Davidson / Pargman and Company
Certified Public Accountants and Advisors
Davidson Pargman & Company LLC partnered up with Adkins Milk Hauling LLC to celebrate the Genoa Area Chamber of Commerce‘s Jingle Bell Parade. Fun times were had by all! Hope everyone has a healthy and happy holiday season!
Awards and settlements are routinely provided for a variety of reasons. For example, a person could receive compensatory and punitive damage payments for personal injury, discrimination or harassment. Some of this money is taxed by the federal government, and perhaps state governments. Hopefully, you’ll never need to know how payments for personal injuries are taxed. But here are the basic rules — just in case you or a loved one does need to understand them.
Under tax law, individuals are permitted to exclude from gross income damages that are received on account of a personal physical injury or a physical sickness. It doesn’t matter if the compensation is from a court-ordered award or an out-of-court settlement, and it makes no difference if it’s paid in a lump sum or installments.
Emotional distress
For purposes of this exclusion, emotional distress is not considered a physical injury or physical sickness. So, for example, an award under state law that’s meant to compensate for emotional distress caused by age discrimination or harassment would have to be included in gross income. However, if you require medical care for treatment of the consequences of emotional distress, then the amount of damages not exceeding those expenses would be excludable from gross income.
Punitive damages for any personal injury claim, whether or not physical, aren’t excludable from gross income unless awarded under certain state wrongful death statutes that provide for only punitive damages.
The law doesn’t consider back pay and liquidated damages received under the Age Discrimination in Employment Act (ADEA) to be paid in compensation for personal injuries. Thus, an award for back pay and liquidated damages under the ADEA must be included in gross income.
Attorney’s fees
You can’t deduct attorney’s fees incurred to collect a tax-free award or settlement for physical injury or sickness. However, to a limited extent, attorney’s fees (whether contingent or non-contingent) or court costs paid by, or on behalf of, a taxpayer in connection with an action involving a claim under the ADEA, are deductible from gross income to determine adjusted gross income. Specifically, the amount of this above-the-line deduction is limited to the amount includible in your gross income for the tax year on account of a judgment or settlement resulting from the ADEA claim, whether by suit or agreement, and whether as lump sum or periodic payments.
Best possible tax result
Keep in mind that while you want the best tax result possible from any settlement, lawsuit or discrimination action you’re considering, non-tax legal factors together with the tax factors will determine the amount of your after-tax recovery. Consult with your attorney as to the best way to proceed, and we can provide any tax guidance that you may need.
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If your business is successful and you do a lot of business travel, you may have considered buying a corporate aircraft. Of course, there are tax and non-tax implications for aircraft ownership. Let’s look at the basic tax rules.
Business travel only
In most cases, if your company buys a plane used only for business, the company can deduct its entire cost in the year that it’s placed into service. The cases in which the aircraft is ineligible for this immediate write-off are:
In those cases, the depreciation schedule is 20% of the cost for year 1, 32% for year 2, 19.2% for year 3, 11.52% for year 4, 11.52% for year 5 and 5.76% for year 6. Note that the bonus depreciation rate is scheduled to be phased down for property placed in service after 2022.
Interestingly, these “cost recovery” rules are more favorable than the rules for business autos. The business auto rules place annual caps on depreciation and, in the year an auto is placed in service, both depreciation and Sec. 179 expensing.
In the case of a business-travel-only aircraft, post-acquisition expenses aren’t treated differently than post-acquisition expenditures for other machinery and equipment. For example, routine maintenance and repair expenses are immediately deductible while amounts that improve or restore the aircraft must be capitalized and depreciated.
The only “catch” that distinguishes the tax treatment of an aircraft used 100% for business travel from the treatment of most other machinery and equipment is that company aircraft are one of the categories of business property that require more rigorous recordkeeping to prove the connection of uses and expenses to business purposes.
Business and personal travel
Personal travel won’t affect the depreciation results discussed above if the value of the travel is compensation income (and is reported and withheld upon as such) to a person that isn’t at least a 5% owner or a person “related” to the corporation. This means, for example, that personal travel by a non-share-holding employee won’t affect depreciation if the value of the travel is compensation to him or her and is reported and withheld upon. The depreciation results can be affected if the person for whom the value of the travel is compensation income is at least a 5% shareholder or a related person. But even in that case, the depreciation results won’t be affected if you comply with a generous “fail-safe” rule.
