IRS Additional Guidance Addresses COBRA Assistance Under ARPA

Article Updated September 17, 2021

In Notice 2021-46, the IRS recently issued additional guidance on the COBRA premium assistance provisions of the American Rescue Plan Act (ARPA).

Under the ARPA, a 100% COBRA premium subsidy and additional COBRA enrollment rights are available to certain assistance eligible individuals (AEIs) during the period beginning on April 1, 2021, and ending on September 30, 2021 (the Subsidy Period).

Subsidy Termination. Importantly, the ARPA required employers to notify each “assistance eligible individual” (employees who lost group coverage due to reduced hours or involuntary termination and who elect coverage) no more than 45 days, but no less than 15 days, before his or her subsidy termination date that their subsidized coverage is about to end. For most individuals still receiving subsidized coverage, this means they must be notified of the September 30 termination date no later than September 15, 2021. No notice is required, however, to those individuals whose premium assistance expires due to their eligibility for another group health plan or Medicare.

The expiration notice must specify that (1) premium assistance for the individual is about to expire, (2) the date of the expiration, and (3) that the individual may be eligible for coverage without any premium assistance through COBRA continuation coverage or coverage under a group health plan, Medicaid, or the Health Insurance Marketplace. The U.S. Department of Labor (the “DOL”) published guidance and a model form employers may utilize in providing notice of the expiration of ARPA’s premium subsidy. This model notice form can be obtained or viewed on the DOL’s website, please visit:

https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/laws/cobra/premium-subsidy/notice-of-premium-assistance-expiration-premium.pdf

If your business is required to offer COBRA coverage, it’s important to mind the details of the subsidies and a related tax credit. Here are some highlights of the additional guidance:

Extended coverage periods. An AEI whose original qualifying event was a reduction of hours or involuntary termination is generally eligible for the subsidy to the extent the extended COBRA coverage falls within the Subsidy Period. The AEI must be entitled to the extended coverage because of a:

Disability determination,
Second qualifying event, or
Extension under a state mini-COBRA law.

This is true even if the AEI didn’t notify the plan of the intent to elect extended COBRA coverage before the start of the Subsidy Period — for example, because of the Outbreak Period deadline extensions.

End of Subsidy Period. The subsidy ends when an AEI becomes eligible for coverage under any other disqualifying group health plan coverage or Medicare — even if the other coverage doesn’t include the same benefits provided by the previously elected COBRA coverage.

For example, though Medicare generally doesn’t provide vision or dental coverage, the subsidy for an AEI’s dental-only or vision-only COBRA coverage ends if the AEI becomes eligible for Medicare.

Comparable state continuation coverage. A state program that provides continuation coverage comparable to federal COBRA qualifies AEIs for the subsidy even if the state program covers only a subset of state residents (such as employees of a state or local government unit).

Claiming the credit. Under most circumstances, an AEI’s current or former common-law employer (depending on whether the AEI had a reduction of hours or an involuntary termination) is the entity that’s eligible to claim the tax credit for providing the subsidy. If a plan (other than a multiemployer plan) covers employees of two or more controlled group members, each common-law employer in the group is entitled to claim the credit with respect to its current or former employees.

Guidance on claiming the credit is also provided for Multiple Employer Welfare Arrangements, state employers, entities undergoing business reorganizations, plans that are subject to both federal COBRA and state mini-COBRA, and plans offered through a Small Business Health Options Program.

The ARPA’s COBRA provisions have been in effect for a while now, so your company likely already has procedures in place to provide the subsidy to AEIs and claim the corresponding tax credit. Nevertheless, this guidance offers helpful clarifications. Contact our firm for more information.

Homeowners and businesses across the country have experienced weather-related disasters in recent months. From hurricanes, tornadoes and other severe storms to the wildfires again raging in the West, natural disasters have led to significant losses for a wide swath of taxpayers. If you’re among them, you may qualify for a federal income tax deduction, as well as other relief from the IRS.

Eligibility for the casualty loss deduction

Casualty losses can result from the damage, destruction or loss of property due to any sudden, unexpected or unusual event. Examples include floods, hurricanes, tornadoes, fires, earthquakes and volcanic eruptions. Normal wear and tear or progressive deterioration of property doesn’t constitute a deductible casualty loss. For example, drought generally doesn’t qualify.

The availability of the tax deduction for casualty losses varies depending on whether the losses relate to personal-use or business-use items. Generally, you can deduct casualty losses related to your home, household items and personal vehicles if they’re caused by a federally declared disaster — meaning a disaster that occurred in an area that the U.S. president declares eligible for federal assistance. Casualty losses related to business or income-producing property (for example, rental property) can be deducted regardless of whether they occur in a federally declared disaster area.

Casualty losses are deductible in the year of the loss, usually the year of the casualty event. If your loss stemmed from a federally declared disaster, you can opt to treat it as having occurred in the previous year. You may receive your refund more quickly if you amend the previous year’s return than if you wait until you file your return for the casualty year.

The role of reimbursements

If your casualty loss is covered by insurance, you must reduce the loss by the amount of any reimbursement or expected reimbursement. (You also must reduce the loss by any salvage value). Reimbursement also could lead to capital gains tax liability.

When the amount you receive from insurance or other reimbursements (less any expense you incurred to obtain reimbursement, such as the cost of an appraisal) exceeds the cost or adjusted basis of the property, you have a capital gain. You’ll need to include that gain as income unless you’re eligible to postpone reporting the gain.

You may be able to postpone the reporting obligation if you purchase property that’s similar in service or use to the destroyed property within the specified replacement period. You also can postpone if you buy a controlling interest (at least 80%) in a corporation owning similar property or if you spend the reimbursement to restore the property.

Alternatively, you can offset casualty gains with casualty losses not attributable to a federally declared disaster. This is the only way you can deduct personal-use property casualty losses incurred in areas not declared disaster areas.

The loss amount vs. the deduction

For personal-use property, or business-use or income-producing property that isn’t completely destroyed, your casualty loss is the lesser of:

The adjusted basis of the property immediately before the loss (generally, your original cost, plus improvements and less depreciation), or
The drop in fair market value (FMV) of the property as a result of the casualty (that is, the difference between the FMV immediately before and immediately after the casualty).

