dowellgroup

State Taxes - A Risk Businesses Must Assess

Tue, 10 Feb 2026 16:01:52 GMT

Failing to address a business' exposure to the tax codes of other states can be an expensive oversight.

Business owners must assess their risk and exposure to State income taxes. For many businesses, gone are the days when only one state income tax return is filed at tax time.

As budgets become tighter in virtually every state, it is inevitable that states look to taxpayers for additional sources of revenue. Increasingly, states have been using multi-state taxation as a way to raise additional revenue. Compounding the problem for businesses is the fact that it is easier than ever to do business anywhere or with anybody in the country…and it’s just going to get easier.

As your business continues to expand, it’s important to be mindful that your business may have income tax or reporting obligations in multiple states. Each state has its own complex tax laws, thresholds for filing, and definitions of nexus. Although it’s nearly impossible nor practical for a business to know every state tax law, every business is required to be compliant with the states they do business in. The seemingly monumental tasks of ensuring compliance with state tax law starts at the ground level; with you simply asking questions and assessing where you do or will do business. Below is a summary of considerations and questions we want you to be thinking of as we approach tax season.

Do you have customers in other states?

Simply having out-of-state customers might not necessarily create a filing requirement, but it is certainly the point where you need to start digging in to where exactly you are doing business. If shipping a product, it is important to determine and document where the customer takes possession of the product. If you are performing a service, you should determine where the services are performed and whether the location of those services is essential to the overall result of your services. It is a best practice for every business to be tracking which states their customers are coming from. Most states apply an economic nexus standard, where you can generate nexus just based on the level of sales.

Do you have physical locations in multiple states?

Opening a physical location, operating a warehouse, or satellite office in another state almost certainly constitutes nexus in that state. Once you establish physical presence in another location, it’s crucial to track the revenue and expenses, inventory, or other significant activity measures by each location. If you own or rent real estate in another state, the income directly produced by said real estate is generally taxable to the state where it resides.

Do you have remote employees working in other states?

Hiring or allowing employees work remotely has become much more prevalent in the 2020s. If you hire someone works remotely in another state, it will generally create payroll tax filing obligations within that state. And, when you file a payroll tax return in a state, your business gets on the “radar” for that state for income taxes. Many states have what’s called a “payroll factor” on their income tax returns; where a portion of taxable income must be allocated to the state based on payroll. It is also important to consider whether having an employee in the state is essential to a revenue stream or customer.

Are you marketing in other states?

Public Law 86-272 can protect “mere solicitation” for orders of tangible goods from out-of-state taxation, but it does not apply to services. Additionally, any coordinated or targeting marketing campaign in a state likely will constitute nexus within that state. There is also a consideration referred to as “cookie nexus”. Several states assert that placing cookies on customers’ computers can create a physical presence in that state. If you have a significant marketing budget or are leaving cookies, you might review where the efforts are concentrated to see if it can be deemed significant to certain states.

Does your business have any shareholders or partners in another state?

A “silent” partner or shareholder who is strictly an investor will not automatically trigger nexus in many states. However, if a partner or shareholder actively participates in the business from another state, then you should look at the circumstances of what work they’re performing to determine if your business has tax-filing requirements in that state.

Do you regularly travel to meet clients in other states?

If a key part of a service you are providing involves travelling to a client location, most states would consider this as doing business in their state. To help assess whether client travel is substantial enough to establish nexus, your business might review the travel expenses, the time spent in a different state, and the revenue generated.

Do you attend seminars, conferences, or trade shows in other states?

Yes, even attending an event on behalf of your business can create nexus in another state. To be clear, simply attending an event probably will not trigger nexus, but active marketing such as setting up a booth, instructing seminars, demonstrating a product, or otherwise soliciting business at the event can establish a physical presence in that state.

While these scenarios are not exhaustive, it’s a good starting point to think about your business’ state tax exposure. If you answered yes to any of these questions, please contact your tax professional at Dowell Group. If you do end up filing in other states, fear not, we’re here to help you. While additional filings may seem cumbersome and feel like an additional tax burden, working with us to help stay compliant will make the process easier and give you peace of mind that you’re doing what’s best for your business and mitigating or minimizing penalties and interest that could be assessed. Not to mention, all states have provisions to avoid double taxation, so a liability in a new state may result in a credit in your home state, which can often nearly be a complete offset.

If you would like additional information or have any questions, please contact your tax professional directly, or call us at 847-934-0300.

2025 Year End Newsletter

Wed, 10 Dec 2025 11:26:20 GMT

Substantial changes brought to tax code by the One Big Beautiful Bill

Individuals – Key Points From OBBB

□ Increased Standard Deduction: The standard deduction has been increased for 2025 and beyond. For 2025, the amounts are $31,500 for joint filers and surviving spouses, $23,625 for heads of household, and $15,750 for singles and marrieds filing separately. These amounts will be adjusted for inflation after 2025. Because these higher amounts mean fewer taxpayers will benefit from itemizing, consider bunching itemized deductions into a single year to exceed the standard deduction, then take the standard deduction in alternate years.

□ Individual SALT Limitation: The state and local tax (SALT) deduction cap is temporarily increased to $40,000 for 2025 ($40,400 in 2026, with 1% annual increases through 2029), before reverting to $10,000 in 2030. For those with MAGI above $500,000 in 2025, the deduction phases out by 30% of the excess over the threshold, but will not drop below $10,000. Managing income and deductions to stay below the phaseout threshold, or timing large transactions to occur in years with a higher cap, can help maximize your tax benefit during this limited window.

□ Individuals' Charitable Deductions (Non-Itemizers) : Beginning in 2026, taxpayers who take the standard deduction can claim an "above-the-line" deduction for cash contributions of up to $1,000 for single filers and $2,000 for married couples filing jointly. This deduction applies only to direct cash gifts to qualified public charities, not to donor-advised funds (DAFs) or private foundations. You should retain record of every charitable donation they make. For non-itemizers, it would be beneficial to delay charitable contributions until 2026 as this “above the line” deduction will not be available on 2025 tax returns.

□ Individuals' Charitable Deductions (Itemizers): Beginning in 2026, for taxpayers who itemize deductions, only the amount of their total charitable contributions that exceeds 0.5% of their AGI will be deductible. For example, a taxpayer with a $200,000 AGI could only deduct contributions above $1,000 (0.5% of $200,000). To minimize the impact of the .5% floor, consider expediting charitable contributions to be made before December 31, 2025 or “bunching” future donations in alternating years. Utilizing a donor-advised fund (DAF) is an effective way to donate larger amounts and taking a deduction in one year, but allowing amounts to be donated to qualified charities over time. Additionally, if you are age 70½ or older, you can circumvent the .5% floor by utilizing a Qualified Charitable Deduction (QCD) if you donate to a charity directly from your IRA.

□ Wagering Losses: Starting in 2026, only 90% of your wagering losses can be deducted against your winnings, even if your losses equal or exceed your winnings. You should keep in mind when gambling that at least 10% of your winnings will be taxable each year, regardless of how much you lose.

□ Car Loan Interest Deduction: For tax years 2025–2028, individuals can deduct up to $10,000 per year in interest paid on loans for new personal-use vehicles even if you don't itemize deductions. The deduction phases out for single filers with MAGI over $100,000 and joint filers over $200,000. To qualify, the loan must be for a new, U.S.-assembled car, SUV, van, pickup, or motorcycle (under 14,000 pounds), secured by a first lien, with the taxpayer as the original owner, and the vehicle's VIN reported on the tax return. If you're planning to buy a new vehicle, consider timing your purchase and loan to maximize deductible interest within the eligible years, and manage your income to stay below the phase-out thresholds for the largest benefit.

□ Miscellaneous Itemized Deductions; Educator Expenses: The Act permanently eliminates miscellaneous itemized deductions for individual taxpayers. Thus, formerly deductible items such as unreimbursed employee business expenses, investment expenses, and tax determination expenses are permanently disallowed. However, starting in 2026, the Act adds a new educator expense deduction that will allow K–12 teachers, counselors, coaches, and aides who work at least 900 hours per year to deduct unreimbursed classroom expenses, such as books, supplies, and equipment. This new deduction won't be classified as a miscellaneous itemized deduction.

□ Casualty Loss Deduction: The rule that limits the casualty loss deduction to losses from disasters has been made permanent. However, starting in 2026, losses from certain state-declared disasters, as well as from federally-declared disasters, will be deductible. A separate Act provision extends the rule that allows an individual's standard deduction to be increased by the individual's net disaster loss. This rule now applies to disasters occurring up to July 4, 2025, the date of enactment of the Act. These losses will be deductible for taxpayers who do not itemize. If you experience a loss due to a qualifying disaster, be sure to document your losses and insurance claims, and consider filing an amended return if you missed claiming a qualified loss in a prior year

□ Pease Limitation: The Pease limitation, which reduced overall itemized deductions for high earners, is permanently repealed. Instead, starting in 2026, high-income taxpayers will see a much smaller 2/37 reduction apply to the lesser of their itemized deductions or the amount by which their taxable income exceeds the 37% tax bracket threshold. With this change, bunching deductible expenses into a single year can be effective, since the reduction is generally less severe than under the old Pease rules.

□ Credit for Contributions to Scholarship-Granting Organizations: For tax years ending after Dec. 31, 2026, individual taxpayers can claim a new income tax credit of up to $1,700 per year for cash contributions to qualifying scholarship-granting organizations (SGOs) in participating states. To maximize this benefit, confirm your state's participation and ensure the SGO is on the IRS-approved list before contributing.

□ Deduction for Taxpayers Age 65 or Older: For tax years 2025–2028, individuals age 65 or older can claim a new $6,000 senior deduction. The deduction is available to both itemizers and non-itemizers. Married taxpayers must file a joint return to claim this deduction. Both spouses on a joint return can claim the deduction if they qualify. The deduction is reduced by 6% of any excess of the taxpayer's modified adjusted gross income (MAGI) above $75,000 (single) or $150,000 (joint). To maximize this benefit, seniors should aim to keep their MAGI below those amounts. Be sure to include the correct SSN for each qualifying individual to avoid disallowance of the deduction.

□ Child Tax Credit: The child tax credit (CTC) has been made permanent and increased to $2,200 per qualifying child for 2025. This amount will be adjusted for inflation after 2025. However, no credit is allowed unless the taxpayer includes a social security number (SSN) for both the qualifying child and the taxpayer (or for at least one spouse in the case of a joint return).

□ Child and Dependent Care Credit: The child and dependent care credit will become more valuable for many families starting in 2026. The maximum credit rate will increase to 50% of eligible expenses, up to $3,000 for one qualifying individual or $6,000 for two or more. The full 50% rate will apply to families with adjusted gross income (AGI) up to $15,000 and gradually phase down to 35% for AGI up to $75,000 ($150,000 for joint filers). The credit rate is further phased down to 20% for AGI up to $105,000 ($210,000 for joint filers). To maximize your benefit, keep thorough records of all qualifying expenses and coordinate with any employer-provided dependent care benefits to avoid missing out on the full credit potential.

□ Adoption Credit: Starting in 2025, the adoption credit is enhanced to include a refundable portion of up to $5,000 per child (indexed for inflation). This means eligible taxpayers can receive up to $5,000 as a refund even if they owe no tax, making the credit more valuable for lower-income families. To maximize this benefit, keep detailed records of all qualified adoption expenses, ensure you have a taxpayer identification number for the child, and file Form 8839 in the year the adoption is finalized.

□ New Tax-Deferred Investment Accounts for Children: Taxpayers can open a new tax-deferred investment account for children, called a “Trump account,” for each eligible child. Taxpayers can contribute up to $5,000 per year in after-tax dollars for each child. Funds must be invested in a diversified U.S. equity index fund. For children born between Jan. 1, 2025, and Dec. 31, 2028, the federal government will automatically contribute $1,000 to each account. Taxpayers should open the account before their child turns 18 to maximize contributions and secure the government benefit if eligible.

□ K–12 Expenses for 529 Accounts: Changes to 529 savings plans allow families to use tax-free distributions for a much broader range of K–12 education expenses, including not just tuition, but also curriculum, books, online materials, tutoring, standardized test fees, dual enrollment, and educational therapies for students with disabilities. Starting in 2026, the annual limit for K–12 distributions doubles from $10,000 to $20,000 per beneficiary. To maximize tax savings, consider timing 529 withdrawals to match qualified expenses within the same tax year, and coordinate with other education tax credits to avoid overlap.

□ Postsecondary Expenses for 529 Accounts: 529 plan distributions can now be used tax-free for a wider range of education expenses, including not only college costs but also “qualified postsecondary credentialing expenses.” This means you can use 529 funds for tuition, fees, books, supplies, and equipment required for enrollment in recognized certificate, licensing, or apprenticeship programs even if they are not traditional degree programs.

□ Alternative Minimum Tax Exemption Amounts: The alternative minimum tax (AMT) exemption amounts are permanently increased for 2026 and beyond, but the phaseout rate for higher-income taxpayers doubles from 25% to 50%. You should review their AMT exposure and consider strategies such as timing income or exercising options in lower-income years to avoid unexpected AMT liability.

□ Energy Efficient Home Improvement Credit: The energy efficient home improvement credit under Code Sec. 25C is terminated for property placed in service after 2025. This applies to qualified improvements such as windows, insulation, and central A/C systems. If you are considering such improvements, it might be beneficial to expedite installation prior to December 31, 2025.

□ Residential Clean energy credit: The residential clean energy expenditures credit is terminated for any expenditures made after 2025. This applies to qualified property such as solar panels, solar water heaters, wind turbines, and geothermal heat pump. If you are considering such improvements, it might be beneficial to expedite installation prior to December 31, 2025.

□ Clean vehicle credits: The credits for new and previously owned clean vehicles terminate for vehicles acquired after September 30, 2025. The credit for qualified commercial clean vehicles also terminates for vehicles acquired after September 30, 2025.

Individuals - Year-End Tax Planning

□ Capital Gains and Losses: Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $96,700 for a married couple for 2025). If the 0% rate applies to long-term capital gains you took earlier this year for example, you are a joint filer who made a profit of $5,000 on the sale of stock held for more than one year and your other taxable income for 2025 is $96,700 or less then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses won't yield a benefit this year. (It will offset $5,000 of capital gain that is already tax-free.)

□ Defer Income and Accelerate Deductions: The provisions of OBBB may result in an overall less tax burden for many taxpayers. Postpone income until next year and accelerate deductions into this year if doing so will enable you to claim larger deductions, credits, and other tax breaks for this year that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into this year. For example, that may be the case for a person who will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or who expects to be in a higher tax bracket next year.

□ Roth IRA Conversion: If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional-IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA this year if eligible to do so. Keep in mind that the conversion will increase your income this year, possibly reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for those potentially subject to higher tax rates under pending legislation.

□ Defer Bonuses: It may be advantageous to try to arrange with your employer to defer, until early next year, a bonus that may be coming your way. This might cut as well as defer your tax. Again, considerations may be different for the highest income individuals.

□ Required Minimum Distributions (RMD): If you were 73 or older this year you must take a required minimum distribution (RMD) from any IRA or 401(k) plan (or other employer-sponsored retirement plan) of which you are a beneficiary. Those who turn 73 this year have until April 1 of next year to take their first RMD but may want to take it by the end of this year to avoid having to double up on RMDs next year.

□ Qualified Charitable Distributions (QCD): If you are age 70½ or older by the end of this year, have traditional IRAs, and especially if you are unable to itemize your deductions, consider making charitable donations via Qualified Charitable Distributions (QCDs) from your IRAs by the end of the year. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. However, you are still entitled to claim the entire standard deduction. For 2025, distributions of up to $108,000 per taxpayer are tax-free (increasing as a result of inflation adjustment to $111,000 in 2026). The IRA qualified charitable distribution also allows distributions to charities (up to $54,000) through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. Amounts donated via the QCD process are not subject to the .5% floor set by OBBB.

□ Planning For Future QCDs: If you are younger than age 70½ at the end of the year, consider making and maximizing non-deductible contributions to your Traditional IRA. Once you reach age 70½, you can take advantage of the allowable QCD amounts each year.

□ Rollover Distributions: Take an eligible rollover distribution from a qualified retirement plan before the end of the year if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes you owe this year. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in this year's income, but the withheld tax will be applied pro rata over the full tax year to reduce previous underpayments of estimated tax.

□ Flexible Spending Account (FSA): Consider increasing the amount you set aside for next year in your employer's FSA if you set aside too little for this year and anticipate similar medical costs next year. If you set aside too much for this year, consider reducing the reducing the amount, as unused funds are forfeited at the end of each year.

□ Health Savings Account (HSA): If you become eligible by December to make Health Savings Account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for the current year. Contributions you make to an HSA outside of your employer can be taken as an “above-the-line” deduction and are not subject to an AGI floor. If you haven’t maximized your allowable HSA contributions for 2025 ($4,300 for self-only coverage, $8,550 for family coverage, an additional $1,000 is allowed for those over 55), consider doing so by April 15 ^th , 2026. If you must pay a medical bill out-of-pocket, and you haven’t yet maximized your HSA for the year, contributing the amount to your HSA and then paying the bill out of your HSA will allow you the above-the-line deduction that would not be available if the bill was paid by cash.

□ Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $19,000 made in 2025 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Individuals – Other Considerations at Year-End

□ Review your portfolio – The end of the year is a perfect time to analyze your holdings and determine if the risk tolerances and asset allocations are still appropriate for your investment objectives. Consider your age, health, and family issues.

□ Review beneficiary designations – Review the beneficiaries named on retirement accounts or insurance policies; consider if assets are titled correctly; determine if a family member should be added as a signer on an account.

□ Wills and Trusts - If you have not set up wills and trusts, then contact your attorney; call us if you need a reference. If it has been many years since you had your wills and trusts drafted, set up a meeting with your attorney or CPA to review the documents, including the named beneficiaries, guardians, and executors.

□ Estate planning – The amount of an individual’s estate that is exempt from estate taxes in 2025 is $13.99 million (double that amount for a married couple). States, like Illinois, may have lower thresholds for the amounts that are subject to state inheritance taxes. Planning is required to make sure that your estate is optimally situated for estate tax purposes.

□ Grantor (“Living”) trusts – If you have substantial assets, you should consider creating a grantor (also known as living or revocable) trust. If you have a grantor trust, be sure that all assets are held in that trust; brokerage accounts should be titled in the name of the trust.

□ Power of Attorney - As part of the review of wills and trusts, also consider powers-of-attorney and health care powers-of-attorney you have in force (or should have in force) for all of your family members.

□ Insurance - Review the various types of insurance coverages you have in place and re-examine your needs. This includes homeowner’s, auto, life, health, disability, umbrella liability, and long-term care.

□ Family meeting – While there may be a few more family gatherings this year compare to last year, many will still be “zooming” their loved ones at the holidays. Whether your family is zooming or in-person, consider having a family meeting to give an overview of your investments and objectives, charitable giving strategies and desires, the location of key documents, and names of your key advisors (CPAs, attorneys, bankers, insurance agents, investment advisors, etc.).

□ Safe deposit box - Make a special point to visit your safe deposit box and inventory (and organize) the contents. Make sure your executor, spouse, or other key person knows where the key is kept.

□ Cyber Security – Many of us have been subject to some level of privacy violations. Consider if you should purchase personal identify theft protection. One good practice is to check once a year with the three major credit bureaus, where you can pull a credit report for free.

□ Passwords – The passwords to your critical accounts (bank, investments, insurance) should be someplace where they are accessible in the event of your illness or death. Your password list should include other accounts as well that are password protected (like phones, internet, email, etc.).

Businesses – Key Points From OBBB

□ Qualified Business Income (QBI) deduction: The Act makes this deduction permanent. It also sets a minimum deduction for active QBI for “applicable taxpayers” at $400; defines an applicable taxpayer as one who’s aggregate QBI for all active qualified trades or businesses for the tax year is at least $1,000; and establishes inflation adjustments for the new minimums starting in post-2026 tax years. Also, the phase-in amounts are increased from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers.

□ Bonus Depreciation: The Act makes additional first-year (bonus) depreciation for certain qualified property permanent at 100% (under prior law, it was to phase out to zero). This provision is effective for property acquired after Jan. 19, 2025. There is also a new 100% bonus depreciation provision for “qualified production property” (QPP, which is certain non-residential real property used in the manufacturing, production or refining of certain tangible personal property). This QPP provision is effective for property placed in service after July 4, 2025.

□ 179 Expensing Limits: For property placed in service after 2024, the Code Sec. 179 expensing limits are increased to $2,500,000 and the phasedown threshold is increased to $4,000,000 (both subject to inflation adjustments). Businesses should consider making expenditures that qualify for the liberalized business property expensing option. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for interior improvements to a building (but not for its enlargement), elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.

□ Research and Development Expenditures (R&D): The Act restores favorable tax treatment for domestic research and development (R&D) costs. Taxpayers were previously required to amortize such costs beginning in 2022. For expenditures incurred after 2024, the Act allows for immediate expensing on your tax return, but also offers the option to amortize over 60 months. For expenditures incurred between 2022-2024, taxpayers may elect to accelerate unamortized costs over 1 or 2 years beginning with their 2025 returns. Alternatively, eligible small businesses with average receipts less than $31 million may amend their 2022, 2023, or 2024 returns to immediately expense R&D costs and claim a refund for those years. The election to amend must generally be made by July 6, 2026.

□ Exclusion of gain on the sale or exchange of Qualified Small Business Stock (QSBS): The Act provides that the “applicable percentage” (50% for stock held for 3 years, 75% for stock held for 4 years, and 100% for stock held for 5 years) of gain on the sale or exchange of QSBS may be excluded from gross income for QSBS acquired after July 4, 2025. Also, (i) the per-issuer limitation on eligible gain is increased from $10 million to $15 million, which will now be subject to inflation adjustments, and (ii) the $50 million aggregate gross asset limitation for QSB eligibility is increased to $75 million, which will now be subject to inflation adjustments.

□ Enhanced Manufacturing Investment Credit: The advanced manufacturing investment credit (also known as the semiconductor credit or the CHIPS credit) on qualified investments in an advanced manufacturing facility built before Jan. 1, 2027 is increased to 35% (up from 25%) for property placed in service after 2025.

□ Information Reporting, Form 1099-K: The Act retroactively reverts the Form 1099-K reporting threshold back to the pre-ARPA $20,000 and 200 transactions threshold.

□ Information Reporting, Forms 1099-NEC, 1099-MISC: For payments made after 2025, the reporting thresholds for Forms 1099-NEC and 1099-MISC are increased from $600 to $2,000 (adjusted for inflation after 2026).

□ Gain on the Sale of Certain Farmland Property: For sales or exchanges occurring after July 4, 2025, sellers of qualified farmland property may elect to pay capital gains tax on the sale in four equal annual installments. The first payment is due with the return for the year in which the sale occurs, with the remaining payments being due with the successive years' returns (but if a payment is missed, the balance is due immediately).

□ Corporate Charitable Contributions: The Act imposes a new 1% floor (in addition to the 10% ceiling) on corporate charitable deductions for post-2025 tax years.

□ Excess Business Losses: The Act makes the Code Sec. 461(l) limit on excess business losses permanent.

□ Energy Efficient Commercial Buildings Deduction: Under the Act, the energy efficient commercial building deduction terminates for the cost of energy efficient commercial building property whose construction begins after June 30, 2026.

Businesses - Year-End Tax Planning

□ Qualified Business Income (QBI) deduction: Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2025, if taxable income exceeds $394,600 for a married couple filing jointly, (about half that for others), the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income up to $100,000 above the threshold, and to other filers with taxable income up to $50,000 above their threshold.

□ Taxpayers may be able to salvage some or all of this deduction, by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout) for the current year. Depending on their business model, taxpayers also may be able increase the deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting us.

□ Cash Basis Accounting: More small businesses are able to use the cash (as opposed to accrual) method of accounting than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test, which is satisfied for 2024 if, during a three-year testing period which precedes the current year, average annual gross receipts don't exceed $30 million. Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments. (For 2025, the amount rises to $31 million.)

□ De Minimis Safe Harbor Election: Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs aren't required to be capitalized under the UNICAP rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS, e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing qualifying items before the end of the year.

□ Corporate Estimated Tax Payments: A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for the current year (and substantial net income next year) may find it worthwhile to accelerate just enough of next year's income (or to defer just enough of its current-year deductions) to create a small amount of net income in the current year. This allows the corporation to base next year's estimated tax installments on the relatively small amount of income shown on its current-year return, rather than having to pay estimated taxes based on 100% of its much larger taxable income for next year.

□ Bonus Deferral: Year-end bonuses can be timed for maximum tax effect by both cash- and accrual-basis employers. Cash basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to them are established with reasonable certainty. However, the bonus must be paid within two months after the end of the employer's tax year for the deduction to be allowed in the earlier accrual year. Accrual employers looking to defer deductions to a higher-taxed future year should consider changing their bonus plans before year end to set the payment date later than the 2.5-month window or change the bonus plans terms to make the bonus amount not determinable at year end.

□ Debt Cancellation Income: To reduce current-year taxable income, consider deferring a debt-cancellation event until next year.

□ Passive Activity Losses (PALs): Sometimes the disposition of a passive activity can be timed to make best use of its freed-up suspended losses. Where reduction of current-year income is desired, consider disposing of a passive activity before year-end to take the suspended losses against current income.

Businesses – Other Considerations

□ Corporate records – Update annual resolutions and officer elections.

□ Good standing – Verify that the annual franchise tax return has been filed with the State of incorporation or organization.

□ Insurance – Consult with your advisors, executive team, and insurance agent to determine if your business, property, and key officers, are adequately insured.

□ Buy-sell agreement – If your business has multiple shareholders, consider adopting an agreement to orderly transfer those shares in the event of a sale, retirement, or death.

□ Budget – Every business should have a budget or a forecast in place. Assemble your trusted team, pull the data together, study the most recent results, consider objectives for the coming year, and create the budget or forecast.

□ Benefits – Many businesses would benefit by checking their benefit package annually, to be sure that it is competitive with the marketplace. This includes retirement accounts offered, insurance options, as well as “soft” benefits like remote work and flex-time.

□ Compensation – Consider if the level of pay of your current employees is competitive. In today’s competitive environment, it is often much easier to retain a key employee than recruit one.

□ Cyber Security – It seems that a day rarely goes by without a story about a business being hacked. Cyber security should rank at the top of everyone’s list. Discuss weaknesses in your server, systems, or procedures with internal staff and with experts in the field. There are some good 3 ^rd parties that can be engaged to test your systems and people.

□ Other Security – Consider other ways your business could be exposed to risk. For instance, is your building secured with proper alarms, cameras, etc.

□ Entity type – Even though making a change is not likely, sit down with your attorney and CPA to discuss entity type; maybe your business would benefit by considering a different structure. Limited liability companies have grown in popularity, but there is also a place for S corporations, and C corporations may still offer some advantages.

□ Ownership structure – There may be a number of reasons to consider the ownership of a business, including the need to reward and retain key employees, to gain income tax or estate tax advantages.

□ Acquisitions – Expanding in the marketplace may offer strategic advantages to a business, whether to open up new markets, access new customers, or gain skill sets. Identifying key targets may be something to consider in the new year, if it fits with the goals of ownership.

Fraud and the Impact on Small Business

Thu, 30 Oct 2025 18:21:08 GMT

Every business is susceptible; controls and oversight are critical to protect the business.

Fraud can happen in any business — and small businesses are especially at risk. Sadly, most business owners and decision-makers will make the choice of doing nothing, with the misguided belief that their business is different, and their personnel would never steal from the business. Fraud is as old as humankind, and desperation and greed will cause people to do things they normally would not even consider. The reality is that every business should have basic procedures in place to protect against fraud. Most businesses do not have the expertise or the personnel to gain proper oversight, which is when they should turn to their CPA firm.

The 2024 Report to the Nations , published by the Association of Certified Fraud Examiners (ACFE) , analyzed 1,921 cases of workplace fraud across 138 countries. The results are clear: no business is too small to be a target.

The Scope of the Problem

Organizations lose an estimated 5% of their annual revenue to fraud — more than $5 trillion globally each year.
The average loss per case was $1.7 million.
The typical fraud lasts 12 months before anyone notices.
For small businesses, the median loss was $141,000 — often enough to threaten survival.

The Three Main Types of Fraud

1. Asset Misappropriation – 89% of cases

The most common type, but usually the least costly.
Examples: theft of cash, misuse of company assets, fake vendor payments, false expense reports, ghost employees.

2. Corruption – 48% of cases

Involves bribery, kickbacks, or conflicts of interest.
Median loss: $200,000 .

3. Financial Statement Fraud – 5% of cases

The least frequent but the most damaging.
Median loss: $766,000 .
Often used to hide poor performance or qualify for loans.

Who Commits Fraud — and Why

Owners and executives cause the biggest losses (median $459,000) because they often have unchecked control.
Employees are responsible for smaller but more frequent frauds (median $60,000).
Collusion makes it worse:
One person acting alone: $75,000 loss
Three or more working together: $329,000 loss
Longer employment = bigger losses:
1–5 years: $100,000
6–10 years: $200,000
10+ years: $250,000

Red Flags to Watch For

According to the ACF E, 84% of fraudsters show at least one warning sign:

Living beyond their means
Financial stress or personal debt
Unusually close relationships with vendors or customers
Reluctance to share duties or take vacations
Complaints about pay o r lack of recognition
Control issues or secrecy around financial records

Small businesses, where trust and close relationships are common, often overlook these red flags until it’s too late.

How Fraud Is Caught

43% of frauds are found through tips — usually from employees, customers, or vendors.
Most tips now arrive by email or online forms, not phone calls.
Other common detection methods:
Internal audit (14%)
Management review (13%)
Frauds found by accident or law enforcement usually cause the largest losses.

Takeaway: Encourage employees to repo rt suspicious activity. Make it safe and simple to do so.

Why Small Businesses Are at Higher Risk

Limited staff — fewer people to separate duties or double-check work.
High trust environments — owners rely on long-term employees without oversight.
Lack of internal controls — 32% of frauds occurred because no controls were in place.
Override of controls — 19% happened when rules were ignored by leadership.

Even small companies can protect themselves with basic, affordable controls.

Proven Ways to Reduce Fraud Losses

The ACFE found that certain internal controls can cut fraud losses by 40–60% and speed up detection.

Top Controls for Small Businesses:

Surprise audits – 63% lower losses
Regular management review – 60% lower losses
External financial statement audits – 52% lower losses
Fraud hotlines or web reporting tools – 50% lower losses
Employee and manager training – 47–50% lower losses
Proactive data monitoring – 50% lower losses

Businesses that combined several of these saw faster detection and fewer repeat incidents.

Practical Steps You Can Take

You don’t need a large compliance department to prevent fraud. Start small, stay consistent, and build awareness.

1. Set the Tone at the Top

Be clear: fraud will not be tolerated.
Owners and managers should model ethical behavior.

2. Divide Responsibilities

No single person should control every part of a financial process.
Separate check writing, bank deposits, and reconciliation duties.

3. Require Time Away

Make vacations mandatory for employees handling money.
Many frauds are uncovered when the perpetrator is absent.

4. Review Bank and Credit Card Statements Monthly

Look for unusual vendors or transactions.
Have someone other than the preparer review reconciliations.

5. Implement a Simple Reporting Channel

An email inbox, online form, or voicemail line can serve as a hotline.
Encourage employees and vendors to report suspicious behavior.

6. Train Your Team

Hold short annual fraud-awareness sessions.
Teach staff how to spot red flags and report concerns safely.

7. Use Your Accountant Strategically

Ask your CPA to help test internal controls and review financial records.
Consider periodic “mini-audits” focused on high-risk areas like payroll or vendor payments.

If Fraud Happens

Even well-managed companies can fall victim. After a fraud, 82% of businesses strengthened their controls , and 95% believed the improvements would prevent future issues. Take it as an opportunity to rebuild stronger systems and reinforce trust.

Final Thoughts

Fraud prevention doesn’t require big-company resources — it requires awareness, consistency, and accountability.
For small businesses, a single dishonest act can cause lasting damage, but smart controls and clear communication can make all the difference. We can provide the expertise a business needs to combat fraud. At our CPA firm, we help small business owners:

Assess fraud risks
Strengthen internal controls
Implement simple, affordable fraud detection systems
Train staff to recognize and report suspicious activity

Protect your business before fraud strikes. Your peace of mind — and your bottom line — depend on it.

Demand for CPA Services Provides a New Dynamic for Clients

Wed, 01 Oct 2025 18:11:23 GMT

Challenges have left some clients out in the cold

Many articles in the press have documented the talent shortage in public accounting. The Wall Street Journal headline from October of 2023 says it all: “Why No One’s Going Into Accounting.” While this shortage has been felt most acutely for many years by public accounting firms who are trying to hire staff, it is important to realize that this shortage is also now being felt by businesses and others who use the services of CPA firms.

Another outcome of the talent shortage is that it comes at a time when the younger baby boomers are seeking to leave the profession. There simply are not enough experienced staff members to take over the ownership and leadership positions that are being vacated. Consolidation of public accounting firms has been occurring at a rapid pace. In early 2025, it was estimated that there were some 85,000 CPA firms in the US, not including solo practitioners. By comparison, in 2015 it is estimated that there were over 90,000 CPA firms.

How is this talent shortage affecting businesses, individuals, nonprofits, and other entities that are using the services of a CPA firm? Here are some observations that we have made over the past few years:

· Audits and other assurance services for businesses, nonprofits, government – The talent shortage has caused some firms to exit providing assurance services completely (assurance services are audits, reviews, and compilations of financial statements). There are simply fewer audit firms and fewer auditors. Audit firms have naturally been making choices, opting to work on the assurance projects that make the best use of their limited staff. Audits and other assurance work that is not as profitable, organizations with substandard accounting records, and organizations with payment challenges are much more challenged to find an audit firm that is willing to invest its resources with them. Fees for all types of assurance services have increased as well.

· Tax work for individuals – the talent shortage is one thing that is limiting the CPAs who do individual income taxes, but the other factor is that the generations that follow the baby boomers are, in general, less willing to work the long and arduous tax season hours that were once a norm in the industry. Fewer hours are being worked fewer returns are being completed. Firms are having to pick and choose which individual tax clients to keep and, as you might imagine, the work that is most likely to be kept is the most profitable work. Almost all firms are increasing the minimum amount that is charged to prepare an individual income tax return. In the Chicago area, it is not uncommon for larger local CPA firms (not just the regional, national or international firms) to have a minimum of $2,000 to $3,000 for an individual income tax return.

· Tax work for businesses – similar to the challenges identified above for individual taxes, businesses are also seeing the effects of the talent shortage and limited capacity of CPA firms. Prices are going up and CPA firms are being much more selective about the work that they do. Smaller clients are being let go, as are unprofitable clients and clients who have substandard business accounting records. CPA firms are less and less likely to tolerate slow payments for their services – if it occurs, the client will likely not be invited back the following year.

· Accounting services for businesses – with limited staff available, CPA firms are going to naturally choose to work on projects that make the best use of their staff’s time. The businesses that continue to be served will be those businesses that take their responsibilities for internal recordkeeping seriously. Increasingly, CPA firms are used to outsource key elements of a client’s accounting process on a monthly or quarterly basis. Without that kind of regular oversight and service during the course of the year, the business’s recordkeeping will quickly deteriorate and become substandard, leading to greater demands on the CPA firm’s staff after the end of the year, when time is the most valuable.

So those are the problems – what actions can individuals or businesses take in this challenging environment? Here are some things that can be done that will increase the likelihood that an individual’s or business’s relationship with their CPA firm will continue:

1. Do not provide your information to the CPA firm at the last minute. The days when a client could take advantage of pushing their professional to the very last day of a deadline are going, going, gone. Clients who procrastinate are at the top of the list to jettison as CPA firms struggle to allocate talent to projects.

2. Be willing to pay on a timely basis for services rendered. A fee or fee range should be understood upfront, so there should be no surprises when it comes to billing. Assuming that there are no mitigating circumstances, do not negotiate for the simple sake of trying to get a discount. Time spent invoicing, negotiating, and collecting are looked at as sunk costs by CPA firms. When choices must be made, a firm will choose not to work with a client who is going to demand more time and energy during the invoicing process.

3. Be timely, thorough, and accurate in responses to questions posed by your professionals. Delays and inaccuracies cause projects to stretch out beyond the budgeted timeframe and quickly erode profitability for the CPA firm. Provide the documentation that is requested in the manner that is requested – most of the time now, it is expected that documentation will be provided by pdf attachment or secure uploads.

4. Businesses need to keep good, contemporaneous accounting records. If the business lacks the internal talent or does not have the time to invest, discuss this with the CPA firm. A solution might be to bring in a 3 ^rd party to provide basic accounting services, or the CPA firm might be able to offer an internal solution to improve the quality and timeliness of the recordkeeping. Take the suggestions and recommendations made your CPA firm to heart; those suggestions are likely key to keeping your business organized and viable from an accounting perspective.

5. Businesses should consider engaging their CPA firm to provide monthly or quarterly oversight or supervision of the internal accounting process. Not only do these ongoing services shorten the cycle after the end of the year when a CPA firm’s resources are under the most pressure, but these services have the extra benefit of keeping the CPA firm informed as to the business’ financial successes or challenges, and allows the CPA firm to interact and provide insights to management on a much more timely basis.

6. Individuals need to also maintain their tax records and documents in an organized fashion, and provide those to the CPA firm in the manner prescribed. CPA firms will have little patience for clients who drop off a box of poorly organized records, or clients who needlessly delay and lengthen the preparation cycle.

7. This should go without saying, but treat all of the staff members of the CPA firm with respect, whether dealing with a administrative person, a paraprofessional, or a CPA.

As the managing partner of Dowell Group, our firm is not immune to these macro challenges in the industry. Given the challenge with staffing shortages, we have had to become more selective about the clients we accept and the projects we undertake. Staffing shortages also result in salary escalation, and our fees have increased across the board as well.

Those challenges notwithstanding, we have always staffed our firm at a level that allows our professionals to put in a reasonable level of extra time in our busiest cycles, but to also have a work-life balance that is critical to clear thinking and quality output and retaining staff. Our staff turnover is well below industry and area averages as a result, and our clients reap the benefits of our stable staffing. To give deeper context to the term "stable staffing," it is key to professional services firms because it means that trained and experienced staff can be counted on to deliver. Like all CPA firms, we have to be more selective in the projects we accept, but Dowell Group continues to have the capacity to take on good work for good clients, whether it is audit or accounting work for businesses, or tax work for individuals, trusts, and estates. Because of our staff stability, Dowell Group is uniquely postioned to take advantage of key opportunities as good business clients, individuals, and trusts & estates look for new homes for the CPA services they need.

I had an experience several years ago with a business prospect that we were just onboarding as a client. At the end of the proposal process, the client turned to me and said, “I want my business to be your best client. What does that mean? It means that my business will do its best to keep quality people involved in my business and to respect the accounting process and the need to maintain good records. It means that we will appreciate the staff who work on our account and treat them with respect. That means that your staff who work on my business will talk so positively about the experience, that the other staff members will hope that they can be assigned to my business someday. It means that Dowell Group will be paid fairly and timely for the work that they do.”

I was a bit surprised by what this new client expressed, but it left an impression. It really is a riff on the Golden Rule, treat others as you wish to be treated. I have never forgotten that encounter, and it definitely has affected how I look at and treat others. The intended consequence is that by seeking to be my firm’s best client, my firm in turn is providing the best services possible. By the way, that client was not just putting up nice-sounding talking points – many years later, that client continues to be one of our best clients at Dowell Group, year-in and year-out.

With the challenges that businesses, individuals, and CPA firms are facing together, striving to be the “best client,” which in turn results in the best services from the CPA firm, certainly provides a roadmap on how to navigate a path forward.

Car Loan Interest Deduction for Individuals

Tue, 30 Sep 2025 19:46:54 GMT

A new deduction for car loan interest, 2025 to 2028

If you are planning on borrowing to purchase a new passenger vehicle in the next few years (before 2029), or have already purchased one in 2025, you should know that, for tax years 2025 through 2028, individuals can take a deduction for the interest paid on specified “qualified passenger vehicle loans ,” up to a maximum deduction of $10,000 for the year, if the vehicle is purchased for personal use (business or commercial use won't qualify) and certain other eligibility criteria are met.

The deduction is taken “above the line.” In other words, it's subtracted from gross income to determine adjusted gross income (AGI), and thus is available to taxpayers whether they claim the standard deduction or itemize. But, the deduction is phased out for taxpayers whose modified adjusted gross income (MAGI) exceeds $100,000 ($200,000 for joint filers).

To qualify for the deduction , the interest must be paid on a loan that's originated after 2024 and before 2029, and that's used to purchase a vehicle, the original use of which starts with the taxpayer (used vehicles do not qualify). A qualified vehicle is a car , minivan, van, SUV, pick-up truck or motorcycle, with a gross vehicle weight rating of less than 14,000 pounds, and that has undergone “final assembly in the U.S.” The Vehicle Identification Number (VIN) of the qualified vehicle must be included on the tax return for any year in which the deduction is claimed. And, if a qualifying vehicle loan is later refinanced, interest paid on the refinanced amount is generally eligible for the qualified passenger vehicle loan interest deduction .

You can claim the deduction for interest paid annually, as long as the loan was originated between January 1, 2025, and December 31, 2028, and other eligibility requirements are met each year. So, for example, if you get a five-year loan for an eligible vehicle in 2025, you may be able to deduct interest you pay each year from 2025 through 2028.

Deduction for Overtime Compensation

Tue, 30 Sep 2025 19:42:54 GMT

A new deduction for overtime for tax years 2025 to 2028

Subject to a phaseout for taxpayers above certain modified adjusted gross income (MAGI) levels, a deduction is allowed for tax years 2025 through 2028 for up to $12,500 (up to $25,000 for joint filers) of “qualified overtime compensation” that a worker receives during the tax year, and for which the worker gets a Form 1099 or W-2, showing the qualified overtime compensation. The deduction is available to both non-itemizers and itemizers.

