As you may have heard, the Coronavirus Aid, Relief and Economic Security (CARES) Act allows “qualified” people to take certain “coronavirus-related distributions” from their retirement plans without paying tax.
So how do you qualify? In other words, what’s a coronavirus-related distribution?
Early distribution basics
In general, if you withdraw money from an IRA or eligible retirement plan before you reach age 59½, you must pay a 10% early withdrawal penalty. This is in addition to any tax you may owe on the income from the withdrawal. There are several exceptions to penalty. For example, you don’t owe the additional 10% tax if you become totally and permanently disabled or if you use the money to pay qualified higher education costs or a certain amount of medical expenses.
Under the CARES Act, you can take up to $100,000 in coronavirus-related distributions made from an eligible retirement plan between January 1 and December 30, 2020. These coronavirus-related distributions aren’t subject to the 10% additional penalty that otherwise generally applies to distributions made before you reach age 59½.
What’s more, a coronavirus-related distribution can be included in income in installments over a three-year period, and you have three years to repay it to an IRA or plan. If you recontribute the distribution back into your IRA or plan within three years of the withdrawal date, you can treat the withdrawal and later recontribution as a totally tax-free rollover.
In new guidance (Notice 2020-50) the IRS explains who qualifies to take a coronavirus-related distribution. A qualified individual is someone who:
• Is diagnosed (or whose spouse or dependent is diagnosed) with COVID-19 after taking a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
• Experiences adverse financial consequences as a result of certain events. To qualify under this test, the individual (or his or her spouse or member of his or her household sharing his or her principal residence) must:
o Be quarantined, be furloughed or laid off, or have work hours reduced due to COVID-19;
o Be unable to work due to a lack of childcare because of COVID-19;
o Experience a business that he or she owns or operates due to COVID-19 close or have reduced hours;
o Have pay or self-employment income reduced because of COVID-19; or
o Have a job offer rescinded or start date for a job delayed due to COVID-19.
As you can see, the rules allow many people — but not everyone — to use retirement funds more effectively under the new exception. If you decide to take advantage of it, be sure to keep good records to show that you qualify. Be careful: You’ll be taxed on the coronavirus-related distribution amount that you don’t recontribute within the three-year window. But you won’t have to worry about owing the 10% early withdrawal penalty if you’re under 59½. Other rules and restrictions apply. Contact us if you have questions or need assistance at firstname.lastname@example.org.
Signed on June 5, 2020, the Paycheck Protection Program Flexibility Act (PPPFA) addressed many flaws related to the Paycheck Protection Program (PPP) portion of the CARES Act. The intent and goal of the new PPPFA was to offer small businesses more flexibility in forgiveness of the loan. Hopefully, most will now receive full forgiveness because of these changes. Before we dive into the changes to the PPP, let’s review what the new legislation does not mean:
Paycheck Protection Program Flexibility Act does NOT increase the amount of the loan you receive. The new act provides small businesses with easier standards to qualify for forgiveness.
FIVE BIGGEST CHANGES included in the Paycheck Protection Flexibility Act and what it could mean for you:
1. The minimum amount of the loan required to be spent on eligible payroll costs was lowered from 75% to 60%. Businesses can now use up to 40% on eligible non payroll costs (mortgage interest, rent, and utilities) and still be eligible for forgiveness.
2. The covered period has been extended from 8 weeks to 24 weeks. The covered period is time period the funds must be used in to qualify for forgiveness and begins once the funds are received. As stated above, this does not change the loan amount but allows small business more flexibility as to use the funds to coincide with additional
3. Standards have been reduced regarding the rehiring employees as business now have until December 31st to rehire their employees instead of June 30th. Further, those businesses that make a good faith effort to rehire employees (and are unable) can still potentially receive full forgiveness.
4. Borrowers of the PPP can delay the payment of employer Social Security Tax (not employee withholdings) until December of 2021 and December 2022 – payable in two equal payments.
5. For those that will not have full forgiveness, repayment period has been increased from two years to five years. The interest rate of 1% remains unchanged.
If you have any questions about how the Paycheck Protection Program Flexibility Act affects you, you can reach us at 508-888-2000 or at email@example.com. Also, the deadline for the PPP REMAINS June 30, 2020, so please be aware if you plan on applying.
The IRS has issued guidance clarifying that certain deductions aren’t allowed if a business has received a Paycheck Protection Program (PPP) loan. Specifically, an expense isn’t deductible if both:
• The payment of the expense results in forgiveness of a loan made under the PPP, and
• The income associated with the forgiveness is excluded from gross income under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The CARES Act allows a recipient of a PPP loan to use the proceeds to pay payroll costs, certain employee healthcare benefits, mortgage interest, rent, utilities and interest on other existing debt obligations.
A recipient of a covered loan can receive forgiveness of the loan in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the loan’s origination date: 1) payroll costs, 2) interest on any covered mortgage obligation, 3) payment on any covered rent, and 4) covered utility payments.
The law provides that any forgiven loan amount “shall be excluded from gross income.”
So the question arises: If you pay for the above expenses with PPP funds, can you then deduct the expenses on your tax return?
The tax code generally provides for a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Covered rent obligations, covered utility payments, and payroll costs consisting of wages and benefits paid to employees comprise typical trade or business expenses for which a deduction generally is appropriate. The tax code also provides a deduction for certain interest paid or accrued during the taxable year on indebtedness, including interest paid or incurred on a mortgage obligation of a trade or business.
No double tax benefit
In IRS Notice 2020-32, the IRS clarifies that no deduction is allowed for an expense that is otherwise deductible if payment of the expense results in forgiveness of a covered loan pursuant to the CARES Act and the income associated with the forgiveness is excluded from gross income under the law. The Notice states that “this treatment prevents a double tax benefit.”
More possibly to come
Two members of Congress say they’re opposed to the IRS stand on this issue. Senate Finance Committee Chair Chuck Grassley (R-IA) and his counterpart in the House, Ways and Means Committee Chair Richard E. Neal (D-MA), oppose the tax treatment. Neal said it doesn’t follow congressional intent and that he’ll seek legislation to make certain expenses deductible. Stay tuned.
The coronavirus (COVID-19) pandemic has affected many Americans’ finances. Here are some answers to questions we have heard.
My employer closed the office and I’m working from home. Can I deduct any of the related expenses?
Unfortunately, no. If you’re an employee who telecommutes, there are strict rules that govern whether you can deduct home office expenses. For 2018–2025 employee home office expenses aren’t deductible. (Starting in 2026, an employee may deduct home office expenses, within limits, if the office is for the convenience of his or her employer and certain requirements are met.) Be aware that these are the rules for employees. Business owners who work from home may qualify for home office deductions.
My son was laid off from his job and is receiving unemployment benefits. Are they taxable?
Yes. Unemployment compensation is taxable for federal tax purposes. This includes your son’s state unemployment benefits plus the temporary $600 per week from the federal government. (Depending on the state he lives in, his benefits may be taxed for state tax purposes as well.)
Your son can have tax withheld from unemployment benefits or make estimated tax payments to the IRS.
The value of my stock portfolio is currently down. If I sell a losing stock now, can I deduct the loss on my 2020 tax return?
It depends. Let’s say you sell a losing stock this year but earlier this year, you sold stock shares at a gain. You have both a capital loss and a capital gain. Your capital gains and losses for the year must be netted against one another in a specific order, based on whether they’re short-term (held one year or less) or long-term (held for more than one year).
If, after the netting, you have short-term or long-term losses (or both), you can use them to offset up to $3,000 ordinary income ($1,500 for married taxpayers filing separately). Any loss in excess of this limit is carried forward to later years, until all of it is either offset against capital gains or deducted against ordinary income in those years, subject to the $3,000 limit.
Do I have to take a required minimum distribution (RMD) this year?
No, with the CARES Act RMDs have been suspended for 2020. You can still take a distribution from a retirement account but there are no requirements for this tax year.
I am 40 years old and have been affected by COVID, can I take money out of my retirement account without penalty?
Yes, you can take up to $100,000 out of your retirement account penalty free if you have been affected by COVID-19. This distribution will still be taxed, however, unless you pay those funds back (which you can choose to spread over three years).