With one limitation, personal travel won’t affect the treatment of otherwise-deductible post-acquisition expenditures if the value of the travel is compensation income (and is reported and withheld upon). The limitation is that if the person for whom the value of the travel is to be treated as compensation income is at least a 10% owner, director, officer or a person related to the corporation, the amount of the deduction for otherwise-deductible costs allocable to the personal travel can’t exceed the travel value.
Moving forward
Other rules and limitations may apply. As you can see, even in the case of an aircraft used for business and personal travel, these rules aren’t onerous. But they do require careful recordkeeping and, when an aircraft is used for personal travel, compliance with reporting and withholding requirements. Contact us to learn more in your situation.
© 2021
Checkpoint Marketing for Firms
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On November 17, the Financial Accounting Standards Board (FASB) issued a new accounting standard on disclosing certain types of government incentives that businesses receive to set up shop in a locality. The standard comes at a time when investors have been clamoring for more detailed information around incentives businesses get — some to the tune of billions of dollars in tax breaks. Plus, given the increase in government assistance related to the COVID-19 pandemic, the number of companies that have adopted accounting policies on government assistance has increased.
Long-awaited standard
Government incentives are offered by policymakers to lure big companies — like Amazon, Tesla and Walmart — to establish a business in their state. The goals are to drive economic growth and create jobs for residents. It’s typically a win-win for both parties.
The FASB first proposed issuing a rule on disclosures in 2015. But the topic proved to be somewhat controversial, generating some pushback from companies over concerns that too much competitive information would be divulged. Ultimately the FASB decided on a slimmed down version of the proposal after considering operational matters and comparing the costs and benefits.
A more consistent approach
Accounting Standards Update (ASU) No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance, is the FASB’s first step to provide rules on the topic as there are no explicit rules in U.S. Generally Accepted Accounting Principles (GAAP). Without prescriptive guidance, accounting differences have bubbled up among companies, hampering the ability of investors to make informed decisions.
The disclosure requirements are designed to help investors understand:
For example, companies would disclose forgivable loans from the government or a receipt of cash or other assets but base them on the accounting method they used to record the transaction.
Required disclosures
The standard requires companies to disclose:
Businesses will be required to provide annual disclosures about transactions for the government that are accounted for by applying a grant or a contribution accounting model by analogy to guidance such as Topic 958, Not-for-Profit Entities, or International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance.
Already, some market watchers have said they want more to be included in the standard. For instance, it doesn’t require disclosure of the biggest tax breaks companies get, such as property tax. Especially important to analysts is how much of a company’s profits stem from its own business acumen versus a reliance on incentives baked into their business models.
Ready, set, disclose
ASU 2021-10 is effective for fiscal periods after December 15, 2021, for both public and private companies. Early application is permitted. If your business receives government assistance, we can help you disclose the details of the transaction in a transparent, reliable manner.
© 2021
Checkpoint Marketing for Firms
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A transparency provision included in the Consolidated Appropriations Act (CAA) requires group health plans to annually submit health care and drug cost reports to the U.S. Department of Labor, Department of Health and Human Services, and the IRS.
Recently, these agencies issued interim final regulations implementing the CAA requirement that group health plans and insurers report health care and prescription drug spending, premium amounts, and enrollment data to the agencies mentioned. Here are some highlights of the regs.
Who must report?
Group health plans, including grandfathered plans and group health insurers, must report. Excepted benefits and account-based plans, such as Health Reimbursement Arrangements, need not be reported.
Insured plans may satisfy the reporting requirements by entering into a written agreement with their health insurers for the insurer to report the required information. If the insurer fails to report, the insurer — not the plan — will have violated the requirements.
For insured and self-insured plans, the requirements may be satisfied if the plan or insurer has a written agreement with a third-party reporting entity. However, if the third-party entity fails to report the required information, the plan or insurer will have violated the requirements.
When are the deadlines?
The agencies interpret the CAA to require plans and insurers to submit information based on the “reference year.” This is defined as the calendar year immediately preceding the calendar year in which the data submission is due. Thus, calendar year 2020 information is due by December 27, 2021; calendar year 2021 information is due by June 1, 2022; calendar year 2022 information is due by June 1, 2023; and so on.
