2023 Limits for Businesses That Have HSAs — or Want to Establish Them

No one needs to remind business owners that the cost of employee health care benefits keeps going up. One way to provide some of these benefits is through an employer-sponsored Health Savings Account (HSA). For eligible individuals, an HSA offers a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the key tax benefits:

Contributions that participants make to an HSA are deductible, within limits.
Contributions that employers make aren’t taxed to participants.
Earnings on the funds in an HSA aren’t taxed, so the money can accumulate tax-free year after year.
Distributions from HSAs to cover qualified medical expenses aren’t taxed.
Employers don’t have to pay payroll taxes on HSA contributions made by employees through payroll deductions.

Eligibility and 2023 contribution limits

To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2023, a “high deductible health plan” will be one with an annual deductible of at least $1,500 for self-only coverage, or at least $3,000 for family coverage. (These amounts in 2022 were $1,400 and $2,800, respectively.) For self-only coverage, the 2023 limit on deductible contributions will be $3,850 (up from $3,650 in 2022). For family coverage, the 2023 limit on deductible contributions will be $7,750 (up from $7,300 in 2022). Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits for 2023 will not be able to exceed $7,500 for self-only coverage or $15,000 for family coverage (up from $7,050 and $14,100, respectively, in 2022).

An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2023 of up to $1,000 (unchanged from the 2022 amount).

Employer contributions

If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan. It’s also excludable from an employee’s gross income up to the deduction limitation. Funds can be built up for years because there’s no “use-it-or-lose-it” provision. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.

Making withdrawals

HSA withdrawals (or distributions) can be made to pay for qualified medical expenses, which generally means expenses that would qualify for the medical expense itemized deduction. Among these expenses are doctors’ visits, prescriptions, chiropractic care and premiums for long-term care insurance.

If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65, or in the event of death or disability.

HSAs offer a flexible option for providing health care coverage and they may be an attractive benefit for your business. But the rules are somewhat complex. Contact us if you have questions or would like to discuss offering HSAs to your employees.

When new technologies emerge, it can take time for the general public to learn how they work. Non-fungible tokens, or NFTs, first appeared in 2014, yet many people are still confused about what they are and how to buy and store them. This gives criminals who understand the technology an advantage. In addition to money laundering, tax evasion and terrorist funding, NFTs are being used to commit fraud and steal from unsuspecting asset buyers. For example, more than $100 million in NFTs was stolen between July 2021 and July 2022, according to analytics company Elliptic.

Snapshot view

In their simplest form, NFTs are immutable digital assets — often related to art, sports, music, digital culture and avatars — linked to the blockchain, the digital ledger used to support cryptocurrencies. Many artists sell unique pieces in the form of NFTs. And one of the best known NFTs is Twitter founder Jack Dorsey’s first tweet, which was sold in 2021 for $2.9 million.

The blockchain enables NFT creators and owners to establish and maintain a digital certificate of authenticity. Most NFT buyers pay with cryptocurrency on the Ethereum network and use a digital wallet to store NFT assets. But there’s no guarantee NFTs will retain their value. When the buyer of the Jack Dorsey tweet tried to flip it in 2022, the highest bid he received was $277.

Where criminals come in

Not surprisingly, there’s plenty of opportunity for fraud on the NFT market. The following are some of the more common schemes buyers should watch out for:

Counterfeits. Some criminals create NFTs using intellectual property that doesn’t belong to them. When it becomes apparent an NFT is counterfeit, its resale value plummets. There’s no recourse for the buyer because cryptocurrency transactions provide sellers with anonymity.

“Free” assets. Scammers might offer a free NFT for signing up for a new website or service. To facilitate the NFT transfer, the mark is told to provide crypto wallet information. Criminals then use that information to steal the wallet’s contents.

Fake marketplaces. Here, fraudsters create websites that look like well-known NFT marketplaces. Users enter their login credentials and receive error messages. Behind the scenes, fraudsters use the newly acquired login data to raid the user’s real account and take control of their digital wallets.

Rug pulls. Dishonest creators might promote a forthcoming NFT via social media, generating interest that pushes up the asset’s bid price. Once buyers pay for the NFT, the promoters disappear, causing the digital asset to plunge in value.

Pump and dump. Similar to “rug pulls” and stock pump-and-dumps, this scheme drives up the price of otherwise valueless NFTs using hype and deception. Co-conspirators help boost prices by buying and selling the NFTs. But once a victim bites, the sellers and co-conspirators disappear and the buyer is left with a worthless asset.

Be careful

As with all financial transactions, exercise caution and skepticism when buying NFTs. Take time to scrutinize your transaction’s details, and if you’re at all suspicious about the legitimacy of the asset or seller, cancel it immediately. Contact us for more information about cryptocurrency and digital asset fraud.

The IRS recently finalized regulations that change the eligibility standards for the Affordable Care Act’s (ACA’s) premium tax credit. This is important news if your organization is an applicable large employer (ALE) under the ACA, or will be in 2023, and there’s any chance your health care coverage won’t be considered “affordable” and of “minimum value” next year.

The family glitch

Under the ACA, if an ALE doesn’t offer minimum essential coverage that’s affordable and provides minimum value to its full-time employees and their dependents, the employer may be subject to a penalty. This penalty is triggered if at least one of its full-time employees receives a premium tax credit for buying individual coverage through a Health Insurance Marketplace (commonly referred to as an “exchange”).

In 2022, employer-sponsored coverage is considered affordable if the required employee contribution for self-only coverage doesn’t exceed 9.5% of the employee’s household income. This threshold is indexed annually for inflation.

Historically, minimum value has been determined solely by reference to the employee’s coverage. Regulations provided that, if self-only minimum value coverage under an employer-sponsored plan is affordable for an employee, then the coverage is also affordable for a spouse with whom the employee is filing a joint return and any dependents who may be eligible to enroll in the employer’s coverage.