I know the tax filing deadline has been extended until July 15 this year. Does that mean I have more time to contribute to my IRA?
Yes. You have until July 15 to contribute to an IRA for 2019. If you’re eligible, you can contribute up to $6,000 to an IRA, plus an extra $1,000 “catch-up” amount if you were age 50 or older on December 31, 2019.
What about making estimated payments for 2020?
The 2020 estimated tax payment deadlines for the first quarter (due April 15) and the second quarter (due June 15) have been extended until July 15, 2020.
If you have any other questions, related to your particular situation, you can reach us at 508-888-2000 or firstname.lastname@example.org
Millions of eligible Americans have already received their Economic Impact Payments (EIPs) via direct deposit or paper checks, according to the IRS. Others are still waiting. The payments are part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Here are some answers to questions you may have about EIPs.
Who’s eligible to get an EIP?
Eligible taxpayers who filed their 2018 or 2019 returns and chose direct deposit of their refunds automatically receive an Economic Impact Payment. You must be a U.S. citizen or U.S. resident alien and you can’t be claimed as a dependent on someone else’s tax return. In general, you must also have a valid Social Security number and have adjusted gross income (AGI) under a certain threshold.
The IRS also says that automatic payments will go to people receiving Social Security retirement or disability benefits and Railroad Retirement benefits.
How much are the payments?
EIPs can be up to $1,200 for individuals, or $2,400 for married couples, plus $500 for each qualifying child.
How much income must I have to receive a payment?
You don’t need to have any income to receive a payment. But for higher income people, the payments phase out. The EIP is reduced by 5% of the amount that your AGI exceeds $75,000 ($112,500 for heads of household or $150,000 for married joint filers), until it’s $0.
The payment for eligible individuals with no qualifying children is reduced to $0 once AGI reaches:
• $198,000 for married joint filers,
• $136,500 for heads of household, and
• $99,000 for all others
Each of these threshold amounts increases by $10,000 for each additional qualifying child. For example, because families with one qualifying child receive an additional $500 Payment, their $1,700 Payment ($2,900 for married joint filers) is reduced to $0 once adjusted gross income reaches:
• $208,000 for married joint filers,
• $146,500 for heads of household,
• $109,000 for all others
How will I know if money has been deposited into my bank account?
The IRS stated that it will send letters to EIP recipients about the payment within 15 days after they’re made. A letter will be sent to a recipient’s last known address and will provide information on how the payment was made and how to report any failure to receive it.
Is there a way to check on the status of a payment?
The IRS has introduced a new “Get My Payment” web-based tool that will: show taxpayers either their EIP amount and the scheduled delivery date by direct deposit or paper check, or that a payment hasn’t been scheduled. It also allows taxpayers who didn’t use direct deposit on their last-filed return to provide bank account information. In order to use the tool, you must enter information such as your Social Security number and birthdate. You can access it here: https://bit.ly/2ykLSwa
I tried the tool and I got the message “payment status not available.” Why?
Many people report that they’re getting this message. The IRS states there are many reasons why you may see this. For example, you’re not eligible for a payment or you’re required to file a tax return and haven’t filed yet. In some cases, people are eligible but are still getting this message. Hopefully, the IRS will have it running seamlessly soon.
COVID-19 relief: Overview of the CARES Act
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. In addition to funding the health care fight against the novel coronavirus (COVID-19), the roughly $2 trillion legislation provides much-needed financial relief to individuals, businesses, not-for-profit organizations, and state and local governments during the pandemic. Here are some of the key provisions for individuals and businesses.
Economic Impact Payments
The CARES Act provides one-time direct Economic Impact Payments of up to $1,200 for single filers or heads of households; married couples filing jointly can receive up to $2,400. An additional payment of up to $500 is available for each qualifying child under age 17.
Economic Impact Payments are subject to phaseout thresholds based on adjusted gross income (AGI). The phaseouts begin at $75,000 for singles, $112,500 for heads of household and $150,000 for married couples.
The payments are phased out by $5 for every $100 of AGI above the thresholds. For example, the payment for a married couple with no children is completely phased out when AGI exceeds $198,000. The payment for a head of household with one child is completely phased out when AGI exceeds $146,500. And, for a single filer, it’s completely phased out when AGI exceeds $99,000.
Employee retention credit
The CARES Act creates a new payroll tax credit for employers that pay wages when:
• Their operations are partially or fully suspended because of certain government orders related to the COVID-19 pandemic, or
• Their gross receipts have declined by more than 50% compared to the same quarter in the prior year.
Eligible employers may claim a 50% refundable payroll tax credit on wages paid (including health insurance benefits) of up to $10,000 that are paid or incurred from March 13, 2020, through December 31, 2020.
For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers’ closure or reduced gross receipts are eligible for the credit.
Be aware that additional rules and restrictions apply.
Paycheck Protection Program (PPP)
This $349 billion loan program — administered by the Small Business Administration (SBA) — is intended to help U.S. employers keep workers on their payrolls. To potentially qualify, you must have fewer than 500 full- or part-time employees. PPP loans can be as large as $10 million. But most organizations will receive smaller amounts — generally a maximum of 2.5 times their average monthly payroll costs.
If you receive a loan through the program, proceeds may be used only for paying certain expenses, generally:
• Payroll (including benefits),
• Mortgage interest,
• Rent, and
Perhaps the most reassuring aspect of PPP loans is that they can be forgiven — so long as you follow the rules. And many rules and limits apply. Because of the limited funds available, if you could qualify, you should apply as soon as possible.
The CARES Act expands business access to capital in additional ways. Many of the other loan programs are also being administered by the Small Business Administration (SBA).
Modifications of TCJA provisions
The CARES Act rolls back several revenue-generating provisions of the Tax Cuts and Jobs Act (TCJA). This will help free up cash for some individuals and businesses during the COVID-19 crisis.
The new law temporarily scales back TCJA deduction limitations on:
• Net operating losses (NOLs),
• Business tax losses sustained by individuals,
• Business interest expense, and
• Certain itemized charitable deductions by individuals and charitable deductions for corporations.
The new law also accelerates the recovery of credits for prior-year corporate alternative minimum tax (AMT) liability.
Significant for the hard-hit restaurant and retail sectors, the CARES Act also fixes a TCJA drafting error for real estate qualified improvement property (QIP). Congress originally intended to permanently install a 15-year depreciation period for QIP, making it eligible for first-year bonus depreciation in tax years after the TCJA took effect. Unfortunately, due to a drafting glitch, QIP wasn’t added to the list of property with a 15-year depreciation period — instead, it was left subject to a 39-year depreciation period. The CARES Act retroactively corrects this mistake and allows you to choose between first-year bonus depreciation and 15-year depreciation for QIP expenditures.
So much more
The financial relief package under the CARES Act also includes provisions to:
• Significantly expand unemployment benefits for workers,
• Allow IRA owners and qualified retirement plan participants under age 59 ½ who suffer certain adverse effects due to the COVID-19 pandemic to withdraw in 2020 up to $100,000 and then recontribute the withdrawn amount within three years with no federal income tax consequences,
• Waive required minimum distributions (RMDs) from IRAs and retirement plans that would otherwise have to be taken in 2020 to avoid an expensive penalty,
• Provide an above-the-line charitable deduction of up to $300, generally for 2020 cash contributions to qualified charities, and
• Exclude from an employee’s taxable income up to $5,250 of employer payments made on the employee’s student loans from the date of the CARES Act’s enactment through December 31, 2020.
The CARES Act also allows employers to defer their portion of payments of Social Security payroll taxes through the end of 2020 (with similar relief provided to self-employed individuals).
Keep in mind that additional guidance could be released, or legislation signed into law, that could affect these CARES Act provisions. And more relief measures could be forthcoming.
The COVID-19 pandemic has affected every household and business in some way. If you have suffered financial losses, contact us to discuss resources that may be available to help you weather this unprecedented storm. If you would like information like this sent to you directly, please sign up for our monthly newsletter here: https://www.fjhcpa.com/monthly-news
On March 27th, the Coronavirus Aid, Relief, and Economic Security Act – simply known as the CARES Act - was signed into law. Many portions of this unprecedented Act have been discussed so here are a few distinct highlights:
Stimulus checks – They are coming!