For business-use or income-producing property that’s completely destroyed, the amount of the loss is the adjusted basis less any salvage value and reimbursements.

If a single casualty involves more than one piece of property, you must figure the loss on each separately. You then combine these losses to determine the casualty loss.

An exception applies to personal-use real property, such as a home. The entire property (including improvements such as landscaping) is treated as one item. The loss is the smaller of the decline in FMV of the entire property and the entire property’s adjusted basis.

Other limits may apply to the amount of the loss you may deduct, too. For personal-use property, you must reduce each casualty loss by $100 (after you’ve subtracted any salvage value and reimbursement).

If you suffer more than one casualty loss during the tax year, you must reduce each loss by $100 and report each on a separate IRS form. If two or more taxpayers have losses from the same casualty, the $100 rule applies separately to each taxpayer.

But that’s not all. For personal-use property, you also must reduce your total casualty losses by 10% of your adjusted gross income, after you’ve applied the $100 rule. As a result, smaller personal-use casualty losses often provide little or no tax benefit.

The requisite records

Documentation is critical to claim a casualty loss deduction. You’ll need to be able to show:

That you were the owner of the property or, if you leased it, that you were contractually liable to the owner for the damage,
The type of casualty and when it occurred,
That the loss was a direct result of the casualty, and
Whether a claim for reimbursement with a reasonable expectation of recovery exists.

You also must be able to establish your adjusted basis, reimbursements and, for personal-use property, pre- and post-casualty FMVs.

Additional relief

The IRS has granted tax relief this year to victims of numerous natural disasters, including “affected taxpayers” in Alabama, California, Kentucky, Louisiana, Michigan, Mississippi, New Jersey, New York, Oklahoma, Pennsylvania, Tennessee and Texas. The relief typically extends filing and other deadlines. (For detailed information for your state visit: https://bit.ly/3nzF2ui.)

Note that you can be an affected taxpayer even if you don’t live in a federally declared disaster area. You’re considered affected if records you need to meet a filing or payment deadline postponed during the applicable relief period are located in a covered disaster area. For example, if you don’t live in a disaster area, but your tax preparer does and is unable to pay or file on your behalf, you likely qualify for filing and payment relief.

A team effort

If you’ve incurred casualty losses this year, tax relief could mitigate some of the financial pain. We can help you maximize your tax benefits and ensure compliance with any extensions.

Article Updated September 15, 2021

Any healthcare provider that received at least $10,000 from the Provider Relief Fund during the first half of 2020 must report on the use of those funds by September 30, 2021.

However, in response to the challenges providers are facing and given the COVID surges and natural disasters around the country, a 60-day grace period is in place (October 1 – November 30, 2021). This period allows providers to come into compliance with their PRF reporting requirements should they fail to meet the September 30, 2021 deadline.

While you will be out of compliance if you do not submit your report by September 30, 2021, recoupment or other enforcement actions will not be initiated during the 60-day grace period (October 1 – November 30, 2021).
Providers who are able are strongly encouraged to complete their report in the PRF Reporting Portal by September 30, 2021.
Providers should return unused funds as soon as possible after submitting their report. All unused funds must be returned no later than 30 days after the end of the grace period (December 30, 2021).

This grace period only pertains to the Reporting Period 1 report submission deadline. There is no change to the Period of Availability for the use of PRF payments.

Reporting portal

To facilitate these reports, the U.S. Department of Health and Human Services (HHS) opened its reporting portal on July 1.

If a Provider Relief Fund recipient has not yet registered for a portal account, the recipient must do so before reporting. To do this, visit prfreporting.hrsa.gov and click “Register.” Yeo & Yeo encourages anyone who has not yet registered to do so as soon as possible. To assist recipients with registering, HRSA updated its Registration User Guide. In addition, the Reporting Worksheet will help you gather the information before you start the reporting process on the website.

Payment Received Period (For Payments Exceeding $10,000 in Aggregate)	Deadline to Use Funds	Reporting Time Period
Period 1: April 10 to June 30, 2020	June 30, 2021	July 1 to Sept. 30, 2021 (Grace period: Oct. 1 – Nov. 30, 2021)
Period 2: July 1 to Dec. 31, 2020	Dec. 31, 2021	Jan. 1 to March 31, 2022
Period 3: Jan. 1 to June 30, 2021	June 30, 2022	July 1 to Sept. 30, 2022
Period 4: July 1 to Dec. 31, 2021	Dec. 31, 2022	Jan. 1 to March 31, 2023

Returning unused funds

Providers that have remaining Provider Relief Fund money that they did not spend on allowable expenses or losses by the deadline must return the unused funds to HHS within 30 calendar days after the end of the applicable reporting period. For Reporting Period 1, unused funds must be returned no later than 30 days after the grace period (December 30, 2021).

To return any unused funds, use the Return Unused PRF Funds Portal. Instructions for returning unused funds are available here.

Please contact your Yeo & Yeo professional if you need assistance with PRF reporting.

The U.S. economy has been nothing short of a roller-coaster ride for the past year and a half. Some industries have had to overcome seemingly insurmountable challenges, while others have seen remarkable growth opportunities arise.

If your business is doing well enough for you to consider adding a location, both congratulations and caution are in order. “Fortune favors the bold,” goes the old saying. However, strained cash flow and staffing issues can severely disfavor the underprepared.

Ask the right questions

Among the most fundamental questions to ask is: Will we be able to duplicate the success of our current location? If your first location is doing well, it’s likely because you’ve put in place the people and processes that keep the business running smoothly. It’s also because you’ve developed a culture that resonates with your customers. You need to feel confident you can do the same at subsequent locations.

Another important question is: How might expansion affect business at both locations? Opening a second location prompts a consideration that didn’t exist with your first: how the two establishments will interact. Placing the two operations near each other can make it easier to manage both, but it also can lead to one operation cannibalizing the other. Ideally, the two locations will have strong, independent markets.

