate as a corporation or as a sole proprietorship. And that’s good because you can make both the employer and the employee contributions, allowing you to put a good chunk of money away.

2. Claim the New, Improved Retirement Plan Start-Up Tax Credit of up to $15,000

By establishing a new qualified retirement plan (such as a profit-sharing plan, 401(k) plan, or defined benefit pension plan), a SIMPLE IRA plan, or a SEP, you can qualify for a non-refundable tax credit that’s the greater of

• $500 or
• the lesser of (a) $250 multiplied by the number of your non-highly compensated employees who are eligible to participate in the plan, or (b) $5,000.

The law bases your credit on your “qualified start-up costs.” For the retirement start-up credit, your qualified start-up costs are the ordinary and necessary expenses you pay or incur in connection with

• the establishment or administration of the plan, and
• the retirement-related education of employees for such plan.

3. Claim the New 2023 Small Employer Pension Contribution Tax Credit (up to $3,500 per Employee)

The SECURE 2.0 passed in 2022 added an additional credit for your employer retirement plan contributions on behalf of your employees. The new up-to-$1,000-per-employee tax credit begins with the plan start date.

The new credit is effective for 2023 and later.

Exception. The new $1,000 credit is not available for employer contributions to a defined benefit plan or elective deferrals under Section 402(g)(3).

In the year you establish the plan, you qualify for a credit of up to 100 percent of your employer contribution, limited to $1,000 per employee. In subsequent years, the dollar limit remains at $1,000 per employee, but your credit is limited to:

• 100 percent in year 2
• 75 percent in year 3
• 50 percent in year 4
• 25 percent in year 5
• No credit in year 6 and beyond

Example. You establish your retirement plan this year and contribute $1,000 to each of your 30 employees’ retirement. You earn a tax credit of $30,000 ($1,000 x 30).

If you have between 51 and 100 employees, you reduce your credit by 2 percent per employee in this range. With more than 100 employees, your credit is zero.

Also, you earn no credit for employees with 2023 wages in excess of $100,000. In future years, the $100,000 will be adjusted for inflation.

4. Claim the New Automatic Enrollment $500 Tax Credit for Each of Three Years ($1,500 Total)

The first SECURE Act added a non-refundable credit of $500 per year for up to three years, beginning with the first taxable year (2020 or later) in which you, as an eligible small employer, include an automatic contribution arrangement in a 401(k) or SIMPLE plan.

The new $500 auto-contribution tax credit is in addition to the start-up credit and can apply to both newly created and existing retirement plans. Further, you don’t have to spend any money to trigger the credit. You just need to add the auto-enrollment feature (which does contain a provision that allows employees to opt out).

5. Convert to a Roth IRA

Consider converting your 401(k) or traditional IRA to a Roth IRA.

You first need to answer this question: How much tax will you have to pay to convert your existing plan to a Roth IRA? With this answer, you now know how much cash you need on hand to pay the extra taxes caused by the conversion to a Roth IRA.

Here are four reasons you should consider converting your retirement plan to a Roth IRA:

1. You can withdraw the monies you put into your Roth IRA (the contributions) at any time, both tax-free and penalty-free, because you invested previously taxed money into the Roth account.
2. You can withdraw the money you converted from the traditional plan to the Roth IRA at any time, tax-free. (But if you make that conversion withdrawal within five years of the conversion, you pay a 10 percent penalty. Each conversion has its own five-year period.)
3. When you have your money in a Roth IRA, you pay no tax on qualified withdrawals (earnings), which are distributions taken after age 59 1/2, provided you’ve had your Roth IRA open for at least five years.
4. Unlike with the traditional IRA, you don’t have to receive required minimum distributions from a Roth IRA when you reach age 72—or to put this another way, you can keep your Roth IRA intact and earning money until you die. (After your death, the Roth IRA can continue to earn money, but someone else will be making the investment decisions and enjoying your cash.)

If you would like my help with any of the above, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 29, 2023

Here’s a brief review of the significant changes and updates related to the Employee Retention Credit (ERC).

Background and Evolution

Originally established under the CARES Act in March 2020, the ERC has experienced numerous transformations. Initially, businesses had to choose between claiming the ERC and taking out a forgivable loan under the Paycheck Protection Program (PPP)—a restriction retroactively changed in December 2020 through the Consolidated Appropriations Act, 2021 (CAA).

The CAA not only retroactively allowed the 2020 ERC for those who opted for PPP but also expanded the ERC’s availability into the first two quarters of 2021 and increased its value.

Changes and Challenges

Several subsequent IRS notices and congressional acts, including the American Rescue Plan Act of 2021 (ARPA), further extended and enhanced the ERC.

But then, sadly, the Infrastructure Investment and Jobs Act enacted in November 2021 retroactively removed the ERC for the fourth quarter of 2021, causing potential complications for businesses that had already processed their claims.

Professional Responsibility and IRS Warnings

Recent communications from the IRS highlight the crucial role of tax professionals in ensuring ERC compliance.

A March 7, 2023, notice reminded practitioners of their Circular 230 responsibilities, underscoring the need for diligence in evaluating ERC eligibility and compliance—even for claims not prepared by the practitioner. Further, the IRS’s inclusion of the ERC in its Dirty Dozen list on March 20, 2023, signals increased scrutiny of ERC claims and emphasizes the potential risks of scams and improper claims.

Maximizing Benefits While Minimizing Risks

Despite these challenges and increased scrutiny, the ERC remains a valuable opportunity for eligible businesses, offering up to $26,000 per qualifying employee. It is crucial for employers to thoroughly assess their eligibility, maintain robust documentation, and seek professional guidance to navigate the complexities of ERC claims.

We are here to assist you in evaluating your eligibility, ensuring compliance, and maximizing your benefits under the ERC. Our team is well versed in the latest developments and stands ready to provide the guidance and support you need. If you would like to discuss the ERC, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 27, 2023

All small-business owners with one to 49 employees should have a medical plan for their business.

Sure, it’s true that with 49 or fewer employees, the tax law does not require you to have a plan, but you should.

When you have 49 or fewer employees, most medical plan tax rules are straightforward.

Here are six opportunities for you to consider:

1. If you have not claimed the federal tax credits equal to 100 percent of the required (2020) and the voluntary (2021) emergency sick leave and emergency family leave payments, amend those returns now. You likely made payments that qualify for the credits.
2. If you have a Section 105 plan in place and have not been reimbursing expenses monthly, do a reimbursement now to get your 2023 deductions, and then put yourself on a monthly reimbursement schedule in 2024.
3. If you want to implement a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), but you have not yet done so, make sure to get that done correctly now. You are late, so you could suffer that $50-per-employee penalty should your lateness be found out.
4. But if you are thinking of the QSEHRA and want to help your employees with more money and flexibility, consider the Individual Coverage Health Reimbursement Arrangement (ICHRA) instead. It’s got more advantages.
5. If you operate your business as an S corporation and want an above-the-line tax deduction for the cost of your health insurance, you need the S corporation to (a) pay for or reimburse you for the health insurance and (b) put that insurance cost on your W-2. Make sure the reimbursement happens before December 31 and you have the reimbursement set up to show on the W-2.
6. Claim the tax credit for the group health insurance you give your employees. If you provide your employees with group health insurance, see whether your pay structure and number of employees put you in a position to claim a 50 percent tax credit for some or all of the monies you paid for health insurance in 2023 and possibly in prior years.

If you need more insights into the opportunities described above, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 24, 2023