- Individuals and married couples are eligible for stimulus checks of $1,200 and $2,400, respectively, plus an additional $500 per child under the age of 17.
- There are income limitations to receive these stimulus checks but even if you did not qualify in 2019, you will be eligible for relief on your 2020 tax return if you would be eligible based upon your 2020 income. The income limitations are $75,000 for individuals and $150,000 for couples. For every $1,000 over the limit, the amount of the stimulus will be reduced by $50 until that number reaches zero.
- If you have not filed your filed your 2019 return, the IRS will use the 2018 return to determine your eligibility. If you were not required to file a return due to Social Security being your only income, the IRS will not require you to file a return and will send out the stimulus checks.
- A question commonly asked is “what if I owe the IRS? Will I still get my stimulus?”, the answer is YES, assuming you qualify.
Small Business Relief – SBA has offered a number of loan products available.
- Paycheck Protection Program (also known as the PPP) is available through local lenders. This allow businesses with under 500 employees to access funds up to 2.5 times their monthly payroll costs to use for expenses such as payroll, rent, utilities, and interest on preexisting debt. A portion – if not all - of this loan will be forgivable if the funds are used for those purposes and your workforce is maintained.
- Economic Injury Disaster Loan (also known as the EIDL) is available directly through SBA. You can find this link on their website. This loan is eligible for those without employees. Additionally, there are advances available for this loan in the form of emergency grants, but you have to fill out that application first.
Unemployment Benefits – Expended benefits.
- Self-employed individuals and gig workers will be eligible for unemployment when they never were previously before. States have been slow on this implementation and vary on the ease of benefits, but they will be made available.
- Additional funds on top of your state unemployment are available as well. Individuals may be eligible for an additional $600 per week of unemployment compensation.
- Prior to the CARES Act, Massachusetts waived the one week waiting period for unemployment. Employees are also eligible for additional 13 weeks of unemployment benefits beyond the normal state maximums if they are still unemployed.
Retirement Plans – 2020 Changes.
- No Required Minimum Distributions for 2020. It should be noted the age for RMDs moving forward will be 72 (instead of 70.5). If you have earned income, there is no longer an age limit for contributing to your IRA if you want to take advantage of the depressed stock market.
- 401K Loan limits have doubled, previously individuals were limited to $50,000 loans from their 401Ks are now eligible for $100,000 loan.
- Withdrawal penalty for distributions by individuals under 59.5; if the withdrawal is for Coronavirus related purposes, there will be no penalty for withdrawals up to $100,000 (just make sure your trustee is aware!). These withdrawals will still be taxable, however. There is an option to spread the tax paid over three years OR to pay it back to the retirement account in three years and avoid the tax ramifications. The distributions must be made due to adverse financial consequences of COVID 19.
The CARES Act also offers additional features such as deferment of some payroll taxes, expanded Net Operating Loss options, increased ability for taxpayers to give to charities (including those that take the standard deduction), among other items. Other Acts such as the Families First Act offer payroll credits for certain businesses.
If you would like to learn more or have questions about how this may pertain to you, please reach us at 508-888-2000 or at email@example.com
On March 27, President Trump signed into law another coronavirus (COVID-19) law, which provides extensive relief for businesses and employers. Here are some of the tax-related provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Employee retention credit
The new law provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis.
Employer eligibility. The credit is available to employers with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers that have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
The credit isn’t available to employers receiving Small Business Interruption Loans under the new law.
Wage eligibility. For employers with an average of 100 or fewer full-time employees in 2019, all employee wages are eligible, regardless of whether an employee is furloughed. For employers with more than 100 full-time employees last year, only the wages of furloughed employees or those with reduced hours as a result of closure or reduced gross receipts are eligible for the credit.
No credit is available with respect to an employee for whom the employer claims a Work Opportunity Tax Credit.
The term “wages” includes health benefits and is capped at the first $10,000 paid by an employer to an eligible employee. The credit applies to wages paid after March 12, 2020 and before January 1, 2021.
The IRS has authority to advance payments to eligible employers and to waive penalties for employers who don’t deposit applicable payroll taxes in anticipation of receiving the credit.
Payroll and self-employment tax payment delay
Employers must withhold Social Security taxes from wages paid to employees. Self-employed individuals are subject to self-employment tax.
The CARES Act allows eligible taxpayers to defer paying the employer portion of Social Security taxes through December 31, 2020. Instead, employers can pay 50% of the amounts by December 31, 2021 and the remaining 50% by December 31, 2022.
Self-employed people receive similar relief under the law.
Temporary repeal of taxable income limit for NOLs
Currently, the net operating loss (NOL) deduction is equal to the lesser of 1) the aggregate of the NOL carryovers and NOL carrybacks, or 2) 80% of taxable income computed without regard to the deduction allowed. In other words, NOLs are generally subject to a taxable-income limit and can’t fully offset income.
The CARES Act temporarily removes the taxable income limit to allow an NOL to fully offset income. The new law also modifies the rules related to NOL carrybacks.
Interest expense deduction temporarily increased
The Tax Cuts and Jobs Act (TCJA) generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income.
The CARES Act temporarily and retroactively increases the limit on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020. There are special rules for partnerships.
Bonus depreciation for qualified improvement property
The TCJA amended the tax code to allow 100% additional first-year bonus depreciation deductions for certain qualified property. The TCJA eliminated definitions for 1) qualified leasehold improvement property, 2) qualified restaurant property, and 3) qualified retail improvement property. It replaced them with one category called qualified improvement property (QIP). A general 15-year recovery period was intended to have been provided for QIP. However, that period failed to be reflected in the language of the TCJA. Therefore, under the TCJA, QIP falls into the 39-year recovery period for nonresidential rental property, making it ineligible for 100% bonus depreciation.
The CARES Act provides a technical correction to the TCJA, and specifically designates QIP as 15-year property for depreciation purposes. This makes QIP eligible for 100% bonus depreciation. The provision is effective for property placed in service after December 31, 2017.
Careful planning required
This article only explains some of the relief available to businesses. Additional relief is provided to individuals. Be aware that other rules and limits may apply to the tax breaks described here. Contact us at firstname.lastname@example.org if you have questions about your situation.
With the pandemic of COVID-19, also known as the Coronavirus, the IRS and state governments have been adjusting deadlines and put in emergency protocols to assist taxpayers. Most relevant to taxpayers, the IRS first pushed back the payment deadline 90 days to July 15th, then moved the filing deadline to that same date. Payments originally due April 15th will be penalty free and interest free for that time period.
The Families First Coronavirus Response Act allows for small businesses to compensate employees affected by this pandemic beginning April 2nd and they will receive tax credits towards their payroll taxes. Stimulus checks have been discussed to assist taxpayers through this difficult time. Foreclosures have been halted for sixty days. State governments are adapting in different ways. In our home state of Massachusetts, collection of sales, meals and room occupancy tax has been suspended for that due in March, April, & May, with all payments due June 20th, however the filing deadlines for these returns have not changed. The unemployment one-week waiting period has been waived. Disaster funding has been made available with the Commonwealth and the SBA. More emergency regulations will be coming amid an extremely fluid situation. Please contact our office at email@example.com to see how these changing regulations may affect you.
If you’re self-employed and work out of an office in your home, you may be entitled to home office deductions. However, you must satisfy strict rules.
If you qualify, you can deduct the “direct expenses” of the home office. This includes the costs of painting or repairing the home office and depreciation deductions for furniture and fixtures used there. You can also deduct the “indirect” expenses of maintaining the office. This includes the allocable share of utility costs, depreciation and insurance for your home, as well as the allocable share of mortgage interest, real estate taxes and casualty losses.
In addition, if your home office is your “principal place of business,” the costs of traveling between your home office and other work locations are deductible transportation expenses, rather than nondeductible commuting costs. And, generally, you can deduct the cost (reduced by the percentage of non-business use) of computers and related equipment that you use in your home office, in the year that they’re placed into service.
You can deduct your expenses if you meet any of these three tests:
1. Principal place of business. You’re entitled to deductions if you use your home office, exclusively and regularly, as your principal place of business. Your home office is your principal place of business if it satisfies one of two tests. You satisfy the “management or administrative activities test” if you use your home office for administrative or management activities of your business, and you meet certain other requirements. You meet the “relative importance test” if your home office is the most important place where you conduct business, compared with all the other locations where you conduct that business.