What is qualified overtime compensation?

Qualified overtime compensation means the portion of overtime compensation paid to an individual that's required under a federal law called the Fair Labor Standards Act (FLSA) §7, and that's above the regular rate of pay. In general, this means non-exempt (i.e., hourly) employees working more than 40 hours in a work week who are entitled under the FLSA to overtime pay at a rate of 1.5 times their regular rate of pay (i.e., “time-and-a-half”).

However, only the part of the overtime compensation that's above the regular rate of pay qualifies for the deduction . In other words, only the “half” in the time-and-a-half (also known called the premium) may be deductible .

Example: An hourly employee, whose regular rate of pay is $20 per hour, works 10 hours of overtime in a given week. Her overtime rate is 1.5 x $20 = $30 per hour and her total overtime pay for the week is $30 x 10 hours = $300. But, of that $300, $200 reflects her regular rate of pay ($20 regular rate x 10 hours = $200) and isn't deductible ; instead, only the extra $100 is qualified overtime compensation.

Phaseout of the deduction. The deduction phases out for taxpayers with MAGI above $150,000 ($300,000 for joint filers).

Married taxpayers must file jointly. For married taxpayers, the deduction is available only if they file jointly.

Social Security Number (SSN) required. To claim the deduction , the taxpayer must include their SSN on the return (no deduction allowed without the SSN).

Information reporting. The deduction is available only for qualified overtime compensation received during the tax year that's included on the worker's Form W-2 or 1099. If an employer or other payor fails to report qualified overtime compensation, they should be contacted to correct the error. Beginning as of 2025, employers and other payors are required by statute to separately account for qualified overtime compensation on Forms W-2 and 1099. However, under a transition rule for 2025 only, they may approximate the qualified overtime compensation by any reasonable means IRS specifies in forthcoming guidance.

 Income tax withholding. IRS is required to adjust its income tax withholding procedures by 2026 to account for qualified overtime compensation. These adjustments should help avoid overwithholding once they're in place.

IRS Transitioning from Cash to Electronic Refunds and Electronic Payments

Fri, 26 Sep 2025 20:34:52 GMT

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Pursuant to President Trump's Executive Order 14247, Modernizing Payments to and from America's Bank Account, the IRS announced this week that it will begin phasing out the use of paper checks for refunds to individual taxpayers at the end of September. More guidance will be published by the IRS relating to the 2025 tax season before the filing season begins. Protecing taxpayers and cutting down fraud is a key reason for this push. Paper checks are 16 times more likely to be lost, stolen, altered, or delayed compared to an electronic payment, according to the IRS. The IRS indicates that there will be some limited exceptions made to the electronic payment rules, mainly in cases where a taxpayer has a lack of access to banking services, or where electronic payments would pose an undue hardship.

Denise Davis, a director at the IRS Taxpayer Services Division, provided details on the agency's efforts to transition away from paper checks. Davis indicates that changes are already planned for January 2026 for both individual and business filers. Davis emphasized that the IRS' main focus is on shifting to electronic payments for tax year 2025 filings – with implementation beginning in January 2026. Davis noted that some extension filers have an October 15, 2025, due date, falling just two weeks after the IRS' stated deadline for switching to electronic refunds. If the IRS sees "gains" among these taxpayers, "we'll take that as a win," said Davis. "But the focus is really January of '26."

Davis noted that only 4% of businesses "have had an opportunity to do direct deposit." Meanwhile, 91.5% of individual filers, out of 165 million, receive payments electronically, typically through direct deposit to a checking or savings account. The agency's plans for business taxpayers in 2026 is fairly simple – gathering banking information. "One of the first things we're doing is we're changing the business tax forms to actually capture direct deposit information," said Davis. "Most businesses are probably banked," she added. The goal is to "capture that information" and shift to direct deposit for those businesses that are due a refund.

Davis provided more detail on the agency's plans to shift the remaining 8.5% of individual filers to electronic payments. First, she shared that "the IRS will actually send letters to individuals that do not provide banking information on their tax returns." Taxpayers that file electronically will see a message "that their return is being accepted and will be processed – however, we will need their banking information, and they will be contacted by the IRS for that." These taxpayers will be able to go into their Individual Online Account and update their banking information, Davis said.

Davis stressed that for security reasons, "IRS employees will not personally intake direct deposit information, either in person or on the phone."

Taxpayers will also be able to log into their Individual Online Account and indicate why they cannot provide banking information, Davis said. In addition, the IRS will have "a dedicated phone extension for taxpayers to provide an exemption exception," she added.

What if a taxpayer does not see, or fails to respond to the request for banking information? "The tax refund will be held for six weeks pending the taxpayer response," Davis explained. "After the six-week period, we'll go ahead and process that refund," she added. The reason for that timing, she said, is that "the IRS will bear business cost of paying interest beyond six weeks." The IRS plans to expand refund options for taxpayers to include direct deposit to checking or savings accounts, reloadable debit cards, and "accounts associated with digital payments." Davis added that the agency will "enhance communications" on finding these digital payment accounts. It also will provide "opportunities for pilots in the future to expand digital wallets."

Davis acknowledged that certain taxpayer populations will require additional tools and processes to make the digital transition. That includes international taxpayers, trustees, and those dealing with bankruptcy. Also on the list are individuals filing amended returns.

Among the IRS' plans beyond 2026 are to improve access for international taxpayers to digital payments, said Davis. The agency also intends to incorporate its experiences from the 2026 filing season "to expand direct deposit activities further in 2027."

In addition to moving remaining individual filers and the vast majority of business filers to electronic payments, Davis said the IRS plans to focus on direct deposits that are rejected by financial institutions. Those rejections total approximately 800,000 annually, she added. The IRS intends to look at the underlying causes, such as incorrect account numbers and deposits attempted to closed bank accounts.

Davis cautioned that the IRS may "continue to update guidance" to incorporate its learning from digital transition efforts. "We may have some mid-year adjustments in the summer of '26, so stay tuned."

Understanding What is Best for Your Business - Lease vs Buy

Wed, 10 Sep 2025 22:04:08 GMT

Advantages exist with both options - understanding which might be best for your business is the challenge.

As a small business owner, every dollar counts, and profit is vitally important to your long term goals. Decisions about whether to lease or own trucks, office equipment, or commercial property can significantly impact your cash flow, taxes, and long-term growth.

There’s no universal “right” answer, but by understanding the benefits and trade-offs of each approach, you can make a choice that supports your business strategy and finances.

Why Small Businesses Consider Leasing

Leasing is often attractive for businesses that want flexibility, predictable costs, and lower upfront investments .

Common Assets Small Businesses Lease:

Delivery or service trucks
Computers, copiers, and phone systems
Office or retail space

Benefits of Leasing:

Lower Upfront Costs
Minimal down payment preserves cash for payroll, inventory, or expansion.
Predictable Monthly Payments
Easier to budget with fixed monthly costs.
Many leases include maintenance, reducing unexpected repair bills.
Access to the Latest Equipment
Technology and vehicles can be upgraded regularly.
Keeps your business competitive and efficient.
Tax Advantages
Lease payments are usually deductible as operating expenses.
Flexibility at Lease-End
Options include returning the asset, purchasing it, or leasing a newer model.

Why Small Businesses Consider Ownership

Ownership works well for businesses that want to build long-term value, equity, and control .

Common Assets Small Businesses Own:

Delivery or service trucks used long-term
Heavy machinery or specialized equipment
Commercial property for offices, shops, or warehouses

Benefits of Ownership :

Building Equity
Vehicles, machinery, and property become long-term business assets.
Real estate often appreciates over time.
Tax Advantages
Depreciation allows cost recovery over time.
Section 179 and bonus depreciation may allow immediate write-offs.
Loan interest on financed purchases can also be deductible.
No Use Restrictions
Full control over asset use, modifications, and mileage.
Long-Term Cost Savings
Once paid off, you own the asset outright, eliminating recurring payments.
Customization Opportunities
Commercial property or equipment can be tailored to your business needs.

A Side-by-Side Comparison

FactorLeasingOwning Upfront Cost MinimalLarger down payment or purchase Monthly Cost Fixed, predictableLoan payments (end when paid off) Taxes Payments deductibleDepreciation, interest, and special expensing Flexibility Easier to upgrade or walk awayLong-term commitment Equity NoneBuilds equity and potential appreciation Maintenance Often includedOwner responsible Restrictions Mileage/usage limits may applyNo restrictions

Example: Small Business Delivery Truck

Scenario:
ABC Landscaping is a small business that needs a reliable truck for weekly deliveries of tools, plants, and materials. They’re deciding between a full-service lease or purchasing the truck outright.

Option 1: Full-Service Lease (7 Years)

Truck Cost: $50,000
Lease Term: 7 years
Monthly Payment: $850
Included Services: Maintenance, tires, insurance, roadside assistance

How it Works:

ABC Landscaping pays $850 per month for 7 years.
Routine maintenance, tires, and roadside assistance are included, reducing unexpected repair costs.
At lease-end, ABC Landscaping can return the truck, purchase it for the residual value, or explore a new lease.
Lease payments are fully deductible as a business expense.

Pros:

Lower monthly payments due to long-term lease
Predictable expenses
Maintenance and repairs included
Flexibility without the risks of ownership

Cons:

No equity built in the truck
Possible mileage or usage limits
Total cost over 7 years may exceed purchase price

Option 2: Ownership

Truck Cost: $50,000
Financing: 5-year loan at 6% interest
Monthly Payment: ~$966 (principal + interest)
Additional Costs: Maintenance, repairs, tires, insurance (all borne by ABC Landscaping)

How it Works:

ABC Landscaping makes monthly loan payments until the truck is fully paid off.
The truck can be used without mileage restrictions and modified as needed.
Depreciation and loan interest may be deductible.
Once the loan is paid, the truck is fully owned and can continue generating value.

Pros:

Builds equity in a tangible business asset
Full control over use and modifications
Potential long-term cost savings

Cons:

Higher upfront cost
Responsible for repairs and maintenance
Truck may become outdated over time

Office Equipment and Commercial Property

Leasing vs. ownership decisions are similar for office equipment and commercial property :

Office Equipment: Leasing may allow you to upgrade computers, copiers, or phone systems every few years, while ownership can reduce long-term costs if you plan to keep the equipment for many years.
Commercial Property: Owning can build equity and potential appreciation, while leasing preserves cash flow and provides flexibility to relocate or expand as your business grows.

Tax Considerations for Small Businesses

Leasing: Lease payments are generally deductible as operating expenses, simplifying bookkeeping.
Ownership: Depreciation, Section 179 expensing, bonus depreciation, and loan interest can provide significant deductions.
Consult Your CPA: Tax rules can vary by asset type and business structure, so it’s important to review your specific situation.

Making the Decision

Ask yourself:

Cash Flow: Do you need to preserve cash, or can you afford a larger upfront investment?
Asset Lifespan: Will the asset serve your business for many years, or become obsolete quickly?
Flexibility Needs: Is upgrading often more important than building equity?
Growth Plans: Will your business expand or relocate soon?
Tax Position: Which option provides the best immediate and long-term tax benefits?

Final Thoughts

For small businesses, leasing and ownership are strategic choices, not just financial ones. Leasing provides flexibility, predictable costs, and lower upfront investment, while ownership builds equity, long-term value, and full control. The right decision depends on your business goals, cash flow, and tax situation. At our firm, we help small businesses analyze real costs, tax savings, and long-term impact to determine the optimal path.

Thinking about leasing or buying trucks, office equipment, or commercial property? Contact us today to discuss your options and make the most financially sound decision for your business.

Documenting Charitable Cash Contributions

Thu, 14 Aug 2025 18:47:30 GMT

It's not enough to make a gift to charity, specific documentation must be received in order to sustain a deduction with the IRS.

Gifting to charity is a fundamental part of the culture in America. According to one study in Philanthropy Roundtable, Americans donate about 7 times more per capita than Europeans. Even for those Americans of meager means, helping those who are in a worse position is not uncommon. Our federal government encourages gifting to charity by allowing taxpayers to claim an itemized deduction for gifts to organized charities. In the recently passed One Big Beautiful Bill Act, the federal government's support of individual giving was further enhanced by an above-the-line deduction for those taxpayers who may not be able to itemize their deductions.

With charitable giving enshrined in our tax laws, it is important to understand the rules that are involved. The IRS enforces the statutes that indicate very specific documentation requirements to enable contributions to be deductible for income tax purposes. This post will deal with the requirements to substantiate donations of cash (cash, check, and credit card) to charities (documentation requirements will be different for donations of property).

To substantiate a charitable contribution deduction, a donor must obtain one type of documentation for a donation of less than $250 and a different type (a written contemporaneous acknowledgment ) for a donation of $250 or more. A blank pledge card provided by the donee organization but filled out by the donor is not adequate substantiation for a contribution because it does not include the information required under the statutes (IRC Sec. 170(f)(17)).

Donations of Less than $250 - No deduction is allowed for any contributions of cash, checks, or other monetary gifts (in any amount), unless the taxpayer maintains a bank record (typically a cancelled check, wire transfer acknowledgment, or credit card record) or a written communication from the charity substantiating the date and amount of the transaction. Credit card statements should show the name of the charity, the date, and the transaction posting date. A bank record includes a scanned image of both sides of a canceled check obtained from a bank. Written communication also includes electronic mail correspondence.

The $250 threshold is applied to each contribution separately. Therefore, if a donor makes multiple contributions to the same organization totaling $250 or more in a single year, but each gift is less than $250, written acknowledgment is not required unless the smaller gifts are parts of a series of related contributions made to avoid the substantiation requirements. All contributions of money, regardless of amount, require either a cancelled check (or other bank record) or written communication from the charity showing the name of the charity organization, the date of the contribution, and the amount of the contribution.

Donations of $250 or More - No deduction is allowed for a contribution of $250 or more unless the taxpayer receives a written contemporaneous acknowledgment from the charity. The acknowledgment must indicate the following:

the name and address of the charity;
the date of the contribution;
the amount of cash contributed;
a reasonably detailed description (but not an estimate of value) of any property contributed;
whether the charity provided the donor any goods or services in exchange for the contribution; and, if so,
a description, and a good faith estimate of the value, of the goods or services provided or, if the only goods or services provided were intangible religious benefits, a statement to that effect.

The IRS has successfully disallowed contributions over $250 when the taxpayer failed to timely obtain the required written acknowledgment from the charity or when the acknowledgment did not contain all the required information. The written acknowledgment must contain a statement as to whether the donor received any goods or services in exchange for the contribution, even if no goods or services were provided. A cancelled check, without a statement of whether the donor received goods or services, does not meet the contemporaneous written acknowledgment requirement. In addition, the receipt of a donor-advised fund packet which shows an intent to donate property is insufficient acknowledgement. Actual acknowledgement must be received once the transfer is actually made.

The written acknowledgment rule does not apply if the net value of the actual donation is less than $250. Therefore, a written contemporaneous acknowledgment is not required if, for example, a cash contribution of $300 is made and the donor receives a $60 gift in return (quid pro quo), but only if the taxpayer has a valid bank record such as a cancelled check for substantiation. For a sizeable donation to a foundation in which the taxpayer/donor is an officer (e.g., a family foundation), the planner may consider recommending that the officer issue a written acknowledgment to the donor, even though the officer and the donor are physically one and the same. IRS Publication 1771 explains that an organization can provide either a paper copy of the acknowledgment to the donor or it can provide the acknowledgment electronically, such as in an email addressed to the donor. Because there is no prescribed format for these acknowledgments, letters, postcards, and computer-generated forms are also acceptable.

The IRS's definition of contemporaneous is that the acknowledgment must be obtained by the taxpayer on or before the earlier of (a) the date the donor files the original return for the year the donation was made, or (b) the return's extended due date. The taxpayer must have acknowledgments for all contributions of $250 (or for less than $250 without a valid bank record) or more when the return is filed, even if this is before the extended due date. It is not possible to amend a return to include contributions for which an acknowledgment is obtained after the original return was filed.

The responsibility for obtaining this documentation lies with the donor, who must request it from the charity. The charity is not required to record or report this information to the IRS on behalf of the donor. Failure to timely obtain a written acknowledgment from the charity will prevent the donor from deducting the charitable contribution. The IRS disallowed a charitable deduction for cash contributions to the taxpayers' church (even though the taxpayers retained copies of canceled checks) because the written acknowledgment was not obtained by the taxpayers prior to filing their return.

Quid Pro Quo Contributions - A quid pro quo contribution is a payment made partly as a contribution and partly for goods or services provided to the donor by the charity. Charitable organizations must provide a written disclosure statement to donors who make a quid pro quo contribution in excess of $75. The written disclosure should inform the donor that the charitable deduction is limited to the excess of the contribution over the value of the goods or services provided by the charity (with a good faith estimate of the value of the goods or services provided). Assigning a value to intangible religious benefits is not necessary. Penalties apply to the donee organization for failure to provide the necessary written disclosure. This requirement is separate from the contemporaneous written substantiation required for deductibility purposes. An example of substantiation requirements for quid pro quo contributions follow:

Connie paid $100 to St. George's School (a qualified charity) in exchange for a concert ticket valued at $40. Because the payment was partly a contribution and partly for goods or services, it is a quid pro quo contribution. Connie can deduct $60 ($100 payment − $40 value received) on her income tax return, provided that she meets the AGI limitations. Because Connie's quid pro quo payment exceeds $75, St. George's School must furnish her with a disclosure statement, even though the deductible amount is less than $75.

Separate payments of $75 or less made at different times of the year for separate fund-raising events will not be combined for determining the $75 threshold.

Payroll Deduction - To satisfy the recordkeeping requirements for donations made via payroll, donors should keep documents from employers (paystub, W-2 wage statement, or other employer furnished document) showing the amount donated in addition to an official pledge card from the charity. These records will satisfy the requirement that the taxpayer receive a written communication from the donee organization. No deduction for a contribution of $250 or more made by payroll deduction is allowed unless the taxpayer meets substantiation rules. To substantiate a contribution of $250 or more made by payroll deduction, the pledge card (or other receipt prepared by the charity) must state that the exempt group does not provide goods and services in whole or partial consideration for any contributions made by payroll deduction. The $250 threshold is applied by treating each payroll deduction as a separate contribution. Therefore, written acknowledgment must be obtained only if $250 or more is withheld from each paycheck. Employers often sponsor a matching program for charitable contributions made by their employees to certain charities. If an employee's contribution to a charity is matched (in whole or in part), and the employee receives goods or services in return for the donation, they are treated as provided solely in consideration for the employee's portion of the total contribution.

Out-of-pocket Expenses - Volunteers who incur out-of-pocket expenses must keep detailed records of those expenditures. If a donor makes a single contribution of $250 or more in the form of unreimbursed expenses (out-of-pocket transportation expenses incurred to perform donated services), the volunteer must have a written acknowledgment from the charity describing the volunteer services provided and whether they received any goods or services (including value) from the charity in consideration. The amount of out-of-pocket expenses does not need to be shown on the acknowledgment.

Travel expenses incurred while away from home, such as meals and lodging, are deductible only if (a) there is no significant personal pleasure, recreation, or vacation in the travel, and (b) the performance of services is substantial. Deductions were denied for travel expenses incurred as a volunteer to a symphony orchestra on an overseas tour. The court held that the expenditures were primarily personal (e.g., sightseeing). The following is an example of the substantiation requirements for out-of-pocket expenses:

Jeff is the chosen representative to an annual convention of his church. He buys an airline ticket to travel to the convention. The church does not reimburse him for the $500 ticket. Assume his expenditure otherwise qualifies as a charitable deduction (e.g., the church is a qualifying organization and there was no significant element of personal pleasure involved in the travel). To substantiate his charitable deduction for out-of-pocket costs, Jeff should keep a record of the expenditure, such as a copy of the ticket. He should also obtain from the church a description of the services that he provided and a statement that he received no goods or services from the organization.

One Big, Beautiful Bill - Business Tax Impacts 2025

Thu, 10 Jul 2025 19:52:25 GMT

How the Tax Act impacts businesses

The new tax legislation (the Act) signed into law on July 4, 2025 (informally known as One Big Beautiful Bill or OBBB) is comprehensive and includes key changes to business-related provisions and incentives. Navigating these changes will be complex, but understanding them is essential for effective tax planning and optimizing your position.

We recommend setting up a meeting to ensure you are well-prepared both to leverage new opportunities and to address any challenges coming in the wake of the changes made under the Act. In the meantime, please review this list, which highlights some of the major provisions impacting businesses.

• Qualified Business Income (QBI) deduction: The Act makes this deduction permanent. It also sets a minimum deduction for active QBI for "applicable taxpayers" at $400; defines an applicable taxpayer as one whose aggregate QBI for all active qualified trades or businesses for the tax year is at least $1,000; and establishes inflation adjustments for the new minimums starting in post-2026 tax years. Also, the phase-in amounts are increased from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers.

• Bonus depreciation: The Act makes additional first-year (bonus) depreciation for certain qualified property permanent at 100% (under prior law, it was to phase out to zero ). This provision is effective for property acquired after Jan. 19, 2025. There is also a new 100% bonus depreciation provision for "qualified production property" (QPP, which is certain non-residential real property used in the manufacturing, production or refining of certain tangible personal property). This QPP provision is effective for property placed in service after July 4, 2025.

• 179 Expensing limits: For property placed in service after 2024, the Code Sec. 179 expensing limits are increased to $2,500,000 and the phasedown threshold is increased to $4,000,000 (both subject to inflation adjustments).

• Business interest: For post-2025 tax years, the Act modifies the definition of adjusted taxable income for purposes of the Code Sec. 163(j) limitation on business interest.

• Exclusion of gain on the sale or exchange of qualified small business stock (QSBS): The Act provides that gain on the "applicable percentage" (50% for stock held for 3 years, 75% for stock held for 4 years, 100% for stock held for 5 years) is eliminated for QSBS acquired after July 4, 2025. Also, the gain exclusion threshold is increased from $10 million to $15 million and the $50 million aggregate gross asset limit is increased to $75 million (subject to inflation adjustments).

• Enhanced manufacturing investment credit: The advanced manufacturing investment credit (also known as the semiconductor credit or the CHIPS credit) on qualified investments in an advanced manufacturing facility built before Jan. 1, 2027 is increased to 35% (up from 25%) for property placed in service after 2025.

• Information reporting, Form 1099-K: The Act retroactively reverts the Form 1099-K reporting threshold back to the pre-ARPA $20,000 and 200 transactions threshold.

• Information reporting, Forms 1099-NEC, 1099-MISC: For payments made after 2025, the reporting thresholds for Forms 1099-NEC and 1099-MISC are increased from $600 to $2,000 (adjusted for inflation after 2026).

• Gain on the sale of certain farmland property: For sales or exchanges occurring after July 4, 2025, sellers of qualified farmland property may elect to pay capital gains tax on the sale in four equal annual installments. The first payment is due with the return for the year in which the sale occurs, with the remaining payments being due with the successive years' returns (but if a payment is missed, the balance is due immediately).

• Deduction limitation for compensation of publicly held corporation executives: Under the Act, determining compensation that is subject to Code Sec. 162(m) , which limits the amounts that publicly held corporations may deduct for compensation of certain top executives to $1 million per year, is expanded for post-2025 tax years to include all members of a publicly-held corporation's controlled group and affiliated service group under Code Sec. 414(b) , Code Sec. 414(c) , Code Sec. 414(m) , Code Sec. 414(o) (which is a broader group than under the pre-Act aggregation rule).

• Corporate charitable contributions: The Act imposes a new 1% floor (in addition to the 10% ceiling) on corporate charitable deductions for post-2025 tax years.

• Excess business losses: The Act makes the Code Sec. 461(l) limit on excess business losses permanent.

• Energy efficient commercial buildings deduction: Under the Act, the energy efficient commercial building deduction terminates for the cost of energy efficient commercial building property whose construction begins after June 30, 2026.

• Cost recovery for energy property: The Act eliminates 5-year MACRS classification for energy property effective for property for which construction begins after 2024.

• Advanced energy project credit: Effective July 4, 2025, "add backs" in the event of the revocation of a project certification are discontinued.

• Advanced manufacturing production credit: The Act terminates the credit for wind energy components produced and sold after Dec. 31, 2027. It also subjects pre-Act applicable critical minerals to a new phaseout schedule and tightens the rules regarding foreign entities.

• Energy efficient home improvement and new energy efficient home credits: The energy efficient home improvement credit under Code Sec. 25C is terminated for property placed in service after 2025. The new energy efficient home credit under Code Sec. 45L terminates for any qualified new energy efficient home acquired after June 30, 2026.

• Residential clean energy credit: The residential clean energy expenditures credit is terminated for any expenditures made after 2025.

• Clean vehicle credits: The credits for new and previously owned clean vehicles terminate for vehicles acquired after Sept. 30, 2025. The credit for qualified commercial clean vehicles also terminates for vehicles acquired after Sept. 30, 2025.

• Alternative fuel vehicle refueling property credits: The credit for "alternative fuel vehicle refueling property" (such as an EV charger) terminates for property placed in service after June 30, 2026.

These are just some of the changes in the Act. We will continue to communicate key aspects with our clients.

One Big, Beautiful Bill 2025 - Impacts for Individuals

Thu, 10 Jul 2025 19:47:29 GMT

Key information for individuals

Significant new tax legislation (the Act) was signed into law July 4, 2025, formally known as One Big Beautiful Bill or, informally, the OBBB. The Act includes numerous changes affecting individual taxation.

Navigating these changes can be complex, and their impact on your specific tax situation will vary. We encourage you to review this list, which highlights some of the key provisions, and contact us at your earliest convenience to discuss the impact of these changes and develop a plan tailored to your situation.

• Reduced Income Tax Rates: The Act makes the lower individual income tax rates and wider tax brackets introduced by the Tax Cuts and Jobs Act "TCJA" permanent, preventing a scheduled tax rate increase after 2025. For example, the top individual rate will remain at 37% (instead of reverting to 39.6%), and the marriage penalty relief for most brackets continues. This means that married couples filing jointly will typically not face higher taxes compared to filing as singles.

• Increased Standard Deduction: The standard deduction has been permanently increased and enhanced for 2025 and beyond: $30,000 for joint filers, $22,500 for heads of household, and $15,000 for singles in 2025, with further increases to $31,500, $23,625, and $15,750, respectively, for 2026 and after. Because these higher amounts mean fewer taxpayers will benefit from itemizing, consider bunching itemized deductions into a single year to exceed the standard deduction, then take the standard deduction in alternate years.

• Child Tax Credit: The Child Tax Credit (CTC) has been permanently increased to $2,200 per qualifying child for tax years after 2024, and will be indexed for inflation in future years. Omission of a correct SSN on a return under the Code Sec. 24 child and other dependent credit rules will be treated as a mathematical or clerical error that IRS can summarily assess. To maximize these credits, ensure all dependents have the required identification numbers before year-end, and consider managing your income or accelerating deductions if your AGI is near the phase-out range.

• E&G-Basic Exclusion Amount: The basic exclusion amount for federal estate and gift tax will increase to $15 million (indexed for inflation) for estates of decedents dying and gifts made after Dec. 31, 2025. Review and update estate plans and consider making large lifetime gifts to tax advantage of this higher exclusion.

• Pease Limitation: Starting in 2026, the Pease limitation which reduced itemized deductions for high earners is permanently repealed. High-income taxpayers will see a much smaller 2/37 reduction apply to the lesser of their itemized deductions or the amount by which their taxable income exceeds the 37% tax bracket threshold. With this change, bunching deductible expenses into a single year can be effective, since the reduction is generally less severe than under the old Pease rules.

• Individual Alternative Minimum Tax Exemption Amounts: The AMT exemption amounts are permanently increased for 2026 and beyond, but the phaseout rate for higher-income taxpayers doubles from 25% to 50%. Taxpayers should review their AMT exposure and consider strategies such as timing income or exercising options in lower-income years to avoid unexpected AMT liability.

• Deduction for Taxpayers Age 65 or Older: For tax years 2025-2028, individuals age 65 or older (and their spouses, if filing jointly) can claim a new $6,000 deduction per qualified person. To maximize this benefit, seniors should aim to keep their adjusted gross income (AGI) below $75,000 (single) or $150,000 (joint), as the deduction is reduced by 6% of any excess. Be sure to include the correct Social Security Number for each qualifying individual to avoid disallowance of the deduction.

• Car Loan Interest: For tax years 2025-2028, individuals can deduct up to $10,000 per year in interest paid on loans for new personal-use vehicles even if they don't itemize deductions. The deduction phases out for single filers with MAGI over $100,000 and joint filers over $200,000. To qualify, the loan must be for a new, U.S.-assembled car, SUV, van, pickup, or motorcycle (under 14,000 pounds), secured by a first lien, with the taxpayer as the original owner, and the vehicle's VIN reported on the tax return. If you're planning to buy a new vehicle, consider timing your purchase and loan to maximize deductible interest within the eligible years, and manage your income to stay below the phase-out thresholds for the largest benefit.

• Child and Dependent Care Credit: Starting in 2026, the Child and Dependent Care Credit will be more valuable for many families. The maximum credit rate increases to 50% of eligible expenses, up to $3,000 for one qualifying individual or $6,000 for two or more. The full 50% rate applies to families with AGI up to $15,000 and gradually phases down to 35% for AGI up to $75,000 ($150,000 for joint filers). To maximize your benefit, be sure to keep thorough records of all qualifying expenses and coordinate with any employer-provided dependent care benefits to avoid missing out on the full credit potential.

• Contributions to Scholarship-Granting Organizations: New for tax years ending after Dec. 31, 2026, individual taxpayers can claim a federal income tax credit of up to $1,700 per year for cash contributions to qualifying scholarship-granting organizations (SGOs) in participating states. To maximize this benefit, confirm your state's participation and ensure the SGO is on the IRS-approved list before contributing.

• Disaster-Related Personal Casualty Losses: If you suffered a loss due to a federally declared disaster, you can now claim a personal casualty loss deduction even if you don't itemize. The standard deduction is increased by the amount of the net disaster loss. Be sure to document your losses and insurance claims, and consider filing an amended return if you missed claiming a qualified loss in a prior year.

• American Opportunity and Lifetime Learning Credits: Starting in 2026, you must include the Social Security Number (SSN) of the student (or yourself or your spouse, if applicable) and the Employer Identification Number (EIN) of each college or university when claiming the American Opportunity Tax Credit (AOTC). To avoid losing this valuable credit due to a clerical error, make sure all SSNs are issued before the tax return deadline and that you have the EIN for each institution. Doublecheck that these numbers are entered correctly on your return, as missing or incorrect information will result in the IRS denying the credit.

• Eligibility to Enroll in Qualified Health Plan: Starting in tax years after 2027, you can only claim the premium tax credit (PTC) for months when the health insurance Exchange has verified that you are eligible to enroll in a qualified health plan (QHP) and to receive advance PTC payments. To avoid losing your credit, be sure to file your federal tax return on time each year. Promptly report any changes in income, family size, or other circumstances to the Marketplace within 30 days, and respond quickly to any requests for information.

• Deduction for Qualified Residence Interest: The deduction for mortgage interest on home acquisition debt is now permanently capped at $750,000 ($375,000 if married filing separately), rather than increasing to $1 million in 2026 as previously scheduled. If you are considering buying a home, refinancing, or taking out a new mortgage, be aware that interest on debt above $750,000 will not be deductible.

• Miscellaneous Itemized Deductions: The Act permanently eliminates miscellaneous itemized deductions for individual taxpayers. This doesn't apply however to itemized deductions under Code Sec. 67(b) . And the Act adds a new deduction thereunder for educators, allowing K-12 teachers, counselors, coaches, and aides working at least 900 hours per year to deduct unreimbursed classroom expenses (like books, supplies, and equipment) starting in 2026.

• New Tax -Deferred Investment Accounts for Children: Taxpayers can open a new tax -deferred investment account for children, called a "Trump account" for each eligible child. Taxpayers can contribute up to $5,000 per year in after-tax dollars for each child, and funds must be invested in a diversified U.S. equity index fund. For children born between Jan. 1, 2025, and Dec. 31, 2028, the federal government will automatically contribute $1,000 to each account. Taxpayers should open the account before their child turns 18 to maximize contributions and secure the government benefit if eligible.

• Adoption Credit: Starting in 2025, the adoption credit is enhanced to include a refundable portion of up to $5,000 per child (indexed for inflation). This means eligible taxpayers can receive up to $5,000 as a refund even if they owe no tax, making the credit more valuable for lower-income families. To maximize this benefit, keep detailed records of all qualified adoption expenses, ensure you have a taxpayer identification number for the child, and file Form 8839 in the year the adoption is finalized.

• Qualified Higher Education Expenses: Changes to 529 savings plans allow families to use tax-free distributions for a much broader range of K-12 education expenses including not just tuition, but also curriculum, books, online materials, tutoring, standardized test fees, dual enrollment, and educational therapies for students with disabilities. Starting in 2026, the annual limit for K-12 distributions doubles from $10,000 to $20,000 per beneficiary. To maximize tax savings, consider timing 529 withdrawals to match qualified expenses within the same tax year, and coordinate with other education tax credits to avoid overlap.

• Higher Education Expenses for 529 Accounts: 529 plan distributions can now be used tax -free for a wider range of education expenses, including not only college costs but also "qualified postsecondary credentialing expenses." This means you can use 529 funds for tuition, fees, books, supplies, and equipment required for enrollment in recognized certificate, licensing, or apprenticeship programs even if they are not traditional degree programs.

• Individuals' Charitable Deductions: Beginning in 2026, the Act makes permanent the 60% ceiling for cash gifts to 50% charities, and provides that a contribution of cash to a 50% charity is deductible to the extent that the total amount of contributions of cash to 50% charities doesn't exceed the excess of: (a) 60% of the taxpayer's contribution base for the tax year, over (b) the total amount of contributions to 50% charities for the tax year. To maximize your deduction, prioritize cash donations to 50% charities.

• Limitation on Casualty Loss Deduction: Starting in 2026, personal casualty loss deductions are permanently limited to losses from federally declared disasters (and certain state-declared disasters). If you experience a loss due to a qualifying disaster, be sure to keep detailed records.

• Remittance Transfers: Starting in 2026, a new 1% excise tax will apply to remittance transfers from U.S. senders to recipients in foreign countries. Transfers funded with cash or through non-U.S. payment apps may be subject to the tax, so plan ahead and use the exempt methods (i.e., the remittance transfer is withdrawn from a financial institution governed by Title 31, Chapter 53 or funded with a U.S.-issued debit or credit card) whenever possible to minimize your tax liability on international money transfers. This provision is effective for transfers made after Dec. 31, 2025, so review your remittance practices before year-end to take advantage of these exceptions and avoid unnecessary taxes.

• Wagering Losses: Starting in 2026, only 90% of your wagering losses can be deducted against your winnings, even if your losses equal or exceed your winnings. To maximize your deductions, consider realizing wagering losses in 2025 before the new rule takes effect, and keep detailed records of all activity.

• Deduction and Exclusion for Moving Expenses: Moving expenses are now permanently nondeductible for most taxpayers, and any employer reimbursement for moving costs is fully taxable as income. If you expect to relocate for work, consider negotiating with your employer to cover the additional taxes you'll owe. Only active-duty military members moving under orders and, starting in 2026, certain intelligence community employees remain eligible to deduct or exclude qualified moving expenses, so these individuals should track and document all eligible costs for tax purposes.

• ABLE Accounts: The Act permanently provides for additional contributions to Achieving a Better Life Experience (ABLE) accounts for employed individuals with disabilities. It also adjusts the base limit amount by one year for inflation. The Act also permanently allows beneficiaries who make qualified contributions to their ABLE account to qualify for the Saver's Credit. To maximize tax benefits, ensure the designated beneficiary personally makes contributions by year-end to qualify for the Saver's Credit, which is now permanently available for ABLE contributions and will increase to a maximum of $2,100 starting in 2027.

Dirty Dozen Tax Scams According to the IRS

Mon, 17 Mar 2025 17:03:39 GMT

The annual list of tax scams was recently released by the IRS, see article below.

Each year, the IRS issues an annual "Dirty Dozen" list of tax scams. The IRS recently published its list for 2025 to raise awareness about the most common tax scams that could threaten taxpayers, businesses, and tax professionals. The IRS notes that these scams peak during filing season but warns that the scams persist throughout the year. We share this information in the hope that it might help someone from becoming a victim.

These are the 12 tax scams and schemes that taxpayers should look out for:

Phishing - Among the top threats this year are email phishing and smishing, where criminals send fraudulent messages impersonating the IRS or other financial entities to trick recipients into revealing their sensitive information. The IRS reminds taxpayers not to click any links from anyone claiming to be from the agency as it may contain malware.
Bad social media advice - Misleading tax advice on social media has been encouraging individuals to file fraudulent claims using Form W-2 or improperly claim credits they do not qualify for. Taxpayers must only follow trusted social media advice from the IRS and other reputable sources to prevent facing significant penalties if they file fraudulent tax returns.
IRS Individual Online Account help scam - Scammers trick taxpayers into sharing personal information by offering fake assistance in creating an IRS Individual Online Account. However, taxpayers do not need help to set up this account and should only follow official IRS guidance.
Fake charities - Fake charities are a recurring problem every year, especially during disasters. Fraudsters often exploit disasters by creating fake charities to steal donations and personal data. These scams do not just involve money, but they also pose identity theft risks. Taxpayers should always verify a charity's legitimacy before donating.
False Fuel Tax Credit claims - The IRS reports that taxpayers have been misled into improperly claiming the Fuel Tax Credit during the past year. However, the credit is not available to most taxpayers because it was designed for off-highway business and farming use.
Sick Leave and Family Leave credits - Many taxpayers have been using Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, to incorrectly claim a credit even though it is only available for self-employed individuals for 2020 and 2021.
Fake self-employment tax credit - A non-existent "Self-Employment Tax Credit" has been falsely claiming online that self-employed people and gig workers can receive payments of up to $32,000 for the COVID-19 period. This misleading information refers to the expired Sick Leave and Family Leave credits. The IRS warns that most taxpayers are not qualified for these credits and it is closely monitoring these claims.
Improper household employment taxes - The IRS also reports a rise in fraudulent filings involving Schedule H, in which taxpayers create fictional household employees to claim a refund based on wages they never paid.
Overstated withholding scam - The overstated withholding scam operates when scammers submit tax returns with exaggerated income and withholding amounts to receive large refunds. The IRS warns that such claims will be closely scrutinized, and refunds will be withheld if discrepancies are determined.
Misleading OIC - The Offer in Compromise program allows eligible taxpayers to settle tax debts for less than the full amount owed. However, aggressive promoters mislead ineligible taxpayers into applying, often charging thousands in fees. The IRS advises taxpayers to use its OIC Pre-Qualifier tool to verify eligibility.
Ghost tax return preparers - "Ghost" preparers are those who will prepare returns but refuse to sign them or include their IRS Preparer Tax Identification Number (PTIN). This is a huge red flag. Taxpayers should avoid preparers who charge a fee based on the refund amount or ask them to sign blank or incomplete returns.
Spear phishing scams - Tax professionals are also targeted through spear phishing scams. Criminals often use malware to infiltrate systems by posing as potential clients to gain access to sensitive tax information.

The IRS encourages individuals to report suspected scams using the online Form 14242 , Report Suspected Abusive Tax Promotions or Preparers, or by mailing the form to the IRS Lead Development Center in the Office of Promoter Investigations.

IRS Interest Rates on Over- and Under-Payments

Mon, 17 Mar 2025 16:49:03 GMT

Rates remain unchanged for 2nd quarter 2025

The IRS has announced that the interest rates used for overpayments and underpayments by taxpayers will remain the same for the 2nd quarter, which begins April 1, 2025.

For individuals, the rates for overpayments and underpayments will be 7% per year, compounded daily.

Other interest rates were announced as follows:

7% for overpayments (payments made over the amount owed), 6% for corporations.
4.5% for the portion of a corporate overpayment exceeding $10,000.
7% for underpayments (taxes owed but not fully paid).
9% for large corporate underpayments.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For all taxpayers besides corporations, the over/under payment rate is the federal short-term rate plus three percentage points.

In the case of a corporation, the underpayment rate is the federal short-term rate plus three percentage points and the overpayment rate is the federal short-term rate plus two percentage points. The rate for large corporate underpayments is the federal short-term rate plus five percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates announced are computed from the federal short-term rate determined during January 2025.

IRS and SSA Collaborating to Find Fraud

Fri, 24 Jan 2025 23:03:36 GMT

To those of us NOT in government, we ask why did this take so long?

The IRS and SSA have shared certain information from their databases in the past. That's how the SSA knows when an individual's adjusted gross income increases, allowing the SSA to change the Medicare premium. That access and information sharing, apparently, was more limited than many of us thought. A recent article highlights fraud and mistakes that the IRS has been able to uncover by virtue of the enhanced data sharing that has been allowed by Congress. The following is from Thomson Reuters:

Treasury Blocks, Recovers Over $31 Million in Social Security Payments to Dead People

By Federal Tax Update Staff

The Treasury Department announced thwarting and recovering over $31 million in fraud and improper payments during a five-month pilot after gaining temporary access to a high-quality dataset of deceased individuals.

Fiscal Assistant Secretary David Lebryk said this is "just the tip of the iceberg," as the Treasury projects more than $215 million in net benefit during its three-year access to the Social Security Administration's (SSA) Full Death Master File.

The SSA maintains the most complete federal database of individuals who are reported to have died.

Effective December 2023 through December 2026, Congress granted Treasury temporary access to the SSA's Full Death Master File, which contains over 142 million records dating back to 1899.

The Treasury said the integration of the master file resulted in a 139% increase in the total number of death matches and improved timeliness and quality of data.

The pilot also reportedly led to a notable growth in both new and expanded partnerships and increased usage of the "Do Not Pay" Working System.

