If you have a parent entering a nursing home, taxes are probably the last thing on your mind. But you should know there may be several possible tax benefits.

Medical expense deductions

The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other qualified expenses, exceed 7.5% of adjusted gross income (AGI).

Qualified long-term care services are those required by a chronically ill individual and administered by a licensed health care practitioner. They include diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal-care services.

To qualify as chronically ill, a physician or other licensed health care practitioner must certify an individual as unable to perform at least two activities of daily living (ADLs) for at least 90 days due to a loss of functional capacity or severe cognitive impairment. ADLs include eating, toileting, transferring, bathing, dressing and continence.

Long-term care insurance

Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to limits) to the extent they — combined with other medical expenses — exceed the percentage-of-AGI threshold. Such a contract doesn’t provide payment for costs covered by Medicare, is guaranteed renewable and doesn’t have a cash surrender value.

Qualified long-term care premiums are includible as medical expenses based on the age of the individual. For 2022 for those 61 to 70 years old, the limit on deductible premiums is $4,510 and for those over 70, the limit is $5,640.

Nursing home payments

Amounts paid to a nursing home are deductible as medical expenses if a person is staying at the facility principally for medical, rather than custodial care. Also, for those individuals, only the portion of the fee that’s allocable to actual medical care qualifies as a deductible expense. If the individual is chronically ill, all qualified long-term care services, including maintenance or personal care services, are deductible.

If your parent qualifies as your dependent, you can add medical expenses you incur for him or her to your own medical expenses when calculating your deduction. We can help with this determination.

Head-of-household filing status

If you aren’t married and you meet certain dependency tests for your parent, you may qualify for head-of-household filing status, which has a higher standard deduction and lower tax rates than filing as single. You may be eligible to use this status even if the parent for whom you claim an exemption doesn’t live with you.

These are just some of the tax issues that may arise when your parent moves into a nursing home. Contact us if you need more information or assistance.

SIDEBAR

Selling your parent’s home

If your parent sells his or her home, up to $250,000 of gain from the sale may be tax-free. To qualify for the $250,000 exclusion, the seller must generally have owned the home for at least two years of the five years before the sale. Also, the seller must have used the home as a principal residence for at least two of the five years before the sale. However, there’s an exception to the two-of-five-year use test for a seller who becomes physically or mentally unable to care for him- or herself during the five-year period.

© 2022

If your business receives large amounts of cash or cash equivalents, you may be required to report these transactions to the IRS. Here are some details.

The requirements

Each person who, while operating a trade or business, receives more than $10,000 in cash in one transaction (or at least two related transactions), must file Form 8300. What constitutes “related transactions?” Related transactions are conducted in a 24-hour period. But transactions that occur in a greater than 24-hour period may also be deemed related if the recipient knows, or has reason to know, that the transactions are connected.

To complete a Form 8300, you’ll need certain information about the person making the payment. This includes a Social Security or taxpayer identification number.

Reasons behind the reporting

Although many cash transactions are legitimate, the IRS explains that “information reported on (Form 8300) can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”

It’s important to keep a copy of each Form 8300 for five years from the date you file it, according to the IRS. Contact us if you have questions related to form retention.

 “Cash” and “cash equivalents” defined

For Form 8300 reporting purposes, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders. Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.

Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.

Options for filing

Businesses required to file reports of large cash transactions on Form 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic acknowledgment of receipt when they file.

The IRS also reminds businesses that they can “batch file” their reports. This is especially helpful to those required to file many forms.

Setting up an electronic account

To file Form 8300 electronically, a business must set up an account with FinCEN’s Bank Secrecy Act E-Filing System. For more information, visit: https://bsaefiling.fincen.treas.gov/AboutBsa.html. Interested businesses can also call the BSA E-Filing Help Desk at 866-346-9478 (Monday through Friday from 8 am to 6 pm EST). Contact us with any questions or for assistance.

© 2022

It’s difficult enough to divide a marital estate. But when a divorcing spouse owns a private business and attempts to artificially deflate its profits or hide assets, it may be time to engage a forensic accountant to investigate.

What to ask

When working on divorce cases, fraud experts ask several questions about private business interests. For example, does a spouse own a cash business that may have income that’s not reported to tax authorities? Does the owner receive special perks or tax write-offs that affect the business’s profitability? Are numbers manipulated to affect the business’s value?