2. Meeting place. You’re entitled to home office deductions if you use your home office, exclusively and regularly, to meet or deal with patients, clients, or customers. The patients, clients or customers must physically come to the office.
3. Exclusive business use. You’re entitled to home office deductions for a home office, used exclusively and regularly for business. You may also be able to deduct the expenses of certain storage space for storing inventory or product samples. If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use to store inventory or product samples.
The amount of your home office deductions is subject to limitations based on the income attributable to your use of the office, your residence-based deductions that aren’t dependent on use of your home for business (such as mortgage interest and real estate taxes), and your business deductions that aren’t attributable to your use of the home office. But any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.
Selling the home
Be aware that if you sell — at a profit — a home that contains (or contained) a home office, there may be tax implications. We can explain them to you.
Pin down the best tax treatment
Proper planning can be the key to claiming the maximum deduction for your home office expenses. Contact us at firstname.lastname@example.org if you’d like to discuss your situation.
Many people who launch small businesses start out as sole proprietors. Here are nine tax rules and considerations involved in operating as that entity.
1. You may qualify for the pass-through deduction. To the extent your business generates qualified business income, you are eligible to claim the 20% pass-through deduction, subject to limitations. The deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income. However, you can take the deduction even if you don’t itemize deductions and instead claim the standard deduction.
2. Report income and expenses on Schedule C of Form 1040. The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have losses, they will generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”
3. Pay self-employment taxes. For 2020, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment of up to $137,700, and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax (for a total of 3.8%) is imposed on self-employment income in excess of $250,000 for joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.
4. Make quarterly estimated tax payments. For 2019, these are due April 15, June 15, September 15 and January 15, 2021.
5. You may be able to deduct home office expenses. If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home. And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.
6. You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.
7. Keep complete records of your income and expenses. Specifically, you should carefully record your expenses in order to claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits.
8. If you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes.
9. Consider establishing a qualified retirement plan. The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re are withdrawn. Because many qualified plans can be complex, you might consider a SEP plan, which requires less paperwork. A SIMPLE plan is also available to sole proprietors that offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.
If you want additional information regarding the tax aspects of your new business, or if you have questions about reporting or recordkeeping requirements, please contact us at 508-888-2000.
If you’re getting ready to file your 2019 tax return, and your tax bill is higher than you’d like, there may still be an opportunity to lower it. If you qualify, you can make a deductible contribution to a traditional IRA right up until the Wednesday, April 15, 2020, filing date and benefit from the resulting tax savings on your 2019 return.
Do you qualify?
You can make a deductible contribution to a traditional IRA if:
• You (and your spouse) aren’t an active participant in an employer-sponsored retirement plan, or
• You (or your spouse) are an active participant in an employer plan, and your modified adjusted gross income (AGI) doesn’t exceed certain levels that vary from year-to-year by filing status.
For 2019, if you’re a joint tax return filer covered by an employer plan, your deductible IRA contribution phases out over $103,000 to $123,000 of modified AGI. If you’re single or a head of household, the phaseout range is $64,000 to $74,000 for 2019. For married filing separately, the phaseout range is $0 to $10,000. For 2019, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with modified AGI of between $193,000 and $203,000.
Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59 1/2, unless one of several exceptions apply).
IRAs often are referred to as “traditional IRAs” to distinguish them from Roth IRAs. You also have until April 15 to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA aren’t. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you’re age 59 1/2 or older.
Here are a couple other IRA strategies that might help you save tax.
1. Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2019? That may help you years down the road when you take tax-free payouts from the account. However, the contribution isn’t deductible. If you realize you need the deduction that a traditional IRA contribution provides, you can change your mind and turn that Roth IRA contribution into a traditional IRA contribution via the “recharacterization” mechanism. The traditional IRA deduction is then yours if you meet the requirements described above.
2. Make a deductible IRA contribution, even if you don’t work. In general, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner and you manage the home front. In this case, you may be able to take advantage of a spousal IRA.
How much can you contribute?
For 2019 if you’re qualified, you can make a deductible traditional IRA contribution of up to $6,000 ($7,000 if you’re 50 or over). In addition, small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for their returns, including extensions. For 2019, the maximum contribution you can make to a SEP account is $56,000.
If you’d like more information about whether you can contribute to an IRA or SEP, contact us or ask about it when we’re preparing your return. We’d be happy to explain the rules and help you save the maximum tax-advantaged amount for retirement.
Help protect your personal information by filing your 2019 tax return early
The IRS announced it is opening the 2019 individual income tax return filing season on January 27. Even if you typically don’t file until much closer to the April 15 deadline (or you file for an extension), consider filing as soon as you can this year. The reason: You can potentially protect yourself from tax identity theft — and you may obtain other benefits, too.
Tax identity theft explained
In a tax identity theft scam, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund.
The legitimate taxpayer discovers the fraud when he or she files a return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the valid one, tax identity theft can cause major headaches to straighten out and significantly delay a refund.
Filing early may be your best defense: If you file first, it will be the tax return filed by a would-be thief that will be rejected, rather than yours.
Note: You can get your individual tax return prepared by us before January 27 if you have all the required documents. It’s just that processing of the return will begin after IRS systems open on that date.
Your W-2s and 1099s
To file your tax return, you must have received all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2019 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2019 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).
If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.
Other advantages of filing early
Besides protecting yourself from tax identity theft, another benefit of early filing is that, if you’re getting a refund, you’ll get it faster. The IRS expects most refunds to be issued within 21 days. The time is typically shorter if you file electronically and receive a refund by direct deposit into a bank account.
Direct deposit also avoids the possibility that a refund check could be lost or stolen or returned to the IRS as undeliverable. And by using direct deposit, you can split your refund into up to three financial accounts, including a bank account or IRA. Part of the refund can also be used to buy up to $5,000 in U.S. Series I Savings Bonds.
What if you owe tax? Filing early may still be beneficial. You won’t need to pay your tax bill until April 15, but you’ll know sooner how much you owe and can plan accordingly.
Be an early-bird filer
If you have questions about tax identity theft or would like help filing your 2019 return early, please contact us. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.
If you save for retirement with an IRA or other plan, you’ll be interested to know that Congress recently passed a law that makes significant modifications to these accounts. The SECURE Act, which was signed into law on December 20, 2019, made these four changes:
Change #1: The maximum age for making traditional IRA contributions is repealed. Before 2020, traditional IRA contributions weren’t allowed once you reached age 70½. Starting in 2020, an individual of any age can make contributions to a traditional IRA, as long he or she has compensation, which generally means earned income from wages or self-employment.
Change #2: The required minimum distribution (RMD) age was raised from 70½ to 72. Before 2020, retirement plan participants and IRA owners were generally required to begin taking RMDs from their plans by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the early 1960s and, until recently, hadn’t been adjusted to account for increased life expectancies.
For distributions required to be made after December 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plans or IRAs is increased from 70½ to 72.
Change #3: “Stretch IRAs” were partially eliminated. If a plan participant or IRA owner died before 2020, their beneficiaries (spouses and non-spouses) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy. This is sometimes called a “stretch IRA.”
However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most non-spouse beneficiaries are generally required to be distributed within 10 years following a plan participant’s or IRA owner’s death. That means the “stretch” strategy is no longer allowed for those beneficiaries.
There are some exceptions to the 10-year rule. For example, it’s still allowed for: the surviving spouse of a plan participant or IRA owner; a child of a plan participant or IRA owner who hasn’t reached the age of majority; a chronically ill individual; and any other individual who isn’t more than 10 years younger than a plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancies.
Change #4: Penalty-free withdrawals are now allowed for birth or adoption expenses. A distribution from a retirement plan must generally be included in income. And, unless an exception applies, a distribution before the age of 59½ is subject to a 10% early withdrawal penalty on the amount includible in income.
Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. The $5,000 amount applies on an individual basis. Therefore, each spouse in a married couple may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.
These are only some of the changes included in the new law. If you have questions about your situation, don’t hesitate to contact us at 508-888-2000.
