Author: Greg Miner

KT Insights
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Tipping in America Today

In my youth, the phrase that boosted profits was, “Would you like fries with that?” Today, with the swivel of a tablet, we are asking our customers, “Would you like to add a tip?”

According to Restaurant Business Magazine, consumers are now not only tipping more, but also more often and in places they were never expecting to before. Encouraging tipping at your business can be a tactic to increase employment retention and compensation, but with a larger volume of tipped employees, employers need to be up to date on all employment and reporting requirements when tips are involved.

If you have not already, be sure to read Sarah Davis’s article in the summer KT Addition to get the full scoop on “Properly Reporting Tips.”

As a CPA discussing tips, the first thing I think of is the number one most missed tax credit by food and beverage services of all sizes – the TIP credit. Depending on your payroll structure, the TIP credit calculation can be quite complicated, however it is always worth the effort.

But why is the TIP credit so important?

Employers must remit Social Security and Medicare tax on all reported tips, meaning the employer is paying 7.65% tax on all tips their employees receive. For example, if your employees reported $100,000 in tips that would generate $7,650 in additional payroll tax expense. This is a sizable expense and why the TIP credit comes in handy.

Any excess tips that are not deemed as wages are eligible for TIP credit. A common situation is that 100% of the tips would be considered eligible for the TIP credit since the base wage covered the minimum wage. In this instance, the employer would receive a tax credit for the 7.65% tax previously remitted.

The downside of the TIP credit is the credit is considered nonrefundable, meaning the credit can only reduce your income tax liability and will not be refunded. No need to worry, though. If you have a lower-profit year, any unused TIP credit will carry over to the following year to offset future income tax liabilities.

If you are not familiar with the TIP credit, be sure to reach out to your KT tax advisor!

October 1, 2024
| Greg Miner
KT Insights
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This Town is Beautiful!

Tax Partner Greg Miner’s experience with Leadership Spearfish

As a recent graduate of the Spearfish Chamber of Commerce’s Leadership Spearfish (LS) program, I have taken time to reflect on my experiences and lessons learned over the past nine months. This program has been an eye-opening experience for me, learning about the community I live in and serve alongside my LS class. From learning about the literal birds and bees at Jensen’s ranch to the finer points of firehose bowling, or where those with less means can receive free medical care, we received an experience that many in our community do not.

Fun Fact

The City of Spearfish operates a hydroelectric plant. Without this plant, Spearfish Creek would be dry nine months of the year. It is perhaps little things like this that are magic to the public. But it is not enough to just experience our city, we must give back to it, too.

“Why didn’t they teach us X in school?”

We have all said this before. Thankfully, my LS class had the opportunity to teach some things in our schools that had not been taught before, reality. At some point reality hits us. Needing to choose between paying rent and fixing your car or having the sweetest ride on the block but having rice and beans for dinner. Once we venture out on our own, these are the choices that we make daily.

We had the opportunity to hold a Reality Fair for 50 high school seniors. Each student would pick a career and receive the associated salary, credit score, consumer debt, and everything else life throws at us. From here students had to make hard choices about all of life’s things like housing, transportation, and even simple items like cell phones. Towards the end of the fair, we started to see the lightbulbs come on as the choices became more and more challenging with the limited resources provided. I cannot wait to come back next year and work with the next group of seniors.

During LS I met over 100 community leaders and experienced the community at all levels. We all know that Spearfish is beautiful on the outside, but at the conclusion of LS, I can attest that Spearfish is quite beautiful on the inside, too!

Learn more about Greg

May 23, 2024
| Greg Miner
KT Insights
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How can your dealership deduct underwater inventory in 2023?

We all remember how used car prices plummeted in December 2022. Were you left wishing you had a way to deduct that loss now to help offset record profits?

The IRS does allow for the lower of cost or market inventory valuation. This would generally apply to used vehicles. If you are closing out the year and left with vehicles that will be sold at a loss next year – via this method, you can deduct those losses in the current year rather than waiting for the auto to sell.

If this sounds interesting to you, give your KT tax advisor a call today!

January 3, 2024
| Greg Miner
KT Insights
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New Car Dealers: EV Days on Market Got You Down?