Run the numbers

You’ll need to consider the financial aspects carefully. Look at how you’re going to fund the expansion. Ideally, the first location will generate enough revenue so that it can both sustain itself and help fund the second. But you may still need to take on debt, and it’s not uncommon for construction costs and timelines to exceed initial projections.

You might want to include some extra dollars in your budget for delays or surprises. If you must starve your first location of capital to fund the second, you’ll risk the success of both.

Account for the tax ramifications as well. If you own the real estate, property taxes on two locations will affect your cash flow and bottom line. You may be able to cut your tax bill with various tax incentives, such as by locating the second location in an Enterprise Zone. But the location will first and foremost need to make sense from a business perspective. There may be other tax issues as well — particularly if you’re crossing state lines.

Assess the risk

For some businesses, expanding to a new location may be the single most impactful way to drive growth and build the bottom line. However, it’s also among the riskiest endeavors any company can take on. We’d be happy to help you assess the feasibility of opening a new location, including creating financial projections that will provide insights into whether the move is a reasonable risk.

Many homeowners across the country have seen their home values increase recently. According to the National Association of Realtors, the median price of homes sold in July of 2021 rose 17.8% over July of 2020. The median home price was $411,200 in the Northeast, $275,300 in the Midwest, $305,200 in the South and $508,300 in the West.

Be aware of the tax implications if you’re selling your home or you sold one in 2021. You may owe capital gains tax and net investment income tax (NIIT).

Gain exclusion

If you’re selling your principal residence, and meet certain requirements, you can exclude from tax up to $250,000 ($500,000 for joint filers) of gain.

To qualify for the exclusion, you must meet these tests:

You must have owned the property for at least two years during the five-year period ending on the sale date.
You must have used the property as a principal residence for at least two years during the five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

Gain above the exclusion amount

What if you have more than $250,000/$500,000 of profit? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.

If you’re selling a second home (such as a vacation home), it isn’t eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss.

The NIIT

How does the 3.8% NIIT apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn’t subject to the NIIT.

However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.

The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses; $125,000 for married taxpayers filing separately; and $200,000 for unmarried taxpayers and heads of household.

Two other tax considerations

Keep track of your basis. To support an accurate tax basis, be sure to maintain complete records, including information about your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed for business use.
You can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for business, the loss attributable to that part may be deductible.

As you can see, depending on your home sale profit and your income, some or all of the gain may be tax free. But for higher-income people with pricey homes, there may be a tax bill. We can help you plan ahead to minimize taxes and answer any questions you have about home sales.

The Government Accounting Standards Board (GASB) issues implementation guides that include questions and answers to clarify, explain, or elaborate on GASB Statements. The Implementation Guide No. 2021-1 includes significant modification to a previously answered question related to the application of a government’s capitalization policy.

Question 5.1 has not changed from the original question; however, the answer has been modified significantly. The amended response could cause significant modification to governments’ capital asset records.

Question 5.1 is as follows: Should a government’s capitalization policy be applied only to individual assets or can it be applied to a group of assets acquired together? Consider a government that has established a capitalization threshold of $5,000 for equipment. If the government purchases 100 computers costing $1,500 each, should the computers be capitalized?

The chart below compares the original and amended answers.

Original Response	Amended Response
It may be appropriate for a government to establish a capitalization policy that would require capitalization of certain types of assets whose individual acquisition costs are less than the threshold for an individual asset. Computers, classroom furniture, and library books are assets that may not meet the capitalization policy on an individual basis yet might be considered material collectively. Computers, classroom furniture, and library books are examples of asset types that may not meet a capitalization policy on an individual basis yet could be significant collectively. In this example, if the $150,000 aggregate amount (100 computers costing $1,500 each) is significant, the government should capitalize the computers.	A government should capitalize assets whose individual acquisition costs are less than the threshold for an individual asset if those assets in the aggregate are significant. Computers, classroom furniture, and library books are examples of asset types that may not meet a capitalization policy on an individual basis yet could be significant collectively. In this example, if the $150,000 aggregate amount (100 computers costing $1,500 each) is significant, the government should capitalize the computers.

Original Response

Amended Response

It may be appropriate for a government to establish a capitalization policy that would require capitalization of certain types of assets whose individual acquisition costs are less than the threshold for an individual asset.

Computers, classroom furniture, and library books are assets that may not meet the capitalization policy on an individual basis yet might be considered material collectively. Computers, classroom furniture, and library books are examples of asset types that may not meet a capitalization policy on an individual basis yet could be significant collectively. In this example, if the $150,000 aggregate amount (100 computers costing $1,500 each) is significant, the government should capitalize the computers.

A government should capitalize assets whose individual acquisition costs are less than the threshold for an individual asset if those assets in the aggregate are significant.

Computers, classroom furniture, and library books are examples of asset types that may not meet a capitalization policy on an individual basis yet could be significant collectively. In this example, if the $150,000 aggregate amount (100 computers costing $1,500 each) is significant, the government should capitalize the computers.

Governments will no longer be able to immediately dismiss capitalization for asset purchases under the capitalization policy threshold when those assets could potentially be significant when evaluated collectively.

Governments should begin assessing this change immediately. Purchasing information for certain capital asset-like purchases will need to be reviewed, and management’s interpretation on how to handle aggregated purchases will need to be documented. The amended guidance may require a change to the capitalization policy.

The directive in Question 5.1 is effective for periods beginning after June 15, 2023. If a government determines that changes to their capital assets are required based on the amended guidance, those changes are to be retroactively applied by restating all prior periods presented.

The IRS explicitly indicates that wages used for Payroll Protection Program loan forgiveness, Shuttered Venue Operators Grants, and Restaurant Revitalization Fund grants may not be used for Employee Retention Credit (ERC) purposes (Rev. Proc. 2021-33). Those are separate silos on the expense side based on IRS guidance and there is no leeway to charge the same expense even temporarily to multiple programs. Several questions have come up relating to claiming and accounting for ERC.

What about entities with grants other than those mentioned above?