If you’re starting to fret about your 2019 tax bill, there’s good news — you may still have time to reduce your liability. Three strategies are available that may help you cut your taxes before year-end, including:
1. Accelerate deductions/defer income. Certain tax deductions are claimed for the year of payment, such as the mortgage interest deduction. So, if you make your January 2020 payment this month, you can deduct the interest portion on your 2019 tax return (assuming you itemize).
Pushing income into the new year also will reduce your taxable income. If you’re expecting a bonus at work, for example, and you don’t want the income this year, ask if your employer can hold off on paying it until January. If you’re self-employed, you can delay your invoices until late in December to divert the revenue to 2020.
You shouldn’t pursue this approach if you expect to land in a higher tax bracket next year. Also, if you’re eligible for the qualified business income deduction for pass-through entities, you might reduce the amount of that deduction if you reduce your income.
2. Maximize your retirement contributions. What could be better than paying yourself instead of Uncle Sam? Federal tax law encourages individual taxpayers to make the maximum allowable contributions for the year to their retirement accounts, including traditional IRAs and SEP plans, 401(k)s and deferred annuities.
For 2019, you generally can contribute as much as $19,000 to 401(k)s and $6,000 for traditional IRAs. Self-employed individuals can contribute up to 25% of your net income (but no more than $56,000) to a SEP IRA.
3. Harvest your investment losses. Losing money on your investments has a bit of an upside — it gives you the opportunity to offset taxable gains. If you sell underperforming investments before the end of the year, you can offset gains realized this year on a dollar-for-dollar basis.
If you have more losses than gains, you generally can apply up to $3,000 of the excess to reduce your ordinary income. Any remaining losses are carried forward to future tax years.
We can help
The strategies described above are only a sampling of strategies that may be available. Contact us at 508-888-2000 if you have questions about these or other methods for minimizing your tax liability for 2019.
The right entity choice can make a difference in the tax bill you owe for your business. Although S corporations can provide substantial tax advantages over C corporations in some circumstances, there are plenty of potentially expensive tax problems that you should assess before making the decision to convert from a C corporation to an S corporation.
Here’s a quick rundown of four issues to consider:
LIFO inventories. C corporations that use last-in, first-out (LIFO) inventories must pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.
Built-in gains tax. Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective, if those gains are recognized within five years after the conversion. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.
Passive income. S corporations that were formerly C corporations are subject to a special tax. That tax kicks in if their passive investment income (including dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.
Unused losses. If your C corporation has unused net operating losses, they can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.
These are only some of the factors to consider when a business switches from C to S status. For example, shareholder-employees of S corporations can’t get all of the tax-free fringe benefits that are available with a C corporation. And there may be issues for shareholders who have outstanding loans from their qualified plans. These factors have to be taken into account in order to understand the implications of converting from C to S status.
Contact us at 508-888-2000, we can explain how these factors will affect your company’s situation and come up with strategies to minimize taxes.
The Tax Cuts and Jobs Act (TCJA) made only one change to the federal gift and estate tax regime, but it was a big one. It more than doubled the combined gift and estate tax exemption, as well as the generation-skipping transfer (GST) tax exemption. This change is only temporary, however. Unless Congress takes further action, the exemptions will return to their inflation-adjusted 2017 levels starting in 2026.
What does this mean for your estate plan? If your estate is well within the 2019 exemption amount of $11.40 million ($11.58 million for 2020), the higher exemption won’t have a big impact on your estate planning strategies. But if your estate is in the $6 million to $11 million range, it’s important to build some flexibility into your plan to address potential tax liability after 2025.
This is further complicated by state laws. In Massachusetts, for example, the estate tax filing threshold is set at $1 million.
An uncertain future
Anything can happen between now and 2026. Lawmakers may allow the exemption amount to revert to its pre-TCJA level, reduce it even further (some have suggested $3.5 million) or make the current amount permanent. Or they may repeal the gift, estate and GST taxes altogether.
This uncertainty makes planning a challenge. Let’s say your estate is worth $8 million. If you die between now and 2025, you’ll avoid estate taxes. But suppose you live beyond 2025 and the exemption drops to an inflation-adjusted $5.75 million. Your estate will be hit with a $900,000 tax liability. A $3.5 million exemption would double the tax to $1.8 million.
One option is to take advantage of the higher exemption by giving away assets (either outright or in trust) during your lifetime. These gifts would be shielded from gift and GST taxes by the current exemption. And the assets (together with any future appreciation in value) would be removed from your estate, avoiding estate taxes even if the exemption decreases in the future.
The problem with this approach is that gifts of appreciated assets retain your tax basis, subjecting your beneficiaries to capital gains taxes if they’re sold. Assets transferred at death, on the other hand, enjoy a “stepped-up basis” and can be sold with lower or no capital gains. If you make substantial lifetime gifts and the exemption amount remains at its current level in the future (or the estate tax is repealed), you’ll have triggered capital gains taxes needlessly.
One strategy to use to build flexibility into your plan is to use an irrevocable trust. This can enable you or your representatives to switch gears once the future of the estate tax becomes clearer. With this strategy, you transfer assets to an irrevocable trust, taking advantage of the current exemption amount. But you give the trustee the authority to take certain actions that would cause the assets to be included in your estate — such as granting you a power of appointment or naming you as successor trustee. The trustee would exercise this authority if it turns out that estate inclusion would produce a better tax outcome.
Contact us to learn about this or other strategies to build flexibility into your estate plan.
Are you charitably minded and have a significant amount of money in an IRA? If you’re age 70½ or older, and don’t need the money from required minimum distributions, you may benefit by giving these amounts to charity.
IRA distribution basics
A popular way to transfer IRA assets to charity is through a tax provision that allows IRA owners who are 70½ or older to give up to $100,000 per year of their IRA distributions to charity. These distributions are called qualified charitable distributions, or QCDs. The money given to charity counts toward the donor’s required minimum distributions (RMDs), but doesn’t increase the donor’s adjusted gross income or generate a tax bill.
So while QCDs are exempt from federal income taxes, other traditional IRA distributions are taxable (either wholly or partially depending on whether you’ve made any nondeductible contributions over the years).
Unlike regular charitable donations, QCDs can’t be claimed as itemized deductions.
Keeping the donation out of your AGI may be important because doing so can:
In addition, keep in mind that charitable contributions don’t yield a tax benefit for those individuals who no longer itemize their deductions (because of the larger standard deduction under the Tax Cuts and Jobs Act). So those who are age 70½ or older and are receiving RMDs from IRAs may gain a tax advantage by making annual charitable contributions via a QCD from an IRA. This charitable contribution will reduce RMDs by a commensurate amount, and the amount of the reduction will be tax-free.
There’s a $100,000 limit on total QCDs for any one year. But if you and your spouse both have IRAs set up in your respective names, each of you is entitled to a separate $100,000 annual QCD limit, for a combined total of $200,000.
The QCD strategy can be a smart tax move for high-net-worth individuals over 70½ years old. If you’re interested in this opportunity, don’t wait until year end to act. Contact us for more information.
Fewer people currently are subject to transfer taxes than ever before. But gift, estate and generation-skipping transfer (GST) taxes continue to place a burden on families with significant amounts of wealth tied up in illiquid closely held businesses, including farms.
Fortunately, Internal Revenue Code Section 6166 provides some relief, allowing the estates of family business owners to defer estate taxes and pay them in installments if certain requirements are met.
Sec. 6166 benefits
For families with substantial closely held business interests, an election to defer estate taxes under Sec. 6166 can help them avoid having to sell business assets to pay estate taxes. It allows an estate to pay interest only (at modest rates) for four years and then to stretch out estate tax payments over 10 years in equal annual installments. The goal is to enable the estate to pay the taxes out of business earnings or otherwise to buy enough time to raise the necessary funds without disrupting business operations.
Be aware that deferral isn’t available for the entire estate tax liability. Rather, it’s limited to the amount of tax attributable to qualifying closely held business interests.
Sec. 6166 requirements
Estate tax deferral is available if 1) the deceased was a U.S. citizen or resident who owned a closely held business at the time of his or her death, 2) the value of the deceased’s interest in the business exceeds 35% of his or her adjusted gross estate, and 3) the estate’s executor or other personal representative makes a Sec. 6166 election on a timely filed estate tax return.