However, in recognition of concerns about the feasibility of meeting the first two statutory reporting deadlines, the agencies won’t initiate enforcement actions against plans or insurers that submit the required data for the 2020 and 2021 reference years by December 27, 2022. The agencies urge plans and insurers to start working to ensure that they can report by this date, and they encourage plans and insurers to submit by either the December 27, 2021, or June 1, 2022, deadlines if possible.
What must be reported?
A broad range of health care spending data must be reported, including general identifying information such as:
In addition, the average monthly premium paid by employees versus employers must be reported, as well as the total health care spending broken down by type (such as hospital care, primary care and specialty care), and prescription drug spending by enrollees versus employers and insurers.
Also, plans and insurers need to report the 50 most frequently dispensed brand prescription drugs, the 50 costliest prescription drugs by total annual spending, and the 50 prescription drugs with the greatest increase in plan or coverage expenditures from the previous year. Prescription drug rebates and fees must be reported as well, with some specificity, along with their impacts on premiums and out-of-pocket costs.
Is there a way to make it easier?
Indeed, there is. The agencies have announced that plans, insurers and third-party reporting entities may submit most of the required information on an aggregate basis. The only plan-level information collected will be the general data.
Aggregated reporting is generally done by state. Insurers typically report aggregated experience by the state where their policies are issued while third-party administrators for self-insured plans commonly report aggregated experience by the state of plan sponsors’ principal place of business. If a reporting entity submits data on behalf of more than one group health plan in a state, the reporting entity may aggregate data for the group health plans for each market segment in the state.
Insured and self-insured plans are considered separate market segments, and those segments are further divided by employer size. The final regs include detailed rules on aggregation entities and acceptable aggregation methods. The agencies intend to provide a portal where reporting entities can submit the required data.
Start preparing now
These final regs usher in sweeping new reporting requirements for group health plans. On the bright side, the inclusion of rules for aggregating data will come as a relief to employers, third-party administrators and advisors. For further information, contact us.
© 2021
Checkpoint Marketing for Firms
THOMSON REUTERS
If you’re starting to worry about your 2021 tax bill, there’s good news — you may still have time to reduce your liability. Here are three quick strategies that may help you trim your taxes before year-end.
1. Accelerate deductions/defer income. Certain tax deductions are claimed for the year of payment, such as the mortgage interest deduction. So, if you make your January 2022 payment in December, you can deduct the interest portion on your 2021 tax return (assuming you itemize).
Pushing income into the new year also will reduce your taxable income. If you’re expecting a bonus at work, for example, and you don’t want the income this year, ask if your employer can hold off on paying it until January. If you’re self-employed, you can delay your invoices until late in December to divert the revenue to 2022.
You shouldn’t pursue this approach if you expect to be in a higher tax bracket next year. Also, if you’re eligible for the qualified business income deduction for pass-through entities, you might reduce the amount of that deduction if you reduce your income.
2. Maximize your retirement contributions. What could be better than paying yourself? Federal tax law encourages individual taxpayers to make the maximum allowable contributions for the year to their retirement accounts, including traditional IRAs and SEP plans, 401(k)s and deferred annuities.
For 2021, you generally can contribute as much as $19,500 to 401(k)s and $6,000 for traditional IRAs. Self-employed individuals can contribute up to 25% of your net income (but no more than $58,000) to a SEP IRA.
3. Harvest your investment losses. Losing money on your investments has a bit of an upside — it gives you the opportunity to offset taxable gains. If you sell underperforming investments before the end of the year, you can offset gains realized this year on a dollar-for-dollar basis.
If you have more losses than gains, you generally can apply up to $3,000 of the excess to reduce your ordinary income. Any remaining losses are carried forward to future tax years.
There’s still time
The ideas described above are only a few of the strategies that still may be available. Contact us if you have questions about these or other methods for minimizing your tax liability for 2021.
© 2021
Checkpoint Marketing for Firms
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Davidson Pargman & Company, LLC
P.O. Box 340
Genoa, IL 60135
Genoa Location:
310 S Hwy 23
Genoa, IL 60135
Bloomingdale Location:
109 Fairfield Way, Suite 105
Bloomingdale, IL 60108
T: 815-379-8360
F: 815-379-8355