The answer is not clear-cut. We will focus on federal grants, as they are more common. In subpart E cost principles of 2 CFR 200, credits must be credited to the federal awards for which the costs are related as either a cost reduction or a cash refund. This means if subpart E applies to the federal grant, any ERC accrued or received must be netted into the grant expenses in some manner. However, if subpart E cost principles do not apply to a particular grant, the grant document should be utilized to determine any restrictions that may apply. Many nonfederal reimbursement-driven grants likely operate similarly to subpart E.

Can ERC be used as matching funds?

In reviewing the matching requirements within 2 CFR 200, the ERC cannot be used as a match to a federal grant. However, other nonfederal grants may or may not allow the ERC to be claimed as a match; the grant document would prevail in that assessment.

Should an entity with federal grants claim the ERC on those wages that could be charged to the grant?

It depends. There are several situations to consider:

1. Situations when the entity has more allowable expenses than the grant revenue can cover. In this case, it makes sense to use the ERC to cover some of those additional expenses beyond what the grant can cover.

2. Situations when there is an easy way to utilize a carryover provision or get an extension on the grant period and utilize the grant funds to cover expenses in a future period. In that case, it makes sense to take the ERC to cover current expenses and save those grant funds that can be extended to offset future expenses.

3. Situations when the grant is for a set period or based on milestones and all the expenses were already covered under the grant. In that case, it does not make sense to claim the ERC as you are replacing one federal source with another. In this case, if the amounts spent on this year’s grant will help determine the amount of next year’s grant, it may be detrimental long-term to take the ERC, as the replacement of grant revenue with ERC funds results in fewer grant expenses and a smaller grant (less revenue) the following year.

What other compliance requirements should I consider?

Indirect Costs – The same rules apply to wages and payroll taxes in the indirect cost pool if there is an actual indirect cost rate calculated and used. If instead a de minimus rate of 10% is used, then any indirect wages used for ERC will not impact the allowable indirect costs.

Cash Management – For the current pay period’s ERC, reducing the expenses to the grant will mean drawing down less cash. The cost principles and cash management requirements need to be carefully considered for retroactive changes to the ERC that are accounted for with the IRS by doing a 941-X to amend the payroll tax return. Cost principles indicate that the credit should be accrued in determining allowable expenses. This means, as soon as you are accruing for the credit, the whole amount of credit is now considered a reduction in expenses which then impacts your ability to draw down the cash in the grant. This could cause timing issues between the reduction in expenses, and therefore reduction of cash drawdowns from the grant, and the actual receipt of ERC cash. The 2 CFR 200 rules were not written to contemplate the size of credits that the ERC is considering or the delays in refunds being sent. This could result in a compliance finding that the entity drew down too much cash from the grant.

Budgeting – The ERC could impact other compliance requirements as well. For example, budgets may require approval to move amounts between different line items, and the claiming of the ERC might reduce the payroll taxes or salaries charged to the grants.

Maintenance of Effort – There may be maintenance of effort requirements that require specific dollar amounts of expenses; netting the ERC against the expenses could cause noncompliance with those requirements.

Final Thoughts

If the entity has expense reimbursement types of grants, especially, an evaluation of how the ERC receipt works in those grants needs to be made. Except for a few cases (PPP, SVOG, and RRF), there is no prohibition on using the ERC. However, the compliance requirements may cause a practical limitation on being able to use the ERC. It is best practice to have discussions with your grantor and document the answers in writing as you determine whether grant funds or ERC funds make the most sense in your situation.

If you need assistance with accounting for ERC, please contact your Yeo & Yeo professional.

The week of September 13-17 has been declared National Small Business Week by the Small Business Administration. To commemorate the week, here are three tax breaks to consider.

1. Claim bonus depreciation or a Section 179 deduction for asset additions

Under current law, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in calendar year 2021. That means your business might be able to write off the entire cost of some or all asset additions on this year’s return. Consider making acquisitions between now and December 31.

Note: It doesn’t always make sense to claim a 100% bonus depreciation deduction in the first year that qualifying property is placed in service. For example, if you think that tax rates will increase in the future — either due to tax law changes or a change in your income — it might be better to forgo bonus depreciation and instead depreciate your 2021 asset acquisitions over time.

There’s also a Section 179 deduction for eligible asset purchases. The maximum Section 179 deduction is $1.05 million for qualifying property placed in service in 2021. Recent tax laws have enhanced Section 179 and bonus depreciation but most businesses benefit more by claiming bonus depreciation. We can explain the details of these tax breaks and which is right for your business. You don’t have to decide until you file your tax return.

2. Claim bonus depreciation for a heavy vehicle

The 100% first-year bonus depreciation provision can have a sizable, beneficial impact on first-year depreciation deductions for new and used heavy SUVs, pickups and vans used over 50% for business. For federal tax purposes, heavy vehicles are treated as transportation equipment so they qualify for 100% bonus depreciation.

This option is available only when the manufacturer’s gross vehicle weight rating (GVWR) is above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, usually found on the inside edge of the driver’s side door.

Buying an eligible vehicle and placing it in service before the end of the year can deliver a big write-off on this year’s return. Before signing a sales contract, we can help evaluate what’s right for your business.

3. Maximize the QBI deduction for pass-through businesses

A valuable deduction is the one based on qualified business income (QBI) from pass-through entities. For tax years through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI. This deduction is subject to restrictions that can apply at higher income levels and based on the owner’s taxable income.

For QBI deduction purposes, pass-through entities are defined as sole proprietorships, single-member LLCs that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes and S corporations. For these taxpayers, the deduction can also be claimed for up to 20% of income from qualified real estate investment trust dividends and 20% of qualified income from publicly traded partnerships.

Because of various limitations on the QBI deduction, tax planning moves can unexpectedly increase or decrease it. For example, strategies that reduce this year’s taxable income can have the negative side-effect of reducing your QBI deduction.

Plan ahead

These are only a few of the tax breaks your small business may be able to claim. Contact us to help evaluate your planning options and optimize your tax results.