Accordingly, neither the spouse nor dependents would qualify for a premium tax credit — regardless of the required employee contribution for their coverage or whether their coverage provides minimum value. This has been sometimes referred to as “the family glitch.”

A new interpretation

The IRS has concluded that the ACA should be interpreted to require separate affordability determinations for employees and for their related individuals. Thus, as amended, the final regs provide that an eligible employer-sponsored plan is affordable for related individuals — thereby disqualifying them from a premium tax credit — only if the required employee contribution for family coverage doesn’t exceed 9.5% (or the indexed amount in future years) of household income.

For this purpose, family coverage means all employer plans that cover any related individual other than the employee, including a “self plus one” plan. The final regs also establish a separate minimum value rule for related individuals.

Ultimately, regardless of a plan’s cost, related individuals will no longer lose eligibility for the premium tax credit if the offered employer plan didn’t provide them affordable and minimum value coverage for the period in question. In addition, the IRS finalized a regulation that expands the definition of minimum value to require substantial coverage of inpatient hospital services and physician services.

Related IRS guidance was also issued allowing certain additional cafeteria plan election changes. Consult your benefits advisor for further details on these.

Some things remain the same

These final regs don’t affect the ACA’s information-reporting requirements, and safe harbors that employers may use to determine affordability are still available. Our firm can help you manage the tax and information-reporting complexities of offering health care coverage.

From an early age, my parents taught me to give back – especially my mom. She is one of the most caring and generous people; she always thinks of others before herself. I wanted to be a similar role model to my kids. So, when I was approached to serve as treasurer for the Mid-Michigan Children’s Museum, I readily agreed.

The Children’s Museum offers a safe and fun environment for children and their families to learn. They have many interactive exhibits, including a water table and air tunnel system. As a mom, I am always looking for different places to take my children, and we all enjoy going to the museum.

I am passionate about supporting the museum and its family-focused atmosphere. I am glad that, as treasurer, I can provide valuable insights by reviewing financial statements and budgets. Everyone I work with on the board is a leader in the Saginaw community, and I am proud to work for this great organization with them.

I give back because I want to help provide a safe place for kids to play and learn.

How much can you and your employees contribute to your 401(k)s next year — or other retirement plans? In Notice 2022-55, the IRS recently announced cost-of-living adjustments that apply to the dollar limitations for pensions, as well as other qualified retirement plans for 2023. The amounts increased more than they have in recent years due to inflation.

401(k) plans

The 2023 contribution limit for employees who participate in 401(k) plans will increase to $22,500 (up from $20,500 in 2022). This contribution amount also applies to 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan.

The catch-up contribution limit for employees age 50 and over who participate in 401(k) plans and the other plans mentioned above will increase to $7,500 (up from $6,500 in 2022). Therefore, participants in 401(k) plans (and the others listed above) who are 50 and older can contribute up to $30,000 in 2023.

SEP plans and defined contribution plans

The limitation for defined contribution plans, including a Simplified Employee Pension (SEP) plan, will increase from $61,000 to $66,000. To participate in a SEP, an eligible employee must receive at least a certain amount of compensation for the year. That amount will increase in 2023 to $750 (from $650 for 2022).

SIMPLE plans

Deferrals to a SIMPLE plan will increase to $15,500 in 2023 (up from $14,000 in 2022). The catch-up contribution limit for employees age 50 and over who participate in SIMPLE plans will increase to $3,500 in 2023, up from $3,000.

Other plan limits

The IRS also announced that in 2023:

The limitation on the annual benefit under a defined benefit plan will increase from $245,000 to $265,000. For a participant who separated from service before January 1, 2023, the participant’s limitation under a defined benefit plan is computed by multiplying the participant’s compensation limitation, as adjusted through 2022, by 1.0833.
The dollar limitation concerning the definition of “key employee” in a top-heavy plan will increase from $200,000 to $215,000.
The dollar amount for determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period will increase from $1,230,000 to $1,330,000, while the dollar amount used to determine the lengthening of the five-year distribution period will increase from $245,000 to $265,000.
The limitation used in the definition of “highly compensated employee” will increase from $135,000 to $150,000.

IRA contributions

The 2023 limit on annual contributions to an individual IRA will increase to $6,500 (up from $6,000 for 2022). The IRA catch-up contribution limit for individuals age 50 and older isn’t subject to an annual cost-of-living adjustment and will remain $1,000.

Plan ahead

Current high inflation rates will make it easier for you and your employees to save much more in your retirement plans in 2023. The contribution amounts will be a great deal higher next year than they’ve been in recent years. Contact us if you have questions about your tax-advantaged retirement plan or if you want to explore other retirement plan options.

Does your company use supplier finance programs to buy goods or services? If so, and if you must adhere to U.S. Generally Accepted Accounting Principles (GAAP), there will be changes starting next year. At that time, you must disclose the full terms of supplier finance programs, including assets pledged to secure the transaction. Here are the details of this new requirement under GAAP.

Gap in GAAP

Supplier finance programs — sometimes called “structured payables” and “reverse factoring” — are popular because they offer a flexible structure for paying for goods and services. In a traditional supplier arrangement, the buyer agrees to pay the supplier directly within, say, 30 to 45 days.

Conversely, with a supplier finance program, the buyer arranges for a third-party finance provider or intermediary to pay approved invoices before the due date at a discount from the stated amount. Meanwhile the buyer receives an extended payment date, say, 90 to 120 days, in exchange for a fee. This enables the buyer to keep more cash on hand. However, many organizations haven’t been transparent in disclosing in their financial statements the effects those programs have on working capital, liquidity and cash flows.

That’s the reason the Financial Accounting Standards Board recently issued Accounting Standard Update (ASU) No. 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. It will require buyers to disclose the key terms of supplier finance programs and where any obligations owed to finance companies have been presented in the financial statements.

