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2022 Required Minimum Distributions | Tax Lawyer Minneapolis

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On December 12, 2022, the Internal Revenue Service reminded those who were born in 1950 or earlier that funds in their retirement plans and individual retirement arrangements face important upcoming deadlines for the 2022 required minimum distributions to avoid penalties.

What are the 2022 Required Minimum Distributions?

Required minimum distributions, or RMDs, are minimum amounts that many retirement plans and IRA account owners must generally withdraw annually after they reach age 72. Account owners can delay taking their first RMD until April 1 following the later of the calendar year they reach age 72 or, in a workplace retirement plan, retire. RMDs are taxable income and may be subject to penalties if not timely taken.

IRA 2022 Required Minimum Distributions

IRAs: The RMD rules require traditional IRA, and SEP, SARSEP, and SIMPLE IRA account holders to begin taking distributions at age 72, even if they’re still working. Account holders reaching age 72 in 2022 must take their first RMD by April 1, 2023, and the second RMD by December 31, 2023, and each year thereafter.

Roth IRAs do not require distributions while the original owner is alive.

Retirement Plans 2022 Required Minimum Distributions

Retirement Plans: In 401(k), 403(b) and 457(b) plans; profit-sharing and other defined contribution plans; and defined benefit plans, the first RMD is due by April 1 of the later of the year they reach age 72, or the participant is no longer employed (if allowed by the plan). A 5% owner of the employer must begin taking RMDs at age 72. Remember, RMDs may not be rolled over to another IRA or retirement plan.

Who Does the Required Minimum Distributions?

An IRA trustee, or plan administrator, must either report the amount of the RMD to the IRA owner or offer to calculate it. An IRA owner, or trustee, must calculate the RMD separately for each IRA owned. They may be able to withdraw the total amount from one or more of the IRAs. However, RMDs from workplace retirement plans must be taken separately from each plan.

50% tax on the Missed 2022 Required Minimum Distributions

Not taking a required distribution, or not withdrawing enough, could mean a 50% excise tax on the amount not distributed. The IRS has worksheets to calculate the RMD and payout periods.

Special Case: Inherited IRAs

An RMD may be required for an IRA, retirement plan account or Roth IRA inherited from the original owner. Retirement Topics – Beneficiary has information on taking RMDs from an inherited IRA or retirement account and reporting taxable distributions as part of gross income. Publication 559, Survivors, Executors and Administrators, can help those in charge of the estate complete and file federal income tax returns, and explains their responsibility to pay any taxes due on behalf of the decedent or person who has died.

Note on the 2020 Coronavirus-Related Distributions

Since 2020 RMDs were waived, an account owner or beneficiary who received an RMD in 2020 had the option of returning it to their IRA or other qualified plan to avoid paying taxes on that distribution. A 2020 RMD that qualified as a coronavirus-related distribution may be repaid over a 3-year period or have the taxes due on the distribution spread over three years.

A 2020 withdrawal from an inherited IRA could not be repaid to the inherited IRA but may be spread over three years for income inclusion.

Sherayzen Law Office will continue to monitor any news concerning the 2022 RMDs.

Deductibility of Meals on Schedule C: General Overview

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Virtually every business incurs some type of meal-related expenses. A question arises as to whether such meals are deductible and to what extent. This article provides a general overview of this topic; remember, though, that the deductibility of meals is highly fact-dependent and this article only provides an educational background to this issue, NOT a legal advice.

General Rule

Generally, expenses incurred with respect to the entertainment-related meals are not deductible, unless the taxpayer is able to establish that the expense is directly related to the active conduct of a business or trade.

However, if a meal expense directly precedes or follows a bona fide business discussion (including a convention meeting), then it is deductible if it is established that the expense was associated with the active conduct of a trade or business. The taxpayers needs to be able to establish that this is the case.

Restrictions on the General Rule

The Internal Revenue Code (IRC) places two broad restrictions on the general rule. First, if neither the taxpayer nor the taxpayer’s employee is present at the meal, then, generally, meal expenses are not deductible.

Second, a meals deduction is not allowed where the expense is lavish or extravagant under the circumstances. This topic has been the subject of controversy for some time now as large corporations have engaged in entertaining their important guests in a manner that the IRS may sometime classify as “lavish.”

It is important to point out that these restriction would not apply to certain exceptions to the general rule.