Also, does the business have subsidiaries or is it part of other business ventures? A business owner may be a silent partner in an entity where ownership isn’t obvious.

Look to the income statements for clues

Anomalies in a business’s income statements may reveal possible deception, particularly:

• Excessive write-offs,
• Withheld revenue deposits,
• A large one-time expense, or
• A decrease in revenue with no related decrease in variable expenses.

Sudden changes that occur when the possibility of divorce arises may suggest unreported income or overstated expenses. However, these changes could also be due to external forces such as adverse market conditions.

When experts evaluate expenses, they may focus on amounts paid to owners and other related parties. These may include payments for compensation, benefits, rent, management fees, company vehicles and more. The owner-spouse also might try to flush personal expenses through the business.

Details in the balance sheet

Balance sheets may reveal whether an owner seeks to hide assets (for example, in an offshore account) or transfer them to a related party for less than market value. Inventory is particularly susceptible to manipulation and notes payable to shareholders — though often legitimate — may conceal income distributed to an owner.

Experts review the equity section for changes in the business’s ownership after the divorce filing and suspicious withdrawals or distributions from capital accounts. Controlling owners sometimes attempt to transfer ownership of business interests to friends or associates to deprive their spouses of the assets or portions of the business income.

Value distortions

Although divorce can give rise to angry actions, most business owners would never stoop to falsifying financial records simply to deprive their ex-spouses of a fair division of marital assets. But if the value of a business seems distorted, contact us to help identify the causes and to suggest reasonable adjustments.

© 2022

If you have a large unpaid federal tax bill, beware. A 2015 law allows the U.S. State Department to deny your passport application — or revoke or limit your current passport — if the IRS certifies that you have a seriously delinquent tax debt (SDTD).

How large does the debt have to be to qualify? In 2022, you have an SDTD if the following are true: you owe more than $55,000 (adjusted for inflation) in back taxes, penalties and interest; the IRS has filed a Notice of Federal Tax Lien; and the period to challenge the lien has expired or the IRS has issued a levy.

If this is your situation, you may be able to avoid losing your passport by taking certain steps. Obviously, you can pay your tax debt in full immediately. If that’s not possible, you may be able to pay your debt on a timely basis with an approved installment agreement, an accepted Offer in Compromise or a settlement agreement with the U.S. Justice Department.

Also, you might be able to retain your passport by requesting a collection due process hearing regarding a levy, or by having collection suspended through a request for innocent spouse relief. Typically, the IRS won’t notify the State Department of an SDTD if there are extenuating circumstances, such as bankruptcy, identity theft, federally declared disasters or other hardships. Contact our firm for more information.

© 2022

If your company benefits include group term life insurance paid by your employer, a portion of the premiums paid for the coverage may be taxable. Depending on the amount of coverage you’re provided, some of it may create undesirable income tax consequences for you.

The cost of the first $50,000 of group term life insurance coverage that your employer pays for is excluded from taxable income and doesn’t add anything to your income tax bill. That’s good news. But the employer-paid cost of group term coverage over $50,000 is taxable income to you. That means it will be included in the taxable wages reported on your Form W-2 — even if you never actually receive it. In other words, it’s “phantom income.”

Have you reviewed your W-2?

What should you do if you think the tax cost of employer-provided group term life insurance is too high? First, you should establish if this is actually the case. If a specific dollar amount appears in Box 12 of your Form W-2 (with code “C”), that dollar amount represents your employer’s cost to provide you with group-term life insurance coverage of more than $50,000, minus any amount you paid for the coverage. You’re responsible for federal, state and local taxes on the amount that appears in Box 12 and for the associated Social Security and Medicare taxes as well.

But keep in mind that the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2.  It’s the amount in Box 1 that is reported on your tax return.

What are your options?

If you decide that the tax cost is too high for the benefit you’re getting in return, you should find out whether your employer has a “carve-out” plan. That’s a plan that allows selected employees to carve out from the group term coverage. If your employer’s plan doesn’t offer a carve-out, ask if they’d be willing to create one.

