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Tax Updates

FORM 1099 REPORTING REQUIREMENTS FOR BUSINESSES

Cash payments made by businesses to entities not taxed as corporations are required to be reported to the IRS if the payments exceed $600 during the 2022 calendar year. Payments to attorneys exceeding $600 are required to be reported to the IRS regardless of the tax status of the payee. Cash payments include payments made by check.

Payments related to services rendered are required to be reported on form 1099-NEC. Forms 1099-NEC are required to be filed with the IRS by January 31, 2023. Examples of services rendered are payments of legal and accounting fees, the portion of vehicle repairs related to labor charges, and snow plowing.

Interest payments are required to be reported to the IRS on form 1099-INT and must be filed with the IRS by February 28, 2023 (March 31, 2023 if the forms are filed electronically).

Payments for dividends paid are required to be reported to the IRS on form 1099-DIV and must be filed with the IRS by February 28, 2023 (March 31, 2023 if the forms are filed electronically).

Payments related to rents, prizes, and awards are reported on form 1099-MISC and must be filed with the IRS by February 28, 2023 (March 31, 2023 if the forms are filed electronically).

Copies of forms 1099-NEC, 1099-INT, 1099-DIV, and 1099-MISC must be provided to the recipients of the payments by January 31, 2023. Mailing the recipient copy by January 31, 2023 satisfies this requirement.

Payments made by your business with a debit or credit card should not be reported on the above referenced forms. These payments are reported to the IRS on form 1099-K by the credit card processing company.

Failure to file forms 1099 with the IRS can result in penalties of up to $570 for each 1099 not timely filed. Additionally, intentional disregard of the forms 1099 reporting requirements can result in a penalty of up to 10 percent of the amount required to reported in each form 1099.

Itemized Deductions and Standard Deductions

Itemized deductions are deducted if total itemized deductions exceed a taxpayer’s standard deduction amount. The standard deduction amount is based on filing status. The greater of itemized deductions or the standard deduction amount is subtracted from adjusted gross income in arriving at taxable income. For 2022 the standard deduction amounts are:

Married filing jointly – $25,900

Married filing separately – $12,950

Head of household – $19,400

Single – $12,950

An additional standard deduction is allowed for taxpayers over the age of 65, blind, or both 65 and blind. The additional standard deduction in 2022 is $1,750 for single taxpayers and $1,400 for married taxpayers.

When married taxpayers file separate tax returns, both spouses must either itemize deductions or use the standard deduction amount. This rule is to prevent taxpayers from receiving larger deductions than would be available if a joint return was filed.

The standard deduction amount for a taxpayer who is a dependent of another taxpayer is limited to the greater of $1,150 or earned income (generally wages) plus $400. The standard deduction amount for a dependent can never be more than $12,950 in 2022.

The death of a taxpayer does not affect the standard deduction amount. A taxpayer is entitled to a full standard deduction regardless of the date of death.

Qualified Business Income Deduction

Congress enacted the 20 percent business deduction beginning in 2018 to coincide with the tax rate reduction provided to corporations. The 20 percent business income deduction effectively reduces the maximum tax rate on an individual’s business income to 29.6 percent (80 percent of the maximum income tax rate of 37 percent). The business income deduction is not allowed when calculating self-employment income. The business income deduction is limited to 20 percent of taxable income.

WHAT IS BUSINESS INCOME?

The Internal Revenue Code allows individuals to deduct 20 percent of business income in computing taxable income. For sole proprietors, business income is calculated as the amount reflected on schedule C adjusted for items discussed below. Business income includes income from rental real estate properties if the taxpayer spends at least 250 hours per year managing and maintaining the rental properties.

For sole proprietors, business income is calculated as the amount reflected on schedule C less the self-employed health insurance deduction, the deductible portion of the self-employment tax, and pension plan contributions related to the taxpayer’s business. Business income does not include income from the sale of business assets treated as long-term capital gains.

CALCULATION OF BUSINESS INCOME DEDUCTION

An example of the calculation of the business income deduction is as follows:

John and Mary file a 2022 joint return and have taxable income of $300,000 before calculating the business income deduction. Mary’s business income is $280,000. The business income deduction allowed on their joint tax return is calculated as the lesser of 1) 300,000 x 0.2 = $60,000 or 2) $280,000 x 0.2 = $56,000. The business income deduction allowed on John and Mary’s joint tax return is $56,000.

In the above example the business income deduction is not limited by taxable income. If a taxpayer’s only source of income is derived from a sole proprietorship, the business income deduction will be limited to 20 percent of taxable income because the taxpayer is entitled to a standard deduction available to all taxpayers.

HIGHER INCOME TAXPAYERS

The business income deduction for higher income taxpayers is either phased out or limited. For service businesses, the business income deduction is reduced or eliminated. For non-service businesses, the maximum business deduction is subject to additional limitations based on wages paid by the business and the cost of property used in the business.

Service businesses include businesses providing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, and athletics. Businesses providing financial and brokerage services, investing services, and trading and dealing in securities are also considered service businesses under the business income deduction rules.

For taxpayers operating a service business, the business income deduction is reduced if taxable income is between $170,050 and $220,050 for single filers and between $340,100 and $440,100 for joint filers. For taxpayers operating a service business the deduction is eliminated for single individuals with taxable income exceeding $220,050 and for married individuals filing a joint return with taxable income exceeding $440,100. The phase-out ranges are applicable to the 2022 tax year and are adjusted annually for inflation.

For taxpayers operating non-service businesses, the business income deduction is not eliminated but additional limitation apply. For single individuals with taxable income exceeding $220,050 and for married taxpayers filing a joint return with taxable income more than $440,100 the 20 percent business deduction is limited based on the rules discussed above and is further limited to the greater of 50 percent of wages paid or 25 percent of wages paid plus 2.5 percent of the cost of property used in the taxpayer’s business.