More details

Supplier finance programs are a relatively new form of arrangement that continues to evolve and grow in popularity. Even after this ASU becomes effective, GAAP doesn’t provide any specific guidance on where to present the amounts owed by the buyers to finance companies. It’s up to the buyer to decide whether these obligations should be presented as accounts payable or short-term debt.

However, the updated guidance does require that in each annual reporting period, a buyer must disclose:

The key terms of the program, including a description of the payment terms and assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary, and
For the obligations that the buyer has confirmed as valid to the finance provider or intermediary 1) the amount outstanding that remains unpaid by the buyer as of the end of the annual period, 2) a description of where those obligations are presented in the balance sheet, and 3) a roll-forward of those obligations during the annual period, including the amounts of obligations confirmed and obligations subsequently paid.

In each interim reporting period, the buyer must disclose the amount of obligations outstanding that the buyer has confirmed as valid to the finance provider or intermediary as of the end of the period.

Ready, set, go

The new rules take effect for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on roll-forward information. That provision is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. Contact us for more information or help implementing the changes.

The IRS recently issued its 2023 cost-of-living adjustments for more than 60 tax provisions. With inflation up significantly this year, many amounts increased considerably over 2022 amounts. As you implement 2022 year-end tax planning strategies, be sure to take these 2023 adjustments into account.

Also, keep in mind that, under the Tax Cuts and Jobs Act (TCJA), annual inflation adjustments are calculated using the chained consumer price index (also known as C-CPI-U). This increases tax-bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than was the case with the consumer price index previously used, potentially pushing taxpayers into higher tax brackets and making various breaks worth less over time. The TCJA adopts the C-CPI-U on a permanent basis.

Individual income taxes

Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $725, to $1,450, depending on filing status, but the top of the 35% bracket increases by $22,950 to $45,900, again depending on filing status.

2023 ordinary-income tax brackets
Tax rate	Single	Head of household	Married filing jointly or surviving spouse	Married filing separately
10%	$0 – $ 11,000	$0 – $ 15,700	$0 – $ 22,000	$0 – $ 11,000
12%	$11,001 – $ 44,725	$15,701 – $ 59,850	$22,001 – $ 89,450	$11,001 – $ 44,725
22%	$44,726 – $ 95,375	$59,851 – $ 95,350	$89,451 – $190,750	$44,726 – $ 95,375
24%	$95,376 – $182,100	$95,351 – $182,100	$190,751 – $364,200	$95,376 – $182,100
32%	$182,101 – $231,250	$182,101 – $231,250	$364,201 – $462,500	$182,101 – $231,250
35%	$231,251 – $578,125	$231,251 – $578,100	$462,501 – $693,750	$231,251 – $346,875
37%	Over $578,125	Over $578,100	Over $693,750	Over $346,875

The TCJA suspended personal exemptions through 2025. However, it nearly doubled the standard deduction, indexed annually for inflation through 2025. For 2023, the standard deduction will be $27,700 (married couples filing jointly), $20,800 (heads of households), and $13,850 (singles and married couples filing separately). After 2025, standard deduction amounts are scheduled to drop back to the amounts under pre-TCJA law unless Congress extends the current rules or revises them.

Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions. But it might not help taxpayers who typically used to itemize deductions.

AMT

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2023, the threshold for the 28% bracket will increase by $14,600 for all filing statuses except married filing separately, which increased by half that amount.

2023 AMT brackets
Tax rate	Single	Head of household	Married filing jointly or surviving spouse	Married filing separately
26%	$0 – $220,700	$0 – $220,700	$0 – $220,700	$0 – $110,350
28%	Over $220,700	Over $220,700	Over $220,700	Over $110,350

The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2023 will be $81,300 for singles and $126,500 for joint filers, increasing by $5,400 and $8,400, respectively, over 2022 amounts. The inflation-adjusted phaseout ranges for 2023 will be $578,150–$903,350 (singles) and $1,156,300–$1,662,300 (joint filers). Amounts for married couples filing separately are half of those for joint filers.

Education and child-related breaks

The maximum benefits of certain education and child-related breaks generally remain the same for 2023. But most of these breaks are limited based on a taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within an applicable phaseout range are eligible for a partial break — and breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges will generally remain the same or increase modestly for 2023, depending on the break. For example:

The American Opportunity credit. For tax years beginning after December 31, 2020, the MAGI amount used by joint filers to determine the reduction in the American Opportunity credit isn’t adjusted for inflation. The credit is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns). The maximum credit per eligible student is $2,500.

The Lifetime Learning credit. For tax years beginning after December 31, 2020, the MAGI amount used by joint filers to determine the reduction in the Lifetime Learning credit isn’t adjusted for inflation. The credit is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns). The maximum credit is $2,000 per tax return.

The adoption credit. The phaseout ranges for eligible taxpayers adopting a child will also increase for 2023 — by $15,820, to $239,230–$279,230 for joint, head-of-household and single filers. The maximum credit will increase by $1,060, to $15,950 for 2023.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible to claim one on his or her tax return.

Gift and estate taxes

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2023, the amounts will be $12.92 million (up from $12.06 million for 2022).

The annual gift tax exclusion will increase by $1,000 to $17,000 for 2023.

Retirement plans

Nearly all retirement-plan-related limits will increase for 2023. Thus, depending on the type of plan you have, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2023:

Type of limitation	2022 limit	2023 limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans	$20,500	$22,500
Annual benefit limit for defined benefit plans	$245,000	$265,000
Contributions to defined contribution plans	$61,000	$66,000
Contributions to SIMPLEs	$14,000	$15,500
Contributions to IRAs	$6,000	$6,500
“Catch-up” contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans for those age 50 and older	$6,500	$7,500
Catch-up contributions to SIMPLEs	$3,000	$3,500
Catch-up contributions to IRAs	$1,000	$1,000
Compensation for benefit purposes for qualified plans and SEPs	$305,000	$330,000
Minimum compensation for SEP coverage	$650	$750
Highly compensated employee threshold	$135,000	$150,000

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if a taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
- For a spouse who participates, the 2023 phaseout range limits will increase by $7,000, to $116,000–$136,000.
- For a spouse who doesn’t participate, the 2023 phaseout range limits will increase by $14,000, to $218,000–$228,000.
For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2023 phaseout range limits will increase by $5,000, to $73,000–$83,000.