With EVs representing just 8% market share of all domestic counterparts; sales and a significantly higher 5-year cost of ownership as compared to their gas-powered counterparts, it is no wonder why days on the market are double to triple comparable gas-powered models.

Beginning in 2024, the IRS has a tool that may make EVs more affordable. Starting in January, new car dealerships will be able to claim up to a $7,500 clean vehicle tax credit on behalf of the buyer and the dealership can provide the buyer with a down payment credit on their purchase.

This gets cash into the buyer’s pocket for the tax credit at the time of purchase rather than waiting until they file their tax return next year.

More information and a link to register here: Register your dealership to enable credits for clean vehicle buyers | Internal Revenue Service (irs.gov)

December 28, 2023
| Greg Miner
KT Insights
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Car Dealership New IRS Reporting Requirement Due January 15th

Sellers of new and used vehicles that qualify for a clean vehicle tax credit will be required to report information to the IRS on all qualifying vehicles sold. The IRS will use this information to validate tax credits claimed by buyers of vehicles.

The first reports are required to be filed by January 15th, 2024, for qualifying vehicles sold in 2023.

More information on qualifying vehicles and registration link here: Clean Vehicle Credit Seller or Dealer Requirements | Internal Revenue Service (irs.gov)

December 19, 2023
| Greg Miner
KT Insights
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The Value of Extending a Tax Return

Imagine a scenario where the lottery jackpot is over 1 billion dollars and your goal is to win.  Lucky for you, you can borrow the DeLorean for the weekend and travel into the future to get the winning numbers and win the big prize. Too bad Uncle Sam does not hand out DeLoreans. The good news is Uncle Sam does allow for 6 months of time travel each year. The IRS allows each business and individual to file for an extension on their income tax returns. These extensions have a lot of great benefits in addition to having more time to file. Buckle up in your DeLorean as we drive into income tax return time travel.

What is a tax return extension? Individuals and businesses can file for an automatic extension of time to file their federal income tax returns. In most cases an extension provides an additional six months to file. This allows you extra time to file without risk of late filing penalties. State taxing authorities also allow for extensions; however, the amount of additional time may not be the same as federal forms.

It is important to understand that paying tax due and filing tax returns are two separate issues. The extension only provides additional time to file. Any tax owing must be paid by the original due date or else you will owe late payment penalties and interest.  However, the true benefit of an extension is more than just having more time to file.

In the public accounting profession, we hear many clients say they don’t want to file for an extension. They generally have practical reasons for not wanting to file an extension including: checking items off the to-do list, bank loan compliance, or simply wanting to receive their tax refund. We also hear some reasons that are not valid concerns like fear of IRS audit or incurring additional penalties for doing an extension. To calm those fears, there is no correlation between filing an extension and IRS audit rates—as long as the taxpayer has paid their taxes at the time of the extension. We understand that it feels good to get that refund in hand or check something off the list, but is filing without an extension the best tax strategy?   

The three most common benefits from filing an extension are understanding future tax law developments, changes in the economic performance of your business, and reduction of errors.  When business income tax returns are prepared, we generally have several elections and tax credits to consider and evaluate. The elections can be as simple as choosing how much depreciation to take or as complicated as changing when revenue or expenses are recognized. In July, we may have a better understanding what the future holds as compared to March. Empowered with this extra information, tax professionals can evaluate the long-term impacts of these elections and find opportunities to lower overall tax. The nation’s current tax structure forces most filers to file in the first portion of the year. This may not sound bad. However, many errors can be generated due to trying to meet tight deadlines and overworked tax professionals. Extensions also allow tax professionals to spread their work out and spend more time focusing on each individual return and the big picture tax plan.  

Another benefit of an extension is that it also extends the three-year window in which amended returns can be filed.

Traditionally, if you were to amend your personal tax return and claim a refund, you have three years to complete the refund request. If you filed your tax return on or before the original due date without extension, you would have 3 years from the original due date to amend a tax return and receive a refund. However, if an extension was filed you could receive up to an additional 6 months of time to claim a refund. I know these rules might sound silly, but it is commonly very important when a tax position needs to be amended or a new law is passed that creates a benefit when money is on the line. 

