Federal Tax News for Businesses
1. Court Limits Sole Proprietor’s Auto Expense Deductions
Business owners can generally deduct the ordinary and necessary costs of doing business if they keep good records. To claim vehicle expenses, a contemporaneous log must be kept showing odometer readings, dates, business purpose of trips and miles driven.
In one case, a personal trainer filed tax returns as a sole proprietor. For the tax year in question, she and her husband deducted actual auto expenses of $28,520 for the wife’s business. That represented 97% of the total use of the family’s only car, which she drove for work-related trips. She kept no contemporaneous mileage logs or other details to support the business use.
The IRS determined that the taxpayers “substantiated neither the full amount of their reported expenses nor their business use percentage.” After analyzing the receipts they submitted, the IRS limited the vehicle expense deduction to $8,898 and the U.S. Tax Court agreed. (Parker, TC Memo 2021-111)
2. New Law Ends Employer Credit and Changes Cryptocurrency Reporting
On November 15, President Biden signed into law the Infrastructure Investment and Jobs Act, which includes a handful of tax provisions. The $1.2 trillion law provides money for improvements in bridges, mass transit, rail, airports, ports, waterways and internet access.
The new law also ends the Employee Retention Credit earlier than scheduled. The credit will now be applicable to wages paid before Oct. 1, 2021 (rather than January 1, 2022). Some employers already claimed an advance payment of the ERC for the fourth quarter of 2021, so the IRS is expected to provide related guidance.
The law will also require new information reporting of digital assets, such as cryptocurrency, after December 31, 2023.
3. How Much Can Be Contributed to an Employer Retirement Plan in 2022?
The IRS has announced the 2022 cost-of-living adjustment amounts for 401(k) plans and other retirement-plan-related limits.
For 2022, individuals can contribute up to $20,500 to their 401(k) plans (as well as 403(b) and most 457 plans), up from $19,500 for 2021. The catch-up contribution limit for employees age 50 and over who participate in 401(k), 403(b) and most 457 plans remains unchanged at $6,500.
The amount individuals can contribute to their SIMPLE retirement accounts is increased to $14,000, up from $13,500. The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans remains unchanged at $3,000.
The annual benefit limit for defined benefit plans has increased from $230,000 in 2021 to $245,000 in 2022. Click here for more information.
4. Tax Responsibilities When a Business Closes
Some businesses fail or just close for many reasons including the impact of COVID-19 and the resulting labor shortages. Business owners who close their doors must fulfill certain federal tax responsibilities and inform the IRS of their plans.
Among the steps to take are:
- Filing a final tax return;
- Paying final compensation to employees and filing related returns;
- Paying taxes owed; reporting payments to contractors that exceed $600;
- Canceling employer ID numbers;
- Closing business accounts; and
- Maintaining records for the required number of years.
5. Court Imposes Trust Fund Recovery Penalties on Administrator
The U.S. Tax Court has upheld trust fund recovery penalties that were imposed against a hospital chief administrator after the hospital’s payroll taxes weren’t paid over to the IRS. The long-time hospital employee was deemed a “responsible person” who was personally liable for $25,905 in penalties.
As the court explained, employers have a duty to withhold income and employment taxes from their employees’ wages. When net wages are paid to an employee and the employer doesn’t pay over the withheld funds, the IRS has no recourse against the employee. Instead, tax law provides a collection tool allowing the IRS to impose penalties on certain persons who fail to withhold and pay over trust fund taxes. The penalty under this section is equal to the total amount of the tax not paid over and is imposed on any responsible person who willfully fails to collect, account for, and pay over the tax.
In this case, the court found the administrator had oversight and check-signing authority for the hospital’s bank accounts and acted willfully in preferring other creditors ahead of the IRS while knowing taxes were going unpaid. She argued that the controller exercised greater financial control over hospital funds, but the court stated that didn’t negate her responsible-person status. (Cashaw, TC Memo 2021-123)
6. Report: “More Action Can Be Taken” on S Corp Compliance
When IRS examiners audit S corporation owners, do they make sure the owners are paying themselves reasonable compensation? Not always, according to a recent report from the Treasury Inspector General for Tax Administration (TIGTA). It “was initiated because some S corporation owners may be motivated to underpay or not pay themselves in order to avoid paying employment taxes,” TIGTA explained.
TIGTA was established to provide independent oversight of IRS activities. In this report, it looked at how S corp owners report their own compensation. TIGTA found that less than 1% of S corp returns are audited by the IRS and nearly half of those audits don’t examine compensation. Audits of single-shareholder owners from 2016-2018 estimate that nearly $25 billion in compensation may have gone unreported. Click here to read the report, which includes recommendations TIGTA made to the IRS to improve compliance.