In the first half of 2021, there was a surge in financial restatements. The reason relates to guidance issued by the Securities and Exchange Commission, requiring special purpose acquisition companies (SPACs) to report warrants as liabilities. SPACs are shell corporations that are listed on a stock exchange with the purpose of acquiring a private company, thereby making it public without going through the traditional IPO process. Historically, SPACs that offer warrants (which allow investors buy shares at a set price in the future) have reported those instruments as equity.

In this situation, most SPAC investors understood that these restatements were related to a financial reporting technicality that applied to the sector at large, rather than problems with a particular company or transaction. But some restatements aren’t so innocuous.

Close-up on restatements

The Financial Accounting Standards Board defines a restatement as a revision of a previously issued financial statement to correct an error. Whether they’re publicly traded or privately held, businesses may reissue their financial statements for several “mundane” reasons. Like the recent situation with SPACs, managers might have misinterpreted the accounting standards, or they simply may have made minor mistakes and need to correct them.

Leading causes for restatements include:

Recognition errors (for example, when accounting for leases or reporting compensation expense from backdated stock options),
Income statement and balance sheet misclassifications (for instance, a company may need to shift cash flows between investing, financing and operating on the statement of cash flows),
Mistakes reporting equity transactions (such as improper accounting for business combinations and convertible securities),
Valuation errors related to common stock issuances,
Preferred stock errors, and
The complex rules related to acquisitions, investments, revenue recognition and tax accounting.

Reasons to restate results

Often, restatements happen when the company’s financial statements are subjected to a higher level of scrutiny. For example, restatements may occur when a private company converts from compiled financial statements to audited financial statements, decides to file for an initial public offering — or merges with a SPAC. Restatements also may be needed when the owner brings in additional internal (or external) accounting expertise, such as a new controller or audit firm.

In some cases, a financial restatement also can be a sign of incompetence, weak internal controls — or even fraud. Such restatements may signal problems that require corrective actions.

We can help

The restatement process can be time consuming and costly. Regular communication with interested parties — including lenders and investors — can help businesses overcome the negative stigma associated with restatements. Management also needs to reassure stakeholders that the company is in sound financial shape to ensure their continued support.

We can help accounting personnel understand the evolving accounting and tax rules to minimize the risk of restatement. Our staff can also help them effectively manage the restatement process and take corrective actions to minimize the risk of restatement going forward.

Commercial loans, particularly small business loans, have been in the news over the past year or so. The federal government’s Paycheck Protection Program has been helpful to many companies, though fraught with administrative challenges.

As your business pushes forward, you may find yourself in need of cash in the months ahead. If so, more traditional commercial loan options are still out there. Before you apply, however, think like a lender to be as prepared as possible and know for sure that the loan is a good idea.

4 basic questions

At the most basic level, a lender has four questions in mind:

How much money do you want?
How do you plan to use it?
When do you need it?
How soon can you repay the loan?

Pose these questions to yourself and your leadership team. Be sure you’re crystal clear on the answers. You’ll need to explain your business objectives in detail and provide a history of previous lender financing as well as other capital contributions.

Lenders will also look at your company’s track record with creditors. This includes business credit reports and your company’s credit score.

Consider the three C’s

Lenders want to minimize risk. So, while you’re role-playing as one, consider the three C’s of your company:

Character. The strength of the management team — its skills, reputation, training and experience — is a key indicator of whether a business loan will be repaid. Strive to work through natural biases that can arise when reviewing your own performance. What areas of your business could be viewed as weaknesses, and how can you assure a lender that you’re improving them?
Capacity. Lenders want to know how you’ll use the loan proceeds to increase cash flow enough to make payments by the maturity date. Work up reasonable cash flow and profitability projections that demonstrate the feasibility of your strategic objectives. Convince yourself before you try to convince the bank!
Collateral. These are the assets pledged if you don’t generate enough incremental cash flow to repay the loan. Collateral is a lender’s backup plan in case your financial projections fall short. Examples include real estate, savings, stock, inventory and equipment.

As part of your effort to think like a lender, use your financial statements to create a thorough inventory of assets that could end up as collateral. Doing so will help you clearly see what’s at stake with the loan. You may need to put personal assets on the line as well.

Gain some insight

Applying for a business loan can be a stressful and even frustrating experience. By taking on the lender’s mindset, you’ll be better prepared for the process. What’s more, you could gain insights into how to better develop strategic initiatives. Contact our firm for help.

A business may be able to claim a federal income tax deduction for a theft loss. But does embezzlement count as theft? In most cases it does but you’ll have to substantiate the loss. A recent U.S. Tax Court decision illustrates how that’s sometimes difficult to do.

Basic rules for theft losses

The tax code allows a deduction for losses sustained during the taxable year and not compensated by insurance or other means. The term “theft” is broadly defined to include larceny, embezzlement and robbery. In general, a loss is regarded as arising from theft only if there’s a criminal element to the appropriation of a taxpayer’s property.

In order to claim a theft loss deduction, a taxpayer must prove:

The amount of the loss,
The date the loss was discovered, and
That a theft occurred under the law of the jurisdiction where the alleged loss occurred.

Facts of the recent court case

Years ago, the taxpayer cofounded an S corporation with another shareholder. At the time of the alleged embezzlement, the other original shareholder was no longer a shareholder, and she wasn’t supposed to be compensated by the business. However, according to court records, she continued to manage the S corporation’s books and records.

The taxpayer suffered an illness that prevented him from working for most of the year in question. During this time, the former shareholder paid herself $166,494. Later, the taxpayer filed a civil suit in a California court alleging that the woman had misappropriated funds from the business.

On an amended tax return, the corporation reported a $166,494 theft loss due to the embezzlement. The IRS denied the deduction. After looking at the embezzlement definition under California state law, the Tax Court agreed with the IRS.

The Tax Court stated that the taxpayer didn’t offer evidence that the former shareholder “acted with the intent to defraud,” and the taxpayer didn’t show that the corporation “experienced a theft meeting the elements of embezzlement under California law.”