How do you start the extension process? Some taxpayers think the best way to file an extension is to call up there CPA around April 15th and request an extension be filed. However, If you do this, you are losing out on a lot of opportunity. The best time to start the extension process is in November of the tax year. In November, you and your tax advisor can review the books, pay stubs, and other tax information to create a plan for year end. By Christmas, the two of you should have everything buttoned up and know roughly how much tax will be owed on April 15th.  In March, your tax advisor can validate the outcome and you can make the tax payment on or before the due date.  The tax returns can be prepared in the summer months and then your tax advisor will communicate if the income was well estimated. Your tax advisor will also help you calculate any income tax estimates that might be due before the tax return is finalized. 

If you are interested in checking something off your to-do list four months early and potentially reducing your taxes at the same time, a tax return extension might be the right answer for you. If you want to implement this strategy for the upcoming filing season, give your KTLLP tax advisor a call today to get on their schedule.     

September 27, 2022
| Greg Miner
KT Insights
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Democrats are in the Rule. What’s the Plan?

The Democrats now in charge of Washington are aiming for higher taxes for most high-income earners. Now that Covid relief has slowed down, CPAs are refocusing to a Democrat-controlled Presidency and Congress. We are being asked by our clients “How much will my taxes go up next year?” and “What do you propose I do about it?” Without new tax law, answering these questions is more like being on a game show. Would you like door number 1 or door number 2?

Did you see Carrie Christensen’s article in the Summer 2021 edition of The KT Addition regarding President Biden’s proposed tax increases? If you missed it, click here: https://www.ktllp.cpa/provisions-in-bidens-tax-proposal-that-may-cost-you-money/. To summarize, if you make more than $400k per year you could be looking at tax increases. The important part to remember here is these are proposed tax increases. No bill has been signed into law and this is all speculation. President Biden has provided a wish list to Congress, and it may take an act of God for the entire wish list to become law. The one thing we can count on is that the tax bill for higher income folks will not decrease.

In a time of uncertainty, it is important to do two things: First, pay attention to the big picture. The proposed tax increases range from 2.6% to 20%. If you are only subject to the 2.6% increase, that is less than inflation currently and no planning may be needed. However, if you are looking at a 20% tax increase, we should develop a plan. Second, we should stay flexible. Flexibility can give your accountant the options and tools needed to play the tax code like a banjo.

If you’re concerned about higher future tax rates, there are a few topics we can address. We can review your business’s accounts receivable collections or billing. Likewise, we can also discuss your accounts payable payments and accruals. Pulling the right levers can influence your 2021 and 2022 taxable income levels. If you have appreciated assets or installment contracts, we could also discuss methods to trigger gains now but leave your appreciated assets intact.   

Everyone knows they can get a tax write off from buying business equipment and certain other business assets before year end, but did you know you can also elect new accounting methods that could increase or decrease your 2021 and/or 2022 business taxable income? We can review your position and determine if a different accounting method would generate more favorable outcomes during a time of higher tax rates. If we are talking accounting methods, maybe it is a good time to also review the type of entity the business is being operated out of. Could a different entity type help you reach your goals faster?

No one likes to throw around the “E” word, but extensions could be our best friend next year. Imagine you are on a game show to win a new car and the game show host asks you to pick door number 1 or door number 2. The only trick is the host will open both doors in 5 minutes and you can wait 6 minutes to answer. Seems silly not to wait right? If we turn the calendar over without new tax law, the game plan should be to get the 2021 data in and the 2021 tax forms worked up. From there we can create door 1 and door 2, wait 5 minutes and see what the host has behind door number 1.

Please contact the KTLLP Team if you have any questions about future tax rates and how planning may be able to save tax dollars for you and/or your business.      

September 24, 2021
| Greg Miner
KT Insights
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Contribute to an HSA, Not a 401K

Why would I suggest contributing to a Health Savings Account (HSA) instead of a 401(k) retirement account? It is simple, HSAs provide “triple-tax-free” benefits on qualified medical expenses plus you can treat the account like a “sleeper retirement account” once you reach age 65. Hold on, don’t reach for the phone yet. Like any great tax “loop-hole” the IRS is going to make you jump through a few hoops to get the benefits.