"Congress granting permanent access to the Full Death Master File will significantly reduce fraud, improve program integrity, and better safeguard taxpayer dollars," said Lebryk.

Trump Executive Order and the IRS

Fri, 24 Jan 2025 22:52:35 GMT

How much impact will Trump's executive order have on the IRS.

Anyone who follows President Trump at all knows that he does not have a love affair with the IRS. Importantly, Trump also seems to have a long memory when it comes to individuals and institutions who he perceives have slighted or hindered him. It remains to be seen how much the executive order will impact the IRS. We think that this article from Thomson Reuters provides a timely update:

Impact of IRS Hiring Freeze on Tax Season, Workforce Goals

By Tim Shaw, Checkpoint

President Trump's executive order implementing a hiring freeze across all federal agencies raised questions about the agency’s readiness for the upcoming tax filing season, but a tax policy expert says taxpayers have nothing to fear – beyond tax season, however, may be a different story.

Issued Monday following his inauguration, Trump ordered an immediate pause on the hiring of federal civilian employees "throughout the executive branch." Agencies cannot fill vacant positions nor create new ones.

The freeze will remain in place until the Office of Management and Budget (OMB) submits a plan to reduce the size of the federal workforce, due 90 days from January 20. But the order contains a special carveout for the IRS. In order for the IRS to begin hiring again, the next Treasury secretary and the OMB director must first give the OK.

Trump's Treasury secretary nominee, billionaire investor Scott Bessent , cleared the Senate Finance Committee on Tuesday by a vote of 16-11 . Bessent's confirmation next goes to the full Senate for approval.

Meanwhile, the IRS is also undergoing a changing of the guard. Danny Werfel resigned as IRS commissioner when Trump retook office following the new administration's announcement that it wants to install former House Representative Billy Long atop the agency Long previously sought to abolish.

January 27 marks the beginning of tax season. With the hiring freeze in place, taxpayers and practitioners are left to wonder if this year will be another bumpy ride like in recent years when the IRS was marred by staff shortages and resource strain. National Taxpayer Advocate Erin Collins in her recent Annual Report to Congress on last tax season gave the IRS the highest marks on its performance since before the COVID-19 pandemic.

According to a social media post by Melanie Lauridsen, vice president of tax policy and advocacy at the American Institute of Certified Public Accountants, there is "NO CONCERN" for this filing season. (emphasis in original) First, there "already was a hiring freeze in place," therefore the executive order "is not a change from where the IRS was" at before the start of Trump's second term. This is due to the additional $20 billion clawed back from the IRS' once-$80 billion, 10-year funding allocation from the Inflation Reduction Act.

Pursuant to previous agreements between former President Joe Biden and Republican lawmakers amid government funding and debt ceiling negotiations, the IRS was set to lose $10 billion from the Inflation Reduction Act bucket for two consecutive years. Later, Biden and Congress agreed to accelerate the claw backs.

The full $20 billion was rescinded on January 1. Biden Treasury officials warned that should that agreement stand, the IRS would halt workforce expansion efforts laid out in the Strategic Operating Plan (SOP) for spending the Inflation Reduction Act funding.

Lauridsen added that seasonal IRS employees "should have already been hired and received training to begin working from January through May. The IRS will also reallocate workers from other areas to help cover filing season processing."

The future of IRS funds from the Inflation Reduction Act and normal annual appropriations hang in the balance under a Republican trifecta that has made its intentions to reduce the size of the agency clear. But during Werfel's time at the helm, the IRS planned to continue growing in all sectors, from customer service to revenue agents and IT professionals.

According to the SOP, the IRS had a road map for modernizing its hiring and training processes, with a focus on data-driven benchmarks. "Given historical budget and staffing constraints, the IRS has not had enough staff to meet taxpayers' service needs or its enforcement goals," read the SOP, released nearly two years ago.

"As the IRS grows its workforce to realize the vision the IRA makes possible, increasing and aligning talent to needs will be critical in fulfilling the business strategy," the IRS said. "Developing a strategic workforce planning approach that brings aboard the talent needed will be an important step in how we meet the future talent needs of the IRS while improving the taxpayer experience."

Lauridsen also noted that executive orders "must be reviewed" by Treasury "prior to implementation."

Outsourcing the Accounting Department: Your Business Should Consider This Option Now

Thu, 23 Jan 2025 23:51:22 GMT

Improve profitability, reduce the opportunity for fraud, focus on your core business, eliminate excuses for tardy financial data - what's not to love about outsourcing your accounting?

It’s a big step, no doubt. Turning over the bookkeeping and accounting responsibilities to a third party can seem like a scary proposition. The vast majority of business owners have had an accounting department as long as they can remember, and keeping status quo can be comforting. But far too often status quo does not work. How many times should a business owner be willing to risk making bad decisions on bad data? How long should a business owner put up with incompetence in the internal accounting department? Why should a business owner continue to run the risk of internal fraud occurring? Why struggle to find, hire, train, and monitor new employees when an internal bookkeeper or accountant leaves or retires? Why pay escalating salaries and benefits, particularly when the department is not working efficiently? If a business owner has never really looked into it, the thought of outsourcing may be overwhelming, or may seem to be too costly. The reality is that NOT making the decision to outsource may be the worse decision possible for the life of the business.

Sadly, for most businesses the accounting department is viewed as a necessary evil: The department is always behind, staffing is unreliable, and the financial statements are produced so late that they are worthless for decision making. Worse yet, in many cases the internal staff is incapable of producing financial statements that can be relied on – the internal staff simply just doesn’t know enough about accounting. Banks are forever asking for the financials, vendors are not getting paid on time, bank accounts are overdrawn for no reason, payroll is botched time and time again, and the owners are frustrated. Maybe the owner even feels handcuffed or intimidated by the power that has been assumed by the controller or the internal accountant. In other cases, business owners make decisions emotionally – “we can’t let Aunt Betty go, she’s been doing our books since I was a teenager, and I trust her.”

Dowell Group has been outsourcing the accounting work for businesses and nonprofits for years. There are some telltale markers for when outsourcing is the best answer, and we’ll highlight a few of those in this article.

Do you really know how your business is doing? Some business owners will instinctively tell us yes, they keep tabs on how the business is performing. But, as we dig deeper, we find out the owner is only tracking the simplest of metrics. In some cases, the owners might be simply looking at sales for the week or the month – as long as they see growth or minimal erosion in the sales, they think they’re doing okay. Those same owners, however, may be overlooking that they often get calls from the bank about overdrafts, or that they scramble to make payroll each pay period. Clearly, sales is only one marker, and by itself it does not come close to telling an owner how the business is doing. Management needs timely financial data in the form of income statements and balance sheets, which have been reconciled and are reliable. Anything short of that is simply a disaster waiting to happen.

Is there sub-par performance from the accounting personnel, or do you find it nearly impossible to find staff? Finding employees is the most common problem shared by all businesses today. There is nothing a business owner can do about the historically low unemployment rates – there are just few qualified candidates, period. Further, a business owner looking at accounting personnel has fierce competition from businesses large and small – including competition from CPA firms. A business’ accounting functionality can grind to a halt when positions are left unfilled. Work simply doesn’t get done, vendors don’t get paid, payments aren’t posted to the accounts receivable, and every vendor and customer ends up calling someone in management or sales to get their questions answered – leading to an incredible amount of unproductive time and wasted opportunities. If a business finds personnel, who is responsible for training them, and what kind of training are they really getting? Likely, it’s minimal training and the new hire is left to figure things out on their own – another recipe for disaster.

What is the cost of being distracted from the bottom line and the core business? There are only so many hours in the day, as the saying goes. During those hours (and weeks, months, and years) business owners are either focusing on decisions and issues that can impact customers and the bottom line or they allow themselves to be distracted by the wrong matters. Success at the highest level comes when we maximize the resources and talents that are available. What would happen if the business owner could take the resources that are allocated to propping up the accounting department and deploy them in new equipment, inventory, or personnel? Beyond the financial resources that go into maintaining an accounting department are the energy and talent distractions: If an owner or key manager is confronting an accounting problem or dilemma, rather than focusing on production, clients, or marketing, there is a real and unrecorded cost involved. Everything has an opportunity cost - what is the opportunity cost of funding an accounting department?

What does the accounting department really cost the business? A business owner needs to consider the all-in cost of maintaining an internal accounting department, even if a business has just a handful of employees working in the accounting department. Salaries add up quickly and then, of course, you have to factor in payroll taxes and benefits, like health insurance and 401k. Even vacations come at a price for the business, as either the work doesn’t get done or someone else has to slide over from their normal duties to fill in. Even with just a few employees, it’s not unusual to see a business spending upwards of $200,000 on the accounting department. If a business is spending that kind of money and still not getting reliable data and having to manage by the seat of their pants, it’s obviously a broken system.

Has too much power been shifted to internal accounting staff? In some organizations, the owner has become so pre-occupied with production, or with sales, or with any myriad number of daily problems, that he or she has allowed the internal accountant or controller unprecedented latitude when it comes to the financial recordkeeping and banking. The owner relies on this person too much, and really doesn't understand how the data flows anymore. Often we hear "it seems like we should be doing better than this, but we're always short of cash and challenged to make payroll. I just don't understand." Lack of accountability and oversight can be deadly to a business. Most businesses can not afford to lose a million dollars to an internal scam artist, but many, many businesses needlessly expose their entities to exactly this risk every day. If oversight is lacking, too much control has been ceded to staff, or the accounting department is out of control, outsourcing to a trusted third party will put an end to the madness.

And what about Aunt Betty? The accounting literature is rife with Aunt Bettys or the trusted long-time bookkeeper who was kept on staff by the benevolent owner and entrusted with all of the accounting – only to find out later that the business was being ransacked of its assets and cash was being embezzled faster than you can say “Bernie Madoff”. Small accounting departments with one, two, or three employees, coupled with management that is very hands off and provides no meaningful oversight are too tempting of a target. Some frauds are not big and dramatic, but instead are a death by a thousand cuts, with the stealing taking place over many years. It can occur in the form of kickbacks from vendors or contractors, selling of inventory that never hits the books, ghost payroll or ghost vendors. Fraud is so prevalent, especially in this tight labor market, where the owner might have had to settle on someone with a spotty resume and track record, simply because the owner was desperate for staff.

If any of these questions resonate with you, outsourcing can fix these problems. Any one of these issues can sink your business, either overnight or over the long haul. You will eventually make a horrendously bad decision on those faulty financials, or the bank will eventually cancel your line of credit when the financials never arrive or are obviously inaccurate. The drain on the business' resources from fraud or incompetence will eventually cause the business to collapse or at the least suffer major embarrassment.

When a business outsources its accounting to a CPA firm, it puts the experts in charge of keeping the accounting records. The expertise exists to solve every accounting question that might be encountered. The fundamentals are not ignored. Processes are put in place to organize the input. Vendors are paid on time, and receivables are kept current. The cash in the bank account is something that can be relied on. Financial statements can be printed and provided to other stakeholders.

Most importantly perhaps, management can make decisions based on data. Staffing is no longer an issue, and no time is spent having to painstakingly interview prospects and train new hires. Oversight of internal staff is no longer an Achilles heel for the business, as a good outsourcing firm will provide its own internal controls. The opportunity for internal fraud in the accounting department completely disappears, and the business will not become a headline in the business section of the local news. Valuable management time is no longer needed for oversight and can be spent on growing sales, providing exceptional service to customers, and developing new markets.

Outsourcing can take on many forms. It can be a complete outsourcing of every aspect of bookkeeping and accounting, so that every accounting responsibility is offloaded to the CPA firm. It may only be an outsourcing at the higher levels, like an outsourced controller, while leaving the internal bookkeepers in place. The outsourced controller would oversee the internal employees make sure that the accounting records are accurate and current. Outsourcing can also focus solely on the highest level, like a CFO, so that the outsourced CFO provides high level oversight of the internal staff and engages side-by-side with ownership in strategic thinking. There is no one-size fits all approach, and the approach can, and should, be tailored to meet the needs of the business.

With so many variations, of course, the cost can be all over the board. Most business owners would pay more to have better financial data. Even those business owners who have been reluctant to consider change and maybe still have that trusted internal staff member, once they experience one too many crises or find out that cash has been leaking inexplicable from the bank accounts, will gladly pay more to get better financial control of their business. It’s a given that a business will get better financial data on a much more timely basis if it outsources.

However, in virtually every case we find that it actually costs less to outsource than it does to maintain the internal accounting personnel. The three main reasons that outsourcing results in cost savings are:

1. Savings comes in the forms of eliminating payroll taxes and benefits of the internal accounting department;

2. A good outsourcing firm will look to best practices when taking over the work. We often find that work has been done inefficiently or that some useless processes are in place (because “that’s the way we’ve always done things”). Maybe your business is trapped in bad, overly complicated, or ineffective accounting software; and

3. An outsourcing firm remains strictly focused on the tasks at hand – there is no lost time at the water cooler, taking personal phone calls, or surfing the internet.

If you can find your business identified in any of the discussion above, contact us. Unfortunately, we can’t help you if you don’t reach out to us. There is no need to put up with an unacceptable accounting department. Take action before your business hits a crisis point.

How to Invest in a Turbulent Stock Market

Fri, 17 Jan 2025 22:52:24 GMT

Maybe it's an inheritance, a bonus at work, or some other cash windfall - the question is when and how is the best way to invest?

If you've been fortunate enough to receive a large amount of money, the next question is often how to invest those funds in the market. There really are two approaches that you can take: 1) invest the full amount immediately, as a "lump sum", or 2) invest the funds in even amounts at regular, designated intervals. The following will briefly explain both strategies.

Lump sum investing - you get a windfall today and you invest the entire balance in the market right away - is the first method identified above. The advantage is that the money is put to work right away, rather than sitting temporarily in a lower return vehicle like a money market fund. The risk is that you may be buying the market at a high point, and if you had only waited a week or a month you might have been able to buy at a lower price. There really is no way of knowing if today's market is high or not - even when the market has had a huge run-up, none of us know exactly what is going to happen next. To maximize returns over the long term, many advisors would say to swallow hard and invest the entire amount immediately. That way, you're acknowledging that the markets could go up or down and you're okay with that, as you're in it for the long haul. There is research that supports the higher returns possible by investing the funds all at once, and some advisors will point to the idea that not investing all at once is really a form of market-timing, which no one is very good at doing. However, if you're someone who can't help but agonize and second-guess, lump sum investing might not be the best move for you psychologically.

Alternatively, another way to invest is buy "dollar cost averaging". The concept is simple, and involves investing a set amount of funds at specific intervals. An example would be that someone receives $10,000. One way to dollar cost average is to invest $2,500 on a quarterly basis, beginning today. Following that strategy, the funds would be fully invested in the market at the end of nine months.

As a side note, if you invest regularly in a 401k plan at work, you are already dollar cost averaging, as you are investing set amounts at specific intervals. That's just a side note, as this brief article is really about how to invest lump sums.

Why is dollar cost averaging a good idea? While history tells us that the markets will have a positive trend over the course of long stretches, none of us know the direction of the markets over the course of a few months or a few years. Dollar cost averaging ensures that if the market is high at one of the designated investment dates, an individual will limit the investment to the pre-set dollar amount, and therefore buy a smaller number of shares on that date. Conversely, if the market drops on an investment date, an investor will still invest the pre-set dollar amount, but will end up buying more shares on that date. Sure, if you had a crystal ball, you'd be better off investing all of the money on the date that the market is the lowest, but that's really the point of this whole exercise - nobody owns a crystal ball.

If you choose to dollar cost average with a lump sum windfall, one final caution might be to not stretch out the timeframe too much. In the example above, the funds would be fully invested in nine months, which may be about the maximum "stretch" you would want to do. Going beyond a handful of months may start to look more and more like trying to time the market, which may end up adding more risk into the equation.

Wiinter is the Perfect Season for Reflection . . .

Thu, 16 Jan 2025 23:21:28 GMT

Baby, it's cold outside - let's talk financial matters and investments!

January 16, 2025

Many of us are unable to spend as much time outdoors as we would like in the coldest part of winter. What better time, then, to give some consideration to concerns that are all too easily set aside during the more pleasant months? It might also be a good reason to put the streaming service - that great time drain many of us know - on hold for a change.

In our December newsletter, we pointed out some year-end tax considerations. We also made note of a few other issues in the newsletter that you might want to consider, which fit perfectly into this reflective winter-time theme. The following are some things to consider; you may check the box on several and move on, but there may be one or two where you can make a personal note to dig into in more detail:

Review your portfolio – The end of the year is a perfect time to analyze your holdings and determine if the risk tolerances and asset allocations are still appropriate for your investment objectives. Consider your age, health, and family issues. This may be something you can do on your own if you are comfortable. If not, contact your investment advisor (or consider getting an investment advisor).
Retirement planning - It is always good to take some time to reflect on your retirement strategy at just about any age, but you should be getting much more granular with your analysis if retirement is nearing, say if you plan to retire in 10 or fewer years. Develop a plan for the annual cash needs in retirement, make some estimates on the amount of income you will have, determine a strategy for drawing down retirement dollars, consider health insurance coverage, when you will draw social security, etc.
Review beneficiary designations – Review the beneficiaries named on retirement accounts or insurance policies; consider if assets are titled correctly; determine if a family member should be added as a signer on an account. Also consider bank accounts; make sure someone has access to the funds if you are incapacitated.
Wills and Trusts - If you have not set up wills and trusts, then contact your attorney; call us if you need a reference. If it has been many years since you had your wills and trusts drafted, set up a meeting with your attorney or CPA to review the documents, including the named beneficiaries, guardians, and executors.
Estate planning – The amount of an individual’s estate that is exempt from estate taxes in 2024 is $13.61 million (double that amount for a married couple). $13.990 million is the exemption amount for 2025 per person. States, like Illinois, may have lower thresholds for the amounts that are subject to state inheritance taxes. Planning is required to make sure that your estate is optimally situated for estate tax purposes. While this is a generous amount historically, many individuals are surprised how close they may be coming to the limit when they total the fair market value of all of their assets.
Grantor (“Living”) trusts – If you have substantial assets, you should consider creating a grantor (also known as living or revocable) trust. If you have a grantor trust, be sure that all assets are held in that trust; brokerage accounts should be titled in the name of the trust. Grantor trusts are not needed in every situation, so talk to a trusted attorney to see what is right for your situation.
Power of Attorney - As part of the review of wills and trusts, also consider powers-of-attorney and health care powers-of-attorney you have in force (or should have in force) for all of your family members.
Insurance - Review the various types of insurance coverages you have in place and re-examine your needs. This includes homeowner’s, auto, life, health, disability, umbrella liability, and long-term care. The coverage amounts change as we move through life events. For instance, typically less life insurance is needed once the children are on their own, or when the mortgage is paid off.
Family meeting – As we age, it becomes more rare when an entire family is able to gather at once. Hopefully, you'll be lucky and have a fews days every years when everyone is together. If not, getting family together virtually can be an option. Whether your family is zooming or in-person, consider having a family meeting to give an overview of your investments and objectives, charitable giving strategies and desires, the location of key documents, and names of your key advisors (CPAs, attorneys, bankers, insurance agents, investment advisors, etc.). The more these issues are discussed in advance, the less confusion there will be at critical times, and your loved ones will have a better understanding of what will happen and what their roles will be.
Safe deposit box - Make a special point to visit your safe deposit box and inventory (and organize) the contents. Make sure your executor, spouse, or other key person knows where the key is kept.
Cyber Security – Many of us have been subject to some level of privacy violations. Consider if you should purchase personal identify theft protection. One good practice is to check once a year with the three major credit bureaus, where you can pull a credit report for free.
Passwords – The passwords to your critical accounts (bank, investments, insurance) should be someplace where they are accessible in the event of your illness or death. Your password list should include other accounts as well that are password protected (like phones, internet, email, etc.).

Hopefully, the above will give you a little inspiration for this winter.

Required Minimum Distributions from Retirement Accounts

Tue, 31 Dec 2024 00:14:16 GMT

As you may be aware, you can't keep retirement funds in your account indefinitely. You generally have to start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, or 401(k) plan when you reach age 73. Roth IRAs do not require withdrawals until after the death of the owner.

Your required minimum distribution (RMD) is the minimum amount you must withdraw from your account each year. You can withdraw more than the minimum required amount. Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).

We typically instruct our clients to turn to their investment advisors to determine if they are required to take an RMD and to calculate the amount of the RMD for the year. Most investment advisors and plan custodians will provide those services free of charge, and will also send reminders to their clients each year to take the RMD before the deadlines. That said, it is still good to have a general understanding of the RMD rules. The RMD rules are complicated, so we have put together the following summary that we hope you will find helpful:

When do I take my first RMD (the required beginning date)?

For an IRA, you must take your first RMD by April 1 of the year following the year in which you turn 73, regardless of whether you're still employed.

For a 401(k) plan, you must take your first RMD by April 1 of the year following the later of the year you turn 73, or the year you retire (if allowed by your plan). If you are a 5% owner, you must start RMDs by April 1 of the year following the year you turn 73.

What is the deadline for taking subsequent RMDs after the first RMD?

After the first RMD, you must take subsequent RMDs by December 31 of each year beginning with the calendar year containing your required beginning date.

How do I calculate my RMD?

The RMD for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS's "Uniform Lifetime Table." A separate table is used if the sole beneficiary is the owner's spouse who is ten or more years younger than the owner.

How should I take my RMDs if I have multiple accounts?

If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all of your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA.

If you have more than one 401(k) plan, you must calculate and satisfy your RMDs separately for

each plan and withdraw that amount from that plan.

May I withdraw more than the RMD?

Yes, you can always withdraw more than the RMD, but you can't apply excess withdrawals toward future years' RMDs.

May I take more than one withdrawal in a year to meet my RMD?

You may withdraw your annual RMD in any number of distributions throughout the year, as long as you withdraw the total annual minimum amount by December 31 (or April 1 if it is for your first RMD).

May I satisfy my RMD obligation by making qualified charitable distributions?

You may satisfy your RMD obligation by having the trustee make qualified charitable distribution of up to $108,000 in 2025 ($105,000 in 2024) to a public charity (some public charities excepted). The amount of the qualified charitable distribution will not be included in your income. You may also make a one-time election to make qualified charitable distributions to certain charitable trusts or a charitable gift annuity.

What happens if I don't take the RMD?

If the distributions to you in any year are less than the RMD for that year, you are subject to an additional tax equal to 25% of the undistributed RMD (reduced to 10% if corrected during a specified time frame).

2024 Year End Newsletter

Mon, 30 Dec 2024 23:03:02 GMT

December 16, 2024

The following letter was prepared and distributed to clients and friends of Dowell Group, LLP. The letter discusses individual and business tax planning ideas that may be appropriate in certain situations. This does not represent tax advice, as every situation must be considered on its own merits.

Dear Clients and Friends,

As we near the end of another year, it can be worthwhile to take a few moments to consider if there are any additional actions that should be taken to improve your tax positions. Our goal is to alert you to tax planning ideas that might prove helpful in these last days of 2024. We have tried to organize this communication in a “checklist” format, separated between issues affecting individuals and businesses, so that you can more quickly identify concerns relevant to your situation. We have also included some comments on other matters of interest that are not directly relate to income taxes, but may be worth considering. We hope the following proves to be helpful to you. Tax planning remains very much a case-by-case analysis. Because we are limited with what we can cover in this format, we also encourage you to visit our website at www.dowellcpa.com, where we regularly post articles that relate to businesses, individuals, trusts, and estates.

In a world that continues to go through so many changes, we are here to serve you. If you have a question or concern, please contact us. We also want to take the time to thank you. In this busy world, we know that we do not often slow down enough to say thanks. We know that we would not be here as a thriving firm without you. Most importantly, whatever your faith or beliefs, we wish you peace, good health, and good relationships this holiday season and in the years ahead.

Sincerely,

Dowell Group, LLP

Individuals - Year-End Tax Planning

□ Higher-income individuals must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of MAGI over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax will depend on the taxpayer's estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to reduce MAGI other than NII, and some individuals will need to consider ways to minimize both NII and other types of MAGI. An important exception is that NII does not include distributions from IRAs or most other retirement plans.

□ The 0.9% additional Medicare tax also may require higher-income earners to take year-end action. It applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds, above. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer.

□ Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $94,050 for a married couple for 2024). If the 0% rate applies to long-term capital gains you took earlier this year for example, you are a joint filer who made a profit of $5,000 on the sale of stock held for more than one year and your other taxable income for 2024 is $89,050 or less then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses won't yield a benefit this year. (It will offset $5,000 of capital gain that is already tax-free.)

□ Postpone income until next year and accelerate deductions into this year if doing so will enable you to claim larger deductions, credits, and other tax breaks for this year that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into this year. For example, that may be the case for a person who will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or who expects to be in a higher tax bracket next year.

□ If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional-IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA this year if eligible to do so. Keep in mind that the conversion will increase your income this year, possibly reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for those potentially subject to higher tax rates under pending legislation.

□ It may be advantageous to try to arrange with your employer to defer, until early next year, a bonus that may be coming your way. This might cut as well as defer your tax. Again, considerations may be different for the highest income individuals.

□ Many taxpayers won't want to itemize because of the high standard deduction amounts that apply for 2024 ($29,200 for joint filers, $14,600 for singles and for marrieds filing separately, $21,900 for heads of household), and because many itemized deductions have been reduced or abolished. Like last year, no more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible; and personal casualty and theft losses are deductible only if they're attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses but only to the extent they exceed 7.5% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt, but payments of those items won't save taxes if they don't cumulatively exceed the standard deduction for your filing status.

□ Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, a taxpayer who will be able to itemize deductions this year but not next year will benefit by making two years' worth of charitable contributions this year, instead of spreading out donations over 2024 and 2025. For 2022-2025, the deduction for charitable contributions of individuals is limited to 60% of the contribution base (generally, AGI).

□ If you expect to owe state and local income taxes when you file your return next year and you will be itemizing this year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into this year. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not good to the extent it causes your state and local taxes paid this year to exceed $10,000.

□ If you were 73 or older this year you must take a required minimum distribution (RMD) from any IRA or 401(k) plan (or other employer-sponsored retirement plan) of which you are a beneficiary. Those who turn 73 this year have until April 1 of next year to take their first RMD but may want to take it by the end of this year to avoid having to double up on RMDs next year.

□ If you are age 70½ or older by the end of this year, have traditional IRAs, and especially if you are unable to itemize your deductions, consider making charitable donations via qualified charitable distributions from your IRAs by the end of the year. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. However, you are still entitled to claim the entire standard deduction. For 2024, distributions of up to $105,000 per taxpayer are tax-free (increasing as a result of inflation adjustment to $108,000 in 2025). (Previously, those who reached reach age 70½ during a year weren't permitted to make contributions to a traditional IRA for that year or any later year. While that restriction no longer applies, the qualified charitable distribution amount must be reduced by contributions to an IRA that were deducted for any year in which the contributor was age 70½ or older, unless a previous qualified charitable distribution exclusion was reduced by that post-age 70½ contribution.) The IRA qualified charitable distribution also allows distributions to charities (up to $53,000) through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts.

□ If you are younger than age 70½ at the end of the year, you anticipate that you will not itemize your deductions in later years when you are 70½ or older, and you don't now have any traditional IRAs, establish and contribute as much as you can to one or more traditional IRAs this year. If these circumstances apply to you, except that you already have one or more traditional IRAs, make maximum contributions to one or more traditional IRAs this year. Then, in the year you reach age 70½, make your charitable donations by way of qualified charitable distributions from your IRA. Doing this will allow you, in effect, to convert nondeductible charitable contributions that you make in the year you turn 70½ and later years, into currently deductible IRA contributions and reductions of gross income from later year distributions from the IRAs.

□ Take an eligible rollover distribution from a qualified retirement plan before the end of the year if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes you owe this year. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in this year's income, but the withheld tax will be applied pro rata over the full tax year to reduce previous underpayments of estimated tax.

□ Consider increasing the amount you set aside for next year in your employer's FSA if you set aside too little for this year and anticipate similar medical costs next year.

□ If you become eligible by December to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for the current year.

□ Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $18,000 made in 2024 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

□ If you were in a federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred, or on the return for the prior year, generating a quicker refund.

□ If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in the current year to maximize your casualty loss deduction this year.

Individuals – Other Considerations at Year-End

□ Estate planning – The amount of an individual’s estate that is exempt from estate taxes in 2024 is $13.61 million (double that amount for a married couple). States, like Illinois, may have lower thresholds for the amounts that are subject to state inheritance taxes. Planning is required to make sure that your estate is optimally situated for estate tax purposes.

Businesses - Year-End Tax Planning

□ Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2024, if taxable income exceeds $383,900 for a married couple filing jointly, (about half that for others), the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income up to $100,000 above the threshold, and to other filers with taxable income up to $50,000 above their threshold. (For 2025, the amount rises to $394,600.)

□ More small businesses are able to use the cash (as opposed to accrual) method of accounting than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test, which is satisfied for 2024 if, during a three-year testing period which precedes the current year, average annual gross receipts don't exceed $30 million. Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments. (For 2025, the amount rises to $31 million.)

□ Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2024, the expensing limit is $1,220,000, and the investment ceiling limit is $3,050,000. For 2025, the amounts rise to $1,250,000 and $3,130,000, respectively. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for interior improvements to a building (but not for its enlargement), elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.

□ The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. So expensing eligible items acquired and placed in service in the last days of the current year, rather than at the beginning of next year, can result in a full expensing deduction on this year's return.

□ Businesses also can claim a 60% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service in 2024, and for qualified improvement property, described above as related to the expensing deduction. The 60% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. Now is the time to take advantage of bonus depreciation as it is being phased out. It will be 40% in 2025, and 20% in 2026. Bonus depreciation will not be available after 2026.

□ Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs aren't required to be capitalized under the UNICAP rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS, e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing qualifying items before the end of the year.

□ A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for the current year (and substantial net income next year) may find it worthwhile to accelerate just enough of next year's income (or to defer just enough of its current-year deductions) to create a small amount of net income in the current year. This allows the corporation to base next year's estimated tax installments on the relatively small amount of income shown on its current-year return, rather than having to pay estimated taxes based on 100% of its much larger taxable income for next year.

□ Year-end bonuses can be timed for maximum tax effect by both cash - and accrual-basis employers. Cash basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to them are established with reasonable certainty. However, the bonus must be paid within two months after the end of the employer's tax year for the deduction to be allowed in the earlier accrual year. Accrual employers looking to defer deductions to a higher-taxed future year should consider changing their bonus plans before year end to set the payment date later than the 2.5-month window or change the bonus plan s terms to make the bonus amount not determinable at year end.

□ To reduce current-year taxable income, consider deferring a debt-cancellation event until next year.

□ Sometimes the disposition of a passive activity can be timed to make best use of its freed-up suspended losses. Where reduction of current-year income is desired, consider disposing of a passive activity before year-end to take the suspended losses against current income.

Businesses – Other Considerations

□ Corporate records – Update annual resolutions and officer elections.

□ Good standing – Verify that the annual franchise tax return has been filed with the State of incorporation or organization.

□ Insurance – Consult with your advisors, executive team, and insurance agent to determine if your business, property, and key officers, are adequately insured.

□ Buy-sell agreement – If your business has multiple shareholders, consider adopting an agreement to orderly transfer those shares in the event of a sale, retirement, or death.

□ Cyber Security – It seems that a day rarely goes by without a story about a business being hacked. Cyber security should rank at the top of everyone’s list. Discuss weaknesses in your server, systems, or procedures with internal staff and with experts in the field. There are some good 3rd parties that can be engaged to test your systems and people.

□ Other Security – Consider other ways your business could be exposed to risk. For instance, is your building secured with proper alarms, cameras, etc.

Employer Alert: 1-1-25 New Laws Impacting Illinois Employers

Mon, 30 Dec 2024 22:58:05 GMT

Changes for Employers with 15 or More Employees

The Illinois Equal Pay Act contains provisions that go into effect as of January 1, 2025. Our hope is to alert impacted employers to key parts of the Act. We are not employment law attorneys, so direct any specific questions to your legal counsel. The focus here is on certain pay transparency provisions of the Act that effect employers who have as few as 15 employees.

These are some, but not certainly not all, of the key changes that take effect for employers with 15 or more employees:

Employers must post the pay or salary, as well as the benefits for any job posting.
Jobs posted only internally to company employees as well as jobs posted externally on a company's website or through a 3rd party must include pay and benefits.
According to the FAQs on the Illinois Department of Labor website, the new law does not apply to a business that posts a "help wanted" sign on its physical premises or website, as there is no specific position or job title identified in the posting.
An employer may provide a range of pay, but the range of pay must be reasonable. For instance, saying that a position will pay "between $1 and $10,000 per hour" would not be reasonable.
A range of pay may not be open-ended and must contain a top and bottom end. A posting such as "$40,000 and up" or "up to $60,000" is not acceptable. The FAQ section on the IL DOL website indicates "phrases with qualifications such as “pay starts at $50,000 depending on experience” are too vague to provide an applicant with an understanding of what the applicable pay would be."
An employer who is seeking external job candidates must also advise current employees about the opportunites for promotion, so that they might apply.
The applies to any job opening that is posted after 1-1-25.
Any employees of the employer count toward the 15-employee limit, regardless of whether the employees are inside or outside of Illinois, or whether the employees are full- or part-time.
The provisions apply whether the pay is by the hour, salary, or for workers who receive tips, bonuses, or commissions.
The job posting requirement applies to all notices or publications of employment opportunities that will be physically performed in whole or in part in Illinois, or will be performed outside of Illinois but will answer to a supervisor, office, or other work site in Illinois.

More information can be found on the Illinois DOL website. In particular, the FAQ section may be helpful for employers to review: https://labor.illinois.gov/faqs/equal-pay-act-salary-transparency-faq.html

Retirement Plans for Businesses

Tue, 24 Sep 2024 20:13:07 GMT

Consider if a retirement plan is right for your business.

One fundamental consideration for every business is determining whether to offer a retirement plan for employees, and that decision is quickly followed by a follow-up: What type of retirement plan should be offered? This article will provide a broad overview of retirement plans and hopefully can be used as a basis for further discussion.

First, a quick discussion of why we consider this to be a fundamental consideration. There are several reasons, and we see these as the critical ones:

Attracting and retaining employees – particularly in a challenging job market, businesses that do not offer a retirement plan are at a distinct disadvantage when it comes to hiring.
Tax advantages – a business’ contributions to retirement plans are typically tax-deductible benefits that the business can offer to its employees.
Owner’s financial benefit – because contributions (to a certain extent) to employees are based on the compensation levels of the individuals, higher-paid employees will be able to maximize their benefits. Business owners are almost always the highest-compensated individuals in the business.

Nonqualified versus Qualified Plans - There are nonqualified retirement plans and qualified retirement plans. We’ll only discuss qualified plans in this article. A qualified retirement plan offers tax advantages, which include a current deduction from income to the employer for contributions to the plan, the tax-free buildup of the value of plan investments, and the deferral of income to the employees until the funds are ultimately distributed.

Defined Benefit Pension Plans and Defined Contribution Plans - There are two basic types of qualified retirement plans —defined benefit pension plans and defined contribution plans.

Defined Benefit Plan - A defined benefit plan provides for a fixed benefit at retirement, based generally upon years of service and compensation according to a selected formula. While defined benefit plans generally pay benefits in the form of an annuity (e.g., over the life of the participant, or joint lives of the participant and his or her spouse), some defined benefit plans provide for payment of benefits in a lump sum. In certain defined benefit plans, called “cash balance plans,” the benefit, in fact, is typically paid and expressed as a cash lump sum.

Adoption of a defined benefit plan requires a commitment to fund the plan. These plans will often provide the greatest current deduction from income, and the greatest retirement benefit, where the owners of the business are older and nearing retirement. However, the large retirement benefits of defined benefit plans must cover all eligible employees, so these plans are typically seen in business with few employees (often 1 to 10 employees). In addition, the added administrative expenses associated with defined benefit plans (the key expense being actuarial costs) can make them less attractive.

Defined benefit plans are often referred to as “pension plans”.

Defined Contribution Plan - A defined contribution plan provides for an individual account for each participant, with benefits based solely on the amount contributed to the participant's account and any investment income, expenses, gains and losses, and any forfeitures (usually from departing employees) that may be allocated to the participant's account. There are limits on the amounts that an employee can contribute annually, and there are limits on the amounts that an employer can contribute annually on behalf of an employee.

Examples of Defined Contribution Plans are as follows:

Profit-sharing plans – Each year, the employer sets a percentage of an employee’s compensation that the employer will contribute to the employee’s profit sharing plan. An employer is not required to contribute in a given year.
401(k) Plans – In common usage, this is often the default retirement plan that is mentioned when someone talks about a retirement plan. A 401(k) plan allows employees to set aside funds from their compensation, which are allocated to an account in their name. An employer may, or may not, contribute funds to the employee’s account. See more information below.
Employee Stock Ownership Plans (ESOPs)- Shares of stock in the employer are purchased to fund the plan and are gradually allocated to employee accounts.
Simplified Employee Pension Plans (SEPs) - Small businesses may adopt a SEP plan, and make contributions to SEP-IRAs on behalf of employees.
Savings Incentive Match Plan for Employees (SIMPLE) - A business with 100 or fewer employees may establish a SIMPLE. Under a SIMPLE plan, an IRA is established for each employee, and the employer makes matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement.
SIMPLE 401(k) plan - Has features similar to a SIMPLE plan, with automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.

Additional information about 401(k) plans – Because these plans are typically the default plan that is mentioned most often in the media, it’s worthwhile to spend a little more time on this topic. As mentioned above, a 401(k) plan is a defined contribution plan providing for employer contributions made at the direction of the employee under a salary reduction agreement. Specifically, the employee elects to have a certain amount of pay deferred and contributed by the employer on his or her behalf to the plan. Employee contributions can be made either (1) on a pre-tax basis, saving employees current income taxation on the amount contributed, or (2) on an after-tax basis, which includes Roth 401(k) contributions (if permitted by the plan), which will allow distributions (including earnings) to be distributed to the employee tax-free in retirement, if conditions are satisfied.

The employer may, or may not, provide matching contributions on behalf of those employees who make elective deferrals to the plan. Matching contributions may be subject to a vesting schedule (which requires complete vesting in three years, or 20% vesting of employer contributions to the employee's account each a year, starting after the employee completes two years of service). While 401(k) plans are subject to testing requirements, so that highly compensated employees (in general, for 2024 plan years, employees who earned more than $155,000 in the preceding year, i.e., in 2023; for 2023 plan years, highly compensated employees are those who earned more than $150,000 in 2022) do not contribute too much more than non-highly compensated employees, these tests can be avoided if you adopt one of the “safe harbor” 401(k) plan designs. For example, in one safe harbor design, your 401(k) plan will automatically match a non-highly compensated employee's 401(k) contribution dollar-for-dollar up to the first 3% of the employee's compensation, and 50-cents for each additional dollar that the employee contributes, up to 5% of the employee's compensation. Immediate or accelerated vesting will apply.

While a SIMPLE IRA and a SIMPLE 401(k) can operate similar to a 401(k) plan, neither of those plans maintain the flexibility and the level of potential benefits that can be found in a 401(k) plan. With those advantages comes additional cost; it will almost always cost more to have a 401(k) plan than to maintain a SIMPLE IRA or a SIMPLE 401(k), due to the added complexities and the annual reporting requirement.

Summary

The initial steps in determining which type of retirement plan is right for a business is a complex matter that will typically involve a CPA at the outset, and then will involve an investment advisor and possible an attorney as the decision-making process progresses.

Managing Accounts Receivable - Cash Flow is King Regardless of Size

Thu, 08 Aug 2024 16:43:02 GMT

Not much is of more importance than cash flow.

As advisors to businesses of all sizes, from basement tech start-ups to large manufacturing operations and including new businesses and mature generational businesses, our firm has seen time and again how businesses fail because they stopped managing cash flow. An article in the Wall Street Journal recently discussed how a major retailer, Saks, has failed to manage their payments to vendors. After courting a number of boutique small business to supply Saks with unique products, the retail giant has failed to make timely payments for the inventory it purchased and resold to its customers. Several small businesses have learned a brutally hard lesson about the importance of cash flow.

Managing cash flow has many components, with these being the most common and critical:

Adequate initial funding
Collecting on receivables
Making timely payments on payables
Sticking to loan terms with lenders
Keeping owner compensation at sustainable levels

When we see businesses struggle, it is typically because one of these elements has been ignored. Let's expand briefly on each of the above:

Adequate initial funding - Often we see businesses launch on a great idea, but with vastly limited cash reserves. Depending on the model, anywhere from 6 months to 12 months of cash reserves should be available at the outset. New businesses will not have leverage with vendors or customers to get exceptions made. Payroll can never be missed, nor can making payroll tax deposits. We have seen businesses time and again make a conscious decision NOT to make payroll tax deposits with the Federal or State governments, which is typically the start of a death spiral. If there isn't adequate cash to start the businesses before operating cash flow begins, don't start the business.
Collecting on receivables - Far too many businesses are timid about collecting what is due to them. Sadly, some of this is out of a displaced fear of potential client loss, but clients who will walk away from a business because they are required to pay their bills are not really clients a business should desire. It is very important at the outset to establish a collection process with your clients. Legitimate and respectable businesses will typically honor any reasonable process. To lean on an old cliche, it is also important to avoid throwing good money after bad - don't continue to expose your business to bad customers by continuing to ship products or provide services. Regularly review the business' receivables and manage the ones that are getting stale. The excuse that "they always end up paying" is a poor business practice. The reality is often that they may end up paying something just to string you along, but they will definitely stiff you with a large outstanding balance when they go out of business or change vendors. While it is a thrill for small businesses to deal with the big players, don't lose your good business discipline just because you're dealing with a marquee client (see the Saks reference above). Saks isn't the only big player to get fat off of the little businesses they feel they can shove around.
Making timely payments on payables - This is the flipside of the above discussion, and there is a little bit of the Golden Rule here - treat others they way you would like to be treated. Stretching payables is an age-old business practice to enhance immediate cash flow, and can be tolerated within reason, but in the end it is a zero-sum game - current cash flow is being enhanced at the expense of future cash flow, unless the plan is to do this in perpetuity, which is no more than a cousin to a Ponzi scheme. Most importantly, valuable time and entrepreneurial energy can be spent needlessly on managing creditors. Stay on top of payables and spend your time growing the business.
Sticking to loan terms with lenders - Borrowed money is not your money - it's the lender's. Banks will seem like they are your best friend during the courtship process, but banks, rightfully, expect a business to adhere to the repayment terms. Only take on debt if you are confident cash flows will enable the business to repay it timely. Tough times require that a business have frank and honest discussions with the lender; most lenders have some flexibility because they know that business can be unpredictable. Be aware, however, that "banker fatigue" is a real thing. Singing the same song over and over will get the business on a short do-not-lend list. Banks are incredibly reluctant to foreclose or enforce the ultimate repayment terms, but they ultimately will, and that intervention to perfect their loans will be the death knell of the business.
Keeping owner compensation at sustainable levels - Don't pull more cash from the business than the business can sustain. If anyone has to miss a payroll, let it be the owner. Owners that establish a lifestyle that depends on pulling a certain amount of income from the business have no latitude when a downturn hits - and downturns always hit eventually. Develop a discipline of taking a fair and reasonable amount of salary or draw from the business, but wait to take larger amounts until it is obvious that the business can afford the cash outflow. Similarly, don't saddle the business with non-business obligations. Keep your personal expenses in your personal account. It takes far too much energy to play this silly and deceptive game of expensing personal items through the business. You'll regret you ever did when it comes time to sell your business, or when the IRS audit lottery draws your name.