The IRS and the court also denied the taxpayer’s alternate argument that the corporation should be allowed to claim a compensation deduction for the amount of money the former shareholder paid herself. The court stated that the taxpayer didn’t provide evidence that the woman was entitled to be paid compensation from the corporation and therefore, the corporation wasn’t entitled to a compensation deduction. (TC Memo 2021-66)

How to proceed if you’re victimized

If your business is victimized by theft, embezzlement or internal fraud, you may be able to claim a tax deduction for the loss. Keep in mind that a deductible loss can only be claimed for the year in which the loss is discovered, and that you must meet other tax-law requirements. Keep records to substantiate the claimed theft loss, including when you discovered the loss. If you receive an insurance payment or other reimbursement for the loss, that amount must be subtracted when computing the deductible loss for tax purposes. Contact us with any questions you may have about theft and casualty loss deductions.

As we approach the holidays and the end of the year, many people may want to make gifts of cash or stock to their loved ones. By properly using the annual exclusion, gifts to family members and loved ones can reduce the size of your taxable estate, within generous limits, without triggering any estate or gift tax. The exclusion amount for 2021 is $15,000.

The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer $45,000 to the children every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 per recipient, and only the excess is taxable. In addition, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below).

Note: This discussion isn’t relevant to gifts made to a spouse because these gifts are free of gift tax under separate marital deduction rules.

Gift-splitting by married taxpayers

If you’re married, a gift made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given by only one of you. Thus, by gift-splitting, up to $30,000 a year can be transferred to each recipient by a married couple because of their two annual exclusions. For example, a married couple with three married children can transfer a total of $180,000 each year to their children and to the children’s spouses ($30,000 for each of six recipients).

If gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return (or returns) that the spouses file. The IRS prefers that both spouses indicate their consent on each return filed. Because more than $15,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $30,000 exclusion covers total gifts. We can prepare a gift tax return (or returns) for you, if more than $15,000 is being given to a single individual in any year.)

“Unified” credit for taxable gifts

Even gifts that aren’t covered by the exclusion, and that are thus taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $11.7 million for 2021. However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.

Be aware that gifts made directly to a financial institution to pay for tuition or to a health care provider to pay for medical expenses on behalf of someone else do not count towards the exclusion. For example, you can pay $20,000 to your grandson’s college for his tuition this year, plus still give him up to $15,000 as a gift.

Annual gifts help reduce the taxable value of your estate. There have been proposals in Washington to reduce the estate and gift tax exemption amount, as well as make other changes to the estate tax laws. Making large tax-free gifts may be one way to recognize and address this potential threat. It could help insulate you against any later reduction in the unified federal estate and gift tax exemption.

Many companies have resumed some level of business-related travel and entertainment (T&E) activities — or they plan to do so this fall. Unfortunately, these expense categories may be susceptible to incomplete recordkeeping and even fraud. So, it’s important for companies to implement formal T&E policies to ensure reporting is detailed and legitimate.

Substantiating expenses

Traditionally, executives, salespeople and other workers who travel or entertain customers for business must submit expense reports after each trip or by the end of each month. Once approved by supervisors, expense reports enable workers to get reimbursed for expenses they pay personally. Alternatively, some companies issue corporate credit cards to cover approved T&E expenses.

To comply with financial reporting and tax rules, the following information is usually required on expense reports:

The amount of the expense,
The time and place of the expense,
The business purpose of the expense, and
The business relationship to the taxpayer of any person fed or entertained (if the expense is for meals or entertainment).

Most companies require travelers to submit copies of original receipts, rather than credit card statements, with their expense reports for T&E items above a predetermined limit (usually $25 or $50). Examples of costs that may qualify for reimbursement are airfare, auto mileage, taxis and ride-sharing services, rental cars, gas and tolls, lodging, tips, business phone calls, wi-fi access charges and meals (with exceptions).

Entertainment expenses — such as football tickets, green fees and fishing excursions — are usually eligible for reimbursement, if permitted by the company’s T&E policy. Plus, they’re deductible for book purposes under U.S. Generally Accepted Accounting Principles (GAAP). But they’re not deductible under current tax law.

Expense accounts gone wild

Completing expense reports is often one of the most dreaded tasks for white-collar professionals. Though the temptation to procrastinate is strong, waiting until the end of the reporting period to submit expense reports can be problematic. It may be difficult to find receipts and remember the details about a business trip that happened weeks or months ago. This can result in errors and omissions when reporting expenses.

Expense account cheating is also common. For example, dishonest workers may overstate expenses, request multiple reimbursements, change numbers on a receipt and otherwise falsify their expense reports. One of the most common fraud methods is to mischaracterize expenses, using legitimate receipts for nonbusiness-related activities.

Getting a handle on spending

Now is a good time to review and possibly upgrade your T&E reporting practices. For example, remind workers what’s considered a “reimbursable” expense, and how often expense reports should be submitted. This prevents misunderstandings and makes punishing infractions, when they occur, easier.

Your company also might want to reinforce its T&E practices by investing in expense tracking software to help managers spot inconsistencies in reporting by subordinates. It’s also important to check for managers who override your company’s T&E policies. Everyone in an organization must be held to the same standards.

Contact us for more information about best practices in reporting T&E expenses. We can help you minimize the risk of errors, omissions and fraud.

For many small to midsize businesses, spending money on marketing calls for a leap of faith that the benefits will outweigh the costs. Much of the planning process tends to focus on the initial expenses incurred rather than how to measure return on investment.

Here are five questions to ask yourself and your leadership team to put a finer point on whether your marketing efforts are likely to pay off:

1. What do we hope to accomplish? Determine as specifically as possible what marketing success looks like. If the goal is to increase sales, what metric(s) are you using to calculate whether you’ve achieved adequate sales growth? Put differently, how will you know that your money was well spent?

2. Where and how often do we plan to spend money? Decide how much of your marketing will be based on recurring activity versus “one off” or ad-hoc initiatives.

For example, do you plan to buy six months of advertising on certain websites, social media platforms, or in a magazine or newspaper? Have you decided to set up a booth at an annual trade show?

Fine tune your efforts going forward by comparing inflows to outflows from various types of marketing spends. Will you be able to create a revenue inflow from sales that at least matches, if not exceeds, the outflow of marketing dollars?