Taxpayers with MAGIs in the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $6,500 contribution limit for 2023 (plus $1,000 catch-up, if applicable, and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

For married taxpayers filing jointly, the 2023 phaseout range limits will increase by $14,000, to $218,000–$228,000.
For single and head-of-household taxpayers, the 2023 phaseout range limits will increase by $9,000, to $138,000–$153,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Crunching the numbers

With the 2023 cost-of-living adjustment amounts soaring higher than 2022 amounts, it’s important to understand how they might affect your tax and financial situation. We’d be happy to help crunch the numbers and explain the best tax-saving strategies to implement based on the 2023 numbers.

Shannon Champagne, CPA, was recently promoted to manager. Let’s learn about Shannon and how her career has progressed since joining Yeo & Yeo.

Tell me about your career path.

I joined Yeo & Yeo as an intern during my last semester of college in January 2018. I was offered a full-time position shortly after. I blinked, and now I’ve been here for nearly five years. I passed the CPA exam and worked through the staff, senior, and now onto manager levels. It could not have been possible without my mentors here at Yeo & Yeo.

What do you enjoy most about your career with Yeo & Yeo?

The people are unmatched. I have built some great friendships with coworkers, and I have the best mentors. I truly feel cared about and know I can go into a partner’s office with a question or just to chat about the weekend. I have role models I trust who have set me up for success, and I know that I will be able to continue to succeed in my career because of that. As a member of the Assurance Service Line, I also enjoy meeting different clients and guiding them through the audit process.

How has the firm supported your work-life presence?

One of the best things about Yeo & Yeo is the culture that encourages a work-life balance. The flexibility is great and has allowed me to do the things I love, like traveling, golfing and spending time with my family and my pride and joy, a three-year-old golden retriever.

What advice would you give to an aspiring accountant progressing in their career?

Be willing to learn, soak up all the knowledge you can, listen to conversations around you and ask questions. Focus on your communication skills. I never thought that, as an accountant, I would be doing as much talking and communicating as I am. We interact with clients and colleagues daily, answering client questions, giving feedback on staff performance and much more, so it is crucial to know how to communicate effectively.

What makes being an accountant fun?

The people and the culture of Yeo & Yeo. Our audit department does several team-building events throughout the year, like golf leagues and axe throwing. It’s fun to build relationships with coworkers outside of a work setting.

Shannon is a member of the firm’s Nonprofit Services Group. Her areas of expertise include audits for nonprofits, school districts and healthcare organizations. She holds a Bachelor in Professional Accountancy from Saginaw Valley State University. Shannon is a member of the Saginaw Young Professionals Network and Women in Leadership Great Lakes Bay Region. She is based in the firm’s Saginaw office.

Roselynn Sharman was recently promoted to Outsourced Business Operations Manager. Let’s learn about Rose and her insights on a career in accounting.

Tell me about your career path.

I joined the firm in 2017 as a staff accountant in the Consulting Department. I took an interest in payroll processing and payroll taxes, as well as providing QuickBooks consulting services. I also took on a role in Outsourced Accounting, providing clients with back-office accounting and HR consulting services. I am now transitioning into the Outsourced Services Operations Manager role, where I will continue to serve clients in outsourced accounting, human resource services, payroll tax reporting, and training and mentoring new staff.

What do you enjoy most about your career with Yeo & Yeo?

I enjoy the variety of clients I work with and learning about their industry challenges so I can best serve them. I also enjoy the family atmosphere and flexibility Yeo & Yeo delivers to its employees.

How has the firm supported your work-life presence?

I love how family-focused Yeo & Yeo is. I appreciate how flexible everyone is, and the ability to work remotely has really helped me to take time for my family and balance that with my career.

What advice would you give to an aspiring accountant progressing in their career?

Try to find an area within accounting that you enjoy and focus on specializing in it. It will help you become a trusted advisor, and it will be very rewarding to have knowledge and expertise in a specific area.

What makes being an accountant fun?

Not a single day is the same in accounting. I enjoy having a variety of projects to work on and clients to serve.

Rose’s areas of expertise include business advisory services, outsourced accounting and payroll tax reporting. She is a member of the Valley Society of Human Resources Management. In the community, she serves as board treasurer of Major Chords for Minors and board treasurer for the Lutheran Women’s Missionary League at St. Lorenz Lutheran Church. She is based in the firm’s Saginaw office.

Is your business ready to take its health care benefits to the next level? One way to do so is to supplement group health coverage with an Excepted Benefit Health Reimbursement Arrangement (EBHRA). Here are some pertinent details.

Rules to follow

Under a traditional HRA, the employer owns and funds the tax-advantaged account up to any chosen amount. However, traditional HRAs are subject to mandates under the Public Health Service Act (PHSA), which was amended by the Affordable Care Act (ACA).

Because employer contributions to EBHRAs are limited, these accounts qualify as “excepted benefits” and aren’t subject to the PHSA mandates. EBHRAs can be offered by companies or other employers of any size, but they must follow certain rules, such as:

Limited-dollar benefits. In 2022, up to $1,800 can be newly allocated to each participant per plan year to reimburse eligible medical expenses. This amount will rise to $1,950 for plan years beginning in 2023 — the first time the limit has increased since these arrangements were launched in 2020.

Carryovers, which are permitted under both traditional HRAs and EBHRAs, are disregarded when applying the limit. Amounts made available under other HRAs or account-based plans provided by the employer for the same period will count against the dollar limit unless those arrangements reimburse only excepted benefits.