We hope this reminds you of good business practices. Most businesses don't do everything well. Maybe you will recognize something you can do better by reading the above. It is always a good time to improve your processes.

IRS Focuses on High Net Worth Individuals, Business Plane Use, and Large Entities

Wed, 07 Aug 2024 21:50:14 GMT

A better-funded IRS will target certain individuals and businesses.

On July 11, 2024, the Internal Revenue Service announced that they surpassed the $1 billion threshold in collecting past-due taxes from uber-wealthy taxpayers. The collection efforts focus on taxpayers with more than $1 million in income and more than $250,000 in recognized tax debt. The IRS is pushing compliance efforts under the Inflation Reduction Act, which provided funding for several new initiatives.

“Years of funding declines meant the IRS couldn’t get to money that we knew was owed, but we simply didn’t have the resources or staffing to collect,” according to IRS Director Danny Werfel. “Funding from the Inflation Reduction Act is reversing a decade-long decline in our compliance work, including increasing our compliance work involving the wealthiest individuals and groups with tax issues. The collection results achieved in less than a year reveal the magnitude of what can be achieved over the long run as our Inflation Reduction enforcement continues to ramp up in the months ahead.”

Werfel said that the funding from the Inflation Reduction Act has helped in these two initiatives:

Improving taxpayer service during the 2024 tax filing season
Expanding enforcement work to pursue complex partnerships, large corporations and high-income, high-wealth individuals who do not pay overdue tax bills

To address the enforcement work, the additional funding at the IRS has resulted in the hiring of new staff and the implementation and deployment of new technology.

A a decade of budget cuts made it nearly impossible for the IRS to investigate the complex web of transactions and strategies used by the wealthiest taxpayers to evade taxes. The IRS is determined to bring those wealthy non-payers and non-filers to justice. The new initiative involves more than 25,000 people with more than $1 million in income, and over 100,000 people with incomes between $400,000 and $1 million between tax years 2017 and 2021. These are all cases where the IRS has received third party information—such as through Forms W-2 and 1099s—indicating these people received income in these ranges but failed to file a tax return.

Other elements of the agency’s renewed compliance focus include:

Abusive use of partnerships - Recently, t he IRS announced a new effort to combat abusive partnership transactions that allow wealthy taxpayers to avoid paying what they owe.
Activities involving large corporations and partnerships - The IRS will open examinations of 76 of the largest partnerships in the U.S., representing a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries. Other activities include expanding the large corporate compliance (LCC) program.
Aircraft use - In February, the IRS announced plans to proceed with dozens of audits involving personal use of business aircraft. The audits will focus on aircraft usage by large corporations, large partnerships and high-income taxpayers. The IRS will examine whether the use of jets is being properly allocated between business and personal use.

Clean Vehicle Credits - Updated FAQs Released by IRS

Mon, 29 Jul 2024 16:36:26 GMT

The IRS recently released a set of Frequently Asked Questions to help taxpayers understand the Clean Vehicle Energy tax credits that are available for certain vehicles.

The IRS recently released a set of Frequently Asked Questions (FAQs) for buyers of vehicles that might qualify for clean vehicle energy credits. These updates for for new, previously owned, and qualified commercial vehicles, and are contained in Fact Sheet 2024-26 (FS-2024-26), issued on July 26, 2024. These FAQs supercede earlier FAQs that were posted by the IRS.

These FAQ revisions include the following topics (these are the revised sections only):

Topic A: Eligibility rules for the New Clean Vehicle Credit: updated questions 2, 7, 8, 12 and 18, and added questions 15-17. •

Topic B: Income and Price Limitations for the New Clean Vehicle Credit: updated questions 3, 4, and 7-10, and added questions 12-14. •

Topic C: When the New Requirements Apply to the New Clean Vehicle Credit: updated questions 4 and 6. •

Topic D: Eligibility Rules for the Previously Owned Clean Vehicles Credit: updated questions 3 and 12 and added questions 13-15. •

Topic E: Income and Price Limitations for Previously Owned Clean Vehicles: updated question 2. •

Topic F: Claiming the Previously Owned Clean Vehicles Credit: updated question 3. •

Topic H: Transfer of New Clean Vehicle Credit and Previously Owned Clean Vehicle Credit: updated questions 1-3, 11, 12, 14-15 and 18, and added questions 23-30. •

Topic I: Registering a Dealer/Seller for Seller Reporting and Clean Vehicle Tax Credit Transfers: updated questions 4, 13, and 14, and added questions 19-30.

These FAQs are extensive and reasonably detailed, and the IRS notes that further modifications could be made. For that reason, we suggest that anyone who purchases a vehicle with the intent to claim an energy credit should go directly to the IRS website if there are any questions, as the IRS website will have the most recent guidance available. The immediate update is available at https://www.irs.gov/pub/taxpros/fs-2024-26.pdf (this can be copy and pasted to your browser).

While these FAQs are not defiinitive guidance and are subject to further change, the IRS notes that a taxpayer who reasonably and in good faith relies on these FAQs will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax.

Estimated Taxes for Individuals

Wed, 12 Jun 2024 17:53:25 GMT

Understanding the rules of estimated taxes for individuals can save unnecessary penalties.

Individual taxpayers in certain situations are required to make estimated tax payments in order to minimize or eliminate the exposure to the penalty for underpayment of estimated tax.

Individuals must pay 25% of a “required annual payment” by Apr. 15, June 15, Sept. 15, and Jan. 15, to avoid an underpayment penalty. When that date falls on a weekend or holiday, the payment is due on the next business day.

The required annual payment for most individuals is the lower of 90% of the tax shown on the current year's return or 100% of the tax shown on the return for the previous year. However, if the adjusted gross income on your previous year's return was over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year's return or 110% of the tax shown on the return for the previous year.

Most people who receive the bulk of their income in the form of wages satisfy these payment requirements through the tax withheld by their employer from their paycheck - but not necessarily. Those who make estimated tax payments generally do so in four installments. After determining the required annual payment, they divide that number by four and make four equal payments by the due dates.

But you may be able to use the annualized income method to make smaller payments. This method is useful to people whose income flow is not uniform over the year, perhaps because of a seasonal business. For example, if your income comes exclusively from a business that you operate in a resort area during June, July, and August, no estimated payment is required before Sept. 15. You may also want to use the annualized income method if a significant portion of your income comes from sales of securities that are made at various times during the year.

If you fail to make the required payments, you may be subject to an underpayment penalty. The penalty equals the product of the interest rate charged by IRS on deficiencies, times the amount of the underpayment for the period of the underpayment.

However, the underpayment penalty doesn't apply to you:

(1) if the total tax shown on your return is less than $1,000 after subtracting withholding tax paid;
(2) if you had no tax liability for the preceding year, you were a U.S. citizen or resident for that entire year, and that year was 12 months;
(3) for the fourth (Jan. 15) installment, if you file your return by that Jan. 31 and pay your tax in full; or
(4) if you are a farmer or fisherman and pay your entire estimated tax by Jan. 15, or pay your entire estimated tax and file your tax return by Mar. 1

In addition, IRS may waive the penalty if the failure was due to casualty, disaster, or other unusual circumstances and it would be inequitable or against good conscience to impose the penalty. The penalty can also be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.

Bear in mind that using the annualized income method typically requires calculations of the estimated tax and, if a professional is doing the calculations, there is a cost for those services. If interest rates are relatively low, as they have been for many years, the opportunity cost of not investing the funds is minimal. In many cases, even if larger quarterly amounts are required, it is prudent to not annualize and simply pay based on the prior year's final tax liability.

Life Insurance and Estate Planning

Wed, 12 Jun 2024 17:44:58 GMT

Life insurance is a significant asset in many estates. Whether it is included for estate tax purposes or not is the issue.

Many people have life insurance, maybe originally it was taken out to protect a spouse or children in the event of an untimely death, or maybe it was taken out as a quasi-investment. In many cases, the policies are simply allowed to lapse when the policy holder retires, to avoid making any more principal payments. In other cases, the insurance stays in force and must be a consideration at the time of death as to whether or not it is part of the estate.

Under the estate tax rules, insurance on your life will be included in your taxable estate if either:

(1) your estate is the beneficiary of the insurance proceeds, or
(2) you possessed certain economic ownership rights (known as “incidents of ownership”) in the policy at your death (or within three years of your death).

Avoiding the first situation is easy: just make sure your estate is not designated as beneficiary of the policy.

The second rule is more complex. Clearly, if you are the owner of the policy, the proceeds are included in your estate regardless of who the beneficiary is. However, simply having someone else possess legal title to the policy will not prevent this result if you keep “incidents of ownership” in the policy. Rights that, if held by you, will cause the proceeds to be taxed in your estate include:

the right to change beneficiaries,
the right to assign the policy (or to revoke an assignment),
the right to pledge the policy as security for a loan,
the right to borrow against the policy's cash surrender value, and
the right to surrender or cancel the policy.

Keep in mind that merely having any of the above powers will cause the proceeds to be taxed in your estate even if you never exercise the power.

Buy-sell agreements. Life insurance obtained to fund a buy-sell agreement for a business interest under a “cross-purchase” arrangement will not be taxed in your estate (unless the estate is named as beneficiary). For example, say A and B are partners who agree that the partnership interest of the first of them to die will be bought by the surviving partner. To fund these obligations, A buys a life insurance policy on B's life. A pays all the premiums, retains all incidents of ownership, and names himself or herself as beneficiary. B does the same regarding A. When the first partner dies, the insurance proceeds are not taxed in the first partner's estate.

Life insurance trusts. An irrevocable life insurance trust (often referred to as an “ILIT”) is an effective vehicle that can be set up to keep life insurance proceeds from being taxed in the insured's estate. Typically, the policy is transferred to the trust along with assets that can be used to pay future premiums. Alternatively, the trust buys the insurance itself with funds contributed by the insured. As long as the trust agreement gives the insured none of the ownership rights described above, the proceeds will not be included in the insured's estate.

The three-year rule. If you are considering setting up a life insurance trust with a policy you own currently or simply assigning away your ownership rights in such a policy, please call me as soon as you reasonably can to effect these moves. Unless you live for at least three years after these steps are taken, the proceeds will be taxed in your estate. For policies in which you never held incidents of ownership, the three-year rule doesn't apply.

Health Savings Accounts - A Brief Primer

Wed, 12 Jun 2024 17:26:38 GMT

Read on for a quick look at what a Health Savings Account can do.

Given the ever-escalating cost of providing employee health care benefits, there might be a more cost-effective method of providing these benefits; namely, a health savings account (HSA). For eligible individuals, HSAs offer a tax-favorable way to set aside funds (or have their employer do so) to meet future medical needs. Here are the key tax-related elements:

contributions you make to an HSA are deductible, within limits,
contributions your employer makes aren't taxed to you,
earnings on the funds within the HSA are not taxed, and
distributions from the HSA to cover qualified medical expenses are not taxed.

Who is eligible? To be eligible for an HSA, you must be covered by a “high deductible health plan” (discussed below). You must also not be covered by a plan which (1) is not a high deductible health plan, and (2) provides coverage for any benefit covered by your high deductible plan. (It's okay, however, to be covered by a high deductible plan along with separate coverage, through insurance or otherwise, for accidents, disability, or dental, vision, or long-term care.)

For 2023, a “high deductible health plan” is a plan with an annual deductible of at least $1,500 for self-only coverage, or at least $3,000 for family coverage. For self-only coverage, the 2023 limit on deductible contributions is $3,850 ($4,150 in 2024). For family coverage, the 2023 limit on deductible contributions is $7,750 ($8,300 for 2024). Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $7,500 for self-only coverage ($8,050 for 2024) or $15,000 for family coverage ($16,100 for 2024).

An individual (and the individual's covered spouse as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2023 (or 2024) of up to $1,000.

A high deductible health plan does not include a plan if substantially all of the plan's coverage is for accidents, disability, or dental, vision, or long-term care, insurance for a specified disease or illness, or insurance paying a fixed amount per day (or other period) of hospitalization.

HSAs may be established by, or on behalf of, any eligible individual.

Deduction limits. You can deduct contributions to an HSA for the year up to the total of your monthly limitations for the months you were eligible. For 2023, the monthly limitation on deductible contributions for a person with self-only coverage is ¹ / ₁₂ of $3,850 ($4,150 in 2024). For an individual with family coverage, the monthly limitation on deductible contributions is ¹ / ₁₂ of $7,750 ($8,300 for 2024). Thus, deductible contributions are not limited by the amount of the annual deductible under the high deductible health plan.

Also, taxpayers who are eligible individuals during the last month of the tax year are treated as having been eligible individuals for the entire year for purposes of computing the annual HSA contribution.

However, if you are enrolled in Medicare, you are no longer an eligible individual under the HSA rules, and so contributions to your HSA can no longer be made.

Contributions may be made to an HSA by or on behalf of an eligible individual even if the individual has no compensation, or if the contributions exceed the individual's compensation. Contributions made by a family member on behalf of an eligible individual to an HSA (which are subject to the limits described above) are deductible by the eligible individual in computing adjusted gross income.

Further, on a once-only basis, taxpayers can withdraw funds from an IRA, and transfer them tax-free to an HSA. The amount transferred can be up to the maximum deductible HSA contribution for the type of coverage (individual or family) in effect at the time of the transfer. The amount so transferred is excluded from the taxpayer's gross income, and is not subject to the 10% early withdrawal penalty.

Employer contributions. If you are an eligible individual, and your employer contributes to your HSA, the employer's contribution is treated as employer-provided coverage for medical expenses under an accident or health plan and is excludable from your gross income up to the deduction limitation, as described above. Further, the employer contributions are not subject to withholding from wages for income tax or subject to FICA or FUTA. The eligible individual cannot deduct employer contributions on his federal income tax return as HSA contributions or as medical expense deductions.

An employer that decides to make contributions on its employees' behalf must make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer does not make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.

Contributions are comparable if they are either: (1) the same amount; or (2) the same percentage of the annual deductible limit under the high deductible health plan covering the employees. For these purposes, comparable participating employees (1) are covered by the employer's high deductible health plan and are eligible to establish an HSA; (2) have the same category of coverage (either self-only or family coverage); and (3) have the same category of employment (either part-time or full-time).

An exception to the comparable contribution requirements applies for contributions made on behalf of nonhighly compensated employees. Under this exception, an employer may make larger HSA contributions for nonhighly compensated employees than for highly compensated employees.

Employer contributions are also excludable if made at the election of the employee under a salary reduction arrangement that is part of a cafeteria plan (i.e., a plan which allows you to elect to use part of your salary towards a variety of benefits). Although contributions to an employee's HSA through a cafeteria plan are treated as employer contributions, the comparability rule does not apply to contributions made through a cafeteria plan.

Earnings. If the HSA is set up properly, it is generally exempt from taxation, and there is no tax on earnings. However, taxes may apply if contribution limitations are exceeded, required reports are not provided, or prohibited transactions occur.

Distributions. Distributions from the HSA to cover an eligible individual's qualified medical expenses, or those of his spouse or dependents, are not taxed. Qualified medical expenses for these purposes generally mean those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it is made after reaching age 65, or in the event of death or disability.

Distributions from an HSA exclusively to pay for qualified medical expenses are excludable from the gross income of the account beneficiary even though the beneficiary is no longer an “eligible individual,” e.g., the individual is over age 65 and entitled to Medicare benefits, or no longer has a high deductible health plan.

HSAs offer a very flexible option for providing health care coverage, but the rules are somewhat involved - proceed with caution.

Options and Basic Tax Treatments

Wed, 12 Jun 2024 17:17:34 GMT

The taxation of options can be complicated and typically will require professional advice.

Many employees receive stock options as part of their compensation packages. From a tax standpoint, there are two kinds of options—statutory and nonstatutory. “Incentive stock options,” or ISOs, as they're commonly known, are statutory options, because they're specifically provided for in the Internal Revenue Code and are subject to numerous qualification requirements. Options that don't meet these requirements are nonstatutory stock options or NSOs (also known as nonqualified stock options or NQSOs).

Both kinds of options have tax advantages, but there are quite a few differences between them. Here's some basic information on the taxation of compensatory stock options that may help you better understand how best to benefit from them.

Option grant: If you have ISOs, you are not taxed on option grant. The same is generally true of NSOs. An NSO is taxed at grant only if it has a “readily ascertainable” fair market value (FMV), which is seldom the case. IRS rules say that an option doesn't have a readily ascertainable value at grant unless: (1) the option is actively traded or (2) (i) the option is immediately transferable; (ii) the option is fully exercisable; (iii) the option and the option stock are unrestricted; and (iv) the value of the “option privilege” is readily ascertainable. In the unlikely event that an NSO is taxable at grant, you have compensation (ordinary) income at that point.

The grant of an ISO isn't subject to the Code Sec. 409A rules, which impose income inclusion and a penalty tax where a deferred compensation plan fails to meet certain technical requirements. The Code Sec. 409A rules may potentially apply to the grant of an NSO, but the option can be structured to avoid the application of Code Sec. 409A .

Option exercise: No regular income tax is owed on the exercise of an ISO, but the alternative minimum tax (AMT) may apply. The bargain purchase element at exercise, which is the difference between the value of the ISO stock (i.e., stock acquired through the exercise of an ISO) at exercise and the lower price you pay for it, is considered to be income when figuring your AMT. Even if you're usually not subject to the AMT, exercising ISOs may push you into its range. (If you are subject to the AMT in the year you exercise ISOs, you may be entitled to an AMT credit carryover for use in some later year.)

Any remuneration that arises when stock is transferred on the exercise of an ISO isn't subject to FICA (social security and Medicare) or FUTA (unemployment) taxation.

When you exercise an NSO that wasn't taxed at grant, you're taxed at ordinary income rates on the difference between the value of the option stock at that time and the price you paid for it (plus any price you may have paid for the option, although generally that will be zero). This is compensation income that's subject to payroll taxes and income tax withholding. Taxes may be withheld from your salary or other compensation income, or you may have to sell some of the stock to cover the withholding or make some other arrangement with your employer.

If the option stock is nontransferable or subject to a substantial risk of forfeiture, then you aren't charged with compensation income until those restrictions no longer exist. However, you can choose to pay tax on exercise so that all gain from that point on would be capital gain.

Sale of option stock: When you sell ISO stock, you generally are taxed at favorable long-term capital gain rates on the difference between the price you paid for the stock and the amount you realize on its sale. However, if you sell the stock within two years of the option grant or within one year of the option exercise, you'll have compensation income to the extent of your bargain element at exercise. The balance of your gain is capital gain, which will be taxed at favorable rates if you've held the stock for more than one year on the sale date.

It's important to know how long you need to hold the stock to qualify for long-term capital gain rates on the difference between the price you paid for the stock and the amount you realize on its sale or, if you don't hold the stock long enough for this favorable tax treatment, how much additional compensation income will be attributed to you. We can determine this from information on a statement from your employer. You should have received this statement by Jan. 31 following the close of the year in which you exercised the ISO.

Any income on disposition of the stock isn't subject to FICA or FUTA taxation. Additionally, any income resulting from a disqualifying disposition of stock acquired under an ISO isn't subject to withholding.

When you sell stock acquired by exercise of an NSO, you have capital gain if you were subject to tax either at option grant or exercise, or when restrictions on your option stock lapsed. Otherwise, you have compensation income at the time of the sale.

Gifts of options: Some people would like to give stock options to family members as part of their overall estate planning. Transferring property before it increases in value helps lower or eliminate estate and gift taxes.

This can't be done with ISOs, because they can't be transferred during the option holder's lifetime and can't be exercised by anyone but the option holder during his or her life.

NSOs have an edge here if the option plan allows options to be transferred to family members, as many plans do. However, the IRS has ruled that an option transfer isn't complete for gift tax purposes until the option is no longer conditioned on the performance of future services. That usually means that the gift will be subject to gift tax at a time when the option's value has increased.

The IRS also has issued some complicated rules for valuing gifts of NSOs. For income tax purposes, a gift of NSOs to a family member isn't a disposition that triggers tax. Instead, the employee will be taxed when the transferee exercises the options.

Business Travel to a Foreign Country

Wed, 12 Jun 2024 17:04:37 GMT

The rules get more complex when foreign travel is involved. Read on for more information.

Travel outside of the United States brings about some different tax considerations. The general rule is that if the trip is entirely for business purposes, you can deduct all the travel costs, plus meals (at 50%), lodging, and some incidental costs such as for laundry and dry cleaning. If the trip is primarily personal, none of the costs of travel to and from the destination are deductible, even if some time is spent on business. Lodging, meals, etc. would be deductible for the business days.

The rules are more complex if the trip is primarily but not entirely for business. In this case, unless an exception applies as discussed below, the costs allocable to the personal (vacation) part of the trip cannot be deducted. For example, if the trip covers ten days—four personal and six business—meals, lodging, etc. are only deductible for the business days. Furthermore, only 60% of the travel costs (airfare, etc.) are deductible, reflecting the fact that only 60% of the days of the trip were business days.

Note, however, that the allocation of part of the travel costs to the nondeductible portion need not be made if the primary purpose of the trip is business and the trip does not last for more than a week. A week for this purpose means seven consecutive days, not counting the day of departure, but counting the day of return.

Even if the trip does last for more than a week, no allocation is required if the personal days total less than 25% of the total days spent on the trip. For this purpose, the total days of the trip include the day of departure and the day of return. Even if business is conducted on only part of a day, it's counted as a business day. Business days also include days spent traveling to or from a business destination and weekend days or holidays falling between two business days.

Example. Jill flies to Paris on a Monday primarily for business reasons. Jill spends Tuesday and Wednesday vacationing and then spends Thursday, Friday, and the following Monday through Thursday on business before flying home Friday. Counting the days of return and departure, it's a 12 day trip. Only the first Tuesday and Wednesday are nonbusiness days. Thus, less than 25% of the trip is personal (2 of 12 days). Except for meals and lodging costs for those two vacation days, the rest of the meals (at 50%) and lodging, and all of the travel costs (airfare, etc.) are deductible. The travel costs need not be allocated between personal and business because of the 25% rule.

If you don't meet the one week or 25% test, you may still be able to deduct all of the travel costs if you can show that the chance to take a vacation was not a major consideration for the trip. Of course, the larger the vacation portion, the more difficult it will be to make your case.

The tax implications of foreign travel can get quite complex, depending on the nature of trip, so some forethought and advance planning can help.

Business Travel with a Spouse

Wed, 12 Jun 2024 16:56:11 GMT

When travel with a spouse is deductible

There are many reasons why it might be ideal to take a spouse on a business trip, and some of the those reasons are for personal enjoyment while at other times the presence of the spouse is required for business purposes. As one might guess, the purpose for having the spouse accompany on a trip will determine whether or not those expenses are deductible for federal income tax purposes.

The rules for deducting a spouse's travel costs are very restrictive. First of all, a spouse must be an employee of the business. The travel costs of a spouse are not deductible, even if his or her presence has a bona fide business purpose, unless the spouse is a bona fide employee of your business. In many cases, this requirement alone prevents the expenses from being tax deductible.

If a spouse is an employee, then his or her travel costs can be deducted if the spouse's presence on the trip serves a bona fide business purpose. Merely having a spouse perform some incidental business service, such as typing up notes from a meeting, isn't enough to establish a business purpose. In general, it isn't sufficient for a spouse's presence to be “helpful” to the business pursuits—it must be “necessary.” In most cases, a spouse's participation in social functions, even as host or hostess, isn't enough to establish a business purpose. That is, if her purpose is to establish general goodwill for customers or associates, this is usually insufficient. Further, if there is a vacation element to the trip, that is, if a spouse will be spending time sightseeing or shopping, it will be more difficult to establish a business purpose for the trip. On the other hand, a bona fide business purpose exists where a spouse's presence is necessary to care for a serious medical condition of the employee-spouse.

If a spouse's travel satisfies these tests, the normal deductions for business travel away from home can be claimed. These include the costs of transportation, meals, lodging, and incidental costs such as dry cleaning, phone calls, internet, and similar travel expenses.

Even if a spouse's travel doesn't satisfy the requirements, however, a substantial portion of the trip's costs may still be deductible. This is because the rules don't require an allocation of 50% of the travel costs to the spouse; the amounts that are not deductible are only any additional costs incurred for a spouse. For example, in many hotels the cost of a single room isn't that much lower than the cost of a double. If a single would cost $250 a night and a double would cost $300, the disallowed portion of the cost allocable to the spouse would only be $50. If a rental car is involved, the cost will be fully deductible even if your spouse is along. Any separate costs incurred by the non-qualifying spouse, such as meals or specific transportation costs incurred due to the spouse, would not be deductible.

Individual Year End Tax Planning

Thu, 14 Dec 2023 13:56:45 GMT

With year-end approaching, it is time to start thinking about moves that may help lower your tax bill for this year and next. This year’s planning is more challenging than usual due to changes made by the Inflation Reduction Act of 2022 and the SECURE 2.0 Act.

With year-end approaching, it is time to start thinking about moves that may help lower your tax bill for this year and next. This year’s planning is more challenging than usual due to changes made by the Inflation Reduction Act of 2022 and the SECURE 2.0 Act.

Whether or not tax increases become effective next year, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for all but the highest income taxpayers, as will the bunching of deductible expenses into this year or next to avoid restrictions and maximize deductions.

If proposed tax increases do pass, however, the highest income taxpayers may find that the opposite strategies produce better results: Pulling income into 2023 to be taxed at currently lower rates, and deferring deductible expenses until 2024, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all relevant factors.

We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all of them will apply to you, but you (or a family member) may benefit from many of them. We can narrow down specific actions when we meet to tailor a particular plan for you. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves might be beneficial:

· New tax credits for EVs. If you are looking to buy a new car this year, remember that the Inflation Reduction Act has introduced various credits for buying both new and used electric vehicles.

· Higher-income individuals must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of MAGI over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

· As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax will depend on the taxpayer’s estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to reduce MAGI other than NII, and some individuals will need to consider ways to minimize both NII and other types of MAGI. An important exception is that NII does not include distributions from IRAs or most other retirement plans.

· The 0.9% additional Medicare tax also may require higher-income earners to take year-end action. It applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds, above. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self- employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer.

· Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to net long-term capital gain to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $89,250 for a married couple; estimated to be $94,050 in 2024). If, say, $5,000 of long-term capital gains you took earlier this year qualifies for the zero rate then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses will offset $5,000 of capital gain that is already tax-free.

· Postpone income until 2024 and accelerate deductions into 2023 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2023 that are phased out over varying levels of AGI. These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may actually pay to accelerate income into 2023. For example, that may be the case for a person who will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or who expects to be in a higher tax bracket next year. That's especially a consideration for high-income taxpayers who may be subject to higher rates next year under proposed legislation.

· If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional- IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA in 2023 if eligible to do so. Keep in mind that the conversion will increase your income for 2023, possibly reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for those potentially subject to higher tax rates under pending legislation.

· It may be advantageous to try to arrange with your employer to defer, until early 2024, a bonus that may be coming your way. This might cut as well as defer your tax. Again, considerations may be different for the highest income individuals.

· Many taxpayers won't want to itemize because of the high basic standard deduction amounts that apply for 2023 ($27,700 for joint filers, $13,850 for singles and for marrieds filing separately, $20,800 for heads of household), and because many itemized deductions have been reduced or abolished (such as the $10,000 limit on state and local taxes) or abolished (such as miscellaneous itemized deductions and the non-disaster related personal casualty losses). You can still itemize medical expenses that exceed 7.5% of your AGI, state and local taxes up to $10,000, your charitable contributions, plus mortgage interest deductions on a restricted amount of debt, but these deductions won't save taxes unless they total more than your standard deduction.

· Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, a taxpayer who will be able to itemize deductions this year but not next will benefit by making two years' worth of charitable contributions this year.

· Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2023 deductions even if you don't pay your credit card bill until after the end of the year.

· If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2023, consider asking your employer to increase withholding of state and local taxes (or make estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2023. But this strategy is not good to the extent it causes your 2023 state and local tax payments to exceed $10,000.

· New rules for required minimum distributions (RMDs) from IRA or 401(k) plans (or other employer-sponsored retirement plans). In general, an IRA owner must take their first RMD for the year in which they reach age 72 (73 if they reach age 72 after December 31, 2022). However, they can delay taking their first RMD until April 1 of the following year. Those who reach age 72 in 2022 must take their first RMD by April 1, 2023, and the second RMD by December 31, 2023. If they reach age 72 in 2023, their first RMD for 2024 (the year they reach 73) is due by April 1, 2025.

· If you are age 70½ or older by the end of 2023, and especially if you are unable to itemize your deductions, consider making 2023 charitable donations via qualified charitable distributions from your traditional IRAs. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. However, you are still entitled to claim the entire standard deduction. (The qualified charitable distribution amount is reduced by any deductible contributions to an IRA made for any year in which you were age 70½ or older, unless it reduced a previous qualified charitable distribution exclusion.)

· Take an eligible rollover distribution from a qualified retirement plan before the end of 2023 if you are facing a penalty for underpayment of estimated tax and increasing your wage withholding won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2023. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2023, but the withheld tax will be applied pro rata over the full 2023 tax year to reduce previous underpayments of estimated tax.

· Consider increasing the amount you set aside for next year in your employer's FSA if you set aside too little for this year and anticipate similar medical costs next year.

· If you become eligible in December of 2023 to make HSA contributions, you can make a full year's worth of deductible HSA contributions for 2023.

· Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $17,000 made in 2023 to each of an unlimited number of individuals. You can't carry over unused exclusions to another year. These transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

· If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2023 return normally filed next year), or on the return for the prior year (2022), generating a quicker refund.

· If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in 2023 to maximize your casualty loss deduction this year.

These are just some of the year-end steps that can be taken to save taxes for individuals. You may require planning that is tailored to your specific situation. Again, by contacting us, we can tailor a particular plan that will work best for you. If that is the case, please reach out to a professional at Dowell Group. If you are looking for year-end steps to consider for businesses, please check out articles for the business-oriented version of this article.

Business Year End Tax Planning

Thu, 14 Dec 2023 13:52:15 GMT

With year-end approaching, it is time to start thinking about moves that may help lower your business's taxes for this year and next.

C corporations should take into account the 15% corporate minimum tax.

We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all of them will apply to you or your business, but you may benefit from many of them. We can narrow down specific actions when we meet to tailor a particular plan for your business, In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves might be beneficial:

• Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2023, if taxable income exceeds $364,200 for a married couple filing jointly, (about half that for others), the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income up to $100,000 above the threshold, and to other filers with taxable income up to $50,000 above their threshold. For 2024, the amount rises to $383,900

• Taxpayers may be able to salvage some or all of this deduction, by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout) for the current year. Depending on their business model, taxpayers also may be able increase the deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting us.

• More small businesses are able to use the cash (as opposed to accrual) method of accounting than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test, which is satisfied for 2023 if, during a three-year testing period, average annual gross receipts don't exceed $29 million. Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments. For 2024, the amount rises to $30 million.

• Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2023, the expensing limit is $1,160,000, and the investment ceiling limit is $2,890,000. For 2024, the amounts rise to $1,220,000 and $3,050,000, respectively. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for interior improvements to a building (but not for its enlargement), elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.

• The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. So expensing eligible items acquired and placed in service in the last days of the current year, rather than at the beginning of next year, can result in a full expensing deduction on this year's return.

• Businesses also can claim a 80% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service in 2023, and for qualified improvement property, described above as related to the expensing deduction. The 80% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. Now is the time to take advantage of bonus depreciation as it is being phased out. It will be 60% in 2024, 40% in 2025, and 20% in 2026. Bonus depreciation will not be available after 2026.

• Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs aren't required to be capitalized under the UNICAP rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS, e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing qualifying items before the end of the year.

• A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for the current year (and substantial net income next year) may find it worthwhile to accelerate just enough of next year's income (or to defer just enough of its current-year deductions) to create a small amount of net income in the current year. This allows the corporation to base next year's estimated tax installments on the relatively small amount of income shown on its current-year return, rather than having to pay estimated taxes based on 100% of its much larger taxable income for next year.

• Year-end bonuses can be timed for maximum tax effect by both cash and accrual-basis employers. Cash basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to them are established with reasonable certainty. However, the bonus must be paid within two months after the end of the employer's tax year for the deduction to be allowed in the earlier accrual year. Accrual employers looking to defer deductions to a higher-taxed future year should consider changing their bonus plans before year end to set the payment date later than the 2.5-month window or change the bonus plans terms to make the bonus amount not determinable at year end.

• Sometimes the disposition of a passive activity can be timed to make best use of its freed-up suspended losses. Where reduction of current-year income is desired, consider disposing of a passive activity before year-end to take the suspended losses against current income.

These are just some of the year-end steps that can be taken to save taxes. Every business is different, however, and planning more specifically for the year-end is almost always worth the financial cost of doing so. Again, by contacting us, we can tailor a particular plan that will work best for you.

Gifting to Charity While Paying Yourself? Yes, It's Possible

Tue, 14 Nov 2023 16:58:24 GMT

How to make doing good a little less frightening financially.

Many individuals are familiar, at least somewhat, with the ability to take some (or all) of their required minimum distribution (RMD) from an individual retirement account (IRA) and donate it to a qualified nonprofit organization. This process, known as making a qualified charitable distribution (QCD), eliminates the need to report the RMD as taxable income; this can be a way to avoid having the RMD increase taxable income and popping the taxpayer into a higher tax bracket. Conversely, if the RMD that is directed to charity does not have to be counted as income, the amount donated to charity does not qualify for a charitable donation. While the lack of a charitable deduction may give some people pause, overall it can be a more cost-effective way to donate to a nonprofit organization. This is a good strategy to meet someone's commitments to fund nonprofit organizations, while keeping the IRA distribution off of an individual's income tax return. A taxpayer is able to make a QCD if the taxpayer is 70 1/2 years old as of January 1, 2023. Just to mention it, a donor advised fund is not a permitted recipient for a QCD. The annual limit on the amount of a QCD in 2023 is $100,000 per taxpayer (a spouse will have an additional $100,000 QCD limit). The annual $100,000 limit will increase in future years, as it is indexed for inflation, beginning in 2024.

Beginning with 2023, there is another new strategy available that has not received much attention. In this riff on the above qualified charitable distribution, an individual can make a donation to a gift annuity to fund a nonprofit (known as a charitable gift annuity), and the individual will receive an annuity of a fixed amount each year in return, either over a fixed number of years or over the donor's life (and even over the donor's spouse's life).

First, a little background information on RMDs. Every taxpayer who has a traditional IRA (an IRA that is not a Roth IRA) is required to take a minimum distribution upon reaching a prescribed age. The purpose of this is to avoid a massive building up of IRA values and to trigger the need to pay taxes on an annual basis on a certain amount of retirement income. The prescribed date when distributions were required was when a taxpayer turned 70 1/2 years old. Recently, that age was bumped up to age 73 if you reach age 72 after Dec. 31, 2022. If a taxpayer turns age 74 after December 31, 2032, the new RMD age will be 75 (but don't hold your breath on something that far into the future).

Returning to the discussion of giving an RMD to charity, it should be noted that this should probably only be considered by those who have planned out their retirements from a financial perspective and who have determined that they have adequate resources to fund their lifestyles and meet their needs, and still have funds available to donate to charity. While the gift to charity of an RMD from an IRA can be outright with no strings attached, as noted in the first paragraph above, some taxpayers may take a little comfort by making the gift and also retaining an income stream. The total amount that can be donated by an individual to a charitable gift annuity to benefit a nonprofit in a tax year (and in a lifetime) is limited to $50,000 (a spouse has a separate $50,000 limit). These income streams that are paid by the nonprofits to the donors under these arrangements will depend on tables produced by the IRS and will be dependent on a taxpayer's age. At the taxpayer's death, any amounts remaining will go to the charity. While in many cases the income stream will not be large - perhaps in the range of 5% to 6% - the retained income stream might provide that extra bit of comfort that is needed by the donor. It should be noted, however, that the payout rates increase based on the age of the donor at the time the annuity is funded.

The annuity must be funded exclusively by QCDs and must commence with fixed payments of 5% or greater not later than one year from the date of funding. The value of the annuity and the remainder interest is determined under IRS interest rates and actuarial tables. Only the individual and his or her spouse may receive the annuity distributions and the distributions are not assignable. It should also be kept in mind that depending on the amount of the individual's investment income from all sources, the annuity payments may be subject to the 3.8% net investment income tax, whereas the RMDs that are taken into income by an individual are not subject to the net investment income tax.

Not all charities are set up to offer this option to their donors, but it should be expected that this option will become more widespread in the months and years ahead. If you are age 70 1/2 in 2023, inclined for charitable giving, and have adequate financial resources to last your lifetime, consider contacting your favorite nonprofit to see if they can accommodate a charitable gift annuity.

Corporate Transparency Act Creates Filing Requirements for Most Businesses in 2024

Mon, 13 Nov 2023 21:42:05 GMT

Catching many businesses by surprise, this Act kicks in with filing requirements as early as January 1, 2024.

Protecting privacy of the underlying business owners has been a key tenet of the incorporation and organizational laws of many states. Regardless of the valid desires in many cases to provide that privacy protection, Congress determined that disclosure of entity ownership is required - despite the laws of individual states.

Out of concerns about foreign terrorists and money laundering going undetected, The Corporate Transparency Act (CTA) was created by Congress to require that businesses disclose who are the underlying owners. It is also believed that this information will assist in tax investigations and potential cases of tax evasion. The Financial Crimes Enforcement Network ("FinCEN") of United States Treasury Department has been charged with enforcing the CTA. Most businesses will be required to file a statement with FinCEN that provides beneficial ownership information (BOI) of the business. Businesses will need to disclose the owner's full name, home address, date of birth, driver's license number or passport number, as well as a copy of the driver's license or passport. This information will be collected and stored in a data warehouse that will be shared with law enforcement, the IRS, and other federal and state departments. The filing requirements begin as early as January 1, 2024.

The CTA requires that "reporting companies" file initial reports and then subsequent updates when there is a change in beneficial ownership. What gives many observers pause is the broad definition of a reporting company. A reporting company is a domestic corporation, limited liability company, or any other entity that is created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe. Not to be limited by domestic entities, the definition broadens to include a corporation, limited liability company, or other entity that is formed under the law of a foreign country, that registers to do business by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.

There are some very specific exemptions from the reporting requirements, which generally are businesses that are already required to register with the US government. These include the following:

Securities reporting issuers
Governmental authorities
Banks
Credit unions
Depository institution holding companies
Money services businesses
Securities brokers or dealers
Security exchanges; other exchanges registered under the Securities Exchange Act of 1934
Investment companies
Venture capital fund advisers
Insurance companies
State-licensed insurance producers
Entitles registered under the Commodity Exchange Act
Public accounting firms
Public utility companies
Financial market utilities
Pooled investment vehicles
Tax-exempt entities or entities assisting a tax-exempt entity
Subsidiaries of certain exempt entities
Inactive entities
Large operating entities

The last exemption noted above, "large operating entities", is defined as a company that employs 20 or more full-time employees (who work on average at least 30 hours per week), have an operating presence at a physical office within the United States, and filed a federal income tax or information return in the United States for the previous year reporting more than $5,000,000 in gross receipts or sales. Clearly, this is a very broadly-cast net that captures most small and family-owned businesses in the US that have less than $5,000,000 in revenue.

Businesses (the reporting company) subject to the CTA must disclose their beneficial owners. Beneficial owners are individuals who, directly or indirectly, either exercise "substantial control" over the reporting company or own or control at least 25% of the ownership interests of the reporting company. Ownership interest includes traditional stock, partner or member capital, and profits interest. It also includes other forms of capital products like warrants, options, and convertible notes that are used to establish ownership. The CTA also indicates that control can come through contracts, joint ownership, or control through intermediate entities. Substantial control is present if the individual is a "senior officer" or is "exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title."

Entities (reporting companies) that were created prior to January 1, 2024 will have one year to file the initial reports. Entities that were created on or after January 1, 2024 will have only 30 days to file, measured from the earlier of its receipt of actual notice of the entity's creation or the secretary of state's provision of public notice of the entity's existence. Both older and newer entities will also have 30 days to provide updated reports when any beneficial ownership information changes. Further, a "willful" failure to file an initial report, providing incorrect information, or failing to update the report may result in civil and/or criminal penalties.