3. Can we track sources of new business, as well as leads and customers? It’s critical to ask new customers how they heard about your company. This one simple question can provide invaluable information about which aspects of your marketing plan are generating the most leads.

Further, once you have discovered a lead or new customer, ensure that you maintain contact with the person or business. Letting leads and customers fall through the cracks will undermine your marketing efforts. If you haven’t already, explore customer relationship management software to help you track and analyze key data points.

4. Are we able to gauge brand awareness? In addition to generating leads, marketing can help improve brand awareness. Although an increase in brand awareness may not immediately translate to increased sales, it tends to do so over time. Identify ways to measure the impact of marketing efforts on brand awareness. Possibilities include customer surveys, website traffic data and social media interaction metrics.

5. Are we prepared for an increase in demand? It may sound like a nice problem to have, but sometimes a company’s marketing efforts are so successful that a sudden upswing in orders occurs. If the business is ill-prepared, cash flow can be strained and customers left disappointed and frustrated.

Make sure you have the staff, technology and inventory in place to meet an increase in demand that effective marketing often produces. We can help you assess the efficacy of your marketing efforts, including calculating informative metrics, and suggest ideas for improvement.

The number of eligible participants at the beginning of the year will determine if your organization’s employee benefit plan requires an audit. An eligible participant is an employee who has met the qualification criteria outlined in the plan document. The employee does not have to be actively participating in the plan to be included in the participant count, rather just eligible to participate.

Employee benefit plans with fewer than 100 eligible participants at the beginning of the year meet the conditions for an audit waiver under 29 CFR 2520.104-46. However, what if your plan has more than 100 eligible participants?

Generally, when a plan has more than 100 eligible participants, an audit is required; however, there are exceptions to this rule. If your plan is in its first year of inception, and there are more than 100 eligible participants, then an audit is required. However, if your plan has been in existence for at least one year and this is the first year that it exceeds 100 eligible participants, then an audit may not be required under the 80/120 rule.

This rule can be complicated and is best explained by an example:

At the beginning of 2019, an employee benefit plan had 95 eligible participants; thus, an audit was not required for 2019. At the beginning of 2020, eligible participants increased to 110. Under the 80/120 rule, the plan can file as a small plan and is not subject to the audit requirement. Had the eligible participant count gone over 120, then an audit would have been required.

Rather than waiting until next year, review your eligible participant count now. If you think you need an audit, contact Yeo & Yeo today.

In recent weeks, some Americans have been victimized by hurricanes, severe storms, flooding, wildfires and other disasters. No matter where you live, unexpected disasters may cause damage to your home or personal property. Before the Tax Cuts and Jobs Act (TCJA), eligible casualty loss victims could claim a deduction on their tax returns. But there are now restrictions that make these deductions harder to take.

What’s considered a casualty for tax purposes? It’s a sudden, unexpected or unusual event, such as a hurricane, tornado, flood, earthquake, fire, act of vandalism or a terrorist attack.

More difficult to qualify

For losses incurred through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters. For example, during the summer of 2021, there have been presidential declarations of major disasters in parts of Tennessee, New York state, Florida and California after severe storms, flooding and wildfires. So victims in affected areas would be eligible for casualty loss deductions.

Note: There’s an exception to the general rule of allowing casualty loss deductions only in federally declared disaster areas. If you have personal casualty gains because your insurance proceeds exceed the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.

Special election to claim a refund

If your casualty loss is due to a federally declared disaster, a special election allows you to deduct the loss on your tax return for the preceding year and claim a refund. If you’ve already filed your return for the preceding year, you can file an amended return to make the election and claim the deduction in the earlier year. This can potentially help you get extra cash when you need it.

This election must be made by no later than six months after the due date (without considering extensions) for filing your tax return for the year in which the disaster occurs. However, the election itself must be made on an original or amended return for the preceding year.

How to calculate the deduction

You must take the following three steps to calculate the casualty loss deduction for personal-use property in an area declared a federal disaster:

Subtract any insurance proceeds.
Subtract $100 per casualty event.
Combine the results from the first two steps and then subtract 10% of your adjusted gross income (AGI) for the year you claim the loss deduction.

Important: Another factor that now makes it harder to claim a casualty loss than it used to be years ago is that you must itemize deductions to claim one. Through 2025, fewer people will itemize, because the TCJA significantly increased the standard deduction amounts. For 2021, they’re $12,550 for single filers, $18,800 for heads of households, and $25,100 for married joint-filing couples.

So even if you qualify for a casualty deduction, you might not get any tax benefit, because you don’t have enough itemized deductions.

Contact us

These are the rules for personal property. Keep in mind that the rules for business or income-producing property are different. (It’s easier to get a deduction for business property casualty losses.) If you are a victim of a disaster, we can help you understand the complex rules.

In order to prepare for a business audit, an IRS examiner generally does research about the specific industry and issues on the taxpayer’s return. Examiners may use IRS “Audit Techniques Guides (ATGs).” A little-known secret is that these guides are available to the public on the IRS website. In other words, your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.

Many ATGs target specific industries or businesses, such as construction, aerospace, art galleries, architecture and veterinary medicine. Others address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.

Unique issues

IRS auditors need to examine different types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand various industries or issues, the accounting methods commonly used, how income is received, and areas where taxpayers might not be in compliance.

By using a specific ATG, an auditor may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the business is located.

Updates and revisions

Some guides were written several years ago and others are relatively new. There is not a guide for every industry. Here are some of the guide titles that have been revised or added this year:

Retail Industry (March 2021),
Construction Industry (April 2021),
Nonqualified Deferred Compensation (June 2021), and
Real Estate Property Foreclosure and Cancellation of Debt (August 2021).

Although ATGs were created to help IRS examiners uncover common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. For a complete list of ATGs, visit the IRS website here: https://www.checkpointmarketing.net/newsletter/linkShimRadar.cfm?key=89521267G3971J9374834&l=72457

In the midst of mounting inflation, supply shortages, geopolitical turmoil, threats of cyberattacks and continuing COVID-19 concerns, public stock prices are expected to fluctuate in the coming months. This situation has unsettled shareholders and makes long-term strategic planning challenging. Now might be a good time to consider getting off the rollercoaster by taking your company out of the public eye.