Exceptions to the General Rule

IRC Section 274(e) specifically provides that some exceptions are not subject to the general rule described above and are deductible as ordinary and necessary expenses (as long as they are properly substantiated). The exceptions are:

a. Food and beverages furnished on the business premises primarily to the taxpayer’s employees;

b. Expenses for services, goods, and facilities that are treated as compensation or wages for withholding tax purposes. If the recipient is a specified individual, then the employer’s deduction cannot exceed the amount of compensation reported. IRC Section 274(e)(2)(B) defines who is a “specified individual”; here, it is sufficient to state that it generally means an officer, director, ten-percent shareholder or a related person;

c. Reimbursed expenses: “expenses paid or incurred by the taxpayer, in connection with the performance by him of services for another person (whether or not such other person is his employer), under a reimbursement or other expense allowance arrangement with such other person”. IRC Section 274(e)(3). However, this exception applies only if: (1) services are performed for an employer and the employer has not treated such expenses as wages subject to withholding; or (2) where the services are performed for a person other than an employer and the taxpayer accounts to such person;

d. Expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees (within the meaning of section 414(q)). See IRC Section 274(e)(4) for further details on treatment of shareholders. The most common example of this exception are company picnics;

e. Expenses incurred by a taxpayer which are directly related to business meetings of his employees, stockholders, agents, or directors. IRC Section 274(e)(5);

f. Expenses directly related and necessary to attendance at a business meeting or convention of any organization described in section 501(c)(6) (relating to business leagues, chambers of commerce, real estate boards, and boards of trade) and exempt from taxation under section 501(a). IRC Section 274(e)(6);

g. Expenses for goods, services, and facilities made available by the taxpayer to the general public. IRC Section 274(e)(7);

h. Expenses for goods or services (including the use of facilities) which are sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money or money’s worth. IRC Section 274(e)(8); and

i. Expenses paid or incurred by the taxpayer for goods, services, and facilities furnished to non-employees as entertainment, amusement, or recreation to the extent that the expenses are includible in the gross income of a recipient and reported on a Form 1099-MISC by the taxpayer.

It is very important to note that exceptions a, e, and f maybe subject to the “50-Percent Limitation” rule.

50-Percent Limitation Rule

Generally, a taxpayer can only deduct 50 percent of the allowable meal and entertainment expenses, including such expenses incurred in the course of travel. The process in calculating the 50-percent limitation involves, first, the calculation of the allowable deductions through the process of exclusion of non-allowable deductions (e.g. lavish portion of the meal) and addition of related expenses (e.g. taxes, tips, room rental, and parking fees) and, then, the 50-percent rule applies. Note that the allowable deductions for transportation costs to and form a business meal are not reduced.

The 50-percent rule maybe subject to various statutory modifications based on profession or the nature of activity. For example, the transportation workers may deduct 80 percent. There are also complications with respect to a leasing company and independent contractors.

Exceptions to the 50-Percent Limitation Rule

The 50-Percent Limitation rule is riddled with exceptions.

First, exceptions b, c, d, g, h and i described above (see Exceptions to General Rule section) are not subject to the 50-Percent Limitation rule.

Second, the food expenses classified as de minimis fringe benefits and excludable from the recipient’s gross income are also not subject to the 50-Percent limitation rule.

Third, there are somewhat complicated exceptions related to the tickets to a sporting events.

Fourth, employee’s meal expenses incurred while moving are not subject to the 50-Percent Limitations rule if they are reimbursed by the employer and includible in the employee’s gross income.

There are various other exceptions to the 50-Percent Limitations rule such as food and beverages provided to employees on certain vessels, oil or gas platforms, drilling rigs, and so on.

Conclusion

This article provides a general review of the rules regarding deductibility of meal on Schedule C. However, this is only an educational article and it does NOT offer a tax or legal advice. You should see a tax professional regarding your specific facts.

Non-Deductible Taxes: General Summary

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The Internal Revenue Code (IRC) permits individual and business taxpayers to deduct various types of taxes imposed by some tax authorities. However, some types of taxes are not deductible under the IRC.

Here is a brief summary of most common non-deductible taxes:

1. Generally, federal income taxes, including social security and railroad retirement taxes paid by employees, are not deductible either as taxes or as business businesses. This also include one-half of the self-employment tax imposed by the IRC Section 1401;

2. Federal war profits and excess profits taxes;

3. Estate, inheritance, legacy, succession, and gift taxes;

4. Income, war profits and excess profits taxes imposed by a foreign government (or even a U.S. possession) if the taxpayer decides to take a foreign tax credit for these taxes;

5. Taxes on real property that must be treated as imposed on another taxpayer because of the apportionment between buyer and seller;

6. Certain fees and taxes under the Patient Protection and Affordable Care Act (P.L. 111-148). For example, annual fee imposed on drug manufacturers and importers for U.S. branded prescription drug sales after 2010; the 2.3 percent excise tax imposed on manufacturers, producers and importers of certain medical devices after 2012; and the annual fee imposed on certain health insurance providers after 2013 are all non-deductible taxes; and

7. Certain other taxes, such as certain additions to taxes imposed on public charities, private foundations, qualified pension plans, REITs (real estate investment trusts), stock compensation of insiders in expatriated corporations, golden parachute payments, greenmail, and other taxes.

Contact Sherayzen Law Office for Tax Planning Advice

If you need a tax advice regarding structuring your business transactions in a tax-responsible way or if you need an advice regarding deductibility of your taxes, contact Sherayzen Law Office. Our experienced tax firm will analyze your situation and propose various tax plans that will strive to reduce the risk of unfavorable treatment of your business transactions under the IRC.