It may take them some time to update their internal processes and software, but it should be assumed that the IRS and State governments will take advantage of this treasure trove of information to expand their audit capabilities and effectiveness. At the Federal level, it should become more difficult for an individual to omit reporting a K-1 from a partnership on their individual tax return. States will have another powerful tool to track down any beneficial owner who uses their state as a home address.

While the Corporate Transparency Act undoubtedly will give the taxing authorities and law enforcement new tools to fight fraud and crime, the cost of compliance (and noncompliance) and overall burden on small businesses is enormous. It can be assumed that most bad actors will not report their beneficial ownership interests under this law, which means that those left complying with the CTA are largely going to be law-abiding taxpayers. On top of that, an incredible amount of sensitive data is all gathered in one place, under the watchful eye of the government - what could possibly go wrong?

Finding Employees - Coping in a Difficult Environment

Tue, 05 Sep 2023 20:34:40 GMT

Having a business fail for lack of employees was unheard of 10 years ago. The problem existed for many businesses long before the pandemic, but it certainly went to a whole new level from 2020 to the present.

Almost every business has dealt with the problem of the scarcity of good employees since the pandemic in 2020, and many businesses have been dealing with this issue for many more years. Certainly since 2020, the issue has been compounded by the Great Resignation and the massive increase in remote working. The ultimately painful and fundamental answer for businesses will come when a recession results in higher levels of unemployment, which should re-balance the scales that have favored employees for so long. Until then, however, businesses can not afford to bury their strategic heads in the sand.

Business has to be creative about how to approach this problem in order to survive and (hopefully) grow. The following are some ideas that might help a business bridge the employment gap in the short run. Some of these ideas will also position the business to produce optimally in the long run, hopefully long after the employee crisis has been solved:

Promote from within - Take an objective look at the current employee roster. Who on the list can take on more responsibilities, who has room for growth, who would love to take on the challenge? There may be some stretching and some learning to do early on, but careful mentoring and guidance may just bridge the talent gap quickly.
Realign jobs - promoting from within (above) can often be coupled with stepping back and taking a holistic look at the operations. Is there a way to change the way things are done to be more efficient? Listen for "we've always done it that way" and use that as the clarion call to study the "why". Can responsibilities from multiple people be realigned in a strategic manner, perhaps freeing up time here and there among those in the talent pool. It is possible that the solution to a talent shortage can come in a collective manner from the more experienced employee base.
Optimize the time of critical employees - Almost every highly-skilled employee spends time doing tasks that are well below their pay grade - sometimes employees are reluctant to give up those easier tasks, so you'll have to push a bit to uncover them. identify those time-sucking tasks and offload them to a less-critical staff member and you've just unearthed more capacity. Even if there is no one to offload to at the present, it is much easier to hire someone to do that routine work than it is to find and hire employees capable of higher end work.
Put lines of business and product offerings under the microscope of profits - Far too often, businesses don't fully understand where they make their money - which products or services have the highest profit ratios. Again, the "we've always done it that way" syndrome can creep in. Status quote can be a silent killer. Maybe the business has always made 36 different products, even though only 12 are the real winners. Maybe the business has "always" provided a certain service offering to its clients, but that service is not as profitable as the other lines of business and takes valuable employee time. Discover those blackholes of product and time and make a bold choice to focus on what the business does best. Doing so will free up the time of many employees in the organization - not only could this solve the employee crisis, but it could have a major positive effect on cash flow for years to come.
Consider training younger talent - If a business does not have a feeder program for new graduates, consider starting one. This is not going to provide the same immediate fix versus hiring experienced employees, but young talent can absolutely reinvigorate a business with new ideas and approaches. By building routines and putting up guardrails, it is possible to get real production from young talent, even as they are training. This is a longer term solution but, when the problem is chronic year in and year out, long term solutions eventually pay off.
Also consider an internship program at your company - You may be able to partner with a local community college, trade school, or university to find good candidates. Depending on need and scale, your company might even be able to sponsor a new training initiative in conjunction with a local partner. The exposure, experience, and connections that interns make while working at the company at these formative times can often turn into full-time job offers. Just like the option above, this is a longer term play. Like any longer term project, the best time to start is yesterday; the second best time is today.

The employee crisis is real. No one knows when this will end - is it a matter purely of demographics, will it be resolved by a recession - but a business owner can not afford to be passive. It's better to assume the problem is chronic and to look for solutions. The above are just a few ideas that businesses can consider. Find one, or a combination of a few, that seems to fit your situation and give it a shot.

Outsourcing the Accounting Department: Your Business Should Consider This Option Now

gdowell@dowellcpa.com (Greg Dowell) — Thu, 24 Aug 2023 18:38:00 GMT

Improve profitability, reduce the opportunity for fraud, focus on your core business, eliminate excuses for tardy financial data - what's not to love about outsourcing your accounting?

1. Savings comes in the forms of eliminating payroll taxes and benefits of the internal accounting department;

3. An outsourcing firm remains strictly focused on the tasks at hand – there is no lost time at the water cooler, taking personal phone calls, or surfing the internet.

ESOPs (Employee Stock Ownership Plans) Might Solve the Succession Puzzle

Wed, 16 Aug 2023 21:17:58 GMT

ESOPs have been around for years; they could be a solution for ownership transition.

August 16, 2023

Gregory S. Dowell

Possibly you have heard of an ESOP before (no connection to Aesop, the legendary Greek who spun fables filled with wisdom), but they sounded too complicated for your business. At their best, ESOPs can create a market for a small business, foster a greater degree of employee participation and commitment, and maintain the culture of a business, rather than seeing that culture disappear via a merger. As business owners struggle with succession planning in a very difficult labor market, it may be time to take a closer look to see if an ESOP might work for you.

An ESOP is a qualified defined contribution plan that is either a stock bonus plan, or a combination stock bonus and money purchase plan, that invests primarily in a business' stock for the benefit of the plan participants. After an employer establishes an ESOP, the employer makes annual contributions to the ESOP in the form of stock or cash. The employer's contributions are tax deductible. An ESOP may use employer cash contributions to buy common stock from the controlling stockholders, as long as the price reflects the value of the stock. The stock acquired by the ESOP is allocated to the participants' accounts but, because it is a qualified retirement plan, the amount added to the participants' accounts each year is not included in their gross income; it accumulates tax-deferred until the participant retires, dies, or becomes disabled.

The ESOP may also borrow to buy the stock (whether from the shareholder, the corporation, or a third party), with the debt being paid out of the employer contributions to the ESOP (these are known as "leveraged ESOPs", versus nonleveraged ESOPs). The loan can be a direct loan from a financial institution with a guarantee by the corporation, or the loan can be made to the corporation with the corporation re-loaning the funds to the ESOP. In the case of a stock that is not traded on a public exchange, a valuation will have to be performed on an annual basis.

An entity has to be a corporation to use an ESOP; a limited liability corporation being taxed as a partnership will not work. An ESOP is also permitted to be a shareholder in an S corporation.

A shareholder who sells stock to an ESOP may be eligible to elect to defer having the gain taxed in the year of sale. To qualify for the tax deferral under Code Section 1042, the following are required:

ESOP must own at least 30% of the business' stock immediately after the sale.
Selling shareholder must have held the stock for at least three years prior to the sale.
Selling shareholder must purchase qualified replacement property within the period beginning three months before and ending 12 months after the date of the sale.
Stock sold to the ESOP must be a qualified security.

If the Section 1042 tax deferral election is made, the selling shareholder is not subject to tax on the gain attributable to the sale of stock, and the tax basis for the qualified replacement property is the same as the selling shareholder’s tax basis for the stock that was sold to the ESOP. Taxable gain is recognized if and when the qualified replacement property is sold or otherwise disposed of. If the qualified replacement property is retained by the selling shareholder until his or her death, the gain on the stock sale to the ESOP will completely escape income taxation because of the Section 1014 basis step-up, although the qualified replacement property will be included in the decedent’s taxable estate according to the usual estate tax rules. Thus, Code Section 1042 and the provision for qualified replacement property allow closely held corporate shareholders to create a diversified investment portfolio without incurring income tax in the short term.

While and S corporation can adopt an ESOP, the shareholders of an S corporation can not elect to defer the tax on the gain under Code Section 1042.

The 30% ownership test is satisfied if, immediately after the sale to the ESOP, the ESOP owns either 30% or more of each class of the corporation’s outstanding stock or 30% or more of the total value of all of the corporation’s outstanding stock. The 30% test does not mean that each selling shareholder must sell at least 30% of his interest. Instead, the view is from the ESOP level. That is, after any given shareholder sale, the ESOP must own at least 30% of the employer stock. Once the ESOP achieves 30% ownership, the subsequent sale of any amount of stock would satisfy the 30% test.

Another feature of these plans is the shareholder's right, each year, to direct the plan as to the investment of at least 25% of the account balance once the shareholder has reached age 55 with at least 10 years of plan participation. This “diversification of investments” election permits older employees to select investments suitable for their anticipated retirement. If the ESOP is part of a larger plan, like a profit sharing plan, that permits employee contributions, the shareholder may be able to divest the employer stock and allocate it to other plan investments once the shareholder has completed three years of service as a participant.

If employment terminates, there is an ESOP distribution rule which is meant to accelerate the date when benefits can begin. ESOP benefit payments must begin no later that one year after the end of the plan year when separated from service on account of retirement or disability, or one year after the end of the plan year that is the fifth plan year following separation from service from some other cause. Since these rules are meant to speed up the date benefits begin, if benefits would begin sooner under the distribution rules applicable to all qualified plans, then that would override the ESOP rules.

For 2023, the limit on contributions to defined contribution plans, including contributions to the ESOP, are limited to the lesser of $66,000 or 100% of compensation. However, certain forfeitures and payments of interest on loans to the ESOP will not be taken into account in calculating these limits which may have the effect of increasing amounts that go into a shareholder's account.

Establishing ESOP plans is not inexpensive. There are significant upfront costs with attorneys and consultants, as well as ongoing costs of compliance and valuations. ESOPs are qualified plans, which means that regulatory compliance must be prioritized annually.

All that said, ESOPs in the right setting can provide tremendous benefits to small businesses, their shareholders, and their employees. Whether an ESOP is right for your business will depend on all of the facts and circumstances, but well may be worth the analysis.

Getting Married? What a Perfect Time to Talk About Taxes!

Tue, 16 May 2023 18:43:46 GMT

by Gregory S. Dowell

Updated May 16, 2023

Spring is the traditional kick-off to wedding season, and thoughts quickly turn to the wedding venue, gifts, the happy couple, and, of course, the guest list. Lurking somewhere in the shadows, behind even that strange uncle you barely know, is another guest that needs to be considered: The tax impact on the newlyweds.

To start, newlyweds will have two options for filing their income taxes in the year of marriage: Filing status can either be married filing jointly, or married filing separately. In the vast majority of cases, a couple will benefit with a lower overall tax burden to the couple by choosing to file married filing jointly. One of the classic cases where a couple may consider filing separately is when one spouse has significant amounts of medical expenses for the year. Medical expenses are only deductible if they exceed 7.5% of adjusted gross income; using only one spouse's income may allow a deduction to be taken if filing separately, compared to losing the medical deduction entirely if both incomes are combined by filing jointly.

We previously had written about the tax trap that often occurs when two people get married, resulting often in an unanticipated balance due when the first joint tax return for the couple was filed. While President Trump’s Tax Cuts and Jobs Act (TCJA), changed the dynamics somewhat, it is still worthwhile to put pen to paper before saying “I do”. Prospective spouses have the opportunity to save money by taking income tax considerations into account before tying the knot. That’s particularly true for those who plan to marry late this year or early next year. As this article explains, from the federal income tax standpoint, some individuals marrying next year may come out ahead by either deferring or accelerating income, depending on their circumstances. Others may find it to their advantage to defer a year-end marriage until next year.

For some quick background, a “marriage penalty” exists whenever the tax on a couple’s joint return is more than the combined taxes each spouse would pay if they weren’t married and each filed a single or head of household income tax return. Before President Trump’s TCJA, only the 10% and 15% married filing jointly brackets were set at twice that of the singles bracket, and so the marriage penalty effect on joint filers applied in the brackets above the 15% bracket. Beginning with the 2018 tax year, however, the TCJA set the statutory tax brackets for marrieds filing jointly-through the 32% bracket-at twice the amount of the corresponding tax brackets for singles. As a result, the TCJA eliminated any tax-bracket-generated marriage penalty effect for joint filers where each spouse has roughly the same amount of taxable income-through the 32% bracket.

For example, if two individuals who each have $215,950 of taxable income file as single taxpayers for 2022, each would have a tax bill of $49,335.50, for a combined total of $98,671. If they were married, their tax bill as marrieds filing jointly would be $98,671, exactly the same amount as the combined total tax they’d pay as single taxpayers.

Because the 35% bracket for marrieds filing jointly isn’t twice the amount of the singles 35% bracket, the marriage penalty effect will still apply to joint filers whose income falls in the 35% bracket. Using 2022 tax tables, two single taxpayers may each have $500,000 in taxable income, for a combined total of $1,000,000, without having any of it taxed higher than 35%. However, for marrieds filing jointly, the 35% tax bracket ends at $647,850 in taxable income, and each additional dollar of taxable income taxed at 37%.

Thus, where two high-earning unmarried taxpayers with substantially equal amounts of taxable income are planning for their marriage to take place either late this year or early next, it may pay from the tax viewpoint to defer the marriage until next year. As an example, if two individuals each have $539,900 of taxable income file as single taxpayers for 2023, each would have a tax bill of $162,718, for a combined total of $325,436. If they were married before the end of the year, their tax bill as marrieds filing jointly would be $334,076, or $8,640 more than the combined total tax they’d pay as single taxpayers.

If only one of the prospective spouses has substantial income, marriage and the filing of a joint return may save taxes, thus resulting in a marriage bonus. The bonus is the result of two factors: 1) the tax brackets for marrieds filing jointly cover wider spans of income than the tax brackets for taxpayers as singles; and 2) the taxable income of the lower-earning individual may not push the couple’s combined income into a higher tax bracket. In such a case, it will probably be better from the tax standpoint to accelerate the marriage into this year if feasible.

There are a number of other factors that should also be taken into account when determining the effect of a marriage on income taxes of the couple. As mentioned early in this post, the first decision is to verify that filing a joint return is preferred to filing separate returns. In addition, many provisions of the tax code phase out completely (or decrease partially) as adjusted gross income increases. In a perfect world, there would only be good surprises for a newlywed couple following their wedding. To avoid any unpleasant income tax surprises, we always recommend that a newlywed couple take the time to make a projection of what their income will look like when combined as a couple, and determine what the tax bill will look like, at the Federal and State levels. After all, planning ahead, communicating with each other, discussing finances, and avoiding unpleasant surprises are some of the keys to a long marriage.

Due Dates for 2023 Tax Filings and Returns

gdowell@dowellcpa.com (Greg Dowell) — Sat, 11 Mar 2023 13:57:59 GMT

Don't forget a birthday, anniversary, or any of these tax filing dates . . .

It used to be pretty easy to figure out – tax returns for most entities were due on April 15 ^th every year. Over the years and for a variety of reasons – some good, some not so good – due dates have changed and a cheat sheet is needed to keep track of them. Here is a look at the major tax due dates throughout 2023:

January 17, 2023. Individuals.

Make a payment of estimated tax for 2022 if not enough 2022 income tax has been withheld. Use Form 1040-ES, or pay by various electronic means. This is the final installment date for 2022 estimated tax. However, individuals needn't make this payment if they file their 2022 returns (Form 1040) and pay any tax due by Jan. 31, 2023.

January 17, 2023. Farmers and fishermen.

Pay estimated tax for 2022 by using Form 1040-ES or via various electronic means. Farmers and fishermen can then file their 2022 income tax returns (Form 1040) by Apr. 18 (as Apr. 15 falls on a Saturday, and Apr. 17 is D.C. Emancipation Day). If they don't make this estimated payment at this time, they must file their 2022 returns and pay any tax due by Mar. 1, 2023, to avoid an estimated tax penalty.

January 31, 2023. Individuals.

File income tax return (Form 1040) for 2022, if the last installment of estimated tax wasn't paid by Jan. 17. Filing the return now prevents any penalty for late payment of the last installment.

January 31, 2023. Employers.

Give employees their copies of Form W-2 for 2022.
File Form W-3 along with Copy A of all the Form W-2s issued for 2022.
“Applicable large employers” must furnish copies of Forms 1095-C to full-time employees, and all other providers of minimum essential coverage must furnish copies of Forms 1095-B to responsible individuals.

January 31, 2023. Businesses.

Give an annual information statement to recipients of certain payments made by the business during 2022. (Use a copy of the appropriate Form 1099.)
File Form 1099-MISC if reporting (whether electronically or by paper) nonemployee compensation payments in box 7. (For all other payments, file Form 1099-MISC by Feb. 28, 2023 on paper, or Mar. 31, 2023, electronically.)

February 15, 2023. Individuals.

Individuals who claimed exemption from income tax withholding for 2022 on the Form W-4 given to the employer must file a new Form W-4 by this date to continue the exemption for another year.

February 15, 2023. Businesses.

Give an annual information statement to recipients of certain payments (e.g., proceeds from broker and barter transactions) made by the business during 2022. (Use a copy of the appropriate Form 1099.)

February 28, 2023. Businesses.

File an information return (Form 1099) with IRS for certain payments made by the business during 2022. There are different versions of Form 1099 for different types of payments. For a 30-day extension of time to file, use Form 8809. The due date for electronic filers is Mar. 31, 2023.

February 28, 2023. Large food and beverage establishment employers.

File Form 8027 to report tip income and allocated tips. Use Form 8027-T to summarize and transmit Form 8027 if employer has more than one establishment. The due date for electronic filers is Mar. 31, 2023.

March 1, 2023. Farmers and fishermen.

File the 2022 income tax return (Form 1040) and pay any tax due. However, farmers and fishermen have until Apr. 18 if they paid their 2022 estimated tax by Jan. 17, 2022.

March 15, 2023. Partnerships.

File a 2022 calendar-year return (Form 1065), and provide each partner with a copy of Schedule K-1. For an automatic 6-month extension to file the return and provide Schedule K-1 or a substitute Schedule K-1, file Form 7004. Then file Form 1065 by Sept. 15.

March 15, 2023. S corporations.

File a 2022 calendar-year income tax return (Form 1120S), pay any tax still due, and provide each shareholder with a copy of Schedule K-1. For an automatic 6-month extension, file Form 7004 and deposit an estimate of the tax owed.

March 15, 2023. S elections.

File Form 2553 to choose to be treated as an S corporation for calendar year 2023 and thereafter. If Form 2553 is filed late, S treatment will begin with calendar year 2024 (unless the taxpayer qualifies for late election relief).

March 31, 2023. Electronic filers of information returns.

Electronically file those information returns listed under Feb. 28, above (e.g., Form 1099s, Form W-2s, etc.). (Feb. 28 is the due date for non-electronic filers.)

March 31, 2023. Large food and beverage establishment employers.

Electronically file Form 8027 to report tip income and allocated tips. Employers with more than one establishment should use Form 8027-T to summarize and transmit Form 8027. (Mar. 1, 2023 is the due date for non-electronic filers.)

April 18, 2023. Individuals.

File an income tax return (Form 1040) for 2022 and pay any tax due.
U.S. citizens and resident aliens living and working (or on military duty) outside the U.S. and Puerto Rico get an automatic 2-month extension (to June 15) to file their returns and pay any tax due.
Make the first installment payment of 2023 estimated tax.
Last day to make contributions to an IRA, Roth IRA, HSA, Archer MSA or Coverdell ESA for 2022.

April 18, 2023. C corporations.

File 2022 calendar-year income tax returns (Form 1120) and make any required income tax payments. Corporations needing additional time (beyond April 18) to file should file Form 7004, and deposit the tax they owe, by April 18, 2023, to obtain an extension to file the return. The filing extension date won't go beyond Oct. 18, 2023. And, that extension doesn't extend the time to pay the tax beyond April 18, 2023.

April 18, 2023. Corporations.

Calendar-year corporations deposit the first installment of estimated income tax for 2023.

June 15, 2023. Individuals.

Make the second installment payment of 2023 estimated tax.
U.S. citizens or resident aliens living and working (or on military duty) outside the U.S. and Puerto Rico file their 2022 Forms 1040 and pay any tax, interest and penalties due (under the 60-day extension to which they're entitled). For further extension to Oct. 16, file Form 4868 and check the box on line 8. For taxpayers serving in a combat zone, the filing deadline is extended further.

June 15, 2023. Corporations.

Calendar-year corporations deposit the second installment of estimated income tax for 2023.

July 17, 2023. Employers.

Employers that maintain an employee benefit plan, such as a pension, profit-sharing, or stock bonus plan, file Form 5500 or Form 5500-EZ for plan years that ended in Sept., Oct., or Nov. of 2022. Employers with Forms 5500 due between Mar. 31, 2023, and July 17, 2023 because of a previously filed extension request, file the Form 5500.

July 31, 2023. Employers.

Employers that maintain an employee benefit plan, such as a pension, profit-sharing, or stock bonus plan, file Form 5500 or Form 5500-EZ for calendar year 2022. Employer that use a fiscal year as the plan year file the form by the last day of the seventh month after the plan year ends.

September 15, 2023. Individuals.

Make the third installment payment of 2023 estimated tax, if not enough 2023 income tax is being withheld. Use Form 1040-ES, or pay by various electronic means.

September 15, 2023. S corporations.

If under a 6-month extension, file a 2022 calendar-year income tax return (Form 1120S), and pay any tax due.

September 15, 2023. Corporations.

Calendar-year corporations must deposit the third installment of estimated income tax for 2023.

September 15, 2023. Partnerships.

If under a 6-month extension, file a 2022 calendar-year return (Form 1065).

October 16, 2023. Individuals.

Individuals with an automatic 6-month extension to file income tax returns for 2022, file Form 1040 and pay any tax, interest, and penalties due.

October 16, 2023. C corporations.

File a 2022 calendar-year income tax return (Form 1120), and pay any tax due if under an automatic 6-month extension.

During November, 2023. Employers.

Request that employees whose withholding exemptions will be different in 2024 fill out a new Form W-4.

December 15, 2023. Corporations.

Calendar-year corporations must deposit the fourth installment of estimated income tax for 2023.

Hurry Up and Wait to File 2022 Returns

gdowell@dowellcpa.com (Greg Dowell) — Tue, 07 Feb 2023 18:51:59 GMT

The IRS asks taxpayers to wait to file 1040s if they received rebate payments from their state in 2022.

The body content of your post goes here. To edit this text, click on it and delete this default text and start typing your own or paste your own from a different source.

Corporate Jet and Tax Implications

gdowell@dowellcpa.com (Greg Dowell) — Wed, 04 Jan 2023 22:17:55 GMT

Corporate Jet - What's the right choice for your business?

If your business has never owned one before, buying a corporate jet is a big step. It is a commitment of resources, not just with the initial outlay, but also in terms of the costs and liabilities that come from ownership. It is an easier decision if the business has ample profit on an annual basis to cover the expenses and if the key corporate personnel suffer significant downtime or inefficiencies from using commercial options that are available. While there are a number of financial considerations to make, this article will focus on some of the tax rules that making owning a corporate jet a realistic possibility.

Business travel only. In most cases, if your company buys a plane used only for business travel, the company can deduct its entire cost in the year that it is placed into service. The cases in which the plane is ineligible for this immediate write-off are (1) the few instances in which neither the 100% bonus depreciation rules nor the “section 179” small business expensing rules apply or (2) when the taxpayer has elected out of 100% bonus depreciation and has not made the election to apply “section 179” small business expensing. In those cases the depreciation schedule is 20% of the cost for Year 1, 32% for Year 2, 19.2% in Year 3, 11.52% in Year 4, 11.52% in Year 5 and 5.76% in Year 6. Note that the bonus depreciation rate will begin to be phased down for property placed in service after calendar year 2022.

Interestingly, the above “cost recovery” rules are more favorable than the rules for business autos. The business auto rules place annual caps on depreciation and, in the year an auto is placed in service, both depreciation and “section 179” small business expensing.

In the case of a business-travel-only aircraft, post-acquisition expenditures are treated no differently than post-acquisition expenditures for other machinery and equipment. So, for example, expenses for routine maintenance and repairs are immediately deductible while amounts that improve or restore the aircraft (such as amounts paid to overhaul an engine) must be capitalized and depreciated.

The only “catch” that distinguishes the tax treatment of an aircraft used 100% for business travel from the treatment of most other machinery and equipment is that company aircraft are one of the categories of business property that, by statute, require more rigorous recordkeeping to prove the connection of uses and expenditures to business purposes.

Business and personal travel. Personal travel won't affect the depreciation results discussed above if the value of the travel is compensation income (and is reported and withheld upon as such) to a person that isn't a (1) 5% owner or (2) person “related” to the corporation. This means, for example, that personal travel by a non-shareholding employee won't affect depreciation if the value of the travel is compensation to him or her and is reported and withheld upon as such. The depreciation results can be affected if the person for whom the value of the travel is compensation income is a 5% shareholder or a related person. But even in that case the depreciation results won't be affected if a generous “fail-safe” rule is complied with.

With one limitation, personal travel won't affect the treatment of otherwise-deductible post-acquisition expenditures if the value of the travel is compensation income (and is reported and withheld upon as such). The limitation is that if the person for whom the value of the travel is to be treated as compensation income is a 10% owner, director, officer, or a person “related” to the corporation, the amount of the deduction for otherwise-deductible costs allocable to the personal travel can't exceed the value of the travel.

An additional issue that can arise in the case of personal travel by a stockholder, and that is whether IRS can recharacterize as a dividend the value of travel treated as compensation. In that case the value is includible in the shareholder's income, but not deductible to the company. However, that possibility arises only if the traveler-stockholder's compensation as increased by the value of the travel can be deemed excessive.

The tax rules in place today provide real benefits to owning a corporate aircraft. However, it is rarely wise to let the tax tail wag the dog, and we think it is wise to look at the financial and nonfinancial implications as well.

Individual Year End Planning

jrothenburger@dowellcpa.com (Jason Rothenburger) — Fri, 02 Dec 2022 20:23:55 GMT

Minimizing taxes is never easy. But in times of legislative and economic uncertainly, it can be a real challenge. And it’s a critical challenge for higher-income taxpayers subject to higher rates and certain additional taxes, as well as tax-break phaseouts.

If proposed tax increases do pass, however, the highest income taxpayers may find that the opposite strategies produce better results: Pulling income into 2022 to be taxed at currently lower rates, and deferring deductible expenses until 2023, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all relevant factors.

1. Higher-income individuals must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of MAGI over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

2. As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax will depend on the taxpayer’s estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to reduce MAGI other than NII, and some individuals will need to consider ways to minimize both NII and other types of MAGI. An important exception is that NII does not include distributions from IRAs or most other retirement plans.

3. The 0.9% additional Medicare tax also may require higher-income earners to take year-end action. It applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds, above. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self- employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer.

4. Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to net long-term capital gain to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $83,350 for a married couple; estimated to be $89,250 in 2022). If, say, $5,000 of long-term capital gains you took earlier this year qualifies for the zero rate then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses will offset $5,000 of capital gain that is already tax-free.

5. Postpone income until 2023 and accelerate deductions into 2022 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2021 that are phased out over varying levels of AGI. These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may actually pay to accelerate income into 2022. For example, that may be the case for a person who will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or who expects to be in a higher tax bracket next year. That's especially a consideration for high-income taxpayers who may be subject to higher rates next year under proposed legislation.

6. If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional- IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA in 2022 if eligible to do so. Keep in mind that the conversion will increase your income for 2022, possibly reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for those potentially subject to higher tax rates under pending legislation.

7. It may be advantageous to try to arrange with your employer to defer, until early 2023, a bonus that may be coming your way. This might cut as well as defer your tax. Again, considerations may be different for the highest income individuals.

8. Many taxpayers won't want to itemize because of the high basic standard deduction amounts that apply for 2022 ($27,700 for joint filers, $13,850 for singles and for marrieds filing separately, $20,800 for heads of household), and because many itemized deductions have been reduced or abolished, including the $10,000 limit on state and local taxes; miscellaneous itemized deductions; and non-disaster related personal casualty losses. You can still itemize medical expenses that exceed 7.5% of your AGI, state and local taxes up to $10,000, your charitable contributions, plus mortgage interest deductions on a restricted amount of debt, but these deductions won't save taxes unless they total more than your standard deduction.

Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, a taxpayer who will be able to itemize deductions this year but not next will benefit by making two years' worth of charitable contributions this year. The COVID-related increase for 2022 in the income-based charitable deduction limit for cash contributions from 60% to 100% of MAGI assists in this bunching strategy.

9. Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2022 deductions even if you don't pay your credit card bill until after the end of the year.

10. If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2022, consider asking your employer to increase withholding of state and local taxes (or make estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2022. But this strategy is not good to the extent it causes your 2022 state and local tax payments to exceed $10,000.

11. Required minimum distributions RMDs from an IRA or 401(k) plan (or other employer-sponsored retirement plan) have not been waived for 2022. If you were 72 or older in 2022 you must take an RMD. Those who turn 72 this year have until April 1 of 2023 to take their first RMD but may want to take it by the end of 2022 to avoid having to double up on RMDs next year.

12. If you are age 70½ or older by the end of 2022, and especially if you are unable to itemize your deductions, consider making 2022 charitable donations via qualified charitable distributions from your traditional IRAs. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. However, you are still entitled to claim the entire standard deduction. (The qualified charitable distribution amount is reduced by any deductible contributions to an IRA made for any year in which you were age 70½ or older, unless it reduced a previous qualified charitable distribution exclusion.)

13. Take an eligible rollover distribution from a qualified retirement plan before the end of 2022 if you are facing a penalty for underpayment of estimated tax and increasing your wage withholding won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2022. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2022, but the withheld tax will be applied pro rata over the full 2022 tax year to reduce previous underpayments of estimated tax.

14. Consider increasing the amount you set aside for next year in your employer's FSA if you set aside too little for this year and anticipate similar medical costs next year.

15. If you become eligible in December of 2022 to make HSA contributions, you can make a full year's worth of deductible HSA contributions for 2022.

16. Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $16,000 made in 2022 to each of an unlimited number of individuals. You can't carry over unused exclusions to another year. These transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

17. If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2022 return normally filed next year), or on the return for the prior year (2021), generating a quicker refund.

Year End Business Planning

jrothenburger@dowellcpa.com (Jason Rothenburger) — Fri, 02 Dec 2022 20:14:43 GMT

With year-end approaching, it is time to start thinking about moves that may help lower your business’s taxes for this year and next.

This year’s planning is more challenging than usual due to recent changes made by the Inflation Reduction Act of 2022 and the potential change in congressional balance of power resulting from the midterm elections.

Whether or not tax increases become effective next year, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for most small businesses, as will the bunching of deductible expenses into this year or next to maximize their tax value.

If proposed tax increases do pass, however, the highest income businesses and owners may find that the opposite strategies produce better results: Pulling income into 2022 to be taxed at currently lower rates, and deferring deductible expenses until 2023, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all relevant factors.

1. Pass-Through Entity (PTE) Tax Elections: The TCJA introduced the state and local tax (SALT) cap, which restricted the amount of state and local taxes deductible by individuals to $10,000. Many states have begun adopting legislation that allows a PTE (S Corporations and Partnerships) to elect to pay state-level taxes at the company level and claim a federal deduction at the entity level rather than passing the tax liabilities to the pass-through owners. Depending on each state’s legislation, pass-through owners also may claim a credit against their resident state income taxes for their share of PTE tax paid by the business or exclude income that is subject to the PTE tax. Business owners should reach out to us to evaluate if they can benefit from the entity-level state tax elections.

2. Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2022, if taxable income exceeds $340,100 for a married couple filing jointly, (about half that for others), the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income up to $100,000 above the threshold, and to other filers with taxable income up to $50,000 above their threshold.

3. Taxpayers may be able to salvage some or all of this deduction, by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout) for 2022. Depending on their business model, taxpayers also may be able increase the deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting us.

4. More small businesses are able to use the cash (as opposed to accrual) method of accounting than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test, which is satisfied for 2022 if, during a three-year testing period, average annual gross receipts don't exceed $27 million (next year this dollar amount is estimated to increase to $29 million). Not that many years ago it was $1 million. Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.

5. Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2022, the expensing limit is $1,080,000, and the investment ceiling limit is $2,700,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for interior improvements to a building (but not for its enlargement), elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.

6. The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. So expensing eligible items acquired and placed in service in the last days of 2022, rather than at the beginning of 2023, can result in a full expensing deduction for 2022.

7. Through 2022, a 100% bonus first year depreciation deduction is allowed for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service this year, and for qualified improvement property, described above as related to the expensing deduction. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2022. Starting in 2023 this bonus depreciation decreases to 80%.

8. Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs aren’t required to be capitalized under the UNICAP rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS, e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, and where potentially increasing tax rates for 2023 aren’t a concern, consider purchasing qualifying items before the end of 2022.

9. A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for 2022 (and substantial net income in 2023) may find it worthwhile to accelerate just enough of its 2023 income (or to defer just enough of its 2022 deductions) to create a small amount of net income for 2022. This allows the corporation to base its 2023 estimated tax installments on the relatively small amount of income shown on its 2022 return, rather than having to pay estimated taxes based on 100% of its much larger 2023 taxable income.

10. Year-end bonuses can be timed for maximum tax effect by both cash- and accrual-basis employers. Cash-basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to them are established with reasonable certainty. However, the bonus must be paid within 2½ months after the end of the employer’s tax year for the deduction to be allowed in the earlier accrual year. Accrual employers looking to defer deductions to a higher-taxed future year should consider changing their bonus plans before year-end to set the payment date later than the 2.5-month window or change the bonus plan’s terms to make the bonus amount not determinable at year end.

11. Employee retention credit (ERC) –– The ERC encouraged businesses to keep employees on their payroll during the pandemic. Although these credits relate to tax years 2020 and 2021, applying for these credits is still available. The IRS warned employers to be cautious of third parties taking improper positions related to ERC eligibility, as claiming the credit inaccurately can result in severe consequences. We can help you appropriately navigate the ERC.

12. Losses and shareholder or partnership basis: A shareholder can deduct its pro rata share of S corporation losses only to the extent of the total of its basis in the S corporation stock and debt. This determination is made as of the end of the S corporation tax year in which the loss occurs. Any loss or deduction that can't be used on account of this limitation can be carried forward indefinitely. If a shareholder wants to claim a 2022 S corporation loss on its own 2022 return, but the loss exceeds the basis for its S corporation stock and debt, it can still claim the loss in full by lending the S corporation more money or by making a capital contribution by the end of the S corporation's tax year (in the case of a calendar year corporation, by December 31. Similarly, a partner's share of partnership losses is deductible only to the extent of their partnership basis as of the end of the partnership year in which the loss occurs. Basis can be increased by a capital contribution, or in some cases by the partnership itself borrowing money or by the partner taking on a larger share of the partnership's liabilities before the end of the partnership's tax year.

13. The impact of the passive activity loss limitation rules must also be considered. Limited partners always have passive activity interests except to the extent IRS regs say otherwise. If an individual who is a limited partner meets the material participation test under the 500-hours-of-participation rule, the five-of-ten-years-of-material-participation rule, or the any-three-prior-year-material-participation rule for a personal service activity, the partner is treated as materially participating in any activity of the limited partnership. This will affect the application of the passive activity rules to their share of any income, gain, loss, deduction, or credit attributable to the limited partnership interest and to any gain or loss from the activity recognized on the sale or exchange of the interest.

How Long Do I Need To Keep My Tax Returns?

gdowell@dowellcpa.com (Greg Dowell) — Thu, 01 Dec 2022 21:28:43 GMT

"How long do I need to keep my tax returns?" is one of the most frequent questions we are asked. Unfortunately, the answer is not always simple - read on.

Bear in mind that the fundamental burden of proof is almost always on the taxpayer in the U.S. tax system. Evidence of income or deductions, in the form of cancelled checks, invoices, bills, bank statements and the like must be maintained by the taxpayer until such time as the period of limitations for the tax return expires. So when does the period of limitations expire?

For the Internal Revenue Service to assess tax to you, these are the basic rules:

3 years - To assess tax to you, the IRS generally has 3 years from the date you filed the return. If a return was filed before the due date, it is treated as filed on the due date. If a return is filed on extension, the extended date is the beginning of the 3-year period.

6 years - A different period applies if you fail to report income that is more than 25% of the gross income shown on the return, or if the income is attributable to foreign financial assets and is more than $5,000. In those cases, the time to assess tax is 6 years from the date you filed the return.

No limit - Not filing a return is NOT an answer, as there is no period of limitations to assess tax when you file a fraudulent return or when you don't file a return.

If you have a claim for a refund, these rules apply:

The later of 3 years or 2 years after tax was paid - For filing a claim for credit or refund, the period to make the claim generally is 3 years from the date you filed the original return (or the due date for filing the return if you filed the return before that date) or 2 years from the date the tax was paid, whichever is later.

7 years - For filing a claim for an overpayment resulting from a bad debt deduction or a loss from worthless securities, the time to make the claim is 7 years from when the return was due.

If you are in business, you must keep the accounting records and the underlying documents that support the income and expenses. A business should follow the above guidelines as far as the length of time to keep its records. A further caveat is that businesses must keep all employment tax records for at least 4 years after the employment tax becomes due or is paid, whichever is later.

Unfortunately, another factor that comes into play is the need to prove the basis of property that was sold. If property was bought 20 years ago, you will need to be able to present proof of that purchase (such as a closing statement), if challenged.

Our typical recommendation is that a taxpayer should keep a copy of every annual return, without limit. Simply put, the burden is on the taxpayer in the U.S. tax system and, if the IRS claims you did not file a return for a given year, you will be able to submit a copy of the return as evidence. Maintaining those archived copies is also not the burden of your tax preparer; the tax preparer must give you a copy of the returns that were prepared, but the preparer is not required to keep copies of client returns forever. While most states follow the guidelines of the IRS, just be aware that states can also have their own unique requirements.

Rising Home Prices and the Mortgage Interest Deduction

gdowell@dowellcpa.com (Greg Dowell) — Thu, 22 Sep 2022 19:17:23 GMT

As home prices increase, limitations on deducting home mortgage interest will come into play.

The tax laws are engineered in many ways to favor or address certain industries. One of these engineered efforts is to favor home ownership by individuals over renting, benefiting the residential construction, real estate, and mortgage industries, all of which directly affects the vast majority of individual taxpayers. The largest single deduction is to itemize the interest paid on a mortgage on a principal residence. If you own a home, the interest paid on a home mortgage provides a tax break. The amount of mortgage interest that may be deducted, however, is limited. With home prices increasing over the last few years nationwide, many home buyers will find that their ability to deduct mortgage interest is limited.

Mortgage debt that is "acquisition debt" is deductible. Acquisition debt means debt that is: (1) secured by the taxpayer's principal home and/or a second home, and (2) incurred in acquiring, constructing, or substantially improving the home. Interest can be deducted on up to two qualified residences, so a primary home and one other vacation home or similar property can qualify. Mortgage interest on a third residence is not deductible.

There is a limitation, however, on the ability to deduct interest. From 2018 through 2025, mortgage interest for acquisition debt greater than $750,000 ($375,000 for a married taxpayer filing separately) is not deductible. For example, if a taxpayer bought a $2 million house with a $1.5 million mortgage, only the interest that paid on the first $750,000 in debt is deductible. The rest is considered personal interest, and not deductible.

For mortgages taken out after 2025 and before 2018, different limits apply. Beginning in 2026 interest is not deductible on acquisition debt greater than $1 million ($500,000 for married individuals filing separately). This is also the limit that applied before 2018. The $1 million ceiling applies to acquisition debt incurred before Dec. 15, 2017, and to refinancings of pre-Dec. 15, 2017 debt. The higher $1 million limit applies to acquisition debt incurred before Dec. 15, 2017, and to debt arising from the refinancing of pre-Dec. 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing does not exceed the original debt amount. Thus, taxpayers can refinance up to $1 million of pre-Dec. 15, 2017 acquisition debt, and that refinanced debt amount won't be subject to $750,000 limitation, but instead will be subject to the $1 million limitation.

Note that the limit (ceiling) on home mortgage debt for which interest is deductible includes both your primary residence and your second home, combined. Many taxpayers assume that they can deduct the interest on $750,000 for each mortgage. But if a taxpayer has a $700,000 mortgage on a primary home and a $500,000 mortgage on a beach house or ski lodge, the interest on $450,000 of the total debt as nondeductible personal interest.

Interest on " home equity loans" isn't deductible, from tax years 2018 to 2025. "Home equity debt," as specially defined for purposes of the mortgage interest deduction, means debt that: (1) is secured by the taxpayer's home, and (2) isn't "acquisition indebtedness" (that is, wasn't incurred to acquire, construct, or substantially improve the home). From 2018 through 2025, there's no deduction for the interest on home equity debt. Note that interest may be deductible on what a lender may call a "home equity loan," "home equity line of credit," etc., where that loan actually fits the tax law's definition of "acquisition debt" because the proceeds are used to substantially improve or construct the home. The 2018 to 2025 denial of the deduction for interest on "home equity debt" applies regardless of when the home equity debt was incurred.

After 2025 and before 2018, home equity interest is deductible, within limits. Beginning with 2026, home equity debt will be deductible. However, the interest that can be deducted is limited to loan amounts of the lesser of $100,000 ($50,000 if your filing status is married filing separately) or your equity in the home. This is also the limit that applied before 2018, when interest on home equity debt was deductible. The interest on a "home equity loan" will be deductible regardless of how you use the loan proceeds, except when the proceeds are used to purchase tax-exempt obligations.

Thus, taxpayers considering taking out a "home equity loan", which is a loan that's not incurred to acquire, construct, or substantially improve the home, should take into consideration the fact that interest on the loan won't be deductible. Further, taxpayers with outstanding home equity debt will lose the interest deduction for interest on that debt, starting in 2018. For the post-2025 and pre-2018 tax year, home equity interest is not deductible for alternative minimum tax (AMT) purposes, unless the loan is used to improve the home.