Qualified reimbursements. An EBHRA may reimburse any qualifying, out-of-pocket medical expense other than premiums for individual health coverage, Medicare or non-COBRA group coverage. Premiums for coverage consisting solely of excepted benefits can be reimbursed, as can premiums for short-term limited-duration insurance (STLDI). However, under certain circumstances, federal agencies may prohibit small employer EBHRAs in particular states from allowing STLDI premium reimbursement.

Required other coverage. The employer must make other nonexcepted, non–account-based group health plan coverage available to EBHRA participants for the plan year. Thus, participants in the EBHRA couldn’t also be offered a traditional HRA.

Uniform availability. An EBHRA must be made available under the same terms and conditions to all similarly situated individuals, as provided by applicable regulations.

HIPAA and ERISA

An EBHRA’s status as an excepted benefit means only that it’s not subject to the ACA’s PHSA mandates or the portability and nondiscrimination rules of the Health Insurance Portability and Accountability Act (HIPAA).

However, EBHRAs are subject to HIPAA’s administrative simplification requirements. This includes the law’s privacy and security rules unless an exception applies — such as for certain small self-insured, self-administered plans.

And, like traditional HRAs, EBHRAs are subject to the Employee Retirement Income Security Act (ERISA) unless an exception applies — such as for church or governmental plans. Thus, reimbursement requests must be handled in accordance with ERISA’s claim and appeal procedures; EBHRA participants must receive a summary plan description; and other ERISA requirements apply.

Finally, EBHRAs must comply with nondiscrimination rules. These generally prohibit discrimination in favor of highly compensated individuals regarding eligibility and which benefits are offered.

Various factors

When deciding whether to offer an EBHRA at your business, you’ll need to consider various factors. These include the impact on existing benefits, which employees will be covered, how much you’ll contribute and which expenses you’ll reimburse. We can help you assess the costs, advantages and risks of this or any other employee benefit you’re considering.

Derrick Friend, CPA, was recently promoted to manager. Let’s learn about Derrick and how his career has progressed since joining Yeo & Yeo.

Tell me about your career path.

I joined the firm in 2016 after returning to school for my master’s degree. I was immediately given opportunities to prepare a wide variety of tax returns and received a great amount of on-the-job training. Over the next few years, I narrowed my niche to state and local tax and 1040 returns. Two years ago, I joined the 1040 tax group, where I specialize in reviewing a high volume of individual tax returns.

What do you enjoy most about your career with Yeo & Yeo?

The people at Yeo & Yeo are great to work with. My mentors and peers have helped me grow my knowledge and career. I enjoy working with clients, too, and helping them navigate their unique tax situations.

How has the firm supported your work-life presence?

Yeo & Yeo provides a very flexible work schedule, even during the busy season. The Hybrid Work Plan, allowing for days to work from home, has been a huge benefit to our family. It makes raising four kids with a working spouse a lot less stressful.

What advice would you give to an aspiring accountant progressing in their career?

Take advantage of the opportunities provided to you and get a feel for what you enjoy doing, then focus on that as your career progresses.

What makes being an accountant fun?

A tax return is like a puzzle, and it’s oddly satisfying when you get all the pieces together. Plus, I like helping people save money through tax-smart strategies.

Derrick specializes in tax planning and preparation with an emphasis on individual taxes. He holds a Master of Accountancy from Walsh College. He joined the firm in 2016 and is based in the Auburn Hills office. In the community, Derrick volunteers at Linden Community Schools.

Major Chords for Minors (MCFM) was created and founded to provide one-on-one music lessons on piano, guitar and drums to at-risk kids whose families cannot afford to give their children lessons. Their mission is to build better children through music and create a community where all children have access to growth through music and mentorship, regardless of their families’ economic circumstances. The program also has a performance band that plays at various events throughout the community, including Party on McCarty, the Saginaw Art Fair, and Friday Night Live.

I love music and playing music. I have been a band kid since middle school and play clarinet, guitar, drums, piano and accordion. I think that being in band gave me a sense of belonging in school and taught me the value of having to practice something to get better at it. When I heard about the opportunity to join the board of MCFM, I decided to get involved. I loved the organization’s mission and purpose. Playing an instrument is expensive so having the opportunity to have free lessons is incredible.

I joined the organization in April 2021, and I am the current board treasurer. Seeing the dedication of the founders, director, instructors and support staff is amazing. They all have a great passion for music but also want to see kids be successful and have the opportunity to grow through music.

I give back because I want all kids to have the same opportunities to learn and share their love of music and the arts.

The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $160,200 for 2023 (up from $147,000 for 2022). Wages and self-employment income above this threshold aren’t subject to Social Security tax.

Basics about Social Security

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers. One is for the Old Age, Survivors and Disability Insurance program, which is commonly known as Social Security. The other is for the Hospital Insurance program, which is commonly known as Medicare.

There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2023, the FICA tax rate for employers is 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2022).

2023 updates

For 2023, an employee will pay:

6.2% Social Security tax on the first $160,200 of wages (6.2% of $160,200 makes the maximum tax $9,932.40), plus
1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return).

For 2023, the self-employment tax imposed on self-employed people is:

12.4% Social Security tax on the first $160,200 of self-employment income, for a maximum tax of $19,864.80 (12.4% of $160,200), plus
2.9% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a return of a married individual filing separately), plus
3.8% (2.9% regular Medicare tax plus 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return).

Employees with more than one employer

What happens if one of your employees works for your business and has a second job? That employee would have taxes withheld from two different employers. Can the employee ask you to stop withholding Social Security tax once he or she reaches the wage base threshold? Unfortunately, no. Each employer must withhold Social Security taxes from the individual’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employee will get a credit on his or her tax return for any excess withheld.

Looking forward

One of the best ways to tackle financial statement fraud is to conduct periodic surprise audits. In fact, surprise audits were associated with at least a 50% reduction in both median loss and median duration, according to Occupational Fraud 2022: A Report to the Nations published by the Association of Certified Fraud Examiners (ACFE) earlier this year.