To qualify as a “closely held business,” an entity must conduct an active trade or business at the time of the deceased’s death (and only assets used to conduct that trade or business count for purposes of the 35% threshold). Merely managing investment assets isn’t enough.
In addition, a closely held business must be structured as:
Several special rules make it easier to satisfy Sec. 6166’s requirements. For example, if an estate holds interests in multiple closely held businesses, and owns at least 20% of each business, it may combine them and treat them as a single closely held business for purposes of the 35% threshold. In addition, the section treats stock and partnership interests held by certain family members as owned by the deceased.
On the other hand, the interests owned by corporations, partnerships, estates and trusts are attributed to the underlying shareholders, partners or beneficiaries. This can make it harder to stay under the 45-partner/shareholder limit.
Contact us with questions at 508-888-2000.
Let’s say you’re charitably inclined but have concerns about maintaining a sufficient amount of income to meet your current needs. The good news is that there’s a trust for that: a charitable remainder trust (CRT). This type of trust allows you to support your favorite charity while potentially boosting cash flow, shrinking the size of your taxable estate, and reducing or deferring income taxes.
A CRT in action
You contribute stock or other assets to an irrevocable trust that provides you — and, if you desire, your spouse — with an income stream for life or for a term of up to 20 years. (You can name a noncharitable beneficiary other than yourself or your spouse, but there may be gift tax implications.) At the end of the trust term, the remaining trust assets are distributed to one or more charities you’ve selected.
Generally, you contribute highly appreciated stock or even real estate. This allows you to sell part or all of the investment without paying Capital Gains Taxes. By avoiding the tax, you can reinvest the entire proceeds and keep that working for you and appreciating or producing income.
When you fund the trust, you can claim a charitable income tax deduction equal to the present value of the remainder interest (subject to applicable limits on charitable deductions). Your annual payouts from the trust can be based on a fixed percentage of the trust’s initial value — known as a charitable remainder annuity trust (CRAT). Or they can be based on a fixed percentage of the trust’s value recalculated annually — known as a charitable remainder unitrust (CRUT).
CRUTs vs. CRATs
Generally, CRUTs are preferable for two reasons. First, the annual revaluation of the trust assets allows payouts to increase if the trust assets grow, which can allow your income stream to keep up with inflation. Second, you can make additional contributions to CRUTs, but not to CRATs.
The fixed percentage — called the unitrust amount — can range from 5% to 50%. A higher rate increases the income stream, but it also reduces the value of the remainder interest and, therefore, the charitable deduction. Also, to pass muster with the IRS, the present value of the remainder interest must be at least 10% of the initial value of the trust assets.
The determination of whether the remainder interest meets the 10% requirement is made at the time the assets are transferred — it’s an actuarial calculation based on the trust’s terms. If the ultimate distribution to charity is less than 10% of the amount transferred, there’s no adverse tax impact related to the contribution.
Seek advice before acting
CRTs require careful planning and solid investment guidance to ensure that they meet your needs. Before taking action, discuss your options with us.
You’ve probably seen or heard ads urging you to donate your car to charity. “Make a difference and receive tax savings,” one organization states. But donating a vehicle may not result in a big tax deduction — or any deduction at all.
Trade in, sell or donate?
Let’s say you’re buying a new car and want to get rid of your old one. Among your options are trading in the vehicle to the dealer, selling it yourself or donating it to charity.
If you donate, the tax deduction depends on whether you itemize and what the charity does with the vehicle. For cars worth more than $500, the deduction is the amount for which the charity actually sells the car, if it sells without materially improving it. (This limit includes vans, trucks, boats and airplanes.)
Because many charities wind up selling the cars they receive, your donation will probably be limited to the sale price. Furthermore, these sales are often at auction, or even salvage, and typically result in sales below the Kelley Blue Book® value. To further complicate matters, you won’t know the amount of your deduction until the charity sells the car and reports the sale proceeds to you.
If the charity uses the car in its operations or materially improves it before selling, your deduction will be based on the car’s fair market value at the time of the donation. In that case, fair market value is usually set according to the Blue Book listings.
In these cases, the IRS will accept the Blue Book value or another established used car pricing guide for a car that’s the same make, model, and year, sold in the same area and in the same condition, as the car you donated. In some cases, this value may exceed the amount you could get on a sale.
However, if the car is in poor condition, needs substantial repairs or is unsafe to drive, and the pricing guide only lists prices for cars in average or better condition, the guide won’t set the car’s value for tax purposes. Instead, you must establish the car’s market value by any reasonable method. Many used car guides show how to adjust value for items such as accessories or mileage.
You must itemize
In any case, you must itemize your deductions to get the tax benefit. You can’t take a deduction for a car donation if you take the standard deduction. Under the Tax Cuts and Jobs Act, fewer people are itemizing because the law significantly increased the standard deduction amounts. So even if you donate a car to charity, you may not get any tax benefit, because you don’t have enough itemized deductions.
If you do donate a vehicle and itemize, be careful to substantiate your deduction. Make sure the charity qualifies for tax deductions. If it sells the car, you’ll need a written acknowledgment from the organization with your name, tax ID number, vehicle ID number, gross proceeds of sale and other information. The charity should provide you with this acknowledgment within 30 days of the sale.
If, instead, the charity uses (or materially improves) the car, the acknowledgment needs to certify the intended use (or improvement), along with other information. This acknowledgment should be provided within 30 days of the donation.
Consider all factors
Of course, a tax deduction isn’t the only reason for donating a vehicle to charity. You may want to support a worthwhile organization. Or you may like the convenience of having a charity pick up a car at your home on short notice. But if you’re donating in order to claim a tax deduction, make sure you understand all the ramifications. Contact us at 508-888-2000 if you have questions.
We all know the cost of college is expensive. The latest figures from the College Board show that the average annual cost of tuition and fees was $10,230 for in-state students at public four-year universities — and $35,830 for students at private not-for-profit four-year institutions. These amounts don’t include room and board, books, supplies, transportation and other expenses that a student may incur.
Two tax credits
Fortunately, the federal government offers two sizable tax credits for higher education costs that you may be able to claim:
1. The American Opportunity credit. This tax break generally provides the biggest benefit to most taxpayers. The American Opportunity credit provides a maximum benefit of $2,500. That is, you may qualify for a credit equal to 100% of the first $2,000 of expenses for the year and 25% of the next $2,000 of expenses. It applies only to the first four years of postsecondary education and is available only to students who attend at least half time.
Basically, tuition, course materials and fees qualify for this credit. The credit is per eligible student and is subject to phaseouts based on modified adjusted gross income (MAGI). For 2019, the MAGI phaseout ranges are:
2. The Lifetime Learning credit. This credit equals 20% of qualified education expenses for up to $2,000 per tax return. There are fewer restrictions to qualify for this credit than for the American Opportunity credit.
The Lifetime Learning credit can be applied to education beyond the first four years, and qualifying students may attend school less than half time. The student doesn’t even need to be part of a degree program. So, the credit works well for graduate studies and part-time students who take a qualifying course at a local college to improve job skills. It applies to tuition, fees and materials.
It’s also subject to phaseouts based on MAGI, however. For 2019, the MAGI phaseout ranges are:
Note: You can’t claim either the American Opportunity Credit or the Lifetime Learning Credit for the same student or for the same expense in the same year.
Credit for what you’ve paid
So which higher education tax credit is right for you? A number of factors need to be reviewed before determining the answer to that question. Contact us for more information about how to take advantage of tax-favored ways to save or pay for college.
Contact us at 508-888-2000 to discuss your options (or previously missed credits) and see if any year-end planning is necessary.
If you’re self-employed and don’t have withholding from paychecks, you probably have to make estimated tax payments. These payments must be sent to the IRS on a quarterly basis. The third 2019 estimated tax payment deadline for individuals is Monday, September 16. Even if you do have some withholding from paychecks or payments you receive, you may still have to make estimated payments if you receive other types of income such as Social Security, prizes, rent, interest, and dividends.