Home buying and ownership receives favorable treatment under the US tax code. Bear in mind, however, that as home values increase and mortgages increase, some complications come into play. It may seem that it is easy enough to say that home mortgage is deductible but, as made clear by the above, a taxpayer needs to bear all of the rules and limitations in mind.

Giving to Charity from Your IRA has Tax Advantages

gdowell@dowellcpa.com (Greg Dowell) — Fri, 02 Sep 2022 22:06:43 GMT

Planning to give to charity? Consider the impact of making those gifts from your IRA at death.

There are numerous tax advantages of giving qualified retirement plan and individual retirement account (IRA) assets to a charity, particularly as a part of an estate plan.

When funds are drawn out of retirement plans and IRAs by noncharitable beneficiaries, federal income tax of up to 37% (in 2022) will have to be paid. State income taxes also may be owed. Furthermore, retirement funds possessed at death may be subject to substantial federal estate tax and state death tax.

Retirement benefits are to be contrasted with other assets that can be passed to noncharitable beneficiaries at death free of income tax. For example, an individual inheriting stock worth $300,000 from a parent (that was purchased by the parent for $100,000) won't have to pay income tax on the $200,000 appreciation. That's not the case for retirement benefits. Retirement plan benefits are subject to both income tax and estate tax at death. A special itemized deduction for any Federal estate tax incurred can help noncharitable beneficiaries lower their income taxes on inherited retirement distributions, but the combined income and estate tax can still be quite substantial.

Because of this double tax bite, someone who plans to make charitable gifts should consider naming a charity as beneficiary of his or her IRA or retirement plan to gain these advantages:.

• The retirement benefits going to the charity won't be subject to federal estate tax and generally won't be subject to state death taxes.

• The estate won't be considered to receive taxable income when the benefits are paid to the charity.

• The retirement account owner's surviving spouse, children and others who may be beneficiaries of the estate won't be considered to receive taxable income when the retirement benefits are paid to the charity.

• The charity won't have to pay federal income tax on distributions from the qualified plan or IRA and generally won't have to pay state income taxes.

For one who is not in a position to leave his or her entire retirement benefits to a charity, there are these options:

• An individual with two or more retirement plans (e.g., an IRA and a profit-sharing plan, or two IRAs) can leave one to a charity and the other(s) to family members.

• An individual with a single IRA can split it into two IRAs and leave one to a charity. This can be achieved tax-free through a rollover or a trustee-to-trustee transfer.

• A married individual can have his or her benefits paid to a QTIP trust for the spouse with a charity to receive the benefits that remain at the death of the surviving spouse. The marital deduction will shield the benefits from estate tax when the individual dies. When the surviving spouse dies, the remaining benefits will go to the charity free of estate and income tax.

• An individual can have his or her will establish a charitable remainder trust at death to provide a noncharitable beneficiary with a fixed annuity for a set number of years (not to exceed 20) or for life, with the remainder going to charity.

Prior to death, it can still be advantageous to use funds in an IRA to meet a taxpayer's charitable funding needs. There is a tax provision which allows IRA owners who are 70 1/2 or older to direct up to $100,000 per year of their IRA distributions to charity. These distributions are known as qualified charitable distributions, or QCDs. The money given to charity counts toward the donor's required minimum distribution (RMD), but doesn't increase the donor's adjusted gross income or generate a tax bill.

Keeping the donation out of the donor's AGI is important because doing so can (1) help the donor qualify for other tax breaks (for example, having a lower AGI can reduce the threshold for deducting medical expenses, which are only deductible to the extent they exceed 7.5% of AGI; (2) reduce taxes on the donor's Social Security benefits; and/or (3) help the donor avoid a high-income surcharge for Medicare Part B and Part D premiums (which kick in if AGI is over certain levels).

Further, because charitable contributions will not yield a tax benefit for those taxpayers who no longer itemize their deductions, those who are receiving RMDs from IRAs, may gain a tax advantage by making annual charitable contributions by way of 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.

Takeaway from this article: If you have an IRA and if you support charities through annual giving, or will support a charity at death, you will want to consider the IRA as a source for this charitable giving.

Key Tax Provisions in Senate Bill (Inflation Reduction Act)

gdowell@dowellcpa.com (Greg Dowell) — Tue, 09 Aug 2022 17:59:08 GMT

Takeaway: Inflation Reduction Act minimally impacts smaller businesses, except for additional IRS enforcement funding.

August 9, 2022

By the narrowest of margins, the Senate on Sunday passed a budget reconciliation bill, HR 5376, which now moves on to the House. The bill is known as the Inflation Reduction Act of 2022, although the precise way that it might effect inflation is debatable. This bill is the remnant of what was originally known as the Build Back Better Act, which failed to get consensus shortly after President Biden's election. While the bill is pared back from its earliest version, it is still touted as America's biggest investment in clean energy and climate change to date, coming in at about $370 billion and supposedly capable of reducing greenhouse gas emissions by 40% by the end of the 2020's.

There are several tax provisions in the bill. Most of them will have no impact on the smallest of businesses in the US, but some will still impact larger privately-held businesses, with most of the impact directed at larger publicly-held companies. The one tax-related feature that will touch all businesses is the increase in funding for the IRS. Because larger companies have the advantage of hiring or employing legions of CPAs and tax attorneys to defend their positions, the brunt of the IRS efforts, despite what they might say, are often by default directed at smaller privately-held businesses. Enforcement disproportionately applied to small businesses is where the IRS can often get a bigger return on their investment, as those businesses do not have the resources to put up limitless defenses against the IRS.

Among the other key provisions is the 15% corporate minimum tax. This tax would apply to financial statement income (or "book income") and again will tend to impact larger privately-held companies and public companies. The corporate minimum tax would be determined by taking 15% of a C corporation's adjusted financial statement income and then subtracting out the alternative minimum foreign tax credit, and would apply to corporations with adjusted financial statement income for the 3 consecutive years ending with the tax year exceeding $1 billion. It is estimated that this provision will only apply to about 200 companies, and it is effective for tax years beginning after 2022.

Another provision is a 1% excise tax on stock buybacks, effective after December 31, 2022. The 1% stock buyback tax was added as an offset to the attempt to stretch the carried interest holding period from 3 to 5 years for long-term gain treatment. "Carried interest" relates to partnership interests that are held in connection with the performance of services.

The bill also extends through 2025 the broader eligibility for health care premium tax credits for taxpayers whose household income exceeds 400% of the poverty line and the calculation of the premium assistance amount.

Other provisions of the bill provide tax credits for the following:

Clean electricity and reducing carbon emissions
Clean fuels
Clean energy and efficiency incentives for individuals
Clean vehicles
Investment in clean energy manufacturing
Incentives for clean electricity and clean transportation

It is anticipated that this bill could pass the House and make it's way to the President by Friday of this week.

Documentation Required for Charitable Donations

gdowell@dowellcpa.com (Greg Dowell) — Thu, 28 Jul 2022 18:57:22 GMT

Understanding the rules of charitable giving can preserve your tax deduction.

Most of us make charitable giving a part of our lives, and we would continuing doing so whether or not the tax code incentivized us to do so. That said, once we make a charitable gift, we want to be sure to maximize the tax value of the gift. While it sounds simple - you deduct what you give to charity - there are specific rules that must be followed and certain documentation that must be maintained.

For a contribution of cash, check , or other monetary gift, regardless of amount, you must maintain a bank record or a written communication from the nonprofit organization showing its name, as well as the date and amount of the contribution. If you make a charitable contribution by text message, a bill from your cellular provider containing the required information is acceptable substantiation. Any other type of written record, such as a log of contributions, is insufficient.

For a contribution of property other than money, you generally must maintain a receipt from the nonprofit organization that shows the organization's name, the date and location of the contribution, and a detailed description (but not the value) of the property. If circumstances make obtaining a receipt impracticable, you must maintain a reliable written record of the contribution. The information required in such a record depends on factors such as the type and value of property contributed.

Tax regulations require that all charitable contributions must be substantiated. Depending on the value of the contribution, those requirements can change. Here's a look at the rules:

$250 or more - No charitable deduction is allowed for any contribution of $250 or more unless you substantiate the contribution with a written receipt from the donee organization. You must have the receipt in hand when you file your return (or by the due date, if earlier) or you won't be able to claim the deduction. If you make separate contributions of less than $250, you won't be subject to the written receipt requirement, even if your contributions to the same charity total $250 or more in a year. The receipt must set forth the amount of cash and a description (but not the value) of any property other than cash contributed. It must also state whether the donee provided any goods or services in return for the contribution, and if so, must give a good-faith estimate of the value of the goods or services. If you received only “intangible religious benefits,” such as attending religious services, in return for your contribution, the receipt must say so. This type of benefit is considered to have no commercial value and so doesn't reduce the charitable deduction available.
$500 or more - if the deduction you claim for non-cash property is $500 or more, you must attach a completed Form 8283 (Noncash Charitable Contributions) to your return or the deduction isn't allowed.
$5,000 or more - you're generally required to obtain a qualified appraisal and to attach an appraisal summary to the tax return. However, a qualified appraisal isn't required for publicly traded securities for which market quotations are readily available. A partially completed appraisal summary and the maintenance of certain records are required for (1) stock that isn't publicly t raded and for which claimed deduction is greater than $5,000 and no more than $10,000, and (2) certain publicly traded securities for which market quotations aren't readily available.

For gifts of art valued at $20,000 or more, you must attach a complete copy of the signed appraisal (rather than an appraisal summary) to your return. IRS may also request that you provide a photograph. If an item of art has been appraised at $50,000 or more, you can ask IRS to issue a “Statement of Value” which can be used to substantiate the value.

If you receive goods or services, such as a dinner or theater tickets, in return for your contribution, your deduction is limited to the excess of what you gave over the value of what you received. For example, if you gave $100 and in return received a dinner worth $30, you can deduct $70. But your contribution is fully deductible if:

you received free, unordered items from the charity that cost no more than $11.20 in 2020 ($11.10 in 2019) in total;
you gave at least $56 in 2020 ($55.50 in 2019) and received only token items (bookmarks, key chains, calendars, etc.) that bear the charity's name or logo and cost no more than $11.20 in 2020 ($11.10 in 2019) in total; or
the benefits that you received are worth no more than 2% of your contribution and no more than $112 in 2020 ($111 in 2019).

If you made a contribution of more than $75 for which you received goods or services, the charity must give you a written statement, either when it asks for the donation or when it receives it, that tells you the value of those goods or services. Be sure to keep these statements.

You can substantiate a contribution that you make by withholding from your wages with a pay stub, Form W-2, or other document from your employer that shows the amount withheld for payment to a charity . You can substantiate a single contribution of $250 or more with a pledge card or other document prepared by the charity that includes a statement that it doesn't provide goods or services in return for contributions made by payroll deduction. The deduction from each wage payment is treated as a separate contribution for purposes of the $250 threshold.

Out-of-pocket expenses - Although you can't deduct the value of services you perform for a charitable organization, some deductions are permitted for out-of-pocket costs you incur while performing the services. You should keep track of your expenses, the services you performed and when you performed them, and the organization for which you performed the services. Keep receipts , canceled checks, and other reliable written records relating to the services and expenses. As discussed above, a written receipt is required for contributions of $250 or more. This presents a problem for out-of-pocket expenses incurred in the course of providing charitable services, since the charity doesn't know how much those expenses were. However, you can satisfy the written receipt requirement if you have adequate records to substantiate the amount of your expenditures, and get a statement from the charity that contains a description of the services you provided, the date the services were provided, a statement of whether the organization provided any goods or services in return, and a description and good-faith estimate of the value of those goods or services.

Most of us assume that the nonprofit organization fully understands the documentation requirements, and will provide a donor with the correct paperwork. While that is generally the case, it is not always true, and a taxpayer should be aware of the above requirements.

Charitable Contributions of Appreciated Property - Insist on a Contemporaneous Written Receipt!

gdowell@dowellcpa.com (Greg Dowell) — Thu, 28 Jul 2022 17:23:03 GMT

Read this if you gift appreciated property to a charity. Don't take the requirements of a written receipt lightly.

In many situations, a case goes to court because the IRS insists on sticking to its specific requirements to allow a deduction, regardless of what the preponderance of the facts and common sense might lead a reasonable person to conclude. Often, we see the courts look through these sometimes draconian requirements, and the courts will side with the taxpayer when it is clear that a deduction is legitimate and that the IRS is seeking to disallow a deduction purely on a rules-based analysis, common sense be damned. This was not the case with Albrecht vs Commissioner, which was decided in favor of the IRS. In this case, there appeared to be clear and compelling evidence that the taxpayer made a gift to a charitable organization, even though it was equally clear that not all of the specific requirements were followed.

In this case, Mrs. Albrecht and her late husband amassed a large collection of Native American jewelry and artifacts during their marriage. In December of 2014, Mrs. Albrecht donated approximately 120 items from this collection to the Wheelwright Museum of the American Indian, with a fair market value claimed of some $464,000. The Museum and Albrecht executed a five-page “Deed of Gift”. The first page stated that petitioner “hereby donates the material described below to the Wheelwright Museum of the American Indian under the terms stated in the Conditions Governing Gifts to the Wheelwright Museum of the American Indian.” Following this statement was the heading “Description of Material: See Attached List.” The Deed of Gift also included the museum's logo, Albrecht's address and donor identification number, and the deed was signed by Albrecht and a museum official. The second page of the deed declared the conditions governing gifts to the museum. One of these conditions stipulated that “the donation is unconditional and irrevocable; that all rights, titles and interests held by the donor in the property are included in the donation, unless otherwise stated in the Gift Agreement.” The donated property was itemized in the final three pages. Despite “the Gift Agreement” reference on the second page of the deed, no such agreement was included with the deed, and the museum did not provide Albrecht with any further written documentation concerning the donation.

Albrecht reported the donation on Schedule A as an itemized deduction and attached a copy of the deed to the return when she electronically filed her tax return. Due to adjusted gross income limitations, Albrecht could not deduct all of the gift on her 2014 return, and she carried over the remaining unused donations to the ensuing years. The IRS subsequently disallowed the donation on her 2014 return, on the basis that the requirements of Internal Revenue Code section 170 were not met.

With charitable donations of $250 or more, section 170 and the regulations require that the taxpayer receive a contemporaneous written acknowledgement (CWA), which must include the following:

amount of cash and a description (but not value) of any property other than cash contributed,
whether the donee organization provided any goods or services in consideration,
description and good faith estimate of the value of any such goods or services, and
taxpayer must receive the CWA from the organization on or before the earlier of the date the taxpayer files the return or the due date for filing the return

While the IRS did not dispute that Albrecht and the museum entered into the deed before the return was filed, the IRS contended that the deed does not comply with the requirement to specify that the museum did not provide any goods or services to Albrecht. Further, while the museum later provided a statement saying that the taxpayer received no goods or services in return, the IRS contended that the requirement to make such a statement must be done in a timely fashion. In rendering its decision, the court indicated that the deed, as written, was deficient in meeting the requirements, as it left open the possibility that the parties could have entered into a side agreement that might include superseding terms. While the court indicated that it appeared that the taxpayer made a good faith attempt to comply with the code section by executing the deed, the strict requirements of section 170 were not met, and the charitable deduction of $464,000 was disallowed.

This decision underscores that it is imperative to follow the requirement to have a contemporaneous written acknowledgement that includes all of the required information. Most of us assume that the charitable organization is on top of these requirements and that all of the necessary documents will be provided to the taxpayer. We might speculate in this case that the deed of gift was written by the taxpayer and presented to the museum. In that scenario, it is possible that the organization took a step backwards and allowed its processes to be interrupted by the deed that was presented to them, perhaps in an effort to facilitate receipt of the gift. This is a clear reminder that the burden is on the taxpayer, not the organization, to meet the requirements. The message is clear: Insist on a contemporaneous written acknowledgement from the organization for any gift of $250 or more.

How Long Should I Keep My Tax Returns?

gdowell@dowellcpa.com (Greg Dowell) — Fri, 22 Apr 2022 20:21:41 GMT

You may not like the answer, but please see the advice that follows.

Many clients ask us for guidance on how long they should keep their personal income tax records and returns. You may have to produce those records if IRS (or a state or local taxing authority) audits your return or seeks to assess or collect a tax. In addition, lenders, co-op boards, or other private parties may require that you produce copies of your tax returns as a condition to lending money, approving a purchase, or otherwise doing business with you.

The answer - and it is not one that minimalists will want to read - is to keep tax returns indefinitely and the supporting records usually for six years. In general, except in cases of fraud or substantial understatements of income, IRS can only assess tax for a year within three years after the return for that year was filed (or, if later, three years after the return was due). For example, if you filed your 2018 individual income tax return by its original due date of Apr. 15, 2019, IRS will have until Apr. 15, 2022, to assess a tax deficiency against you. If you file your return late, IRS generally will have three years from the date you filed the return to assess a deficiency. Bear in mind the three year period is stretched out slightly if a return has been extended, as it would be open for assessment until three years from the extended filing due date. In the above example, the IRS would have until October 15, 2022 to examine a 2018 return.

However, the three-year rule isn't ironclad. The assessment period is extended to six years if more than 25% of gross income is omitted from a return. Why the need to keep tax returns indefinitely, which sounds only slightly better than forever? It's because that in a case where no return has been filed for a tax year, the IRS can assess tax at any time - even beyond six years. If IRS claims that you never filed a return for a particular year, keeping a copy of the return will help you to prove that you did.

While it's impossible to be completely sure that IRS won't at some point seek to assess tax, retaining tax returns indefinitely and important records for six years after the return is filed should, as a practical matter, be adequate. Records relating to property may have to be kept longer. The tax consequences of a transaction that occurs this year, such as a sale of property, may depend on events that happened years ago. The period for which you should retain records must be measured from the year in which the tax consequences actually occur.

For example, suppose you bought your home in 2006 for $200,000, made $20,000 of capital improvements in 2013, and sell it this year. To determine the tax consequences of the sale, you must know your basis in the home — your original cost plus later capital improvements. If your return for the year of sale is audited, you may have to produce records relating to the purchase in 2006 and the capital improvement in 2013 to prove what your basis is. Therefore, those records should be kept until at least six years after you file your return for the year of sale.

You should retain all records relating to home purchases and improvements even if you expect your gain to be covered by the home-sale exclusion, which can be as much as $500,000 for joint return filers. You will still need to prove the amount of your basis should IRS ask about it. In addition, there's no telling how much the home will be worth when it's sold, and there's no guarantee that the home-sale exclusion will still be available when the future sale takes place.

When new property takes the basis of old property, records relating to the old property should be kept until six years after the sale of the new property is reported. For example, suppose you bought a car for business use in 2014 and you traded it in on a new car for business use in 2017. If you sell that car, your basis in the car will determine whether you have a tax gain or a tax loss on the sale, and your basis in the car is determined, at least in part, by your basis in the car you traded in for it in 2017. Accordingly, records relating to your old car should be kept until six years after the year of sale.

Similar considerations apply to other property that is likely to be bought and sold—for example, stock in a business corporation or in a mutual fund, bonds (or other debt securities), etc. In particular, remember that if you reinvest dividends to buy additional shares of stock, each reinvestment is a separate stock purchase. The records of each reinvestment should be kept for at least six years after the return is filed for the year in which the stock is sold.

Because the calculation of the casualty and theft loss deduction is determined in part by your basis in the damaged or stolen property, you'll need to have records to support that basis, until six years after you file the return claiming the loss deduction.

In case of separation or divorce, there are additional considerations. If separation or divorce becomes a possibility, be sure you have access to any tax records affecting you that are kept by your spouse. Or better still, make copies of the tax records, since relations may become strained and access to the records may be difficult. Copies of all joint returns filed and supporting records are important, since both spouses are liable for tax on a joint return, and a deficiency may be asserted against either spouse. Your records should include a copy of the divorce decree or agreement of separate maintenance, which may be needed to substantiate alimony payments (which, for pre-2019 divorces, are deductible by the payor spouse and included in the payee's income) and distinguish them from child support or a property settlement. Your records should also include agreements or decrees over custody of children and any agreements about who is entitled to claim them as dependents. Retain records of the cost of all jointly-owned property. Also, get records as to the cost or other basis of all property your spouse or former spouse transferred to you during your marriage or as a result of the divorce, because your basis in that property is the same as your spouse's or former spouse's basis in it was.

You may keep your records in electronic form instead of or in addition to keeping paper copies. The periods for which the records should be kept are the same as for paper records. If your tax records are stored on your computer's hard drive, you should back it up to an external storage device or on paper.

To safeguard your records against loss from theft, fire, or other disaster, you should consider keeping your most important records in a safe deposit box or other safe place outside your home. In addition, consider keeping copies of the most important records in a single, easily accessible location so that you can grab them if you have to leave your home in an emergency. If, in spite of your precautions, records are lost or destroyed, it may be possible to reconstruct some of them. For example, a paid tax return preparer is required by law to retain, for a period of three years, copies of tax returns or a list of taxpayers for whom returns were prepared. Most preparers comply with this rule by retaining copies (sometimes for a longer period than the legally required three years) and can furnish a copy if yours is not available.

With copies of your tax returns stored indefinitely at your residence, you may have to get rid of a few other things taking up your valuable storage space. Maybe you'll sleep better at night, however, knowing that all of those tax returns are tucked away safely in their storage space.

Reduce Your Individual Income Taxes by Contributing to the Illinois Tax Credit Scholarship

gdowell@dowellcpa.com (Greg Dowell) — Mon, 21 Feb 2022 18:18:02 GMT

75% of the qualified contribution is allowed for as an Illinois income tax credit.

The Invest in Kids Scholarship Tax Credit Program was enacted in 2017. Individuals and businesses are allowed to take a credit against their Illinois income taxes to the extent of 75% of their contributions to qualified Scholarship Granting Organizations (SGOs). The SGOs, in turn, use the funds to provide scholarships to students who have a financial need to attend qualified, non-public schools and technical academies in Illinois. K through 12 students who meet the need-based criteria can apply for scholarship through the Program, and the scholarships will cover up to 100% of private school tuition, up to a maximum of the average Illinois cost to educate, which is approximately $13,000. There are also multipliers in the Program that allow for even larger scholarships to students who are gifted, have learning needs, have language barriers to learning, or other special education qualifications.

As an example, a qualifying $1,000 contribution will net a $750 Illinois tax credit. There is a cap to the amount of the credit that can be taken, but the cap is $1 million per year per taxpayer. To hit the $1 million credit cap, a taxpayer can contribute about $1.333 million. To take the Illinois credit, it is very important to note that donors may NOT take a Federal income tax deduction for gifts made to SGOs.

A taxpayer must request approval to make a contribution and receive the Contribution Authorization Certificate prior to making the contribution. Applications for the 2022 tax year became available as of January 1, 2022. To take part in this Program, donors make an account with the Illinois Department of Revenue at mytax.illinois.gov. The registration process can take up to 10 business days, after which donors may reserve their tax credit on a first-come, first-served basis (overall donations to this Program are capped at $100 million, and are further distributed geographically throughout Illinois), and individual donors can choose to contribute to specific SGOs.

This may be one of the better under-the-radar tax credit opportunities out there, if your charitable giving philosophy lines up with the educational purpose of the Scholarship Tax Credit Program. More information may be found on the Illinois Department of Revenue website:

https://www2.illinois.gov/rev/programs/InvestInKids/Pages/default.aspx

Missing: Employees from the Workplace

gdowell@dowellcpa.com (Greg Dowell) — Sat, 19 Feb 2022 00:21:18 GMT

The trend of too few employees persists.

The body content of your post goes here. To edit this text, click on it and delete this default text and start typing your own or paste your own from a different source.

Tax Season Has Begun

Thu, 03 Feb 2022 17:24:29 GMT

2022 Tax Filing Season started January 24: The IRS officially started the 2022 tax season on Monday, January 24 ^th , when the tax agency began accepting and processing 2021 tax year returns. The January 24 start date for individual tax return filers allowed the IRS time to perform programming and testing that is critical to ensuring IRS systems run smoothly. Updated programming helps ensure that eligible people can claim the proper amount of the Child Tax Credit (CTC) after comparing their 2021 advance credits and claim any remaining stimulus money as a Recovery Rebate Credit when they file their 2021 tax return.

Advance Child Tax Credit Information Letters

The IRS will issue information letters to Advance Child Tax Credit (ACTC) recipients. To help taxpayers reconcile and receive all of the Child Tax Credits (CTC) to which they are entitled, the IRS will send Letter 6419 (2021 Advance CTC). The letter will include the total amount of ACTC payments taxpayers received in 2021 and the number of qualifying children used to calculate the advance payments. Taxpayers should keep this and any other IRS letters about ACTC payments with their tax records. Families who received advance payments will need to file a 2021 tax return and compare the CTC payments they received in 2021 with the amount of the CTC they can properly claim on their 2021 tax return. People who received the advance CTC payments can also check the amount of their payment using the CTC update portal available on www.irs.gov . We are encouraging clients to carefully review these 6419 letters for accuracy.

Third Economic Impact Payment (Stimulus payment)

Most eligible people were already issued their third Economic Impact Payment and won’t include any information about it when they file. However, people who didn't qualify for a third payment or did not receive the full amount may be eligible for the 2021 Recovery Rebate Credit based on their 2021 tax situation. They will need the total amount of their third Economic Impact Payment to file an accurate tax return to avoid a processing delay. Taxpayers can sign into their IRS Online Account to view the total amount of the third-round Economic Impact Payment or wait to receive IRS Letter 6475.

IP PIN

The IRS IP PIN (Identity Protection, Personal Identification Number) is a 6-digit number assigned to only eligible taxpayers to help prevent the misuse of their Social Security number on fraudulent federal income tax returns. Most taxpayers don't need an IP PIN. However, you may request one as a proactive step to protect yourself from tax-related identity theft. If you want to request an IP PIN, you must pass a rigorous identity verification process. Spouses and dependents are eligible for an IP PIN if they can pass the identity verification process.

If you know you need an IP PIN to file your taxes and you lost your CP01A letter (or never received it) you can:

· Retrieve your IP PIN online at the IRS's Get an IP PIN site ; or

· Call the IRS at 1-800-908-4490 to have your IP PIN mailed to you. Will take up to 21 days. Pandemic delays it longer.

You can only get IP PINs from the IRS. A webpage from the authentic IRS website will always have a URL (web address) beginning, "https://www.irs.gov". Be cautious. Links to websites which appear in search engine results often appear authentic, but can be fake. To be safe, do not click on the link shown in a search result.

Once you are assigned an IP PIN, each year in early January, the IRS issues a notice in the postal US mail called, Notice: CP01A, which contains your unique 6-digit IP PIN. This number will change for each tax year. To prevent rejection of your electronically filed tax return, this document should be included with your tax return supporting documentation. E-filing is not possible without it.

If you're unable to retrieve your IP PIN online, you may call the IRS at 800-908-4490 for specialized assistance, Monday - Friday, 7 a.m. - 7 p.m. your local time (Alaska & Hawaii follow Pacific Time), to have your IP PIN reissued. An assistor will verify your identity and mail your IP PIN to your address of record within 21 days.
Exceptions:
• If you’ve moved since January 1 of this year, or
• It’s after October 14 and you haven’t filed your current or prior year Forms 1040, 1040A, 1040EZ, or 1040 PR/SS, you’ll need to complete and mail a paper tax return without your IP PIN. The IRS will review your return to confirm it is yours but this may delay any refund you are due.

Electronic Filing and Direct Deposit

In the annual report delivered to Congress, the National Taxpayer Advocate states that “Paper is the IRS’s Kryptonite, and the agency is still buried in it”. As of late December, the IRS had backlogs of 6 million unprocessed original individual returns and 2.3 million amended individual returns. Paper-filed tax returns and paper refund checks will take even longer this year.

The IRS is encouraging taxpayers to file electronically and use direct deposit to get their refunds. Combining e-file with direct deposit is the safest and fastest way to receive a refund. When choosing e-file and direct deposit, most people receive their refunds in less than 21 days. This could take longer if the tax return requires further review which is another reason to confirm your Advanced Child Tax Credits and Economic Impact Payments before filing your return.

Mileage Rate Updates for 2022

gdowell@dowellcpa.com (Greg Dowell) — Mon, 20 Dec 2021 22:46:14 GMT

The IRS recently released Notice 2022-03, which provides the optional 2022 standard mileage rates for taxpayers. These rates are used to compute the deductible costs of operating an automobile for business, charitable, medical or moving expense purposes. In addition, the notice also provides the amount taxpayers must use to calculate reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that may be sued in computing the allowance under a fixed and variable rate plan (FAVR).

The standard mileage rate for 2022 is $.585 per mile for business use. The standard mileage rate is $.14 per mile for charitable purposes (unchanged from 2021), when rendering services to a charitable organization. For medical purposes, the standard mileage rate is $.18 per mile (an increase of $.02 from 2021). Note that this same $.18 rate is used for moving expenses, but the moving expense deduction is suspended by TCJA for tax years before January 1, 2026, except for members of the Armed Forces.

Taxpayers may choose to calculate the actual costs of using their vehicle rather than using the standard mileage rates. If a standard mileage rate is initially used for business purposes, a taxpayer can choose either the standard mileage rate or actual expenses in later years. In the case of a leased vehicle, if the standard mileage is used in the initial year, it must be used for the entire lease period.

For autos used for business, the part of the business standard mileage rate treated as depreciation is $.26 per mile for 2022 (it was also $.26 per mile for 2021).

For purposes of computing the allowance under a FAVR plan in 2022, the standard auto cost may not exceed $56,100 (includes autos, trucks, and vans).

For purposes of the fleet-average valuation rule and the vehicle cents per mile valuation rule, the maximum FMV of autos (including trucks and vans) first made available to employees in calendar year 2022 is $56,100.

Net Operating Losses (NOLs) in 2021

gdowell@dowellcpa.com (Greg Dowell) — Mon, 20 Dec 2021 20:07:50 GMT

The tax treatment of net operating losses ("NOLs") have been in a constant state of flux, it seems. Severely curtailed in recent years in terms of the ability to carryback NOLs to prior tax years, the ability to utilize NOLs to offset income and generate refunds was liberalized once again during the pandemic under the CARES Act. It's important to understand that 2021 is more of a reversion to the law in effect just before the pandemic hit.

Most taxpayers no longer have the option to carryback a net operating loss (NOL). For most taxpayers, NOLs arising in tax years ending after 2020 can only be carried forward. The 2-year carryback rule in effect before 2018, generally, does not apply to NOLs arising in tax years ending after December 31, 2017. As mentioned, the CARES Act provided for a special 5-year carryback for taxable years beginning in 2018, 2019 and 2020. Exceptions apply to certain farming losses and NOLs of insurance companies other than a life insurance company. It's also important to note that for losses arising in taxable years beginning after December 31, 2020, the net operating loss deduction is limited to 80% of the excess (if any) of taxable income determined without regard to the NOL deduction, qualified business income deduction ("QBID" under Section 199A), and foreign-derived intangible income and global intangible low-taxed income (Section 250) deductions over the total NOL deduction from NOLs arising in taxable years beginning before January 1, 2018.

Is My Settlement from a Lawsuit Taxable?

gdowell@dowellcpa.com (Greg Dowell) — Fri, 17 Dec 2021 16:06:42 GMT

Discussion of proceeds from a settlement and medical expenses paid . . .

Proceeds received in a lawsuit can have many different tax implications. Often this depends on the nature of the lawsuit and the reason for the settlement payments, but it can also depend on how past events were treated. This article will touch on some of the more typical situations that occur when a taxpayer receives funds from settling a lawsuit.

If you have ever been injured in an accident, or known someone who has, it's a brutal experience. Not only is there the trauma of the physical injury to deal with, but the aftermath is almost as bad. The last thing an injured person wants to do is to think about a lawsuit - they just want and need to focus on their injuries and healing. The reality, however, is that the injured - and their family - have to consider if their injuries might warrant a personal injury claim. There is also the challenge of hiring a personal injury attorney - there are great PI attorneys out there, but a personal injury will tend to draw out every sketchy attorney who relishes the opportunity to lock in 30% of the settlement proceeds as their fee.

Settling a personal injury case can take years in some instances. Fortunately, there is a little bit of compassion in the Internal Revenue Code that provides that proceeds received in a settlement that relate to personal injury or physical sickness are nontaxable. This is also extended to include proceeds that are received for mental anguish or emotional distress, as long as the amount of the proceeds received for mental anguish or emotional distress resulted from a physical injury or sickness. There is a caveat, however: If a taxpayer previously took itemized deductions for any medical expenses related to those injuries, the proceeds received from the settlement are taxable up to the amount of the deduction that was previously taken.

This can get murky in many cases. For instance, what happens when a settlement is received for personal injury (nontaxable in the year of receipt), and medical expenses are incurred many, many years later, but those expenses are clearly related to the underlying injuries that were incurred by the taxpayer?

Aside from personal injury, if the proceeds received were related to employment, as in the case of unlawful discrimination or involuntary termination, the amount that relates to lost wages is taxable, and is also subject to the normal withholdings for wages (federal and state income tax, as well as social security taxes). Similarly, if one is self-employed, the proceeds received for lost profits from a trade or business are also subject to income tax as well as self-employment tax.

Proceeds received for the loss in value of property are treated differently. Generally, if proceeds received are less than or equal to the adjusted basis in the property (the adjusted basis is usually the purchase price less any allowable depreciation), the proceeds are nontaxable. However, any amount received in excess of the adjusted basis would be taxable gain, and likely reportable as a capital gain on Schedule D or as ordinary income on form 4797.

Note that all interest income received as part of a settlement is taxable income. Proceeds received for punitive damages are also taxable to the recipient. Bear in mind that, if taxable, recipients of these funds could be subject to the need to pay estimated taxes on a quarterly basis (federal and state), or be subject to penalties.

Not only are there physical issues to deal with, legal matters to consider and contend, there are clearly tax matters to negotiate as well. This area can be complicated and each case can be unique. As usual, we suggest talking to a CPA who is qualified and experienced when encountering situations like this.

Year-End Tax Planning for Businesses

gdowell@dowellcpa.com (Greg Dowell) — Wed, 01 Dec 2021 23:22:01 GMT

Tax planning considerations for businesses

Turmoil in the economy, political agendas, and the pandemic may all end up in influencing tax legislation in the immediate future. Until we know of changes with certainty, it is important to plan using the present framework.

With year-end approaching, it is time to start thinking about moves that may help lower your business’s taxes for this year and next. This year’s planning is more challenging than usual due to the uncertainty surrounding pending legislation that could increase corporate tax rates plus the top rates on both business owners’ ordinary income and capital gain starting next year.

Whether or not tax increases become effective next year, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for most small businesses, as will the bunching of deductible expenses into this year or next to maximize their tax value.

If proposed tax increases do pass, however, the highest income businesses and owners may find that the opposite strategies produce better results: Pulling income into 2021 to be taxed at currently lower rates, and deferring deductible expenses until 2022, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all relevant factors.

1. Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2021, if taxable income exceeds $329,800 for a married couple filing jointly, (about half that for others), the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income up to $100,000 above the threshold, and to other filers with taxable income up to $50,000 above their threshold.

2. Taxpayers may be able to salvage some or all of this deduction, by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout) for 2021. Depending on their business model, taxpayers also may be able increase the deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting us.

3. More small businesses are able to use the cash (as opposed to accrual) method of accounting than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test, which is satisfied for 2021 if, during a three-year testing period, average annual gross receipts don't exceed $26 million (next year this dollar amount is estimated to increase to $27 million). Not that many years ago it was $1 million. Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.

4. Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2021, the expensing limit is $1,050,000, and the investment ceiling limit is $2,620,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for interior improvements to a building (but not for its enlargement), elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.
5. The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. So expensing eligible items acquired and placed in service in the last days of 2021, rather than at the beginning of 2022, can result in a full expensing deduction for 2021.

6. Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service this year, and for qualified improvement property, described above as related to the expensing deduction. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2021.

7. Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book- tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs aren’t required to be capitalized under the UNICAP rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS, e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, and where potentially increasing tax rates for 2022 aren’t a concern, consider purchasing qualifying items before the end of 2021.

8. A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for 2021 (and substantial net income in 2022) may find it worthwhile to accelerate just enough of its 2022 income (or to defer just enough of its 2021 deductions) to create a small amount of net income for 2021. This allows the corporation to base its 2022 estimated tax installments on the relatively small amount of income shown on its 2021 return, rather than having to pay estimated taxes based on 100% of its much larger 2022 taxable income.

9. Year-end bonuses can be timed for maximum tax effect by both cash- and accrual-basis employers. Cash- basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to them are established with reasonable certainty. However, the bonus must be paid within 2½ months after the end of the employer’s tax year for the deduction to be allowed in the earlier accrual year. Accrual employers looking to defer deductions to a higher-taxed future year should consider changing their bonus plans before year- end to set the payment date later than the 2.5-month window or change the bonus plan’s terms to make the bonus amount not determinable at year end.

10. To reduce 2021 taxable income, consider deferring a debt-cancellation event until 2022.

11. Sometimes the disposition of a passive activity can be timed to make best use of its freed-up suspended losses. Where reduction of 2021 income is desired, consider disposing of a passive activity before year-end to take the suspended losses against 2021 income. If possible 2022 top rate increases are a concern, holding off on disposing of the activity until 2022 might save more in future taxes.

Year-End Tax Planning for Individuals

gdowell@dowellcpa.com (Greg Dowell) — Wed, 01 Dec 2021 23:12:30 GMT

Actions to consider before year-end

A change in administrations, Congress divided, and a pandemic that won't go away all make for challenging times as we near the end of 2021. These same factors also could be the catalyst for changes in the tax laws for 2021, 2022, and beyond. For individual taxpayers, we offer the following advice: With year-end approaching, it is still worthwhile to take some time to think about moves that may help lower your tax bill for this year and next. This year’s planning is more challenging than usual due to the uncertainty surrounding pending legislation that could, among other things, increase top rates on both ordinary income and capital gain starting next year.

Tax increases could become effective next year, which may change the approach to year-end planning. However, if tax increases do not occur, or if the increase is moderate for a given taxpayer, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for all but the highest income taxpayers, as will the bunching of deductible expenses into this year or next to avoid restrictions and maximize deductions.

If proposed tax increases do pass, however, the highest income taxpayers may find that the opposite strategies produce better results: Pulling income into 2021 to be taxed at currently lower rates, and deferring deductible expenses until 2022, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all relevant factors.

3. Pending legislative changes to the 3.8% net investment income tax NIIT proposed to be effective after this tax year would subject high income (e.g., phased-in starting at $500,000 on a joint return; $400,000 for most others) S shareholders, limited partners, and LLC members to NIIT on their pass-through income and gain that is not subject to payroll tax. Accelerating some of this type of income into 2021 could help avoid NIIT on it under the potential 2022 rules, but would also increase 2021 MAGI, potentially exposing other 2021 investment income to the tax.

4. The 0.9% additional Medicare tax also may require higher-income earners to take year-end action. It applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds, above. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer.

5. Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to net long-term capital gain to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $80,800 for a married couple; estimated to be $83,350 in 2022). If, say, $5,000 of long-term capital gains you took earlier this year qualifies for the zero rate then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses will offset $5,000 of capital gain that is already tax-free.

6. Postpone income until 2022 and accelerate deductions into 2021 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2021 that are phased out over varying levels of AGI. These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may actually pay to accelerate income into 2021. For example, that may be the case for a person who will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or who expects to be in a higher tax bracket next year. That's especially a consideration for high- income taxpayers who may be subject to higher rates next year under proposed legislation.

7. If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional-IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA in 2021 if eligible to do so. Keep in mind that the conversion will increase your income for 2021, possibly reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for those potentially subject to higher tax rates under pending legislation.

8. It may be advantageous to try to arrange with your employer to defer, until early 2022, a bonus that may be coming your way. This might cut as well as defer your tax. Again, considerations may be different for the highest income individuals.

9. Many taxpayers won't want to itemize because of the high basic standard deduction amounts that apply for 2021 ($25,100 for joint filers, $12,550 for singles and for marrieds filing separately, $18,800 for heads of household), and because many itemized deductions have been reduced or abolished, including the $10,000 limit on state and local taxes; miscellaneous itemized deductions; and non-disaster related personal casualty losses. You can still itemize medical expenses that exceed 7.5% of your AGI, state and local taxes up to $10,000, your charitable contributions, plus mortgage interest deductions on a restricted amount of debt, but these deductions won't save taxes unless they total more than your standard deduction. In addition to the standard deduction, you can claim a $300 deduction ($600 on a joint return) for cash charitable contributions.

10. Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, a taxpayer who will be able to itemize deductions this year but not next will benefit by making two years' worth of charitable contributions this year. The COVID-related increase for 2021 in the income-based charitable deduction limit for cash contributions from 60% to 100% of MAGI assists in this bunching strategy.

11. Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2021 deductions even if you don't pay your credit card bill until after the end of the year.

12. If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2021, consider asking your employer to increase withholding of state and local taxes (or make estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2021. But this strategy is not good to the extent it causes your 2021 state and local tax payments to exceed $10,000.

13. Required minimum distributions RMDs from an IRA or 401(k) plan (or other employer-sponsored retirement plan) have not been waived for 2021, as they were for 2020. If you were 72 or older in 2020 you must take an RMD during 2021. Those who turn 72 this year have until April 1 of 2022 to take their first RMD but may want to take it by the end of 2021 to avoid having to double up on RMDs next year.

14. If you are age 70½ or older by the end of 2021, and especially if you are unable to itemize your deductions, consider making 2021 charitable donations via qualified charitable distributions from your traditional IRAs. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. However, you are still entitled to claim the entire standard deduction. (The qualified charitable distribution amount is reduced by any deductible contributions to an IRA made for any year in which you were age 70½ or older, unless it reduced a previous qualified charitable distribution exclusion.)