Surprisingly, however, less than half of respondents (42%) conduct surprise audits. So, numerous organizations have an opportunity to add this highly effective tool to their antifraud arsenal.

Cost of financial misstatement

Financial statement fraud happens when “an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports.” Examples include a salesperson who prematurely reports sales to boost commissions or a controller who books fictitious revenue to hide theft — or lackluster financial performance.

These types of schemes can be costly. The ACFE’s survey found that the median loss from misstated financial results is roughly $593,000.

Element of surprise

Routine financial statement audits don’t provide an absolute guarantee against financial misstatement and other fraud schemes. In fact, external audits were the primary detection method in just 4% of the cases reported in the ACFE study. Although a financial statement audit serves as a vital role in corporate governance, the ACFE advises that it shouldn’t be relied upon as an organization’s primary antifraud mechanism.

By comparison, a surprise audit more closely examines the company’s internal controls that are intended to prevent and detect fraud. Here, auditors aim to identify any weaknesses that could make assets vulnerable and to determine whether anyone has already exploited those weaknesses to misappropriate assets. Auditors show up unexpectedly — usually when the owners suspect foul play, or randomly as part of the company’s antifraud policies — to review cash accounts, bank statements, expense reports, payroll, purchasing, sales and other areas for suspicious activity.

The element of surprise is critical. Announcing an upcoming audit gives wrongdoers time to cover their tracks by shredding (or creating false) documents, altering records or financial statements, or hiding evidence.

Perpetrators are likely to have paid close attention to how previous financial statement audits were performed — including the order in which the auditor proceeded. But, in a surprise audit, the auditor might follow a different process or schedule. For example, instead of beginning audit procedures with cash, the auditor might first scrutinize receivables or vendor invoices. Surprise audits focus particularly on high-risk areas such as inventory, receivables and sales. In the course of performing them, auditors typically use technology to conduct sampling and data analysis.

Big benefits

In the ACFE survey, the median loss for organizations that conducted surprise audits was $75,000, compared with a median loss of $150,000 for those organizations that didn’t perform this measure — a 50% difference. This discrepancy is no surprise in light of how much longer fraud schemes went undetected in organizations that failed to conduct surprise audits. The median duration in those organizations was 18 months, compared with only nine months for organizations that performed surprise audits.

Such audits can have a strong deterrent effect as well. While surprise audits, by definition, aren’t announced ahead of time, companies should state in their fraud policies that random tests will be conducted to ensure internal controls aren’t being circumvented. If this isn’t enough to deter would-be thieves or convince current perpetrators to abandon their schemes, simply seeing guilty co-workers get swept up in a surprise audit should do the trick.

Additional investigation

As with financial statement audits, an auditor’s finding of suspicious activity in a surprise audit will likely require additional forensic investigation. Depending on the type of scheme, an auditor might conduct interviews with suspects and possible witnesses, scour financial statements and records, and perform in-depth data analysis to get to the bottom of the matter. Contact us to schedule a surprise audit for your organization.

On October 13, the U.S. Department of Labor (DOL) published a proposed rule to revise existing guidance on how to determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA).

The DOL intends to rescind an earlier rule and replace it with an analysis for determining employee vs. independent contractor status that’s more consistent with the FLSA as interpreted by longstanding judicial precedent.

Earlier rule

The earlier rule was published on January 7, 2021, by the DOL under the Trump administration. It addressed the distinction between employees and independent contractors under the FLSA using two core factors of the economic realities test:

The nature and degree of the worker’s control over the work, and
The worker’s opportunity for profit or loss based on initiative and/or investment.

Under the 2021 rule — which took effect on March 8, 2021, and remains in effect — these factors weigh more than other considerations when determining whether a worker is an employee or independent contractor.

Opponents have argued that the 2021 rule runs counter to established court rulings on the matter. The DOL under the current Biden administration issued rules in 2021 to delay and withdraw the rule, but they were vacated by a federal district court on March 14, 2022.

Proposed rule

The DOL said that its newly proposed rule would reduce the risk that employees are misclassified as independent contractors and provide added certainty for employers that hire independent contractors or might consider doing so.

The agency further stated that it issued the proposed rule because it believes the 2021 rule doesn’t fully comport with the FLSA’s text and purpose as interpreted by courts, and it departs from decades of case law applying the “economic reality” test.

The proposed rule, according to the DOL, doesn’t use the two core factors. Rather, it aims to return to a “totality of the circumstances” analysis of the economic reality test. Under this analysis, the factors don’t have a predetermined weight and are considered in view of the economic reality of the whole activity.

Thereby, the proposed rule provides multiple factors to be considered when determining worker status. These include:

Whether investments by a worker are capital or entrepreneurial in nature,
The nature and degree of control an employer has over the working relationship, and
Whether work performed is an integral part of the employer’s operations.

The DOL notes that no single factor under the proposed rule will be dispositive, and additional factors may be considered.

Opposition rising

Interested parties have until November 28, 2022, to submit comments on the proposed rule. As of this writing, several business groups — including the National Retail Federation and the National Association of Home Builders — have voiced opposition to it. They’ve cited issues such as the likelihood of “endless litigation,” insufficient time to retrain HR staff and lack of clarity in the rule itself. Contact us for further information on employee classification and help with compliance.

There’s no shortage of online do-it-yourself (DIY) tools that promise to help you create an “estate plan.” But while these tools can generate wills, trusts and other documents relatively cheaply, they can be risky except in the simplest cases. If your estate is modest in size, your assets are in your name alone, and you plan to leave them to your spouse or other closest surviving family member, then using an online service may be a cost-effective option. Anything more complex can expose you to a variety of costly pitfalls.