You must make sufficient federal income tax payments long before the April filing deadline through withholding, estimated tax payments, or a combination of the two. If you fail to make the required payments, you may be subject to an underpayment penalty, as well as interest.
In general, you must make estimated tax payments for 2019 if both of these statements apply:
If you’re a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.
Quarterly due dates
Estimated tax payments are spread out through the year. The due dates are April 15, June 15, September 15 and January 15 of the following year. However, if the date falls on a weekend or holiday, the deadline is the next business day (which is why the third deadline is September 16 this year).
Estimated tax is calculated by factoring in expected gross income, taxable income, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.
Most individuals make estimated tax payments in four installments. In other words, you can determine the required annual payment, divide the number by four and make four equal payments by the due dates. But you may be able to make smaller payments under an “annualized income method.” This can be useful to people whose income isn’t uniform over the year, perhaps because of a seasonal business. For example, let’s say your income comes exclusively from a business that you operate in a beach town during June, July and August. In this case, with the annualized income method, no estimated payment would be required before the usual September 15 deadline. You may also want to use the annualized income method if a large portion of your income comes from capital gains on the sale of securities that you sell at various times during the year.
Determining the correct amount
Contact us if you think you may be eligible to determine your estimated tax payments under the annualized income method, or you have any other questions about how the estimated tax rules apply to you.
Operating a business as an S corporation may provide many advantages, including limited liability for owners and no double taxation (at least at the federal level). Self-employed people may also be able to lower their exposure to Social Security and Medicare taxes if they structure their businesses as S corps for federal tax purposes. But not all businesses are eligible — and with changes under the Tax Cuts and Jobs Act, S corps may not be as appealing as they once were.
Compare and contrast
The main reason why businesses elect S corp status is to obtain the limited liability of a corporation and the ability to pass corporate income, losses, deductions and credits through to shareholders. In other words, S corps generally avoid double taxation of corporate income — once at the corporate level and again when it’s distributed to shareholders. Instead, tax items pass through to the shareholders’ personal returns, and they pay tax at their individual income tax rates.
But double taxation may be less of a concern today due to the 21% flat income tax rate that now applies to C corporations. Meanwhile, the top individual income tax rate is 37%. S corp owners may be able to take advantage of the qualified business income (QBI) deduction, which can be equal to as much as 20% of QBI.
In order to assess S corp status, you have to run the numbers with your tax advisor, and factor in state taxes to determine which structure will be the most beneficial for you and your business.
S corp qualifications
If you decide to go the S corp route, make sure you qualify and will stay qualified. To be eligible to elect to be an S corp or to convert, your business must:
In addition, certain businesses are ineligible, such as financial institutions and insurance companies.
Base compensation on what’s reasonable
Another important consideration when electing S status is shareholder compensation. One strategy for paying less in Social Security and Medicare employment taxes is to pay modest salaries to yourself and any other S corp shareholder-employees. Then, pay out the remaining corporate cash flow (after you’ve retained enough in the company’s accounts to sustain normal business operations) as federal-employment-tax-free cash distributions.
However, the IRS is on the lookout for S corps that pay shareholder-employees unreasonably low salaries to avoid paying employment taxes and then make distributions that aren’t subject to those taxes.
Paying yourself a modest salary will work if you can prove that your salary is reasonable based on market levels for similar jobs. Otherwise, you run the risk of the IRS auditing your business and imposing back employment taxes, interest and penalties. We can help you decide on a salary and gather proof that it’s reasonable.
Consider all angles
Contact us at 508-888-2000 if you think being an S corporation might help reduce your tax bill while still providing liability protection. We can help with the mechanics of making an election or making a conversion, under applicable state law, and then handling the post-conversion tax issues.
If you’re like many people, you’ve worked hard to accumulate a large nest egg in your traditional IRA (including a SEP-IRA). It’s even more critical to carefully plan for withdrawals from these retirement-savings vehicles.
Knowing the fine points of the IRA distribution rules can make a significant difference in how much you and your family will get to keep after taxes. Here are three IRA areas to understand:
1.Taking early distributions. If you need to take money out of your traditional IRA before age 59½, any distribution to you will be generally taxable (unless nondeductible contributions were made, in which case part of each payout will be tax-free). In addition, distributions before age 59½ may be subject to a 10% penalty tax.
However, there are several ways that the penalty tax (but not the regular income tax) can be avoided. These exceptions include paying for unreimbursed medical expenses, paying for qualified educational expenses and buying a first home (up to $10,000).
2. Naming your beneficiary (or beneficiaries). This decision affects the minimum amounts you must withdraw from the IRA when you reach age 70½; who will get what remains in the account at your death; and how that IRA balance can be paid out. What’s more, a periodic review of the individuals you’ve named as IRA beneficiaries is critical to assure that your overall estate planning objectives will be achieved. Review them when circumstances change in your personal life, finances and family.
3. Taking required distributions. Once you reach age 70½, distributions from your traditional IRAs must begin. It doesn’t matter if you haven’t retired. If you don’t withdraw the minimum amount each year, you may have to pay a 50% penalty tax on what should have been taken — but wasn’t. In planning for required minimum distributions, your income needs must be weighed against the desirable goal of keeping the tax shelter of the IRA going for as long as possible for both yourself and your beneficiaries.
Keep more of your money
Prudently planning how to take money out of your traditional IRA can mean more money for you and your heirs. Keep in mind that Roth IRAs operate under a different set of rules than traditional IRAs. Contact us to review your traditional and Roth IRAs, and to analyze other aspects of your retirement planning.
The Tax Cuts and Jobs Act (TCJA) has changed the landscape for business taxpayers. That’s because the law introduced a flat 21% federal income tax rate for C corporations. Under prior law, profitable C corporations paid up to 35%.
The TCJA also cut individual income tax rates, which apply to sole proprietorships and pass-through entities, including partnerships, S corporations, and LLCs (treated as partnerships for tax purposes). However, the top rate dropped from 39.6% to only 37%.
These changes have caused many business owners to ask: What’s the optimal entity choice for me?
Entity tax basics
Before the TCJA, conventional wisdom was that most small businesses should be set up as sole proprietorships or pass-through entities to avoid the double taxation of C corporations. A C corporation pays entity-level income tax and then shareholders pay tax on dividends — and on capital gains when they sell the stock. For pass-through entities, there’s no federal income tax at the entity level.
Although C corporations are still potentially subject to double taxation, their current 21% tax rate helps make up for it. This issue is further complicated, however, by another tax provision that allows noncorporate owners of pass-through entities to take a deduction equal to as much as 20% of qualified business income (QBI), subject to various limits. But, unless Congress extends it, that deduction is available only through 2025.
Many factors to consider
The best entity choice for your business depends on many factors. Keep in mind that one form of doing business might be more appropriate at one time (say, when you’re launching), while another form might be better after you’ve been operating for a few years. Here are a few examples:
As you can see, there are many issues involved and taxes are only one factor.
For example, one often-cited advantage of certain entities is that they allow a business to be treated as an entity separate from the owner. A properly structured corporation can protect you from business debts. But to ensure that the corporation is treated as a separate entity, it’s important to observe various formalities required by the state. These include filing articles of incorporation, adopting by-laws, electing a board of directors, holding organizational meetings and keeping minutes.
The best long-term choice
The TCJA has far-reaching effects on businesses. Contact us to discuss how your business should be set up to lower its tax bill over the long run. But remember that entity choice is easier when starting up a business. Converting from one type of entity to another adds complexity. We can help you examine the ins and outs of making a change for you specifically at 508-888-2000.
The gift and estate tax exemption is higher than it’s ever been, thanks to the Tax Cuts and Jobs Act (TCJA), which temporarily doubled the exemption to an inflation-adjusted $10 million ($20 million for married couples who design their estate plans properly). This year, the exemption amount is $11.4 million ($22.8 million for married couples).
If you’re married and you executed your estate planning documents years ago, when the exemption was substantially lower, review your plan to ensure that the increased exemption doesn’t trigger unintended results. It’s not unusual for older estate planning documents to include a “formula funding clause,” which splits assets between a credit shelter trust and the surviving spouse — either outright or in a marital trust.