There are several different types of carve-out plans that employers can offer to their employees. For example, the employer can continue to provide $50,000 of group term insurance (since there’s no tax cost for the first $50,000 of coverage). Then, the employer can either provide the employee with an individual policy for the balance of the coverage or give the employee the amount the employer would have spent for the excess coverage as a cash bonus that the employee can use to pay the premiums on an individual policy.

You may have questions about this important topic, such as how much your group term life insurance benefit is adding to your income. Contact us for help with this and other questions.

Sidebar   How is phantom income calculated?

The cost of employer-provided group term life insurance that will be taxable income to you is determined using the IRS Premium Table based on preset factors such as age. Under these determinations, the amount of taxable phantom income attributed to an older employee is often higher than the premium the employee would pay for comparable coverage under an individual term policy. This tax trap gets worse as the employee gets older and as the amount of his or her compensation increases.

© 2022

Traditionally, important tax and financial records have been stored as hard copies in desk drawers, filing cabinets and safe deposit boxes. These days, however, it’s become increasingly popular and easy to digitize documents and store them electronically. Is this the right move for you?

The case for going digital

One of the biggest advantages of digital documents is a drastic reduction in the amount of paper that you must sort, organize and store. Also, digital documents are generally more protected from damage than paper files — assuming they’re stored properly. After all, paper records are subject to damage or loss by fire, theft, mold and sprinklers. These risks can be easily mitigated with good electronic storage practices.

Digitized records improve productivity. For example, documents can be efficiently searched for (and searched through) using keywords. But paper files that are misplaced or misfiled may require hours of rifling through file cabinets and paper folders.

Electronic documents can also be digitally date-stamped, which helps ensure that you’re accessing the most recent versions. You can track edits to electronic files, monitor who’s been viewing them and restrict access to sensitive documents, too.

Options for electronic storage and some risks

To digitize paper documents, you need only a scanner. Scanners are widely available for purchase or rent. After digitization you can reduce your paper files by shredding many of them, though you may need to retain paper versions of some legal documents. (Consult an attorney about which ones.)

When it comes to storage, you essentially have two options:

1. A self-hosted system.Here, you buy a dedicated hard drive (or several high-quality thumb drives) on which to store your digital records. It’s best not to keep these files on your home computer because, if it crashes or gets hacked, your sensitive data will be exposed. Hackers can’t get to self-hosted files because they’re not on the internet, and you can limit your drive’s exposure to natural disasters or accidental damage by keeping it in a fire-proof safe.
2. The cloud.You’ve likely heard of, and may even use, internet-based storage for photos or other items. You can do this for tax and financial records as well, but you’ve got to be careful. Choose a reputable and stable provider that encrypts everything. The upside is you’ll have instant access to your files anywhere in the world— as long as you have a secure internet connection. The downside: You’ll lose access during internet outages and no cloud system is 100% guaranteed secure.

Document security is peace of mind

For many people, the right approach to secure document storage might be using both paper and electronic to some extent. Retain paper files of certain documents for a recommended period and digitize everything else. We can help you find the best way to keep your tax and financial records organized and safe.

© 2022

Businesses need to have inventory on hand. But having excess inventory is expensive, so it’s important to keep it as lean as possible. Here are some ways to trim the fat from your inventory without compromising revenue and customer service.

Accuracy first

Effective inventory management requires starting with an accurate physical inventory count. That allows you to determine your true cost of goods sold  — and to identify and remedy discrepancies between your physical count and perpetual inventory records. A CPA can introduce an element of objectivity to the counting process and help minimize errors.

Next, compare your inventory costs to those of other companies in your industry. Trade associations often publish benchmarks for:

• Gross margin ([revenue – cost of sales] / revenue),
• Net profit margin (net income / revenue), and
• Days in inventory (annual revenue / average inventory × 365 days).

Your company should strive to meet — or beat — industry standards. For a retailer or wholesaler, inventory is simply purchased from the manufacturer. But the inventory account is more complicated for manufacturers and construction firms. It’s a function of raw materials, labor and overhead costs.

The composition of your company’s cost of goods will guide you on where to cut. In a tight labor market, it’s hard to reduce labor costs. But it may be possible to renegotiate prices with suppliers.