15. Take an eligible rollover distribution from a qualified retirement plan before the end of 2021 if you are facing a penalty for underpayment of estimated tax and increasing your wage withholding won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2021. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2021, but the withheld tax will be applied pro rata over the full 2021 tax year to reduce previous underpayments of estimated tax.

16. Consider increasing the amount you set aside for next year in your employer's FSA if you set aside too little for this year and anticipate similar medical costs next year.

17. If you become eligible in December of 2021 to make HSA contributions, you can make a full year's worth of deductible HSA contributions for 2021.

18. Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2021 to each of an unlimited number of individuals. You can't carry over unused exclusions to another year. These transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

19. If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster- related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2021 return normally filed next year), or on the return for the prior year (2020), generating a quicker refund.

20. If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in 2021 to maximize your casualty loss deduction this year.

These are just some of the year-end steps that can be taken to save taxes for individuals. You may require planning that is tailored to your specific situation. If that is the case, please reach out to a professional at Dowell Group. If you are looking for year-end steps to consider for businesses, please check our articles for the business-oriented version of this article.

Stock Appreciation Rights

gdowell@dowellcpa.com (Greg Dowell) — Thu, 07 Oct 2021 23:39:56 GMT

Overview of Stock Appreciation Rights (SARs)

by Gregory S. Dowell

October 8, 2021

We recently discussed phantom stock in a previous blog. Stock appreciation rights (SARs) are similar to phantom stock units insofar as SARs represent the right to receive the appreciation in value of corporate stock that accrues between the date the SARs are issued and the date they are exercised. The employee generally can exercise the SAR at any time before the date his employment is terminated. Typically, when the employee exercises the SAR, either the corporation pays cash to the employee based on the value of the SAR (a “naked” SAR) or, if the SARs are issued in conjunction with a stock option plan, the value of the SARs can be used to fund the employee's exercise of the stock option.

The employee does not recognize income until the taxable year in which he exercises the SAR and the corporation pays the employee the value of his SAR. The corporation can then deduct the amount of compensation paid to the employee based on the value of the SAR.

The issuance of a naked SAR does not violate the single class of stock requirement ( IRS Letter Ruling 882802 9, relating to phantom stock plans). Moreover, even if the SAR is issued in conjunction with a stock option, the issuance of the SAR should not create a second class of class provided the SAR: (i) does not convey the right to vote; (ii) is an unfunded and unsecured promise to pay money or property in the future; (iii) is issued to an individual who is an employee in connection with the performance of services for the corporation; and (iv) is issued pursuant to a plan with respect to which the employee is not currently taxed on income.

If the SAR meets the above requirements, it should not be treated as outstanding stock of the corporation. Therefore, SARs should not be considered in determining whether the stock of the corporation confers different rights with respect to distribution and liquidation proceeds for purposes of applying the single class of stock rules for S corporations.

Phantom Stock

gdowell@dowellcpa.com (Greg Dowell) — Thu, 07 Oct 2021 23:16:41 GMT

Using phantom stock as a way to motivate and align interests of key employees.

October 7, 2021

by Gregory S. Dowell

Many closely-held businesses look for ways to attract and retain high-level employees who are key to the success of the business. There is a huge desire to lock in and focus everyone's interests on what's best for growing the company, whether it's a matter of growing sales or improving the bottom line or improving the return on equity overall. In a public company, it's much easier, because the stock is actively traded in the market place. Public companies can use warrants or stock options or restricted stock units to achieve these objectives. Due to the very broad ownership base in a public company and the oversight by the SEC, it is unlikely that there will be governance issues downstream. However, giving up the equity of the company to key employees is often not the best choice for smaller non-publicly traded businesses, even though it might only result in a very minority position to the key employee. That's because opening up the ownership ranks also opens up the company to more complications, scrutiny, and exposure. Given those obstacles, businesses have to look for other means to motivate employees and align interests for the betterment of the business.

One way that smaller businesses can motivate and retain key employees is to offer "phantom stock" in the business to non-owner executives. Phantom stock, as the name implies, does not involve ownership of actual shares of corporate stock. Rather, under a phantom stock plan, the employee is assigned phantom stock units, the value of which is based on some formula relating to the stock. The company can determine what key metrics are most critical to the long-term success of the business and shape the phantom stock plan accordingly. Components of the formula that affects the value of the units typically include amounts distributed by the corporation on actual shares of stock and the appreciation in the value of the stock that accrues between the date the units are issued and the date of settlement. The settlement date usually refers to the date on which the employee's employment with the corporation is terminated. The formula must be respected and values determined on a regular basis.

From a tax perspective, the employee does not recognize income until the taxable year in which the corporation pays the employee the value of his phantom stock units. In said year, the corporation can then deduct the amount of compensation paid to the employee based on the value of the phantom stock units. Phantom stock plans have been recognized by the IRS as valid deferred compensation arrangements. As a deferred compensation arrangement, a phantom stock plan should not violate the single class of stock requirements of Internal Revenue Code section 1361.

If this strategy appeals to a business owner, it is recommended to engage legal counsel with familiarity in this subject area to draft the plan.

Health Savings Accounts - An Overview

gdowell@dowellcpa.com (Greg Dowell) — Mon, 30 Aug 2021 17:34:09 GMT

Health Savings Accounts - A General Overview

As the cost of employee health care benefits continues to escalate, one way to help manage the costs of these benefits is through the use of a health savings account (HSA). For eligible individuals, HSAs offer a tax-favorable way to set aside funds (or have their employer do so) to meet future medical needs. Here are the key tax-related elements:

contributions you make to an HSA are deductible, within limits,
contributions your employer makes aren't taxed to you,
earnings on the funds within the HSA are not taxed, and
distributions from the HSA to cover qualified medical expenses are not taxed.

For 2021, a “high deductible health plan” is a plan with an annual deductible of at least $1,400 for self-only coverage, or at least $2,800 for family coverage. For self-only coverage, the 2021 limit on deductible contributions is $3,600. For family coverage, the 2021 limit on deductible contributions is $7,200. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $7,000 for self-only coverage or $14,000 for family coverage.

HSAs may be established by, or on behalf of, any eligible individual.

Deduction limits. You can deduct contributions to an HSA for the year up to the total of your monthly limitations for the months you were eligible. For 2021, the monthly limitation on deductible contributions for a person with self-only coverage is ¹ / ₁₂ of $3,600. For an individual with family coverage, the monthly limitation on deductible contributions is ¹ / ₁₂ of $7,200. Thus, deductible contributions are not limited by the amount of the annual deductible under the high deductible health plan.

However, if an individual is enrolled in Medicare, he is no longer an eligible individual under the HSA rules, and so contributions to his HSA can no longer be made.

As you can see, HSAs offer a very flexible option for providing health care coverage, but the rules are somewhat involved.

2021 American Rescue Plan Act Excludes Some Unemployment Income

Thu, 18 Mar 2021 23:49:19 GMT

2020 income tax returns are impacted -

The American Rescue Plan Act of 2021 was enacted recently, and it makes the first $10,200 of unemployment benefits nontaxable for households that earn up to $150,000 of income. That benefit applies to 2020 unemployment income received. If an individual has already filed an income tax return and is effected by this new provision (and paid tax on unemployment benefits), the IRS is asking taxpayers not to file an amended return at this time. Just today, the IRS has indicated that it will issue automatic refunds to any individuals so affected.

IRS Extends Due Date for Individual Income Tax Return Filings

Thu, 18 Mar 2021 23:38:32 GMT

But caveats apply -

On March 17, 2021, the IRS announced that it was postponing the due date for all individual returns. No other types of tax returns for other entities were included in this announcement, so relief is only for individuals. The due date, which was April 15th, has been pushed out to May 17th. The IRS plans to issue formal guidance soon offering more details on the announcement.

Note that the deferred due date applied only to individual taxpayers at this time. Individuals will not need to file an extension form (form 4868) to get the benefit of the extension to May 17th. Taxpayers seeking more time to file their returns will file the extension form by the May 17th date, which will push the due date out to October 15th. Note that any taxes due for 2020 can be paid by May 17th, and no interest or penalties will apply.

However, taxpayers who pay quarterly estimates should understand that the due date for paying the 1st installment has not changed - it remains to be April 15th. As a practical matter, many taxpayers who pay estimated taxes will want to stay on track with the April 15th deadline, as they will want to know their final 2020 income tax liability in order to calculate the 1st quarter 2021 installment. Also note that no states have indicated yet if state tax deadlines will be similarly extended.

Illinois Fund to Help Small Nonprofits

Wed, 03 Feb 2021 23:16:45 GMT

Small nonprofits should consider if they might qualify for funding.

In 2007, the Charitable Trust Stabilization Fund was created to help small nonprofits in Illinois. Qualifying small nonprofits, defined as those with annual budgets of $1 million or less, can apply for grants. The grants go before an 11-member committee that oversees the management of the Fund.

Applications for the Spring 2021 grant cycle will be taken from January 1st through March 31st, in three categories: food programs; housing programs; and workforce and economic development. Those nonprofits that are located in areas of pervasive poverty, unemployment, and economic distress will be given special attention. The applications are completed online. More information, and access to the online application, can be found at the following address:

https://illinoistreasurer.gov/Office_of_the_Treasurer/Charitable_Trust

Charitable Contribution Strategies for 2021

Tue, 02 Feb 2021 17:02:51 GMT

Considerations for charitable giving in 2021

The CARES Act, which took effect in 2020 as a response to the coronavirus pandemic, included some provisions that impacted charities for 2020 and 2021. As covered in a previous article, one of those changes was to allow $300/$600 deductions for gifts to qualified charities by single and joint filers, regardless of whether they were able to itemize or not. That was a nice benefit, as many taxpayers stopped itemizing under the TCJA a couple of years ago. Other changes were made to the Federal tax code which also impacted individuals who give to charity.

One of those other changes was in the limitation on how much in the way of charitable contributions made during the year could be deducted on that year's income tax return. The limitation on charitable deductions for individuals that was generally 60% of modified adjusted gross income doesn't apply to cash contributions made to public charities in 2020 or 2021 (again, this limitation is lifted for cash contributions). As a result of the CARES Act, an individual can gift as much as 100% of their modified adjusted gross income.

While it is not a change, the ability to gift a required minimum distribution (RMD) directly to a charity continues to be a great tax saving option in many cases. Specifically, an individual who has reached age 72 in calendar year 2020 (the age was 70 1/2 up to tax year 2019, when the SECURE Act increased the age for RMDs) can distribute taxable traditional and Roth IRA amounts of up to $100,000 directly to certain tax-exempt charities. In such a case, the individual donor does not recognize the income from the RMD, and does not receive a deductible charitable contribution. This can be a great way to get a benefit for a taxpayer who does not itemize and who would have given the money to charity, regardless. Without this election, such a taxpayer would have recognized taxable income from the RMD and made a nondeductible contribution. With the election, the taxpayer avoids having to report the RMD as taxable income. This may also help some of the taxpayer social security from being federally taxed as well. One of the keys is that the contribution must go directly to the qualifying charity from the IRA custodian, so a little interaction with the custodian is necessary. Further, the organization has to be a public charity, and not all charities have this designation.

Another way to make a gift is to consider using appreciated securities that have been held for the long term, particularly if an individual has enjoyed significant appreciation in a stock. The stock can be given to a charity, and the individual gets a deduction for the fair value of the stock - which effectively "gifts" away the taxpayer's capital gain. The charity pays not tax on the stock gift received, and typically turns around and immediately sells the stock.

There are multiple opportunities to maximize charitable giving, and the best strategy will often need to be fine-tuned for the specific situation.

PPPL - Part 2 Is Now Available to Small Businesses

gdowell@dowellcpa.com (Greg Dowell) — Tue, 19 Jan 2021 14:21:53 GMT

More help is on the way for small businesses.

January 19, 2021

by Gregory S. Dowell

On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CAA, 2021) into law. The CAA includes Division N - Additional Coronavirus Response and Relief (ACRR), which has a provision that provides for Paycheck Protection Program (PPP) Second Draw loans.

As quick background, the CARES Act authorizes the Small Business Administration (SBA) to make loans to qualified businesses under certain circumstances. The provision established the PPP, which provides up to 24 weeks of cash-flow assistance through 100% federally guaranteed loans to eligible recipients to maintain payroll during the coronavirus (COVID-19) pandemic and to cover certain other expenses. The Paycheck Protection Program Flexibility (PPPF) Act made substantial changes to the PPP, including decreasing the percentage that loan proceeds must be used on payroll costs from 75% to 60%, thereby increasing the percentage that may be used for nonpayroll costs such as rent, mortgage interest and utilities from 25% to 40%. Additionally, the PPPF Act permits borrowers to defer payments of principal, interest, and fees to 10 months after the last day of the covered period (the earlier of 24 weeks or December 31, 2020). Prior to the PPPF Act, the deferral period would end after six months. The application period closed on August 8, 2020. The SBA began approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders on October 2, 2020.

That brings us to the Paycheck Protection Program Second Draw Loans. ACRR permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts may take a second draw from the PPP of up to $2 million.

Eligible entities - Prior PPP borrowers must meet the following conditions to be eligible for the second draw loans:

• Employ no more than 300 employees per physical location;

• Have used or will use the full amount of their first PPP loan ; and

• Demonstrate at least a 25% reduction in gross receipts in the first, second,or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after January 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.

Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives.

Loan terms - Borrowers may receive a second loan of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or the calendar year. However, borrowers in the hospitality or food services industries (NAICS code 72) may receive loans of up to 3.5 times average monthly payroll costs. Only a single second draw is permitted to an eligible entity.

Gross receipts and simplified certification of revenue test - Second draw loans of no more than $150,000 may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement. Non-profits and veterans organizations may use gross receipts to calculate their revenue loss standard.

Loan forgiveness - Like the first PPP loan, the second draw loan may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as such as rent, mortgage interest and utilities of 40%.

Application of exemption based on employee availability - ACRR extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, applies the rule of reducing loan forgiveness for the borrower reducing the number of employees retained and reducing employees salaries in excess of 25%.

Clarification of tax treatment of Paycheck Protection Program loans - Sec. 276 clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. This provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven, and that the tax basis and other attributes of the borrower s assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act. The provision provides similar treatment for Second Draw PPP loans, effective for tax years ending after the date of enactment of the provision.

An Overview of Joe Biden's Tax Plans

gdowell@dowellcpa.com (Greg Dowell) — Wed, 06 Jan 2021 19:54:26 GMT

A quick high-level summary of possible changes under President-elect Biden.

by Gregory S. Dowell

January 6, 2021

Assuming we have a transition of the presidency (a hesitation that would have seemed silly in any other presidential transition), what would a Joe Biden presidency look like, in terms of tax implications? Here is a very quick overview of changes impacting individuals, estates, businesses, and corporations:

Highest individual tax rate will increase to 39.6% (up from the current 37%).
Increase in Social Security taxes on employees making more than $400,000. Currently, SS tax is paid only on the first $137,700 of wages or self-employment income (indexed each year for inflation). The SS tax rate is 12.4%, divided equally between employee and employer, or born in full for those who are self-employed.
Increase in capital gains rate on those with income in excess of $1 million; capital gains would be taxed at the same rate as ordinary income, or 39.6%.
Eliminate the 20% Qualified Business Income deduction for those with taxable incomes over $400,000.
Reintroduce a phase-out of itemized deductions as income increase, and cap the total benefit of itemized deductions at a rate of 28%.
Instead of allowing a deduction for retirement contributions, so that the deduction is worth more as a tax bracket increases, all contributions would generate a refundable credit at the same percentage rate, regardless of the individual's tax rate.
Expansion of child and dependent care credit to $8,000 - up from $3,000.
New first-time homebuyer's credit of up to $15,000, advanced to the time of purchase, rather than the time the return is filed.
Increase the child tax credit to $3,000 ages 6 to 17 and $3,600 for children under 6, and make it fully refundable.
Estate tax changes would include an elimination of the step-up in basis at death, presumably taxing all appreciation at death.
Reduce the estate tax exemption to $3.5 million and the maximum rate to 45%.
Increase corporate tax rate to 28% from the current 21%.
Create a new "minimum" tax on corporations.
Significant penalties for offshore production by US companies.
Provide a "made in USA" credit for companies making investments that create jobs in the US.

Charitable Contribution Break for 2020 Standard Deduction Filers

gdowell@dowellcpa.com (Greg Dowell) — Wed, 06 Jan 2021 19:04:00 GMT

A special break for those who don't itemize deductions . . .

by Gregory S. Dowell

January 6, 2021

Under the tax act known as TCJA, many taxpayers were no longer able to itemize deductions and were better off taking a standard deduction. With a standard deduction, the amounts given to charity are not deductible. Prior to 2020, only those individuals who itemized their deductions could get a tax benefit for the amounts given to a nonprofit organization. That changed, however, with the coronavirus-related rules that came out in 2020. A new deduction is available in 2020 for those who take the standard deduction, rather than itemize. In those cases, a deduction may be taken for up to $300 of cash (cash, not noncash) contributions made to a public charity, such as a church, school, etc. This same expansion does not apply to funds given to a donor advised fund or to a IRC Section 509(a)(3) supporting organization. The same rules apply as far as substantiation, in that the burden remains with the taxpayer to prove the contribution and to have a receipt from the charity. In other words, this is not an automatic extra $300 that is added to the standard deduction. In 2021, a married couple filing jointly can deduct up to $600 of such contributions if they take the standard deduction.

2021 Mileage Rates Change

Wed, 23 Dec 2020 02:23:56 GMT

New Rates for 2021 for Business, Medical, and Charitable Miles

The IRS recently released mileage rates and, yes, those rates have decreased again for 2021. Some rates to note:

Business use - for a car, van, pickup truck, or panel truck, the optional standard mileage rate for 2021 will be $.56 per mile (down from $.575 per mile in 2020). This is also the maximum rate that an employer can reimburse an employee without substantiating the actual expense incurred.
Medical care - driving is deductible at $.16 per mile.
Charitable expense - remains at $.14 per mile.

Congress Unites and Offers More Relief

Wed, 23 Dec 2020 02:09:14 GMT

Bill on President's Desk for Signature

December 22, 2020

Gregory S. Dowell

It tooks months to get this point, but Congress finally seems to have coalesced around providing support to US businesses and American taxpayers. The bill sits on President Trump's desk at this time, where it is hoped that it will be signed soon - before any politicians change their mind. The bill is known as the Consolidated Appropriations Act, 2021, HR 133. That unwieldly title may offer real relief to suffering taxpayers.

A few of the highlights:

Quick additional relief for individuals - provides a refundable tax credit at $600 per taxpayer ($1,200 for married taxpayers filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married taxpayers filing jointly) at a rate of $5 per $100 of additional income.
Congress thankfully addressed and reversed the IRS' position that the expenses paid by a business with Paycheck Protection Loan proceeds were not deductible. Congress failed to address this in the original CARES Act, and the IRS stepped in and with a heavy hand indicated that any such expenses paid with funds that were not claimed as income would be non-deductible. Despite several Congressional leaders objecting, the IRS held tight to its position. Allowing said expenses to be deductible would apply to the original PPPL proceeds, as well as any additional PPPL proceeds a business might receive.
Educator expenses - provides that the cost of personal protective equipment qualifies for the educator expense deduction.
Payroll tax credits - extends the refundable payroll tax credits for paid sick and family leave, through the end of March 2021.
Employee retention tax credit - extends the CARES Act employee retention tax credit (ERTC) through June 30, 2021. Among other changes, it increases the credit rate to 70%, and increases the limit on wages from $10,000 per year to $10,000 per quarter.
Full deduction for business meals - for expenses incurred after 12-31-20, temporarily allows a 100% business expense deduction for meals as long as a restaurant provides the food or beverage.
Charitable contributions - extends the provision that those who don't itemize may still deduct charitable contributions in 2021, at the rate of $300, or $600 for married couples filing jointly.

Net Operating Losses and Considerations under the CARES Act

Wed, 02 Dec 2020 22:49:55 GMT

Changes with NOLs to consider

December 2, 2020

by Gregory S. Dowell

The CARES Act contained a provision that liberalized the treatment of net operating losses (NOLs) for tax purposes. The intent of Congress was to provide some relief to businesses by allowing businesses with NOLs to carryback those losses for 5 years; carrying back NOLs that result in a refund of prior taxes paid would thereby improve a business' cash flow. Not only did Congress allow the carryback of losses incurred in 2020 (the year of the pandemic), but in an attempt to provide more cash flow to businesses, Congress also allowed losses for 2018 and 2019 to be carried back as well.

So while this may sound simple, this clearly becomes a decision that has to be made on a case-by-case basis, as it still may be more advantageous to carry a loss forward, rather than carrying in back. A taxpayer who anticipates unusually high income in the immediate future, perhaps due to postponed pandemic sales, may very well benefit more by a carry forward, when the marginal tax rates may be higher and the offsetting loss will produce greater results.

A taxpayer may also benefit by considering ways to increase losses in 2018, 2019, or 2020, particularly if there are certain years in the prior 5 years where the taxpayer paid unusually high income taxes. Taxpayers have the ability to increase NOLs in a number of ways, including changing depreciation methods or shortening the depreciable lives of assets, accelerating large equipment purchases, or by combining through other revenue and expense accounts to look for flexibility in what has been recorded. The ability to make changes is clearly limited for 2018 and 2019, but the current tax year 2020 provides much more flexibility in these waning days. In the current year 2020, for instance, taxpayers may be able to pay additional compensation or bonuses to increase a 2020 NOL.

Bear in mind that income in the prior years may have been taxed at higher tax rates, prior to the passage of the Tax Cuts and Jobs Act (TCJA). This liberalization, then, allows losses in 2018, 2019, and 2020 to effectively be carried back to offset income that was assessed at higher rates in prior years, resulting in a permanent tax benefit to the taxpayer.

As indicated above, this decision is made on a case-by-case basis, with no one solution fitting every situation. Taxpayers are encouraged to consider their own unique situations.

SBA and US Treasury Indicate a Simplified Paycheck Protection Program Loan Forgiveness Process for Loans of $50,000 of Less

Thu, 29 Oct 2020 00:38:55 GMT

October 8, 2020

by Gregory S. Dowell

The SBA and the US Treasury announced today that they were releasing a simplified loan forgiveness application for the Paycheck Protection Program Loans of $50,000 or less. The intent is to minimize the burden on small businesses that the Program puts on the smallest of businesses.

From the Secretary of the US Treasury, Steven T. Mnuchin: “The PPP has provided 5.2 million loans worth $525 billion to American small businesses, providing critical economic relief and supporting more than 51 million jobs. Today’s action streamlines the forgiveness process for PPP borrowers with loans of $50,000 or less and thousands of PPP lenders who worked around the clock to process loans quickly, We are committed to making the PPP forgiveness process as simple as possible while also protecting against fraud and misuse of funds. We continue to favor additional legislation to further simplify the forgiveness process."

The forgiveness application for loans of $50,000 or less is made on form 3508S. The form is one page and requires a small amount of data, with an additional optional page that transmits demographic information. Three pages of instructions are provided separately. While there is a small amount of data to input and no documentation to attach and submit, the SBA also states that they reserve the right to inspect documentation, if necessary.

This effort by the SBA and Treasury follows months of complaints and concerns that the SBA/Treasury was not doing enough to alleviate the burdens of the smallest of businesses that benefited from the PPPL. Many tax professionals continue to anticipate that this is not the last word on the matter, and that the forgiveness process may be further simplified in the weeks ahead. Given that possibility, it may be worthwhile to hold off on making any such application for the immediate few weeks.

IRS Backlogs Delays Check Processing and Notices

Fri, 21 Aug 2020 14:49:59 GMT

by Gregory S. Dowell

August 21, 2020

W e continue to hear from a number of clients that the IRS has not cashed the checks that were mailed along with the payment vouchers. We’ve also been hearing that paper returns have not been processed by the IRS, despite the fact that they were mailed in months ago.

Last Thursday, the IRS acknowledged the backlog that has occurred, caused by the pandemic. The IRS has confirmed that checks it has received will be posted based on the date the checks were received by the IRS, rather than on the date the IRS processes the check. Taxpayers are urged not to put stop payments on their checks, as this will only add further delays. At the same time, the IRS indicates that it will provide relief from bad check penalties for dishonored checks that it received between March 1st and July 15th of this year.

The IRS indicates it has begun mailing a backlog of letters and notices to taxpayers. As might be expected, many of those letters and notices include payment dates and response dates that have already passed or will be impossible to meet. Rather than generating new corrected notices, the IRS is including an insert titled “Important! You Have More Time to Make Your Payment.”, which goes on to provide the updated payment or response date.

While these glitches are understandable to some degree, given the chaos that ensued with the shutdown of the IRS offices, our advice is that taxpayers should be sure to timely respond to all notices received, and keep copies of all notices and responses made. Understanding the delays in processing that have occurred, we would hesitate to have any client put a stop payment on a check, without more specific and definitive information on the circumstances.

CARES – Recent Tax Changes Affecting Individuals and Businesses

Sat, 01 Aug 2020 16:24:16 GMT

April 1, 2020

by Gregory S. Dowell

W e hope that you are keeping yourself, your loved ones, and your community safe from COVID-19. Along with those paramount health concerns, you may be wondering about some of the recent tax changes meant to help everyone coping with the Coronavirus fallout. We want to update you on the tax-related provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress’s gigantic economic stimulus package that the President signed into law on March 27, 2020.

Recovery rebates for individuals. To help individuals stay afloat during this time of economic uncertainty, the government will send up to $1,200 payments to eligible taxpayers and $2,400 for married couples filing joints returns. An additional $500 additional payment will be sent to taxpayers for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit).

Rebates are gradually phased out, at a rate of 5% of the individual’s adjusted gross income over $75,000 (singles or marrieds filing separately), $122,500 (head of household), and $150,000 (joint). There is no income floor or ‘‘phase-in’’—all recipients who are under the phaseout threshold will receive the same amounts. Tax filers must have provided, on the relevant tax returns or other documents (see below), Social Security Numbers (SSNs) for each family member for whom a rebate is claimed. Adoption taxpayer identification numbers will be accepted for adopted children. SSNs are not required for spouses of active military members. The rebates are not available to nonresident aliens, to estates and trusts, or to individuals who themselves could be claimed as dependents.

The rebates will be paid out in the form of checks or direct deposits. Most individuals won’t have to take any action to receive a rebate. IRS will compute the rebate based on a taxpayer’s tax year 2019 return (or tax year 2018, if no 2019 return has yet been filed). If no 2018 return has been filed, IRS will use information for 2019 provided in Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement.

Rebates are payable whether or not tax is owed. Thus, individuals who had little or no income, such as those who filed returns simply to claim the refundable earned income credit or child tax credit, qualify for a rebate.

Waiver of 10% early distribution penalty. The additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus (a qualified individual). Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread out. Employers may amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.

Waiver of required distribution rules. Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019.

Charitable deduction liberalizations. The CARES Act makes four significant liberalizations to the rules governing charitable deductions:

(1) Individuals will be able to claim a $300 above-the-line deduction for cash contributions made, generally, to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.

(2) The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.

(3) Similarly, the limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required.

(4) For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

Exclusion for employer payments of student loans. An employee currently may exclude $5,250 from income for benefits from an employer-sponsored educational assistance program. The CARES Act expands the definition of expenses qualifying for the exclusion to include employer payments of student loan debt made before January 1, 2021.

Break for remote care services provided by high deductible health plans. For plan years beginning before 2021, the CARES Act allows high deductible health plans to pay for expenses for tele-health and other remote services without regard to the deductible amount for the plan.

Break for nonprescription medical products. For amounts paid after December 31, 2019, the CARES Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren’t paid under a prescription. And, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements.

Business only provisions

Employee retention credit for employers . Eligible employers can qualify for a refundable credit against, generally, the employer’s 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax) for 50% of certain wages (below) paid to employees during the COVID-19 crisis.

The credit is available to employers carrying on business during 2020, including non-profits (but not government entities), whose operations for a calendar quarter have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also available to employers who have experienced a more than 50% reduction in quarterly receipts, measured on a year-over-year basis relative to the corresponding 2019 quarter, with the eligible quarters continuing until the quarter after there is a quarter in which receipts are greater than 80% of the receipts for the corresponding 2019 quarter.

For employers with more than 100 employees in 2019, the eligible wages are wages of employees who aren’t providing services because of the business suspension or reduction in gross receipts described above.

For employers with 100 or fewer full-time employees in 2019, all employee wages are eligible, even if employees haven’t been prevented from providing services. The credit is provided for wages and compensation, including health benefits, and is provided for the first $10,000 in eligible wages and compensation paid by the employer to an employee. Thus, the credit is a maximum $5,000 per employee.

Wages don’t include (1) wages taken into account for purposes of the payroll credits provided by the earlier Families First Coronavirus Response Act for required paid sick leave or required paid family leave, (2) wages taken into account for the employer income tax credit for paid family and medical leave (under Code Sec. 45S ) or (3) wages in a period in which an employer is allowed for an employee a work opportunity credit (under Code Sec. 51 ). An employer can elect to not have the credit apply on a quarter-by-quarter basis.

The IRS has authority to advance payments to eligible employers and to waive penalties for employers who do not deposit applicable payroll taxes in reasonable anticipation of receiving the credit. The credit is not available to employers receiving Small Business Interruption Loans. The credit is provided for wages paid after March 12, 2020 through December 31, 2020.

Delayed payment of employer payroll taxes . Taxpayers (including self-employeds) will be able to defer paying the employer portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022. Taxes that can be deferred include the 6.2% employer portion of the Social Security (OASDI) payroll tax and the employer and employee representative portion of Railroad Retirement taxes (that are attributable to the employer 6.2% Social Security (OASDI) rate). The relief isn’t available if the taxpayer has had debt forgiveness under the CARES Act for certain loans under the Small Business Act as modified by the CARES Act (see below). For self-employeds, the deferral applies to 50% of the Self-Employment Contributions Act tax liability (including any related estimated tax liability).

Net operating loss liberalizations. The 2017 Tax Cuts and Jobs Act (the 2017 Tax Law) limited NOLs arising after 2017 to 80% of taxable income and eliminated the ability to carry NOLs back to prior tax years. For NOLs arising in tax years beginning before 2021, the CARES Act allows taxpayers to carryback 100% of NOLs to the prior five tax years, effectively delaying for carrybacks the 80% taxable income limitation and carryback prohibition until 2021.

The Act also temporarily liberalizes the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit). For tax years beginning after 2021, taxpayers will be eligible for: (1) a 100% deduction of NOLs arising in tax years before 2018, and (2) a deduction limited to 80% of taxable income for NOLs arising in tax years after 2017.

The provision also includes special rules for REITS, life insurance companies, and the Code Sec. 965 transition tax. There are also technical corrections to the 2017 Tax Law effective dates for NOL changes.

Deferral of noncorporate taxpayer loss limits. The CARES Act retroactively turns off the excess active business loss limitation rule of the TCJA in Code Sec. 461(l) by deferring its effective date to tax years beginning after December 31, 2020 (rather than December 31, 2017). (Under the rule, active net business losses in excess of $250,000 ($500,000 for joint filers) are disallowed by the 2017 Tax Law and were treated as NOL carryforwards in the following tax year.)

The CARES Act clarifies, in a technical amendment that is retroactive, that an excess loss is treated as part of any net operating loss for the year, but isn’t automatically carried forward to the next year. Another technical amendment clarifies that excess business losses do not include any deduction under Code Sec. 172 (NOL deduction) or Code Sec. 199A (qualified business income deduction).

Still another technical amendment clarifies that business deductions and income don’t include any deductions, gross income or gain attributable to performing services as an employee. And because capital losses of non-corporations cannot offset ordinary income under the NOL rules, capital loss deductions are not taken into account in computing the Code Sec. 461(l) loss and the amount of capital gain taken into account cannot exceed the lesser of capital gain net income from a trade or business or capital gain net income.

Acceleration of corporate AMT liability credit. The 2017 Tax Law repealed the corporate alternative minimum tax (AMT) and allowed corporations to claim outstanding AMT credits subject to certain limits for tax years before 2021, at which time any remaining AMT credit could be claimed as fully-refundable. The CARES Act allows corporations to claim 100% of AMT credits in 2019 as fully-refundable and further provides an election to accelerate the refund to 2018.

Relaxation of business interest deduction limit. The 2017 Tax Law generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income (ATI). The CARES Act generally allows businesses, unless they elect otherwise, to increase the interest limitation to 50% of ATI for 2019 and 2020, and to elect to use 2019 ATI in calculating their 2020 limitation. For partnerships, the 30% of ATI limit remains in place for 2019 but is 50% for 2020. However, unless a partner elects otherwise, 50% of any business interest allocated to a partner in 2019 is deductible in 2020 and not subject to the 50% (formerly 30%) ATI limitation. The remaining 50% of excess business interest from 2019 allocated to the partner is subject to the ATI limitations. Partnerships, like other businesses, may elect to use 2019 partnership ATI in calculating their 2020 limitation.

Technical correction to restore faster write-offs for interior building improvements . The CARES Act makes a technical correction to the 2017 Tax Law that retroactively treats (1) a wide variety of interior, non-load-bearing building improvements (qualified improvement property (QIP)) as eligible for bonus deprecation (and hence a 100% write-off) or for treatment as 15-year MACRS property or (2) if required to be treated as alternative depreciation system property, as eligible for a write-off over 20 years. The correction of the error in the 2017 Tax Law restores the eligibility of QIP for bonus depreciation, and in giving QIP 15-year MACRS status, restores 15-year MACRS write-offs for many leasehold, restaurant and retail improvements.

Accelerated payment of credits for required paid sick leave and family leave. The CARES Act authorizes IRS broadly to allow employers an accelerated benefit of the paid sick leave and paid family leave credits allowed by the Families First Coronavirus Response Act by, for example, not requiring deposits of payroll taxes in the amount of credits earned.

Pension funding delay. The CARES Act gives single employer pension plan companies more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until January 1, 2021. At that time, contributions due earlier will be due with interest. Also, a plan can treat its status for benefit restrictions as of December 31, 2019 as applying throughout 2020.

Certain SBA loan debt forgiveness isn’t taxable. Amounts of Small Business Administration Section 7(a)(36) guaranteed loans that are forgiven under the CARES Act aren’t taxable as discharge of indebtedness income if the forgiven amounts are used for one of several permitted purposes. The loans have to be made during the period beginning on February 15, 2020 and ending on June 30, 2020.

Suspension of certain alcohol excise taxes. The CARES Act suspends alcohol taxes on spirits withdrawn during 2020 from a bonded premises for use in or contained in hand sanitizer produced and distributed in a manner consistent with FDA guidance related to the outbreak of virus SARSCoV- 2 or COVID-19.

Suspension of certain aviation taxes . The CARES Act suspends excise taxes on air transportation of persons and of property and on the excise tax imposed on kerosene used in commercial aviation. The suspension runs from March 28, 2020 to December 31, 2020.

IRS information site. Ongoing information on the IRS and tax legislation response to COVID- 19 can be found at https://www.irs.gov/coronavirus .

We hope the above is helpful. Stay safe.

Paycheck Protection Program Flexibility Act

Mon, 08 Jun 2020 14:02:11 GMT

June 8, 2020

By Jason A. Rothenburger

W ith overwhelming bipartisan support, Congress got it right. With so many small businesses that received funds from the Paycheck Protection Program (PPP) struggling to use those funds within the original allotted eight-week time frame, Congress has made the right decision to make some key changes to the PPP, by passing the Paycheck Protection Program Flexibility Act (PPPFA). Business owners can breathe a huge sigh of relief now that those changes have been signed into law.

The original PPP was flawed in a couple of key ways. At around the same time the PPP was rolled out, those seeking unemployment benefits could earn an additional $600 a week in federal unemployment benefit on top of the regular unemployment benefits. This additional benefit allowed some workers to earn more in unemployment benefits then they would be going back to work. Business owners have been struggling to rehire their employees because of this.

The other key flaw in the original PPP was the eight-week covered period to use the funds. Under the original PPP, the eight-week covered period began the day after the PPP funds were received. With the fire drill that was the first round of funding and the threat that the money was going to run out within days or perhaps hours, many business owners were forced to apply for funds, knowing they would not be able to reopen their businesses right away. With the COVID shutdowns continuing longer than they were originally expected to last, many businesses were coming up on the end of the eight-week covered period without having been able to open back up. While the intent of the PPP was to have business owners pay their employees even if they did not open back up, many business owners did not do so. It simply did not make sense for them to pay their employees while shutdown.

Here are the key elements of the Paycheck Protection Program Flexibility Act (PPPFA):

Covered period extended to 24 weeks from eight weeks. Business owners who received PPP funds now have 24 weeks from the funding date of the loan (or December 31, 2020 which ever is earlier) to use those funds.
Repayment period extended from two years to five years. The applicable interest rate remains unchanged at 1%.
The payroll costs percentage has been lowered from 75% to 60%. The original guidance released by SBA required that business owners spend 75% of the amount of their PPP funds on payroll costs. PPPFA reduced that requirement to 60%. Business owners can now use up to 40% of their funding for non-payroll costs (rent, mortgage payments, utilities).

These changes are critical in the uncertain times we all face and are expected to all but guarantee millions of business owners to qualify for full forgiveness. While there are still aspects of the PPP that need further clarification, the PPPFA addresses some of the key unknowns that were a source of a great deal of stress and anxiety for many small business owners.

SBA Announces Safe Harbor for PPP Loans of Less than $2 Million

Thu, 14 May 2020 14:03:45 GMT

May 14, 2020

by Gregory S. Dowell

T he SBA announced on Wednesday, May 13, 2020 that it will assume that businesses that received Paycheck Protection Program loans (PPPL) of less than $2 million have met the required certification to show that they received the loans in good faith. PPPLs were created by law to provide small businesses with resources so that they could continue to maintain their payrolls.

There has been some concern about the requirement to make the certification. Immediately following the first awards of the PPPLs, it became known that many public companies had managed to receive loans. This caused a general outcry that these public companies had access to public markets and other sources of capital, and these larger businesses were preventing other nonpublic businesses from accessing the funds. It was also questioned whether these businesses needed the funds, in the spirit intended by the law.

The Treasury’s Frequently Asked Questions (“FAQ’s”) for the Payroll Protection Program Loans was updated to indicate that “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” The SBA determined that businesses that borrowed less than $2 million were more likely to have met the intent of the law, justifying this safe harbor. Loans in excess of $2 million will continue to be subject to possible SBA audits to insure that the good faith certification standard was met.

IRS Position: Business Can Not Deduct Payroll Expenses Forgiven By a PPPL

Mon, 04 May 2020 14:12:42 GMT

By Gregory S. Dowell

May 4, 2020

T he IRS is lost again without a compass. With many businesses hanging on to to their financial lives by a thread, the IRS has decided to interpret the CARES Act in a way that was not intended by lawmakers. In its recently released Notice 2020-32, The IRS indicates that a business receiving a Paycheck Protection Program Loan (PPPL), which contains a clause for forgiveness if certain payroll and other expenses are incurred in the first 8 weeks following funding, may be in for a surprise. The IRS says that the expenses incurred by the business that are subsequently forgiven are NOT deductible by the business. In coming to this conclusion, the IRS applies Internal Revenue Code Section 265, which says basically that a deduction is not allowable if the expenses are allocable to income that is exempt from taxation. The purpose of Section 265 is to prevent a taxpayer from deducting expenses incurred to earn tax-exempt income; it’s intended to prevent a double-deduction. Another example would be that a business is not allowed to deduct an expense that is subsequently reimbursed. The Code Section is entirely logical; it’s the application of the Code Section to this situation that the IRS has managed to completely mangle.

The CARES Act is a bit of a marvel. It came together very quickly to respond to the crisis created by the pandemic. Anything written that quickly is bound to be a less-than-perfect document, but to nitpick it’s inadequacies would be short-sighted. As is the case with any legislation, even legislation that is debated and honed over much longer periods of time, it is important to look to the intent of the lawmakers. In this case, the lawmakers emphasized that they were giving a huge break to businesses by making the forgiveness of the PPPL nontaxable. Based on the IRS’ interpretation, there is no break to business offered by the law; a business simply has an offsetting transaction if the forgiven loan disallows the payroll and other expenses incurred. It was clearly the intent of the law to allow businesses to deduct the expenses and NOT claim the forgiven debt. Why else would lawmakers claim there was a benefit to businesses?

The IRS does this occasionally – it runs off the rails with an interpretation from time to time. The AICPA, the professional society of CPAs, is making a legislative protest to force the IRS to restate its position. Let’s hope that the lawmakers reflect back on their intent in the Act and give the IRS a stern

warning to get its “act” together.

New Law Refreshes Key Loan Programs for Businesses

Fri, 01 May 2020 14:06:12 GMT

May 1, 2020

by Gregory S. Dowell

I mportant Reminder for Business Owners and Nonprofits

This is a reminder that on April 24th, President Trump signed into law a new bill that added $310 billion to replenish the Paycheck Protection Program Loans (the PPPL was funded at $250 billion) and the Economic Injury Disaster Loans (EIDL was funded at $60 billion). We first communicated to you about these programs in late March and early April. The first funds allocated to both of these programs were exhausted; hence the need for replenishment.

The PPPL may be forgiven if the borrowers maintain their payrolls and meet other criteria. The EIDL has a forgivable feature to it as well, with the cap set at $10,000; any amount not forgiven could be paid back at a 1% interest rate over two years. As of May 1st, the SBA website indicates that they are no longer accepting new applications for the EIDL, as funding has been exhausted. The remainder of this communication will focus only on the PPPL.