Your plan’s details count

Part of the problem is that online services can help you create individual documents — the good ones can even help you comply with applicable laws, such as ensuring the right number of witnesses to your will — but they can’t help you create an estate plan. Putting together a plan means determining your objectives and coordinating a collection of carefully drafted documents designed to achieve those objectives. And in most cases, that requires professional guidance.

For example, let’s suppose Ken’s estate consists of a home valued at $500,000 and a mutual fund with a $500,000 balance. He uses a DIY tool to create a will that leaves the home to his daughter and the mutual fund to his son. It seems like a fair arrangement. But suppose that by the time Ken dies, he’s sold the home and invested the proceeds in his mutual fund. Unless he amended his will, he will disinherit his daughter. An experienced estate planning advisor would have anticipated such contingencies and ensured that Ken’s plan treated both children fairly, regardless of the specific assets in his estate.

Professional experience vs. technical expertise

DIY tools also fall short when a decision demands a professional’s experience rather than mere technical expertise. An online service makes it easy to name a guardian for your minor children, for example, but it can’t help you evaluate the many characteristics and factors that go into selecting the best candidate.

We’d be pleased to help answer any of your estate planning questions and to help draft your documents.

Yeo & Yeo is pleased to announce the promotion of three professionals.

Shannon Champagne, CPA, has been promoted to Manager. She is a member of the firm’s Nonprofit Services Group. Her areas of expertise include audits for nonprofits, school districts and healthcare organizations. Champagne holds a Bachelor in Professional Accountancy from Saginaw Valley State University. She is a member of the Saginaw Young Professionals Network and Women in Leadership Great Lakes Bay Region. She is based in the firm’s Saginaw office. As a member of the firm’s Assurance Service Line, Champagne enjoys meeting different clients and guiding them through the audit process.

Derrick Friend, CPA, has been promoted to Manager. He specializes in tax planning and preparation with an emphasis on individual taxes and holds a Master of Accountancy from Walsh College. He joined the firm in 2016 and is based in the Auburn Hills office. In the community, Friend volunteers at Linden Community Schools. As a member of the firm’s Tax Service Line, he enjoys helping clients save money through tax-smart strategies.

Roselynn Sharman has been promoted to Outsourced Business Operations Manager. Her areas of expertise include business advisory services, outsourced accounting and payroll tax reporting. She is a member of the Valley Society of Human Resources Management. In the community, she serves as board treasurer of Major Cords for Minors and board treasurer for the Lutheran Women’s Missionary League at St. Lorenz Lutheran Church. Sharman enjoys that not a single day is the same in accounting, and she appreciates having a variety of projects to work on and clients to serve. She is based in the firm’s Saginaw office.

When a company’s leadership engages in strategic planning, growing the business is typically at the top of the agenda. This is as it should be — ambition is part and parcel of being a successful business owner. What’s more, in many industries, failing to grow could leave the company at the mercy of competitors.

However, unbridled growth can be a dangerous thing. A business that expands too quickly can soon run out of working capital. And the very leaders who pushed the business to grow beyond its means might find themselves spread too thin and burned out.

That’s why, as your company lays out its strategic plans for the coming year(s), it’s important to focus on manageable growth.

A common scenario

Among the biggest challenges that many “high-growth” businesses face is finding enough financing for their expansion plans. Their owners often think, “If we want to double sales, we’ve got to double assets.” Buying equipment, hardware, software, raw materials and other assets usually requires debt or equity financing — which can be good for a lender but perilous for a borrower.

Overzealous asset acquisition strategies can cause repayment problems if cash flow projections fall short. There’s often a delay between:

When a growing company buys inventory, makes products or provides services, and pays employees (cash outflows), and
When it receives customer payments (cash inflows).

The faster the growth, the bigger the gap. Businesses typically fund the shortfall with a credit line. And as they take on more and more debt, loan repayments can eventually consume most or even all the company’s cash flows.

Warning signs

It’s easy to get swept up in the whirlwind of rapid growth, but it’s not inevitable. You and your leadership team can watch for common warning signs that you may be at risk of becoming a victim of your own success. These include:

An increasing debt-to-equity ratio. High-growth businesses tend to burn through cash at an alarming rate, if given the opportunity. If your strategic plan will likely drive you to consume an entire credit line, and then ask for more, watch out. Closely monitor your ratio of debt to equity. A consistent upward trend is cause for concern — even if it’s within loan restrictions.

Quickly declining profit margins. Leadership teams overly obsessed with growth tend to focus on the top line and lose sight of expenses. Low prices and an undisciplined approach to taking on any and every customer can further erode profits.

Rising complaints. High-growth companies are often inclined to overlook quality control and fall short on backend obligations, such as warranties and customer service. This typically leads to customer complaints. Meanwhile, cash shortfalls may lead to delayed payments to vendors and lenders. At some point, these parties will likely start complaining as well.

Do the managing

Make no mistake: growing your business is an important and, in many cases, necessary goal. But if you don’t manage that growth, it could manage you — into a crisis. Contact us for help building reasonable financial objectives into your strategic planning process.

Mitigating the adverse effects of climate change is one of the primary targets of the recently enacted Inflation Reduction Act (IRA). To that end, the legislation is packed with tax incentives, including the significant expansion and extension of two tax deductions for energy-efficient construction. The changes to the Section 179D deduction for commercial buildings and the Section 45L credit for residential homes increase their potential value and make them available to more taxpayers than ever before.

Sec. 179D deduction

The Sec. 179D deduction has been around since 2006 but was made permanent only recently, by the Consolidated Appropriations Act. The IRA adds changes that substantially boost the size of the potential deduction and expand the pool of eligible taxpayers.

Pre-IRA, the deduction generally was limited to the owners of commercial properties or residential properties that are four stories or higher. The deduction also could be assigned to “designers” (including architects and engineers) of buildings owned by government entities.