Don’t forget the carrying costs of inventory, such as storage, insurance, obsolescence and pilferage. You can also improve margins by negotiating a net lease for your warehouse, installing antitheft devices or opting for less expensive insurance coverage.

Product mix

Cutting your days-in-inventory ratio should be done based on individual product margins.  Stock more products with high margins and high demand — and less of everything else. Whenever possible, return excessive supplies of slow-moving materials or products to your suppliers.

Product mix should be sufficiently broad and in tune with consumer needs. Before cutting back on inventory, you might need to negotiate speedier delivery from suppliers or give suppliers access to your perpetual inventory system. These precautionary measures can help prevent lost sales due to lean inventory.

Reality check

Often, managers are so focused on sales, HR issues and product innovation that they lose control over inventory. Contact us for a reality check.

A wise person — who may or may not have been an accountant — once said, “Simplicity is the key to a family budget.” However, the budget should also be comprehensive enough to cover all necessities. To find the right balance, a budget should cover two distinct facets of family members’ lives: the near term and the long term.

Your near-term budget should encompass the day-to-day items that affect your family. First, the home: This is often the most expensive item in a personal budget, and includes mortgage payments or rent, utilities, maintenance, and supplies.

Other items related to daily life that need to be accounted for include groceries, fuel, clothing, child care, insurance and out-of-pocket medical expenses. Also, families need to draw clear distinctions between fixed and discretionary spending.

Along with being a practical guide to near-term family spending, a budget should address long-term goals, some of which are further out than others. For example, virtually everyone’s longest-term objective should be to have a comfortable retirement. So, a budget needs to incorporate retirement plan contributions and other ways to meet this goal.

A relatively less long-term goal might be funding college for each child. And, as a long-term but “as soon as possible” objective, a budget needs to be structured to pay off debts and maintain a strong credit rating. Our firm can help you craft a sensible budget that reflects your family’s distinctive needs.

© 2022

If you’re a business owner, you might be wondering if using alternative energy technologies in your company can help you manage energy costs and improve your bottom line.  If this sounds interesting, you should know there’s also a valuable federal income tax benefit (the business energy credit) that applies to the acquisition of many types of alternative energy property.

The credit is intended primarily for business users.  But be aware that other energy tax breaks apply if you use alternative energy in your home or if you produce energy for sale.

What property is eligible?

The business energy credit is equal to 30% of the following types of property (with the caveat that construction must be begun before 2024):

• Equipment that uses solar energy to generate electricity for heating and cooling structures, for hot water, or for heat used in industrial or commercial processes (except for swimming pools),
• Equipment that uses solar energy to illuminate a structure inside using fiber-optic-distributed sunlight,
• Specific fuel-cell property,
• Certain small wind energy property,
• Specific waste energy property, and
• Certain offshore wind facilities with construction beginning before 2026.

If construction of equipment that uses solar energy to generate electricity for heating and cooling structures, for hot water, or for heat used in industrial or commercial processes begins this year, the credit rate is 26% and is reduced to 22% for construction beginning in calendar year 2023; and, unless the property is placed in service before 2026, the credit rate is 10%. For the other types of property mentioned above, if construction begins this year, the credit rate is 26%, and is reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%. The only exception to this is the final type of property mentioned above —certain offshore wind facilities. This type of property isn’t subject to a phase-out.

The business energy credit is equal to 10% of the following types of property with construction beginning before 2024:

• Specific equipment that is used to produce, distribute, or use energy derived from a geothermal deposit,
• Certain cogeneration property,
• Some microturbine property, and
• Certain equipment that uses the ground, or ground water, to heat or cool a structure.

The downside and the upside

There are several restrictions related to the credit. For example, it isn’t available for property acquired with certain non-recourse financing. Additionally, if the credit is allowable for property, the “basis” of that property is reduced by 50% of the allowable credit.

On the other hand, a favorable aspect is that, for the same property, the credit can sometimes be used in combination with other benefits. Examples include federal income tax expensing, state tax credits or utility rebates.

There are business considerations unrelated to the tax and nontax benefits that may influence your decision to use alternative energy. And even if you choose to use it, you might do so without owning the equipment, which would mean forgoing the business energy credit.

Still wondering?

As you can see, there are many issues to consider and you may have remaining questions. We can help you work through these alternative energy tax considerations.

© 2022