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Work Opportunity Tax Credit provides help to employers

Green man figurine in a people crowd. Recruiting new workers, headhunters. Search for talented workers specialists. Stands out from crowd. Different, special. A talented and capable candidate.

In today’s tough job market and economy, the Work Opportunity Tax Credit (WOTC) may help employers. Many business owners are hiring and should be aware that the WOTC is available to employers that hire workers from targeted groups who face significant barriers to employment. The credit is worth as much as $2,400 for each eligible employee ($4,800, $5,600 and $9,600 for certain veterans and $9,000 for “long-term family assistance recipients”). It’s generally limited to eligible employees who begin work for the employer before January 1, 2026.

The IRS recently issued some updated information on the pre-screening and certification processes. To satisfy a requirement to pre-screen a job applicant, a pre-screening notice must be completed by the job applicant and the employer on or before the day a job offer is made. This is done by filing Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit.

Which new hires qualify?

An employer is eligible for the credit only for qualified wages paid to members of a targeted group. These groups are:

  1. Qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program,
  2. Qualified veterans,
  3. Qualified ex-felons,
  4. Designated community residents,
  5. Vocational rehabilitation referrals,
  6. Qualified summer youth employees,
  7. Qualified members of families in the Supplemental Nutritional Assistance Program (SNAP),
  8. Qualified Supplemental Security Income recipients,
  9. Long-term family assistance recipients, and
  10. Long-term unemployed individuals.

Other rules and requirements

There are a number of requirements to qualify for the credit. For example, there’s a minimum requirement that each employee must have completed at least 120 hours of service for the employer. Also, the credit isn’t available for certain employees who are related to or who previously worked for the employer.

There are different rules and credit amounts for certain employees. The maximum credit available for the first-year wages is $2,400 for each employee, $4,000 for long-term family assistance recipients, and $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit of $9,000 over two years.

For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth employees is $1,200 per employee.

A beneficial credit

In some cases, employers may elect not to claim the WOTC. And in limited circumstances, the rules may prohibit the credit or require an allocation of it. However, for most employers hiring from targeted groups, the credit can be beneficial. Contact us with questions or for more information about your situation.

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Assessing ERISA’s impact on a telehealth benefit

The popularity of telehealth grew exponentially when the COVID-19 pandemic hit in the spring of 2020. Many people have now returned to in-person appointments with their physicians, though virtual visits remain a convenient option under some circumstances.

The situation has motivated many employers to formally offer telehealth as an employee benefit. As a result, a common question arises: Is such a benefit subject to the Employee Retirement Income Security Act (ERISA)?

Key definition

The answer is generally yes. Telehealth, sometimes also referred to as telemedicine, is typically offered under a group health plan — which is indeed governed by ERISA if sponsored by a private sector employer. Even if telehealth is offered separately from the employer’s group health plan, the benefit can still be subject to the law if it’s considered all or part of an ERISA welfare benefit plan.

In general, an ERISA welfare benefit plan is a plan, fund or program established or maintained by an employer to provide employees with ERISA-listed benefits. Let’s break down each element as it relates to telehealth and whether the benefit would be subject to ERISA:

A plan, fund or program. An arrangement that provides “one-off” benefits and, thus, doesn’t require an “ongoing administrative scheme” might not be considered a plan, fund or program subject to ERISA. But it’s difficult to imagine a telehealth benefit that wouldn’t involve ongoing administration, so this element would likely be met.

Established or maintained by an employer for its employees. If an employer explicitly offers telehealth as a health care benefit, this element would probably be met.

Provides ERISA-listed benefits. Medical benefits are among those listed in ERISA. As telehealth is clearly medical care, this element would likely be met.

DOL safe harbor

Under a regulatory safe harbor issued by the U.S. Department of Labor, certain group insurance arrangements are exempt from ERISA even if they provide ERISA-listed benefits. An arrangement is exempt under this safe harbor if the following requirements are met:

  1. The employer makes no contributions.
  2. Participation is completely voluntary.
  3. The employer doesn’t endorse the arrangement and its involvement is limited to permitting the insurer to publicize the program and collecting and remitting insurance premiums.
  4. The employer receives no consideration for collecting and remitting premiums other than reasonable compensation.

A voluntary employee-pay-all telehealth benefit offered by a third party, with employer involvement limited to the permitted activities set forth in the safe harbor, probably wouldn’t be an ERISA plan.