To claim the deduction, a taxpayer was required to show a 50% reduction in energy and power costs. The deduction amount was up to 63 cents per square foot for each of three eligible systems (HVAC and hot water, interior lighting and building envelope). The maximum deduction was $1.88 per square foot (adjusted for inflation). Taxpayers could get a partial deduction if they couldn’t show the requisite savings in all three systems and the deduction could be claimed only once per property.

The IRA keeps these requirements intact for the remainder of 2022 but makes some major changes starting on January 1, 2023. For starters, the qualification threshold drops to 25% energy savings, with a base deduction of 50 cents per square foot.

If, however, the project satisfies prevailing wage and apprenticeship requirements for laborers and mechanics, you can qualify for the so-called “bonus” deduction of up to $2.50 per square foot. This deduction amount increases on a sliding scale:

If you qualify for the bonus, your deduction increases by 10 cents for each percentage point of energy savings above 25%, up to a 50% reduction, maxing out at $5 per square foot.
If you don’t qualify for the bonus, your deduction increases by 2 cents for each percentage point of energy savings beyond 25%, again up to 50%, for a maximum deduction of $1 per square foot.

The IRA brings other changes, too. For example, it eliminates the availability of partial deductions, and it allows all tax-exempt entities — not just government entities — to assign their deductions to designers.

The law also revises the standard for determining the amount of energy savings. Currently, the determination is made using the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) standard in effect two years prior to the start of the construction. Under the IRA, energy savings will be evaluated under the ASHRAE standard from four years prior to completion of construction.

In addition, the deduction is no longer “one and out.” You can claim it again every three tax years (four years for buildings that are owned by government or tax-exempt entities) for subsequent energy-efficient improvements.

And the IRA creates a new alternative deduction path for renovation projects. To be eligible, you must have a qualified retrofit plan and reduce the building’s energy use “intensity” by at least 25% (as opposed to annual energy and power costs) compared to before the retrofit. Qualifying taxpayers can claim the retrofit credit in the qualifying final certification year. The deduction amount can’t exceed the total adjusted basis of the retrofit property placed in service.

Sec. 45L credit

The Sec. 45L credit also first became available in 2006, but it expired at the end of 2021. The credit applied to “eligible contractors” that built energy-efficient single-family, manufactured and low-rise multifamily residences. To qualify, the residences had to be 50% more energy-efficient than a standard dwelling unit that complies with the 2006 International Energy Conservation Code standards. The maximum credit was $2,000 per unit, with no partial credit permitted.

The IRA revived the Sec. 45L credit, extending it in its original form for qualifying buildings placed in service in 2022, with the same eligibility requirements and credit amount. Beginning in 2023 and running through 2032, though, the credit will be available for residential properties of any size, including those that exceed three floors. This means that multifamily properties that are four or more floors will be able to qualify for both 179D and 45L.

However, the IRA imposes more stringent standards for determining energy savings. Properties must satisfy the U.S. Department of Energy’s Energy Star Manufactured New Homes Program or Energy Star Residential New Construction Program requirements.

The base credit amount changes in 2023, too. It increases to $2,500 per unit for single-family Energy Star homes and falls to only $500 per unit for Energy Star multifamily homes. But taxpayers might qualify for much larger credits by fulfilling additional criteria.

If a property meets the requirements for the even stricter Zero Energy Ready Home program, the credit jumps to $5,000 per single-family unit and $1,000 per unit for multifamily homes. The credit for an Energy Star multifamily property goes up to $2,500 per unit if the property satisfies prevailing wage requirements, or $5,000 per unit if it’s also Zero Energy Ready.

Make the most of the IRA

The Sec. 179D and 45L incentives are only the tip of the iceberg when it comes to the IRA’s energy-related tax provisions affecting both personal and business property. We can help you leverage all of the applicable opportunities to minimize your federal tax liability.

Businesses can provide benefits to employees that don’t cost them much or anything at all. However, in some cases, employees may have to pay tax on the value of these benefits.

Here are examples of two types of benefits which employees generally can exclude from income:

A no-additional-cost benefit. This involves a service provided to employees that doesn’t impose any substantial additional cost on the employer. These services often occur in industries with excess capacity. For example, a hotel might allow employees to stay in vacant rooms or a golf course may allow employees to play during slow times.
A de minimis fringe benefit. This includes property or a service, provided infrequently by an employer to employees, with a value so small that accounting for it is unreasonable or administratively impracticable. Examples are coffee, the personal use of a copier or meals provided occasionally to employees working overtime.

However, many fringe benefits are taxable, meaning they’re included in the employees’ wages and reported on Form W-2. Unless an exception applies, these benefits are subject to federal income tax withholding, Social Security (unless the employee has already reached the year’s wage base limit) and Medicare.

Court case provides lessons

The line between taxable and nontaxable fringe benefits may not be clear. As illustrated in one recent case, some taxpayers get into trouble if they cross too far over the line.

A retired airline pilot received free stand-by airline tickets from his former employer for himself, his spouse, his daughter and two other adult relatives. The value of the tickets provided to the adult relatives was valued $5,478. The airline reported this amount as income paid to the retired pilot on Form 1099-MISC, which it filed with the IRS. The taxpayer and his spouse filed a joint tax return for the year in question but didn’t include the value of the free tickets in gross income.

The IRS determined that the couple was required to include the value of the airline tickets provided to their adult relatives in their gross income. The retired pilot argued the value of the tickets should be excluded as a de minimis fringe.

The U.S. Tax Court agreed with the IRS that the taxpayers were required to include in gross income the value of airline tickets provided to their adult relatives. The value, the court stated, didn’t qualify for exclusion as a no-additional-cost service because the adult relatives weren’t the taxpayers’ dependent children. In addition, the value wasn’t excludable under the tax code as a de minimis fringe benefit “because the tickets had a value high enough that accounting for their provision was not unreasonable or administratively impracticable.” (TC Memo 2022-36)

You may be able to exclude from wages the value of certain fringe benefits that your business provides to employees. But the requirements are strict. If you have questions about the tax implications of fringe benefits, contact us.