Triple-tax-free benefits means you receive (1) a deduction for contributions, (2) the account can be invested and grow tax deferred, and (3) tax-free distributions can be made for qualified medical expenses. Now compare the HSA to a 401(k) which offers a deduction for contributions, but distributions will be taxable.      

How do HSAs work? Be sure to read Kim Richters’ article in the fall 2019 KT addition for the complete details. Now that you are refreshed on HSAs, let’s see the numbers!

As illustrated in exhibit A, Frank and Jill pay $2,000 per year for out of pocket medical expenses (which they can’t deduct due to Adjusted Gross Income limitations). They also contribute $3,500 into their 401(k)s over the employer matching limits ($2,730 out of pocket due to income tax deduction). Fast-forward 20 years, assuming a 7% rate of return, Frank and Jill’s 401(k)s would be worth $143,500. Assuming a top marginal tax rate of 22%, the after tax value of the 401(k) is $112,000. Now let’s look at Rich and Mary that use an HSA instead of a 401(k).

Exhibit A
  Frank and Jill Contribution/PaidTax DeductionTax SavingsCash Out of Pocket
401(k)$3,50022%$770$2,730
Out of Pocket Medical$2,0000%$0$2,000
    $4,730
  Rich and Mary ContributionTax DeductionTax SavingsCash Out of Pocket
HSA $6,72529.65%$1,995$4,730
    $4,730

Rich and Mary contribute the same $4,730 after tax dollars as did Frank and Jill, resulting in an HSA contribution of $6,725. Rich and Mary withdraw $2,000 from the HSA per year to cover qualified medical expenses and the remaining $4,725 grows in the HSA account tax deferred. After 20 years Rich and Mary have $193,700 in the HSA, which is $50,200 more than Frank and Jill’s 401(k). Assuming Rich and Mary use the HSA to reimburse medical expenses and Medicare premiums, Rich and Mary will have $81,700 in after tax benefits over the 401(k) option Frank and Jill used while making the same contribution. How did the HSA provide the extra after tax benefits over the 401(k)?

Rich and Mary contributed to the HSA via their paychecks and effectively enjoyed a 29.65% deduction on $2,000 of annual medical expenses. This percentage is higher than their income tax rate of 22% as they saved 7.65% in payroll taxes.  Frank and Jill do not enjoy this payroll tax savings from the 401(k) contributions. In addition, Rich and Mary are not paying income taxes on HSA distributions for qualified medical expenses, and as such, are effectively deducting these medical costs.             

Employers can benefit from offering HSAs as well. HSA contributions made through payroll reduce payroll taxes for both the employer and employee. If an employee contributed $7,100 to an HSA, the contribution would result in $543 payroll tax savings for the employer. It does not take long for the savings to stack up.   

Many individuals are turned off by high deductible health insurance plans. However, I have found some great benefits. When I compared the low deductible plans to the high deductible plans, I found that if I paired the high deductible plans with an HSA and maxed out the annual contribution, the high deductible plan premium and the HSA contribution were about the same cost as the low deductible plan premium. Plus my HSA balance increases every year. Not all plans and tax situations are the same. Meet up with your favorite Ketel Thorstenson, LLP tax advisor and do the math. You might find a nice “loop-hole”.

HSA Fun Facts:

  • There are absolutely no taxable income limitations.
  • There is no requirement to reimburse medical expenses in the year paid. You can hold onto your receipts and take reimbursements later while the funds grow tax-deferred.   
  • HSAs have no Required Minimum Distributions.
  • You are allowed a once in a lifetime transfer from an IRA to an HSA, but this will reduce your annual contribution limitation.
  • HSA’s can pay for or reimburse COBRA premiums.
January 13, 2020
| Greg Miner
KT Insights
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Roth IRAs : Slick Strategy or Evil Surtax

The fact is most taxpayers like the idea of having tax free income and paying less income taxes. It is true, qualified Roth retirement accounts can provide tax-free income to you during retirement, but what cost might you pay for this gratitude?

For example, you contribute $5,000 per year to a qualified Roth retirement account for 30 years.   At 7% annual return the account will allow you then to withdraw $46,000 per year over 20 years. Combined with $20,000 annual social security income, your income would be $66,000 per year.  With today’s tax rates, and assuming you were married, you would pay no income tax on that amount.