Rules to follow

If your organization’s telehealth benefit does fall under the purview of ERISA, which is likely the case, you’ll need to ensure the benefit complies with the applicable rules. These include having a plan administrator, following claims and appeals procedures, and providing a summary plan description. Our firm can help you assess the costs of any benefits you offer or are considering, including the impact of ERISA compliance.

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Don’t forget income taxes when planning your estate

As a result of the current estate tax exemption amount ($12.06 million in 2022), many estates no longer need to be concerned with federal estate tax. Before 2011, a much smaller amount resulted in estate plans attempting to avoid it. But now, because many estates won’t be subject to estate tax, more planning can be devoted to saving income taxes for your heirs.

While saving both income and transfer taxes has always been a goal of estate planning, it was more difficult to succeed at both when the estate and gift tax exemption level was much lower. Here are three considerations.

Plan gifts that use the annual gift tax exclusion. One of the benefits of using the gift tax annual exclusion to make transfers during life is to save estate tax. This is because both the transferred assets and any post-transfer appreciation generated by those assets are removed from the donor’s estate.

As mentioned, estate tax savings may not be an issue because of the large estate exemption amount. Further, making an annual exclusion transfer of appreciated property carries a potential income tax cost because the recipient receives the donor’s basis upon transfer. Thus, the recipient could face income tax, in the form of capital gains tax, on the sale of the gifted property in the future. If there’s no concern that an estate will be subject to estate tax, even if the gifted property grows in value, then the decision to make a gift should be based on other factors.

For example, gifts may be made to help a relative buy a home or start a business. But a donor shouldn’t gift appreciated property because of the capital gain that could be realized on a future sale by the recipient. If the appreciated property is held until the donor’s death, under current law, the heir will get a step-up in basis that will wipe out the capital gain tax on any pre-death appreciation in the property’s value.

Take spouses’ estates into account. In the past, spouses often undertook complicated strategies to equalize their estates so that each could take advantage of the estate tax exemption amount. Generally, a two-trust plan was established to minimize estate tax. “Portability,” or the ability to apply the decedent’s unused exclusion amount to the surviving spouse’s transfers during life and at death, became effective for estates of decedents dying after 2010. As long as the election is made, portability allows the surviving spouse to apply the unused portion of a decedent’s applicable exclusion amount (the deceased spousal unused exclusion amount) as calculated in the year of the decedent’s death. The portability election gives married couples more flexibility in deciding how to use their exclusion amounts.

Be aware that some estate exclusion or valuation discount strategies to avoid inclusion of property in an estate may no longer be worth pursuing. It may be better to have the property included in the estate or not qualify for valuation discounts so that the property receives a step-up in basis. For example, the special use valuation — the valuation of qualified real property used for farming or in a business on the basis of the property’s actual use, rather than on its highest and best use — may not save enough, or any, estate tax to justify giving up the step-up in basis that would otherwise occur for the property.

If you’d like to discuss these strategies and how they relate to your estate plan, contact us.

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2022 Q4 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have businesses in federally declared disaster areas.

Monday, October 3

The last day you can initially set up a SIMPLE IRA plan, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that comes into existence after October 1 of the year, you can establish a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence.

Monday, October 17

  • If a calendar-year C corporation that filed an automatic six-month extension:
    • File a 2021 income tax return (Form 1120) and pay any tax, interest and penalties due.
    • Make contributions for 2021 to certain employer-sponsored retirement plans.

Monday, October 31

  • Report income tax withholding and FICA taxes for third quarter 2022 (Form 941) and pay any tax due. (See exception below under “November 10.”)

Thursday, November 10

  • Report income tax withholding and FICA taxes for third quarter 2022 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

Thursday, December 15

  • If a calendar-year C corporation, pay the fourth installment of 2022 estimated income taxes.

Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.

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Should there be new tax rules for telecommuters?

During the initial pandemic lockdowns of 2020, many people learned for the first time what it was like to work from home. Not everyone loved it, but some employers and employees found telecommuting to be so mutually beneficial that they’re still doing it. And the practice was growing in popularity before the public health crisis anyway.

Now that working remotely is so commonplace, should the IRS update the tax rules regarding the deductibility of travel expenses by employees? The American Institute of Certified Public Accountants (AICPA) thinks so.