While public companies enjoy easier access to capital, some small- and mid-market public companies may benefit from delisting. “Going private” stabilizes a company’s value, because it allows management to focus on long-term goals rather than satisfying Wall Street’s demand for short-term profits. Plus, it can reduce compliance costs, lower taxes and eliminate much public and regulatory scrutiny.

But going private can be nearly as complex as going public. So it’s important to understand the financial reporting requirements before you take the plunge.

SEC requirements

Among other requirements, a company that’s going private — together with its controlling shareholders and other affiliates — must file detailed disclosures pursuant to Securities and Exchange Commission (SEC) Rule 13e-3.

The SEC scrutinizes such transactions to ensure that unaffiliated shareholders are treated fairly. To comply with SEC Rule 13e-3 and Schedule 13E-3, companies must disclose:

The purposes of the transaction (including any alternatives considered and the reasons they were rejected),
The fairness of the transaction, both substantive (price) and procedural, and
Any reports, opinions and appraisals “materially related” to the transaction.

Failure to act with the utmost fairness and transparency can bring harsh consequences. The SEC’s rules are intended to protect shareholders, and some states even have takeover statutes to provide shareholders with dissenters’ rights. Such a transition results in a limited trading market to be able to sell the stock.

Handle with care

Going private certainly isn’t for every public company, and other possible remedies exist for problems such as high compliance costs and corporate governance risk. But if the timing’s right and your shareholders are supportive, going private could be a great way to improve your company’s outlook.

Beware, however, that going-private transactions require diligence to withstand SEC scrutiny and prevent lawsuits. If you’re planning to delist your company’s stock, we can help structure and report your transaction to ensure transparency, procedural fairness and a fair price. Contact us to determine what’s right for your company’s situation.

Business owners are regularly urged to create and update their succession plans. And rightfully so — in the event of an ownership change, a solid succession plan can help prevent conflicts and preserve the legacy you’ve spent years or decades building.

But if you want to take your succession plan to the next level, consider expanding its scope beyond ownership. Many companies have key employees, perhaps a CFO or an account executive, who play a critical role in the success of the business.

Your succession plan could include any employee who’s considered indispensable and difficult to replace because of experience, industry or technical knowledge, or other characteristics.

Look to the future

The first step is to identify those you consider essential employees. Whose departure would have the most significant consequence for your business and its strategic plan? Then, when you have a list of names, who might succeed them?

Pinpointing successors calls for more than simply reviewing or updating job descriptions. The right candidates must have the capability to carry out your company’s short- and long-term strategic plans and goals, which their job descriptions might not reflect.

Succession planning should take a forward-looking perspective. The current jobholder’s skills, experience and qualifications are only a starting point. What worked for the last 10 or 20 years might not cut it for the next 10 or 20.

Identify your HiPos

When the time comes, many businesses publicize open positions and invite external candidates to apply. However, it’s easier (and often advantageous) to groom internal candidates before the need arises. To do so, you’ll want to identify your “high potential” (HiPo) employees — those with the ambition, motivation and ability to move up substantially in your organization.

Assess your staff using performance evaluations, discussions about career plans and other tools to determine who can assume greater responsibility now, in a year or in several years. And look beyond the executive or management level; you may discover HiPos in lower-ranking positions.

Develop individual action plans

Once you’ve identified potential internal candidates, develop individual plans for each to follow. Consider your business’s needs, as well as each candidate’s personality and learning style.

An action plan should include multiple components. One example is job shadowing. It will give the candidate a good sense of what is involved in the position under consideration. Other components could include leadership roles on special projects, training, and mentoring and coaching.

Share your vision for the person’s future to ensure common goals. You can update action plans as your company’s and employees’ needs evolve.

Account for the job market

Succession planning beyond ownership is more important than ever in a tight job market. Vacancies for key employees are often difficult to fill — especially for demanding, highly skilled and top-tier positions. We’d be happy to help you review your succession plan and identify which positions may have the greatest financial impact on the continued profitability of your business.

Employer-provided life insurance is a coveted fringe benefit. However, if group term life insurance is part of your benefit package, and the coverage is higher than $50,000, there may be undesirable income tax implications.

Tax on income you don’t receive

The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesn’t add anything to your income tax bill. But the employer-paid cost of group term coverage in excess of $50,000 is taxable income to you. It’s included in the taxable wages reported on your Form W-2 — even though you never actually receive it. In other words, it’s “phantom income.”

What’s worse, the cost of group term insurance must be determined under a table prepared by the IRS even if the employer’s actual cost is less than the cost figured under the table. With these determinations, the amount of taxable phantom income attributed to an older employee is often higher than the premium the employee would pay for comparable coverage under an individual term policy. This tax trap gets worse as an employee gets older and as the amount of his or her compensation increases.

Your W-2 has answers

What should you do if you think the tax cost of employer-provided group term life insurance is higher than you’d like? First, you should establish if this is actually the case. If a specific dollar amount appears in Box 12 of your Form W-2 (with code “C”), that dollar amount represents your employer’s cost of providing you with group term life insurance coverage in excess of $50,000, less any amount you paid for the coverage. You’re responsible for federal, state and local taxes on the amount that appears in Box 12 and for the associated Social Security and Medicare taxes as well.

But keep in mind that the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2, and it’s the Box 1 amount that’s reported on your tax return

Possible options

If you decide that the tax cost is too high for the benefit you’re getting in return, find out whether your employer has a “carve-out” plan (a plan that carves out selected employees from group term coverage) or, if not, whether it would be willing to create one. There are different types of carve-out plans that employers can offer to their employees.

For example, the employer can continue to provide $50,000 of group term insurance (since there’s no tax cost for the first $50,000 of coverage). Then, the employer can either provide the employee with an individual policy for the balance of the coverage, or give the employee the amount the employer would have spent for the excess coverage as a cash bonus that the employee can use to pay the premiums on an individual policy.