Tax

While similar to FSAs (Flexible Savings Plans) in that both allow pre-tax contributions, Health Savings Accounts or HSAs offer taxpayers several additional tax benefits such as contributions that roll over from year to year (i.e., no “use it or lose it”), tax-free interest on earnings, and when used for qualified medical expenses, tax-free distributions.

What is a Health Savings Account?

A Health Savings Account is a type of savings account that allows you to set aside money pre-tax to pay for qualified medical expenses. Contributions that you make to a Health Savings Account (HSA) are used to pay current or future medical expenses (including after you’ve retired) of the account owner, his or her spouse, and any qualified dependent.

Caution: Medical expenses that are reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return are not eligible.

Caution: Insurance premiums for taxpayers younger than age 65 are generally not considered qualified medical expenses unless the premiums are for health care continuation coverage (such as coverage under COBRA), health care coverage while receiving unemployment compensation under federal or state law.

You cannot be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care and you cannot be claimed as a dependent on someone else’s tax return. Spouses cannot open joint HSAs. Each spouse who is an eligible individual who wants an HSA must open a separate HSA.

An HSA can be opened through your bank or another financial institution. Contributions to an HSA must be made in cash. Contributions of stock or property are not allowed. As an employee may be able to elect to have money set aside and deposited directly into an HSA account; however, if this option is not offered by your employer, then you must wait until filing a tax return to claim the HSA contributions as a deduction.

High Deductible Health Plans.

A Health Savings Account can only be used if you have a High Deductible Health Plan (HDHP). Typically, high-deductible health plans have lower monthly premiums than plans with lower deductibles, but you pay more health care costs yourself before the insurance company starts to pay its share (your deductible).

A high-deductible plan can be combined with a health savings account, allowing you to pay for certain medical expenses with tax-free money that you have set aside. By using the pre-tax funds in your HSA to pay for qualified medical expenses before you reach your deductible and other out-of-pocket costs such as copayments, you reduce your overall health care costs.

Calendar year 2018. For calendar year 2018, a qualifying HDHP must have a deductible of at least $1,350 for self-only coverage or $2,700 for family coverage. Annual out-of-pocket expenses (e.g., deductibles, copayments, and coinsurance) of the beneficiary are limited to $6,650 for self-only coverage and $13,300 for family coverage. This limit doesn’t apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies.

Last month rule. Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers).

You can make contributions to your HSA for 2017 until April 17, 2018. Your employer can make contributions to your HSA between January 1, 2018, and April 17, 2018, that are allocated to 2017. The contribution will be reported on your 2018 Form W-2.

Summary of HSA Tax Advantages

• Tax deductible. You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040).
• Pre-tax dollars. Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
• Tax-free interest on earnings. Contributions remain in your account until you use them and are rolled over year after year. Any interest or other earnings on the assets in the account are tax-free. Furthermore, an HSA is “portable” and stays with you if you change employers or leave the workforce.
• Tax-free distributions. Distributions may be tax-free if you pay qualified medical expenses.
• Additional contributions for older workers. Employees, aged 55 years and older are able to save an additional $1,000 per year.
• Tax-free after retirement. Distributions are tax-free at age 65 when used for qualified medical expenses including amounts used to pay Medicare Part B and Part D premiums, and long-term care insurance policy premiums. However, you cannot use money in an HSA to pay for supplemental insurance (e.g., Medigap) premiums.

Questions about HSAs? Don’t hesitate to call.

• By Leon Clinton
• December 11, 2017

When it comes to creating a budget, it’s essential to estimate your spending as realistically as possible. Here are five budget-related errors commonly made by small businesses and some tips for avoiding them.

1. Not Setting Goals. It’s almost impossible to set spending priorities without clear goals for the coming year. It’s important to identify, in detail, your business and financial goals and what you want or need to achieve in your business.
2. Underestimating Costs. Every business has ancillary or incidental costs that don’t always make it into the budget–for whatever reason. A good example of this is buying a new piece of equipment or software. While you probably accounted for the cost of the equipment in your budget, you might not have remembered to budget time and money needed to train staff or for equipment maintenance.
3. Forgetting about Tax Obligations. While your financial statements may seem adequate, don’t forget to set aside enough money for tax (e.g., sales and use tax, payroll tax) owed to state, local, and federal entities. Don’t make the mistake of thinking this is “money in the bank” and use it to pay for expenses you can’t really afford or worse, including it in next year’s budget and later finding out that you don’t have the cash to pay for your tax obligations.
4. Assuming Revenue Equals Positive Cash Flow. Revenue on the books doesn’t always equate to cash in hand. Just because you’ve closed the deal, it may be a long time before you are paid for your services and the money is in your bank account. Easier said than done, perhaps, but don’t spend money that you don’t have.
5. Failing to Adjust Your Budget. Don’t be afraid to update your forecasted expenditures whenever new circumstances affect your business. Several times a year you should set aside time to compare budget estimates against the amount you actually spent, and then adjust your budget accordingly.

Please call if you need assistance setting up a budget to meet your business financial goals.

• By Leon Clinton
• December 9, 2017

Whether you file as a corporation or sole proprietor here’s what business owners need to know about tax changes for 2017.

Standard Mileage Rates
The standard mileage rates in 2017 are as follows: 53.5 cents per business mile driven, 17 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.

Health Care Tax Credit for Small Businesses
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $52,000 (adjusted annually for inflation). In 2017 this amount is $52,400.

In 2017 (as in 2016, 2015, and 2014), the tax credit is worth up to 50 percent of your contribution toward employees’ premium costs (up to 35 percent for tax-exempt employers). For tax years 2010 through 2013, the maximum credit was 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities.

Section 179 Expensing and Depreciation

The Section 179 expense deduction was made permanent at $510,000 by the Protecting Americans from Tax Hikes Act of 2015 (PATH). For equipment purchases, the maximum deduction is $500,000 of the first $2.03 million of qualifying equipment placed in service during the current tax year. The deduction is phased out dollar for dollar on amounts exceeding the $2 million threshold amount (indexed for inflation) and eliminated above amounts exceeding $2.5 million. In addition, Section 179 is now indexed to inflation in increments of $10,000 for future tax years.

The 50 percent bonus depreciation has been extended through 2019. Businesses are able to depreciate 50 percent of the cost of equipment acquired and placed in service during 2015, 2016 and 2017. However, the bonus depreciation is reduced to 40 percent in 2018 and 30 percent in 2019. The standard business depreciation amount is 25 cents per mile.

Please call if you have any questions about Section 179 expensing and the bonus depreciation.

Work Opportunity Tax Credit (WOTC)

Extended through 2019, the Work Opportunity Tax Credit has been modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire. Please call if you have any questions about the Work Opportunity Tax Credit.

SIMPLE IRA Plan Contributions
Contribution limits for SIMPLE IRA plans increased to $12,500 for persons under age 50 and $15,500 for persons age 50 or older in 2017. The maximum compensation used to determine contributions increases to $270,000.

Please contact the office if you need help understanding which deductions and tax credits you are entitled to.

• By Leon Clinton
• December 7, 2017