Call for clarity

In an August 25 letter to the IRS and U.S. Department of the Treasury, the AICPA called for clarity on several matters. One was determining how an employee should be reimbursed for expenses incurred in traveling to an employer’s work location when travel days are limited and the distance has increased — a scenario that’s become more common and has upended traditional notions of commuting.

The organization said its analysis of new scenarios involving various work arrangements — such as location-based, remote and hybrid — found that “current revenue rulings and interpretations of case law are outdated, do not reflect the current work environment, and are unclear in many instances.”

Travel or commute?

In many modern working arrangements, both the employer and employee view the latter’s residence as the main site at which work is performed. “In many instances, existing tax guidance does not apply to today’s work arrangements to determine when expenses are deductible travel expenses and when such amounts are non-deductible commuting expenses,” the letter states.

Specifically, the AICPA recommended that the IRS and Treasury Dept. revise Revenue Ruling 99-7 to eliminate its reference to the “exclusive use” requirement under Internal Revenue Code Section 280A(c). In addition, the concept of “for the convenience of employer” should be updated, the organization also recommended.

As an alternative, the AICPA suggested creating new guidance to establish a safe harbor for determining a “principal place of business” with specific criteria that would no longer refer to the “exclusive use” requirement of Sec. 280A(c).

Further recommendations

According to the letter, employers are reassessing their fringe benefit programs in response to employees’ questions about remote work arrangements. Such queries include whether remote workers could be reimbursed for travel expenses related to spending time in an employer-provided location, such as an office. The AICPA recommended that the federal agencies:

  • Clarify the tax treatment of non-travel expenses incurred when employees are working remotely,
  • Refine the definition of “pursuit of a trade or business,” and
  • Offer guidance on how modern work location arrangements are delineated.

Because many employers have set policies and positions “based on reasonable interpretations of existing guidance,” new guidance should include transition relief to help employers facilitate compliance, the AICPA told the IRS and Treasury Dept.

Time will tell

Is the AICPA’s letter a harbinger of landmark changes to travel expense rules for employers and employees? Only time will tell. We can keep you updated on this developing story and answer any questions you have about the tax impact of fringe benefits.

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Seller-paid points: Can homeowners deduct them?

In its latest report, the National Association of Realtors (NAR) announced that July 2022 existing home sales were down but prices were up nationwide, compared with last year. “The ongoing sales decline reflects the impact of the mortgage rate peak of 6% in early June,” said NAR Chief Economist Lawrence Yun. However, he added that “home sales may soon stabilize since mortgage rates have fallen to near 5%, thereby giving an additional boost of purchasing power to home buyers.”

If you’re buying a home, or you just bought one, you may wonder if you can deduct mortgage points paid on your behalf by the seller. The answer is “yes,” subject to some important limitations described below.

Basics of points

Points are upfront fees charged by a mortgage lender, expressed as a percentage of the loan principal. Points, which may be deductible if you itemize deductions, are normally the buyer’s obligation. But a seller will sometimes sweeten a deal by agreeing to pay the points on the buyer’s mortgage loan.

In most cases, points that a buyer pays are a deductible interest expense. And seller-paid points may also be deductible.

Suppose, for example, that you bought a home for $600,000. In connection with a $500,000 mortgage loan, your bank charged two points, or $10,000. The seller agreed to pay the points in order to close the sale.

You can deduct the $10,000 in the year of sale. The only disadvantage is that your tax basis is reduced to $590,000, which will mean more gain if — and when — you sell the home for more than that amount. But that may not happen until many years later, and the gain may not be taxable anyway. You may qualify for an exclusion for up to $250,000 ($500,000 for a married couple filing jointly) of gain on the sale of a principal residence.

Important limits

There are some important limitations on the rule allowing a deduction for seller-paid points. The rule doesn’t apply:

  • To points that are allocated to the part of a mortgage above $750,000 ($375,000 for married filing separately) for tax years 2018 through 2025 (above $1 million for tax years before 2018 and after 2025);
  • To points on a loan used to improve (rather than buy) a home;
  • To points on a loan used to buy a vacation or second home, investment property or business property; and
  • To points paid on a refinancing, home equity loan or line of credit.

Tax aspects of the transaction

We can review with you in more detail whether the points in your home purchase are deductible, as well as discuss other tax aspects of your transaction.

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