Now, let’s take the same facts, but instead you contribute $6,580 to a qualified deferred account like a traditional 401k or traditional IRA.   If you were in the 24% tax bracket you would have the same net outlay of $5,000 due to the immediate tax savings.  Assuming the same rate of return, the account, combined with social security would provide $79,000 in taxable income over 20 years.  And while this extra income will cause your social security to be taxable, the total tax would only be $5,500 for an after tax income of $73,500.

Wow, by having used the deferred account in the second example, your after-tax income is $7,500 more each year for 20 years!  Why did this work out that way?

It is simple, when contributing after-tax dollars to a Roth account you are locking in today’s marginal tax rate on those contributions, and paying the tax—at 24% in the example.  However, a regular IRA works just the opposite:   When contributing to a deferred retirement account you are getting a deduction at your top marginal tax rate, then later paying income tax using marginal rates that were lower, in the example.

So which is the right answer for me?  Roth or Regular?

Well that depends, and this article oversimplifies the mathematics and other considerations, such as that Required Minimum Distributions are not required for Roth IRAs.  Also, there is a bit of gaming involved as we don’t know the tax rates in retirement, nor will we know your income.  But it generally comes down to this: If you are in a low tax bracket today (12% or less), the ROTH is a no-brainer.  However, if you are in a high tax bracket today—and you expect to be in a lower bracket in retirement, it is generally better to take the tax benefit today.  After all, we all know the saying about a bird in the hand vs. the one in the bush.

Not all taxpayers or situations are created equal. Please consult your tax advisor and financial advisor before making any changes to your current retirement plan.

June 6, 2019
| Greg Miner
KT Insights
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Do you take Advantage of the 0% Tax Rate?

Yes, that’s right.  A 0% tax rate.

Do you own an asset that has appreciated over the years? Are you considering selling that asset, but are worried about the income tax consequences? This isn’t necessarily a bad problem to have and it is possible to pay very little, if any, income tax when selling an appreciated asset. However, income tax planning may be required to take advantage of preferable long term capital gains tax rates.

Examples of assets that may qualify for capital gain treatment include public or private company stock, land, and apartment buildings just to name a few. To qualify for long term capital gains treatment, you must have owned the asset for more than 1 year prior to the sale.

Long term capital gains are taxed at either 0%, 15% or 20%.  In addition, a 3.8 surtax may apply to high income individuals, and higher rates apply if there is depreciation recapture. The rate applicable to you is dependent on your overall taxable income. For those with  2016  income under $37,650 ($75,300 for Married Filling Joint) the long term capital gains rate was 0%. If 2016 taxable income was between $37,650 and $415,050 ($75,300 and $466,950 MFJ) the long term capital gains rate was 15%. If taxable income was above $415,050 ($466,950 MFJ) the long term capital gains rate was 20%.

For example, if a married couple’s taxable income was $80,000 and $20,000 of the $80,000 was long term capital gains, they would pay 0% on the first $15,300 of gain and pay 15% on the last $4,700 of gain that exceeds $75,300 of total taxable income.

Now that we know what the 0% long term capital gains tax rate is, how can you take advantage?

There are several tools in our bag and each situation is different. Land and real estate could be sold on a contract for deed. Using a contract for deed and electing the installment method would spread the capital gains out over several years and, if done correctly, you may be able to take advantage of the 0% long term capital gains tax rate each year of the contract.

In the case of stock, we could assist you with planning in December to determine the exact amount of 0% long term capital gains bracket you have remaining and help you trigger the right amount of gains in 2017.. If you still wanted to hold the stock you can repurchase the stock immediately after it was sold, but with an increased income tax basis.

Another great option is to defer other types of income, for example with deductible retirement contributions, to both reduce ordinary income tax and reduce the long term capital gains tax rate from 15% to 0%.

Appreciated assets could also play a big role in charitable giving and estate planning. There are several other factors that need to be considered including taxable social security income and surtaxes. If you want to take advantage of the 0% long term capital gains tax rate please contact your KTLLP tax advisor.

September 20, 2017
| Greg Miner