Formula funding clause in action
Although the precise language may vary, a typical clause funds the credit shelter trust with “the greatest amount of property that may pass to others free of federal estate tax,” with the balance going to the surviving spouse or marital trust. Generally, credit shelter trusts are designed to preserve wealth for one’s children (from an existing or previous marriage), with limited benefits for the surviving spouse.
A formula clause works well when an estate is substantially larger than the exemption amount ? but, if that’s no longer the case, it can lead to undesirable results, including inadvertent disinheritance of one’s spouse.
For example, Ciara and Mike, a married couple, each own $10 million in assets, and their estate plan contains a formula funding clause. If Ciara died in 2017, when the estate tax exemption was $5.49 million, that amount would have gone into a credit shelter trust and the remaining $4.51 million would have gone to a marital trust for Mike’s benefit. But if Ciara dies in 2019, when the exemption has increased to $11.4 million, her entire estate will pass to the credit shelter trust, leaving nothing for the marital trust.
Exemption amount heading up and then down
With the TCJA temporarily doubling the gift and estate tax exemption amount, unexpected results may occur if you don’t review and revise your plan accordingly. This is especially true if your plan includes a formula funding clause.
Also, be aware that, even though the exemption amount will continue to be adjusted annually for inflation, it expires after 2025. Without further legislation, the exemption will return to an inflation-adjusted $5 million in 2026. We’d be pleased to help review your plan and determine if changes are needed.
Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2019. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
September 30/October 1
The record-high exemption amount currently in effect means that fewer families are affected by gift and estate taxes. As a result, the estate planning focus for many people has shifted from transfer taxes to income taxes. A nongrantor trust can be an effective option to reduce income taxes, and it offers a way around the itemized deduction limitations imposed by the Tax Cuts and Jobs Act (TCJA).
What’s a nongrantor trust?
A nongrantor trust is simply a trust that’s a separate taxable entity. The trust owns the assets it holds and is responsible for taxes on any income those assets generate. A grantor trust, in contrast, is one in which the grantor retains certain powers and, therefore, is treated as the owner for income tax purposes.
Both grantor and nongrantor trusts can be structured so that contributions are considered “completed gifts” for transfer tax purposes (thereby removing contributed assets from the grantor’s taxable estate). But traditionally, grantor trusts have been the estate planning tool of choice. Why? It’s because the trust’s income is taxed to the grantor, reducing the size of the grantor’s estate and allowing the trust assets to grow tax-free, leaving more wealth for beneficiaries. Essentially, the grantor’s tax payments serve as an additional tax-free gift.
With less emphasis today on gift and estate tax savings, nongrantor trusts offer some significant benefits.
How can nongrantor trusts reduce income taxes?
The TCJA places limits on itemized deductions, but nongrantor trusts may offer a way to avoid those limitations. The law nearly doubled the standard deduction to $12,000 for individuals and $24,000 for married couples. (Indexed annually for inflation, the 2019 standard deduction amounts are $12,200 for individuals and $24,400 for married couples.) The TCJA also limits deductions for state and local taxes (SALT) to $10,000.
These changes reduce or eliminate the benefits of itemized deductions for many taxpayers, especially those in high-SALT states. By placing assets in nongrantor trusts, it may be possible to increase your deductions, because each trust enjoys its own $10,000 SALT deduction.
For example, Andy and Kate, a married couple filing jointly, pay well over $10,000 per year in state income taxes. They also own two homes, each of which generates $20,000 per year in property taxes. Under the TCJA, the couple’s SALT deduction is limited to $10,000, which covers a portion of their state income taxes, but they receive no tax benefit for the $40,000 they pay in property taxes.
To avoid this limitation, Andy and Kate transfer the two homes to an LLC, together with assets that earn approximately $40,000 per year in income. Next, they give 25% LLC interests to four nongrantor trusts. Each trust earns around $10,000 per year, which is offset by its $10,000 property tax deduction. Essentially, this strategy allows the couple to deduct their entire $40,000 property tax bill.
Beware the multiple trust rule
If you’re considering this strategy, be aware that the tax code contains a provision that treats multiple trusts with substantially the same grantors and beneficiaries as a single trust if their purpose is tax avoidance.
To ensure that this rule doesn’t erase the benefits of the nongrantor trust strategy, designate a different beneficiary for each trust. Contact us for more information.
Spring and summer are the optimum seasons for selling a home. And interest rates are currently attractive, so buyers may be out in full force in your area. Freddie Mac reports that the average 30-year fixed mortgage rate was 4.14% during the week of May 2, 2019, while the 15-year mortgage rate was 3.6%. This is down 0.41 and 0.43%, respectively, from a year earlier.
But before you contact a realtor to sell your home, you should review the tax considerations.
Sellers can exclude some gain
If you’re selling your principal residence, and you meet certain requirements, you can exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for the exclusion is also excluded from the 3.8% net investment income tax.
To qualify for the exclusion, you must meet these tests:
In addition, you can’t use the exclusion more than once every two years.
Handling bigger gains
What if you’re fortunate enough to have more than $250,000/$500,000 of profit when selling your home? 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.
Other tax issues
Here are some additional tax considerations when selling a home:
Keep track of your basis. To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use.
Recapturing depreciation. Even if you meet the requirements to exclude the your gain on the sale of your home, you still may have a liability if your claimed depreciation on your home in prior years.
Be aware that you can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.
If you’re selling a second home (for example, a vacation home), be aware that it won’t be 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 exchange. Or you may be able to deduct a loss.
Your home is probably your largest investment. So before selling it, make sure you understand the tax implications. We can help you plan ahead to minimize taxes and answer any questions you have about your situation. Contact us with questions regarding this important investment at 508-888-2000.
While the number of plug-in electric vehicles (EVs) is still small compared with other cars on the road, it’s growing — especially in certain parts of the country. If you’re interested in purchasing an electric or hybrid vehicle, you may be eligible for a federal income tax credit of up to $7,500. (Depending on where you live, there may also be state tax breaks and other incentives.)
However, the federal tax credit is subject to a complex phaseout rule that may reduce or eliminate the tax break based on how many sales are made by a given manufacturer. The vehicles of two manufacturers have already begun to be phased out, which means they now qualify for only a partial tax credit.
Tax credit basics
You can claim the federal tax credit for buying a qualifying new (not used) plug-in EV. The credit can be worth up to $7,500. There are no income restrictions, so even wealthy people can qualify.
A qualifying vehicle can be either fully electric or a plug-in electric-gasoline hybrid. In addition, the vehicle must be purchased rather than leased, because the credit for a leased vehicle belongs to the manufacturer.
The credit equals $2,500 for a vehicle powered by a four-kilowatt-hour battery, with an additional $417 for each kilowatt hour of battery capacity beyond four hours. The maximum credit is $7,500. Buyers of qualifying vehicles can rely on the manufacturer’s or distributor’s certification of the allowable credit amount.
How the phaseout rule works
The credit begins phasing out for a manufacturer over four calendar quarters once it sells more than 200,000 qualifying vehicles for use in the United States. The IRS recently announced that GM had sold more than 200,000 qualifying vehicles through the fourth quarter of 2018. So, the phaseout rule has been triggered for GM vehicles, as of April 1, 2019. The credit for GM vehicles purchased between April 1, 2019, and September 30, 2019, is reduced to 50% of the otherwise allowable amount. For GM vehicles purchased between October 1, 2019, and March 31, 2020, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for GM vehicles purchased after March 31, 2020.
The IRS previously announced that Tesla had sold more than 200,000 qualifying vehicles through the third quarter of 2018. So, the phaseout rule was triggered for Tesla vehicles, effective as of January 1, 2019. The credit for Tesla vehicles purchased between January 1, 2019, and June 30, 2019, is reduced to 50% of the otherwise allowable amount. For Tesla vehicles purchased between July 1, 2019, and December 31, 2019, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for Tesla vehicles purchased after December 31, 2019.
Despite the phaseout kicking in for GM and Tesla vehicles, there are still many other EVs on the market if you’re interested in purchasing one. For an index of manufacturers and credit amounts, visit this IRS Web page: https://www.irs.gov/businesses/irc-30d-new-qualified-plug-in-electric-drive-motor-vehicle-credit . Contact us at 508-888-2000 or at email@example.com if you want more information about the tax breaks that may be available for these vehicles.