Key attributes of the Paycheck Protection Program are:
1. Small business or nonprofit (501 (c)(3)) with fewer than 500 employees (500 employees includes full-time and part-time); includes all affiliates, subsidiaries, and businesses under common control; exceptions apply for businesses in the food service sector, franchises, and SBIC-financed businesses
2. Self-employed individual carrying on a trade or business
3. These loans go up to 10 years, with up to 6 to 12 months of forbearance at the outset
4. Maximum loan amounts are the lesser of $10 million or 2.5 times the average monthly payroll for the 12 months preceding the loan funding
5. Payroll compensation includes tips, medical insurance costs, paid leave, severance, retirement plan contributions, and state and local employment taxes
6. Payroll calculations can include leased employees
7. Individual employee compensation is limited to $100,000 per year
8. All payment obligations must have been in existence prior to 2-15-20
9. No personal guarantees required for these loans

Loan forgiveness is also included:
1. Amounts eligible to be forgiven are amounts spent on payroll, mortgage interest, rent, utilities, and interest on other debt obligations.
2. Loan will be fully forgiven to the extent it is expended during the first 8 weeks following funding, if average number of employees is not changed from the average number of employees from 2-15-19 to 6-30-19 or from 1-1-20 to 2-29-20.
3. No employee may have their compensation reduced during the period by more than 25%
4. Violations of either of the above will result in a proportionate amount of the loan remaining outstanding and the remainder being forgiven. If employees separated between 2-15-20 and 4-27-20 but are rehired by 6-30-20, they will be treated as having been employed throughout the period.
5. Forgiven loan is not taxable for Federal income tax purposes.
6. If any part of the loan is forgiven, employer is not eligible for 2-year deferral of employer’s share of Social Security taxes.

The portion not forgiven will be repayable over a maximum of 10 years, with interest capped at 4%.

Paycheck Protection loans are administered by the Small Business Administration (SBA). The loans may be applied for directly through a bank qualified as an SBA lender or through the SBA.

We have been advised that, due to the expected volume of applications, banks may likely only process loans of existing customers at first.

The actual application document is simple and requires just one numerical input for average monthly payroll. The banks are responsible for gathering all supporting information. Time is of the essence, as the PPPL funds will likely be exhausted in the next few days. We advise businesses and nonprofits who believe they have been impacted by the coronavirus to contact their banks and to apply immediately. Begin compiling all of the necessary documents that the SBA will require as soon as possible, which might include documents to verify:

1) Number of employees as of 2/15/2020.
2) Payroll information from 2019 and projected May 2020 and June 2020 (more guidance to come on acceptable formats)

3) Documentation on leases, mortgages, and utilities:
a. Evidence of payment amounts and balances due on mortgages and leases
b. Utility bills for 2019 to present (electric, gas, water, transportation, telephone, internet)
4) Current 2020 financial statements
5) 2019 financial statements
6) 2019 (if filed), 2018, 2017, and 2016 tax returns
7) Proof of liability insurance
8) Copies of organizational documents, including:
a. Bylaws (for a Corporation); Operating Agreement (for an LLC)
b. Articles of Incorporation (for a Corporation); Articles of Organization (for an LLC)

The situation is fluid and it is important to act quickly. Additional funding may come at a later date, but there is no certainty.

Forgivable Loans – Payroll Protection Program Loans under the CARES Act

Tue, 31 Mar 2020 16:30:45 GMT

by Gregory S. Dowell

March 31, 2020

Important Information for Business Owners and Nonprofits

The Coronavirus Aid, Relief, and Economic Security Act (CARES) that was passed into law over the past weekend contains provisions that affect income taxes for individuals and businesses, as well as paid leave and unemployment benefits. CARES also included $350 billion to help small businesses (including self-employed persons and nonprofits) maintain their payrolls. Known as the Paycheck Protection Program , these loans are backed by the Federal government and may be forgiven if the borrowers maintain their payrolls and meet other criteria. This update is going to address only the loan provision under the Paycheck Protection Program.

Key attributes of the Paycheck Protection Program are:

Small business or nonprofit (501 (c)(3)) with fewer than 500 employees (500 employees includes full-time and part-time); includes all affiliates, subsidiaries, and businesses under common control; exceptions apply for businesses in the food service sector, franchises, and SBIC-financed businesses
Self-employed individual carrying on a trade or business
These loans go up to 10 years, with up to 6 to 12 months of forbearance at the outset
Maximum loan amounts are the lesser of $10 million or 2.5 times the average monthly payroll for the 12 months preceding the loan funding
Payroll compensation includes tips, medical insurance costs, paid leave, severance, retirement plan contributions, and state and local employment taxes
Payroll calculations can include leased employees
Individual employee compensation is limited to $100,000 per year
All payment obligations must have been in existence prior to 2-15-20
No personal guarantees required for these loans

Loan forgiveness is also included:

Amounts eligible to be forgiven are amounts spent on payroll, mortgage interest, rent, utilities, and interest on other debt obligations.
Loan will be fully forgiven to the extent it is expended during the first 8 weeks following funding (but cannot go beyond 6-30-20), if average number of employees is not changed from the average number of employees from 2-15-19 to 6-30-19 or from 1-1-20 to 2-29-20.
No employee may have their compensation reduced during the period by more than 25%
Violations of either of the above will result in a proportionate amount of the loan remaining outstanding and the remainder being forgiven. If employees separated between 2-15-20 and 4-27-20 but are rehired by 6-30-20, they will be treated as having been employed throughout the period.
Forgiven loan is not taxable for Federal income tax purposes.
If any part of the loan is forgiven, employer is not eligible for 2-year deferral of employer’s share of Social Security taxes.

The portion not forgiven will be repayable over a maximum of 10 years, with interest capped at 4%.

Paycheck Protection loans are administered by the Small Business Administration (SBA). The applications for these loans have not been finalized; the expected date of the application’s availability is April 10th or slightly sooner. The loans may be applied for directly through a bank qualified as an SBA lender or through the SBA.

We have been advised that, due to the expected volume of applications, banks may likely only process loans of existing customers at first. We further hear that banks may limit the initial loan to just the forgivable amounts for each borrower, and presumably will circle back around to address other borrowing needs as soon thereafter as possible.

While the applications are not available yet, we advise businesses and nonprofits to begin compiling all of the necessary documents that the SBA will require as soon as possible, which would include documents to verify:

Number of employees as of 2/15/2020.
Payroll information from 2019 and projected May 2020 and June 2020 (more guidance to come on acceptable formats)
Documentation on leases, mortgages, and utilities:

Copies of lease agreements
Copies of mortgages
Evidence of payment amounts and balances due on mortgages and leases
Utility bills for 2019 to present (electric, gas, water, transportation, telephone, internet)

Certification from a representative of the business or organization who is authorized to certify that the document provided is true and correct and that the amount being forgiven was used in accordance with the program’s guidelines for use.
Current 2020 financial statements
2019 financial statements
2019 (if filed), 2018, 2017, and 2016 tax returns
Proof of liability insurance
Copies of organizational documents, including:

Bylaws (for a Corporation); Operating Agreement (for an LLC)
Articles of Incorporation (for a Corporation); Articles of Organization (for an LLC)

The situation is fluid and it is important to act quickly. The best thing that can be done at this time is to gather documents.

Forgivable Loans – Update 3-31-20

Tue, 31 Mar 2020 16:28:53 GMT

The landscape is changing furiously with regard to the Paycheck Protection Program loans, which are the forgivable loans that will be in hot demand. The U.S. Treasury has released information today, which included the application that will be used, along with a list of information for borrowers and lenders. Here are the links that you should be able to cut and paste into your browser:

Application:

https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf

Borrowers Information:

https://home.treasury.gov/system/files/136/PPP%20Borrower%20Information%20Fact%20Sheet.pdf

Lenders Information:

https://home.treasury.gov/system/files/136/PPP%20Lender%20Information%20Fact%20Sheet.pdf

To the detriment of many, many businesses, not all banks are included as lenders at the outset. SBA lenders will be the first place that the Treasury looks to, and their clients will have the smoothest path forward. Other banks are presumably scrambling to get into line, as the Treasury has included provisions to allow other lenders to participate, but they have to apply and receive some level of certification. Best thing businesses and nonprofits can do is to check with their banks to see if they are SBA lenders.

$2 Trillion Relief Package Signed Into Law

Sat, 28 Mar 2020 17:00:53 GMT

by Gregory S. Dowell

March 28, 2020

President Trump signed into law the $2 trillion relief package designed to help businesses and individuals in the U.S. make it through the COVID-19 pandemic. Never has there been a larger economic rescue package in our nation’s history.

O ne of the key elements for individuals is the one-time issuance of stimulus checks, up to a maximum $1,200 per taxpayer and $500 per child, under the age of 17. To qualify, an individual must be a legal resident and not be claimed as a dependent. Qualification is further subjected to an earnings test, with phase outs for single taxpayers with adjusted gross income above $75,000, married couples filing jointly with AGI over $150,000, and heads of household with AGI above $112,500. The IRS will be charged with making these determinations, based on 2019 income taxes or, if the 2019 returns are not yet filed, the 2018 tax return. Some seniors and disabled individuals who don’t need to file income tax returns will also be eligible; in those cases, the IRS will look to the Social Security Administration’s records. Like it or not, the law appears to allow for the system to be “gamed”. The credits are actually an advance on a 2020 tax credit; a credit will be calculated on the 2020 return using the 2019 data, reduced by the advance payment received. Those who hold off filing a 2019 return because their 2018 return would give them a bigger benefit would seem to stand to benefit, as there is no provision in the law forcing them to pay back any such overpayment when they file their 2020 tax returns.

The Treasury Secretary and the IRS have committed to paying the stimulus checks as soon as possible. Those taxpayers who have had refund checks direct-deposited in the past will potentially get their funds in about 3 weeks. Paper checks will be mailed and will lag.

Unemployment benefits will be expanded as well. Federal funds will be added to the State unemployment payments that are being made. Federal funds will be paid in the amount of $600 per week for up to 4 months. On top of that, the regular State unemployment benefits that normally are paid over 26 weeks will be extended an additional 13 weeks.

So when will your stimulus money come? If you’ve used a bank account for direct payments to or refunds from the IRS, your money will be direct-deposited. On Thursday, Treasury Secretary Steven Mnuchin said on CNBC that direct deposits could go out within three weeks. Individuals who don’t have a bank account on file with the IRS will be sent checks in the mail, according to their most recent address on file. That’s likely to take longer. Self-employed individuals, who normally do not qualify for unemployment insurance, will be able to apply. The typical 7-day waiting period the precedes the first unemployment check will also be waived, in an effort to get checks to individuals more quickly.

In an expansion of the Families First Coronavirus Response Act signed by President Trump on March 18th, the new law also addresses sick leave. In businesses with fewer than 500 employees, the law allows up to 12 weeks of family leave (with the first two weeks unpaid) if employees stay home with children whose schools and day care centers have closed because of the pandemic. Workers who were laid off by March 1st but rehired by December 31st will be eligible to the family leave. The family leave pay is calculated at 2/3 of normal pay, capped at $200 per day and an aggregate of $10,000 per worker and a maximum of $1,000 per week. Employers are expected to issue the checks and then get reimbursed by the government.

Employees will also be entitled to 80 hours of paid sick leave at their regular rate of pay. The law caps the pay at $511 on a daily basis, and an aggregate of $5,110 per worker. Part-time workers are also eligible. Eligible workers include those who have been unable to work due to quarantine. Those forced to stay out of work to care for someone with COVID-19 or who has a child whose school or daycare has closed due to the virus are eligible for 2/3 of their normal pay, with a maximum of $200 per day, and an aggregate of $2,000 per worker.

Retirement plans cap eligible loans at $50,000, and that cap has been raised to $100,000. Further, the limitation that loans may not exceed 50% of the 401(k) vested balance has also been waived. The 10% penalty on early withdrawals has been waived on coronavirus-related distributions of up to $100,000, and the amount so withdrawn may be re-contributed to the plan within 3 years. If not re-contributed, the withdrawn amount will be taxed over a 3-year period at ordinary income tax rates. Required minimum distributions for those over age 72 from retirement accounts have also been waived for 2020.

Mortgage relief is also offered. Fannie Mae and Freddie Mac will allow 6 months of deferral and no foreclosures or evictions can take place. Outside of this new law, other banks have also committed to be lenient during the pandemic. Renters gain more protection if they live in buildings that are backed by federal loans.

Relief from student loan payments were also expanded under the stimulus package. Interest will not accrue on federal student loans from April 1st to September 30th, and no payments will be required during that time. However, the Department of Education will treat the loans as if payments were made during this period, thereby reducing student loan debt. Temporarily, private collection agencies will no longer pursue defaulted borrowers.

SBA Disaster Loans Related to COVID-19

Mon, 23 Mar 2020 16:58:08 GMT

by Gregory S. Dowell

March 23, 2020

Small businesses that have suffered substantial economic injury due to COVID-19 may apply for Federal disaster relief loans from the Small Business Administration (SBA). Loans will be available to small businesses and nonprofits to help alleviate the economic impact of COVID-19. A few important notes about these loans:

Small business owners and nonprofits in all US states and territories are eligible for these loans.
These loans can be made for up to $2 million.
The loans can be used to pay for fixed debts, payroll, accounts payable, and other bills that businesses and nonprofits can not pay, due to the impact of the virus.
The loans cannot be used to cover lost profits.
The interest rates on these loans is 3.75% for small business and 2.75% for nonprofits.
Loans can go up to a maximum of 30 years, with terms of the loans determined on a case-by-case basis, considering each borrower’s ability to pay.
Available to employers with 500 or fewer employees.
While the loans offer a one-year deferral of payment, the interest begins accruing on the loans immediately.

Applications for these loans is made online at disasterloan.sba.gov/ela. Due to virus exposure concerns, the SBA is moving all assistance online, where webinars and training videos may be accessed as well.

IRS Issues Notice Relating to Postponement of Due Dates to July 15th

Sat, 21 Mar 2020 17:05:10 GMT

by Gregory S. Dowell

March 21, 2020

Following the recent announcement via tweet from the U.S. Treasury Secretary, the IRS released Notice 2020-18 late on Friday, indicating that due to the ongoing coronavirus pandemic, tax returns due April 15 will not have to be filed until July 15 this year. The IRS Notice indicates that the postponed due date applies to any “individual, a trust, estate, partnership, association, company or corporation” that has a federal income tax return or income tax payment due on April 15th will receive an automatic postponement of the due date to July 15th. There is no need to file an extension form to get this postponement.

N otice 2020-18 further confirms that no interest, penalty, or addition to tax for failure to file a federal income tax return or to pay federal income taxes will accrue between April 15, 2020, and July 15, 2020, for any return or payment postponed by the notice.

Friday’s notice applies only to federal income tax returns and payments, including self-employment tax payments, that would normally have been due on April 15, 2020, for 2019 tax years, as well as to estimated income tax payments due April 15, 2020, for 2020 tax years. The notice explicitly states that it does not apply to any other type of federal tax or to any federal information return.

Many states have not reacted yet to indicate whether they will follow the federal lead on allowing automatic extensions or payments deferrals. As a practical matter, if will be very difficult for states to impose either their original filing due dates or payment due dates following the federal actions, as many states require a taxpayer to calculate a federal return prior to calculating the state return. Further, a state’s requirement to pursue either filing or paying by the original due dates would impose an undue burden on taxpayers and tax preparers.

The Wisdom of Using Your Gut Instinct

Sat, 21 Mar 2020 16:35:11 GMT

by Gregory S. Dowell

February 29, 2020

A local business had taken an ownership position in a distillery in the Midwest. The distillery was the brainchild of one man, and he came to the concept of micro-distillery at exactly the right time. The industry was not set to explode for a couple of years yet, so he was an entrepreneur who was in the right place and the right time, just as the demand curve was accelerating. The distillery business was exciting, and was piggy-backing on the buzz of the microbrewery boom that had taken place. By virtue of knowing my client, the entrepreneur was also fortunate to have the right investor – someone with deep pockets and industry connections that could help the distillery get to market quickly. The plan, as articulated to the investor, was to expand, expand, and expand, selling as many barrels as possible to gain a foothold, then to sell out to one of the big distilling houses.

Everything was rosy during the “dating” stage; the investor was enamored with the entrepreneur and vice versa. However, it wasn’t long before the flow of information from the investor slowed to a trickle. Sure, he was always there with plenty of verbiage and marketing hype, but he didn’t like to put hard, cold financial information in front of the investor. At the same time, there were always capital calls that needed to be made within a tight timeframe – maybe it was a great opportunity to buy supplies or product, or maybe it was a too-good-to-pass-up chance to expand with more equipment, but the demands for cash were always immediate and significant. When the investor had enough of the financial demands and the dancing around, he contacted our firm. He was several million into the deal. The task sounded deceptively simple: Figure out if the distillery was making money. If it wasn’t, what was the reason, and what realistically was the rate of cash burn for the foreseeable future?

The entire experience can be summed up from the initial meetings that were held. From the moment of our first interview with the entrepreneur, we were uncomfortable. He was less than forthcoming when we asked pointed questions about the financials. He said he couldn’t let us look at the accounting records immediately because they had fallen behind with the recordkeeping. Later, he indicated that they lacked the ability to accurately track their expenses and cost of goods sold. Our team of CPAs went on-site to one of their locations (they had two), with the express intent of seeing what data might or might not exist – we were kicking the tires and looking under hood. The visit was planned well in advance, and the business had plenty of time to prepare. From one perspective, the day on-site was wasted, as there was a lot of standing around while the entrepreneur and his internal accounting team attempted to pull the records together. From another perspective, that day told us volumes about the business, re-affirming our initial gut reaction to the business and the entrepreneur. When we finally received information, it was a nearly useful blend of excel spreadsheets and handwritten notes.

This engagement lasted several weeks, with many more delays caused by the entrepreneur and many more reams of bad data. All the while, however, the entrepreneur continued to pressure the investor for another capital infusion. The paradox, of course, was that the entrepreneur could not show that he had been a good steward of what had been entrusted with him, and yet he wanted more. While we were saddled with bad data and an entrepreneur who was interested in obfuscating the truth, our team of CPAs persevered. Using forensic accounting techniques, we pulled together the most reliable financial data possible, so that we could ultimately give our client a sense of the real financial condition of the business, as well as where it was headed. After sharing the results and our insights, it was clear that our investor needed to find an exit strategy, or at least limit any further financial damage. From our perspective, we look back on this engagement as a reminder of the power of doing the fundamental things right in a business. All of the talk and hype may sound clever and mesmerizing, but eventually what counts is financial performance. Transparency is important; when business partners cease being transparent, let the buyer beware.

Families First Coronavirus Response Act – Passed March 18, 2020

Thu, 19 Mar 2020 17:03:21 GMT

by Gregory S. Dowell

March 19, 2020

The President signed the Families First Coronavirus Act (HR 6201, the “Act”) intended to ease the economic consequences stemming from coronavirus (COVID-19) by providing family and medical leave, and sick leave, to employees. The Act further provides tax credits to employers and self-employeds providing the leave. The Act also affects employer-sponsored health plans. Here are details:

F amily and medical leave. The Act includes the Emergency Family and Medical Leave Expansion Act (EFMLEA) (Division C of the Act), which requires employers with fewer than 500 employees to provide both paid and unpaid public health emergency leave to certain employees through December 31, 2020. The emergency leave generally is available when an employee who has been employed for at least 30 days is unable to work or telework due to a need for leave to care for a son or daughter under age 18 because a school or place of care has been closed, or a childcare provider is unavailable, due to an emergency with respect to COVID-19 that is declared by a federal, state, or local authority. The first 10 days of leave may be unpaid and then paid leave is required, calculated based on an amount not less than two-thirds of an employee’s regular rate of pay and the number of hours the employee would otherwise be normally scheduled to work, not to exceed $200 per day and $10,000 in the aggregate. Certain exemptions and special rules apply, and a tax credit may be available (see below).

Emergency paid sick time. Under the Emergency Paid Sick Leave Act (EPSLA) (Division E of the Act), private employers with fewer than 500 employees, and public employers of any size, must provide 80 hours of paid sick time to full-time employees who are unable to work (or telework) for specified virus-related reasons. Part-time employees are entitled to sick time based on their average hours worked over a 2-week period. This amount is immediately available regardless of the employee’s length of employment. The maximum amounts payable vary based on the reason for absence. Employees who are (1) subject to a quarantine or isolation order, (2) advised by a health provider to self-quarantine, or (3) experiencing symptoms and seeking diagnosis, must be compensated at their regular rate, up to a maximum of $511 per day ($5,110 total). Employees caring for an individual described in category (1), (2), or (3), caring for a son or daughter whose school is closed or child care provider is unavailable, or experiencing a “substantially similar condition” specified by the government must receive two-thirds of their regular rate, up to a maximum of $200 per day ($2,000 total). Employers cannot require employees to find a replacement worker or use other sick leave before this sick time. Employers may exclude health care providers and emergency responders, and the DOL can issue regulations exempting businesses with fewer than 50 employees. The sick leave mandate takes effect not later than 15 days after March 18, 2020 (the date of the Act’s enactment) and expires December 31, 2020.

Employer tax credits. The Act provides tax credits to employers to cover wages paid to employees while they are taking time off under the EPSLA and EMFLEA. (Act Sec. 7001; Act Sec. 7003) The credits have three components:

1.a. The EPSLA credit for each employee is equal to the lesser of the amount of his leave pay or either (1) $511 per day while the employee is receiving paid sick leave to care for themselves, or (2) $200 if the sick leave is to care for a family member or child whose school is closed. An additional limit applies to the number of days per employee: the excess of 10 days over the aggregate number of days taken into account for all preceding calendar quarters.

1.b. The EMFLEA credit for each employee is the amount of his leave pay limited to $200 per day with a maximum of $10,000.

2. The amount of the EPSLA and EMFLEA credits are increased by the portion of the employer’s “qualified health plan expenses” that are properly allocable to qualified sick leave wages or qualified family and medical leave wages. Qualified health plan expenses means amounts paid or incurred by the employer to provide and maintain a group health plan (as defined in Code Sec. 5000(b)(1)), but only to the extent that such amounts are excluded from the gross income of employees by reason of Code Sec. 106(a).

3. In addition, the credits allowed to employers for wages paid under the EPSLA and EFMFLEA are increased by the amount of the tax imposed by Code Sec. 3111(b) (the 1.45% hospital insurance portion of FICA) on qualified sick leave wages, or qualified family leave wages, for which credit is allowed under Act Sec. 7001 or Act Sec. 7003.

The credits are refundable to the extent they exceed the employer’s payroll tax.

Employers don’t receive the credit if they’re also receiving the credit for paid family and medical leave in Code Sec. 45S.

The EPSLA and EMFLEA credits may also be taken against the employer’s railroad retirement tax.

These rules apply only to wages paid with respect to the period beginning on a date selected by the Secretary of the Treasury which is during the 15-day period beginning on the date of the enactment of the Act (March 18, 2020), and ending on December 31, 2020.

Comparable credits for self-employeds. The Act also provides for similar refundable credits against the self-employment tax. It covers 100% of a self-employed individual’s sick-leave equivalent amount, or 67% of the individual’s sick-leave equivalent amount if they are taking care of a sick family member, or taking care of a child following the child’s school closing for up to 10 days. The sick-leave equivalent amount is the lesser of average daily self-employment income or either (1) $511/day to care for the self-employed individual or (2) $200/day to care for a sick family member or child following a school closing, paid under the EPSLA.

Self-employed individuals can also receive a credit for as many as 50 days multiplied by the lesser of $200 or 67% of their average self-employment income paid under the EMFLEA.

These rules apply only to days occurring during the period beginning on a date selected by the Secretary of the Treasury, which is during the 15-day period beginning on the date of the enactment of this Act (March 18, 2020), and ending on December 31, 2020.

Employer FICA exclusion. Wages paid under the EPSLA and EFMFLEA are not considered wages under Code Sec. 3111(a) (employer tax – old age, survivors and disability insurance portion of FICA; 6.2%) or under Code Sec. 3221(a) (employer’s railroad retirement tax).

IRS Provides Extension for Federal Income Tax Payments That Would Be Due on April 15th – Tax Returns Must Either Be Filed or Extended

Wed, 18 Mar 2020 17:07:56 GMT

Gregory S. Dowell

March 18, 2020

I n IRS Notice 2020-17: Relief for Taxpayers Affected by Ongoing Coronavirus Disease 2019 Pandemic, the IRS has provided tax payment relief for any person with a federal income tax payment due April 15.

For an affected taxpayer, the due date for making federal income tax payments usually due April 15, 2020 is postponed to July 15, 2020. Any person with a federal income tax payment due April 15, 2020, is affected by the COVID-19 emergency for purposes of the relief described in section III of the Notice (Affected Taxpayer).

Treasury Secretary Mnuchin’s March 17 announcement indicated that the extension was for 90 days, which would have brought the extension to July 14, 2020. The Notice thus provides a 91-day extension.

For an Affected Taxpayer, the due date for making federal income tax payments due April 15, 2020, in an aggregate amount up to the Applicable Postponed Payment Amount, is postponed to July 15, 2020. The Applicable Postponed Payment Amount is up to $10,000,000 for each consolidated group (as defined in Reg §1.1502-1) or for each C corporation that does not join in filing a consolidated return.

For all other Affected Taxpayers, the Applicable Postponed Payment Amount is up to $1,000,000 regardless of filing status. For example, the Applicable Postponed Payment Amount is the same for a single individual and for married individuals filing a joint return. In both instances the Applicable Postponed Payment Amount is up to $1,000,000.

The due date is postponed only for federal income tax payments for 2019 normally due on April 15, 2020 and federal estimated income tax payments (including estimated payments on self-employment income) due on April 15, 2020 for the 2020 tax year.

According to March 18, 2020 Special Edition of e-News for Tax Professionals, the payment postponement of up to $1,000,000 applies to income tax payments due on April 15, 2020 from trusts and estates.

The due date for calendar year C corporations to pay their 2019 income tax is April 15, 2020. Those corporations also must deposit the first installment of their estimated 2020 income tax on April 15, 2020. Thus, both of those types of payments are covered by the Notice. And, while calendar year S corporation 2019 taxes (e.g., the Code Sec. 1374 built-in gains tax) are due on March 15, 2020, and thus aren’t covered by the Notice, the first installment of a calendar year S corporation’s 2020 estimated tax is due on April 15, 2020 and thus is covered by the Notice.

The IRS has not provided a payment extension for the payment or deposit of any other type of federal tax (including payroll taxes and excise taxes) or for the filing of any tax return or information return.

As a result of the postponement of the due date for making federal income tax payments up to the Applicable Postponed Payment Amount from April 15, 2020, to July 15, 2020, the period beginning on April 15, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to pay the federal income taxes postponed by this notice. Interest, penalties, and additions to tax with respect to such postponed federal income tax payments will begin to accrue on July 16, 2020.

In addition, interest, penalties and additions to tax will accrue, without any suspension or deferral, on the amount of any federal income tax payments in excess of the Applicable Postponed Payment Amount due but not paid by an Affected Taxpayer on April 15, 2020.

Taxpayers subject to penalties or additions to tax despite the relief granted may seek reasonable cause relief under Code Sec. 6651 for failure to timely pay tax or seek a penalty waiver under Code Sec. 6654 for failure by to pay estimated income tax, as applicable.

Importantly, the Notice does not provide any filing date extensions. As of this date, all tax returns due on April 15th must either be filed or extended.

90-Day Deferral to Pay in Some Cases – US Treasury Secretary Mnuchin Came So Close to Doing the Right Thing

Tue, 17 Mar 2020 17:09:55 GMT

by Gregory S. Dowell

March 17, 2020

At least we know the US Treasury has finally thought about the burden that COVID-19 has placed on taxpayers and tax preparers, although it’s very puzzling why the Treasury Secretary didn’t go further with relief plans and has willingly continued to put more Americans at risk. During a press briefing on Tuesday, Treasury Secretary Mnuchin indicated that individual taxpayers who owe up to $1 million in federal taxes can defer paying until July 15th. Corporations can defer making payments until then on up to $10 million in federal taxes.

The hole in the plan, to those of us who see the business of tax preparation and tax filing up close and personal, is that the Secretary then stated “all you have to do is file your taxes – you’ll automatically not get charged interest and penalties.” And therein lies the problem that a privileged bureaucrat is surely unlikely to understand. In his mind, filing the tax returns by April 15th should be an uninterrupted process, somehow immune from the threat and unaffected by the corona virus, unlike the operations of other businesses. He does not know or understand that millions of taxpayers file their tax returns by interacting with their enrolled agents, accountants, and CPAs. Many of those are very small businesses and very modest taxpayers who do not interact by the use of portals or Skype or email, but in person – face-to-face and across a desk. Many are elderly who rely on face-to-face interactions with their tax professionals once a year. Many are citizens who are currently, or likely will be, under quarantine and unable to meet with a tax professional.

Why in the world the Treasury would want to put more taxpayers and professionals at risk than necessary is beyond comprehension. Certainly, wealthier business owners, wealthier individuals, and wealthier tax professionals who have access to technology and resources will be able to conduct business during these trying times, albeit with hiccups and interruptions and modifications. Taxpayers and professionals in those categories know how to file extensions and are used to doing so, even in a normal year. This, clearly, is a burden that falls disproportionately on taxpayers and tax preparers who are outside of that wealth box described above. Those the Secretary chose not to help are taxpayers who are more likely to be without a job and without a paycheck as a result of the pandemic.

The correct approach is so simple: Along with suspending ALL federal tax payments, not just of $1 million or $10 million, extend the deadline to file any federal taxes that are due by 90 days. This should have been done by the March 15th deadline for certain entity returns, but that cow has left the barn.

Maybe Secretary Mnuchin will have a keen advisor that alerts him to this injustice, or maybe he will realize it himself in a moment of quiet reflection while he sips his tea from a porcelain cup.

House passes bill corona virus relief bill

Sat, 14 Mar 2020 17:13:08 GMT

Gregory S. Dowell

March 14, 2020

T he House moved quickly over the weekend to pass HR 6201, as a response to the COVID-19 pandemic. The bill includes emergency family and medical leave benefits, emergency paid sick leave benefits, and employer and self-employed tax credits, as well as exclusion from employer FICA tax to help employers cover those benefits.

Employer tax credits. The Act provides tax credits to employers to cover wages paid to employees while they are taking time off under the bill’s sick leave and family leave programs. The sick leave credit for each employee would be equal to his wages, limited to $511 per day while the employee is receiving paid sick leave to care for themselves, or $200 if the sick leave is to care for a family member or child whose school is closed. An additional limit applies to the number of days per employee: the excess of 10 days over the aggregate number of days taken into account for all preceding calendar quarters.

The family leave credit for each employee is limited to $200 per day with a maximum of $10,000.

The credits are refundable to the extent they exceed the employer’s payroll tax.

Employers don’t receive the credit if they’re also receiving the credit for paid family and medical leave.

These rules apply only to wages paid with respect to the period beginning on a date selected by the Secretary of the Treasury which is during the 15-day period beginning on the date of the enactment of the Act, and ending on December 31, 2020. (Act Sec. 7001; Act Sec. 7003)

Comparable credits for self-employeds . The Act also provides for similar refundable credits against the self-employment tax. It covers 100% of a self-employed individual’s sick-leave equivalent amount, or 67% of the individual’s sick-leave equivalent amount if they are taking care of a sick family member, or taking care of a child following the child’s school closing. The sick-leave equivalent amount is the lesser of average daily self-employment income, or $511/day to care for the self-employed individual, or $200/day to care for a sick family member or child following a school closing.

Self-employed individuals could receive a family leave credit for as many as 50 days multiplied by the lesser of $200 or their average self-employment income.

Employer FICA exclusion. Under the Act, sick leave and family and medical leave paid under the Act will not be considered wages under Code Sec. 3111(a) (employer tax – old age, survivors and disability insurance portion of FICA; 6.2%).

C Corps – Worth Another Look After TCJA

Wed, 19 Feb 2020 18:15:05 GMT

by Gregory S. Dowell

February 19, 2020

One of the more dramatic provisions of the Tax Cuts and Jobs Act (TCJA) was the reduction of the overall corporate tax rate to 21%. For a quick backdrop, there are effectively two kinds of corporations for federal income tax purposes. All corporations start out as regular run-of-the-mill corporations – let’s call those “C corporations”. A special provision in the Internal Revenue Code allows certain corporations who meet strict criteria to become a “small business corporation”, commonly called the S corporation. C corps who qualify under the criteria can elect to be S corps – thus giving us the two different kinds of corporations, the C corps and S corps.

B ecause of the benefits of being an S corp, most C corps that could qualify for this status elected to be S corps. Because of a limitation on the number of shareholders, many people assume that S corps are smaller businesses, maybe just a cut above mom-and-pop shops. That is a bad assumption, however. There are some very, very large corporations that have few shareholders and have elected S corp status – so S corps are not necessarily limited to just smaller businesses. Historically, because of the advantages of being an S corp, those businesses that remained C corps were those businesses that had many shareholders (like publicly-traded corporations) and certain other businesses where it was deemed to be strategic to remain a C corp.

Initially, many thought TCJA might dramatically change the landscape for smaller businesses when the highest corporate tax rate was reduced to 21%. While many new C corps were formed as a result of TCJA, in practice we have not seen a mad rush to be a C corp. Largely, that’s because the age-old problem of double-taxation in a C corp still exists, even though it’s less of a problem now with the lower cap of 21%.

Given the interest in C corps, however, it is worth taking a look at some of the basic characteristics of the entity. The following will cover some tax and nontax matters relative to a C corp:

A C corporation is a corporate entity (either U.S. or non-U.S.). If a U.S. corporation, it is organized at the state level and under state law, not the federal level. A corporation comes into being when its organizers file articles of incorporation with a state (or a country, in the case of a foreign corporation). Ownership of a corporation is in the form of stock, and there is no limit to the number of shareholders that can own a single C corporation. In addition, there is no limit on the number of classes of stock that can be issued.
Assets and liabilities: A corporation owns its assets and is liable for its debts. Assuming the corporation has been operating as a separate entity and has respected its corporate identity, shareholders are not liable for corporate debt. The fact that the shareholders are not liable for corporation debt is one of the primary advantages of the corporation as a form or doing business.
Management and employees: The C corporation is managed by its employees, who are hired by the corporation’s board of directors. The members of the board of directors are elected by shareholders. The shareholders do not have a right to directly manage the affairs of the C corporation. Instead, they exercise indirect control over the corporation by electing the board, which then appoints corporate managers.
Shareholders who provide services to a C corporation are treated either as employees or independent contractors, depending on the specific circumstances, and are taxable on compensation received. When shareholders are employees of a C corporation they are eligible to receive tax-free fringe benefits, such as health care benefits. They can also participate in company-sponsored retirement plans.
Taxation of a C corporation: A C corporation is taxable on the income it earns. Shareholders of a C corporation are not directly taxable on this income. A C corporation is the only business form where this is the case. All other forms of business are pass-through entities, where owners are taxed directly on entity-level income.
Although shareholders are not taxed directly on corporation income, they can be indirectly taxable on the income. If a C corporation distributes the income in the form of dividends, then the shareholders pay tax.
Transfers of assets and liabilities to a C corporation: When a C corporation is formed shareholders contribute cash, property, or services to the corporation in exchange for stock; and sometimes the corporation assumes shareholder liabilities (such as debt to which property is subject). Contributions of property and debt in exchange for stock are usually tax-free; however, there are exceptions. When the corporation assumes debt, and the debt exceeds the basis of property transferred in exchange for stock, then the excess debt triggers gain recognition. In addition, transfers of appreciated property to a corporation in exchange for its stock are tax-free only if the transferors of property own at least 80% of the corporation after the transfer.
When stock is received in exchange for services provided to a C corporation, the receipt of stock is usually taxable.
Distributions of property to shareholders: Although the transfer of property to a C corporation is tax-free, the distribution of appreciated property by a corporation to a shareholder is usually taxed. When appreciated property is distributed by a C corporation to a shareholder, either as a dividend or as consideration for the repurchase of stock, the corporation ordinarily recognizes gain as if it sold the property to the shareholder; and, the shareholder recognizes gain equal to the excess of the value of the property received over the shareholder’s stock basis.
Estate planning: The C corporation is a useful device for minimizing estate and gift tax. In general, stock in a C corporation is often valued (for estate and gift tax purposes) at a discount to the value of assets owned by the corporation.

This is just a brief overview, but provides a look at some of the basic characteristics of a C corporation. When choosing an entity type for a business, it is important to take into consideration as many factors as possible. Even if there is no single perfect choice, careful consideration will narrow down the list and ultimately lead to the best possible entity type.

SECURE Act Mainly Impacts 2020 Retirement Planning

Fri, 03 Jan 2020 18:23:33 GMT

January 3, 2020

by Gregory S. Dowell

CPAs who work in tax get really, really tired of last-minute tax bills that get pushed through Congress and signed into law, and it happened again this year. At the end of 2019, President Trump signed into law the SECURE Act, which primarily affects retirement planning (if you’re asked in a game of Trivial Pursuit, SECURE stands for Setting Every Community Up for Retirement Enhancement Act ). Many of the provisions go into effect in 2020, so in the coming months it’s wise to consider the impact of the SECURE Act on your retirement plans.

Some changes are favorable, some not. Here’s a quick rundown of the impact on individuals:

Repeal of the maximum age for traditional IRA contributions.

Not everyone takes an early retirement. Many individuals continue to work later and later in life, sometimes out of necessity, but often out of desire. Odds are you know someone like this. Prior to the Act, these workers were restricted on their ability to make contributions to an IRA. Before 2020, traditional IRA contributions were not allowed once the individual attained age 70½. Starting in 2020, the new rules allow an individual of any age to make contributions to a traditional IRA, as long as the individual has compensation, which generally means earned income from wages or self-employment.

Required minimum distribution age raised from 70½ to 72.

We save money in our IRAs for our retirement, but many people don’t need to pull funds from their IRAs and can afford to let the funds remain invested. Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to account for increases in life expectancy.

For distributions required to be made after Dec. 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72.

Partial elimination of stretch IRAs.

For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) 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 (in the IRA context, this is sometimes referred to as 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 nonspouse beneficiaries are generally required to be distributed within ten years following the plan participant s or IRA owner s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed.

Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).

Expansion of Section 529 education savings plans to cover registered apprenticeships and distributions to repay certain student loans.

A Section 529 education savings plan (a 529 plan, also known as a qualified tuition program) is a tax-exempt program established and maintained by a state, or one or more eligible educational institutions (public or private). Any person can make nondeductible cash contributions to a 529 plan on behalf of a designated beneficiary. The earnings on the contributions accumulate tax-free. Distributions from a 529 plan are excludable up to the amount of the designated beneficiary’s qualified higher education expenses.

Before 2019, qualified higher education expenses didn’t include the expenses of registered apprenticeships or student loan repayments.

But for distributions made after Dec. 31, 2018 (the effective date is retroactive), tax-free distributions from 529 plans can be used to pay for fees, books, supplies, and equipment required for the designated beneficiary s participation in an apprenticeship program. In addition, tax-free distributions (up to $10,000) are allowed to pay the principal or interest on a qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary.

Kiddie tax changes for gold star children and others.

In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which made changes to the so-called “kiddie tax,” which is a tax on the unearned income of certain children. Before enactment of the TCJA, the net unearned income of a child was taxed at the parents’ tax rates if the parents’ tax rates were higher than the tax rates of the child.

Under the TCJA, for tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. Children to whom the kiddie tax rules apply and who have net unearned income also have a reduced exemption amount under the alternative minimum tax (AMT) rules.

There had been concern that the TCJA changes unfairly increased the tax on certain children, including those who were receiving government payments (i.e., unearned income) because they were survivors of deceased military personnel (“gold star children”), first responders, and emergency medical workers.

The new rules enacted on Dec. 20, 2019, repeal the kiddie tax measures that were added by the TCJA. So, starting in 2020 (with the option to start retroactively in 2018 and/or 2019), the unearned income of children is taxed under the pre-TCJA rules, and not at trust/estate rates. And starting retroactively in 2018, the new rules also eliminate the reduced AMT exemption amount for children to whom the kiddie tax rules apply and who have net unearned income.

Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child.

Generally, a distribution from a retirement plan must be included in income. And, unless an exception applies (for example, distributions in case of financial hardship), a distribution before the age of 59-1/2 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. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.

Taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes.

Before 2020, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation for IRA contribution purposes, and so could not be used as the basis for making IRA contributions.

Starting in 2020, the new rules remove that obstacle by permitting taxable non-tuition fellowship and stipend payments to be treated as compensation for IRA contribution purposes. This change will enable these students to begin saving for retirement without delay.

Tax-exempt difficulty-of-care payments are treated as compensation for determining retirement contribution limits.

Many home healthcare workers do not have taxable income because their only compensation comes from “difficulty-of-care” payments that are exempt from taxation. Because those workers do not have taxable income, they were not able to save for retirement in a qualified retirement plan or IRA.

For IRA contributions made after Dec. 20, 2019 (and retroactively starting in 2016 for contributions made to certain qualified retirement plans), the new rules allow home healthcare workers to contribute to a retirement plan or IRA by providing that tax-exempt difficulty-of-care payments are treated as compensation for purposes of calculating the contribution limits to certain qualified plans and IRAs.

RMDs Gifted Directly to Charity – Consider When No Longer Able to Itemize Deductions

Fri, 13 Dec 2019 18:31:29 GMT

December 13, 2019

by Gregory S. Dowell

A couple of years ago, I wrote and posted an article on the option of a taxpayer making a required minimum distribution (RMD) directly to a charity. In light of the Tax Cuts and Jobs Act, this makes even more sense as an option to consider.

As background, a taxpayer is required to take an RMD from his/her individual retirement account (IRA) once the taxpayer reaches the age of 70 1/2. That RMD is considered to be taxable income for the year. Under TCJA, many taxpayers no longer itemize, particularly those who live in states with high income and property taxes (like Illinois, California, or New York). As mortgage interest expenses decrease over time (or are limited by TCJA), once state income and property taxes are removed as an itemized deduction, there often aren’t enough other deductions to allow the taxpayer to itemize (an exception would be if someone had very high medical bills, or gives large amounts to charity, or has high investment interest).

So, if a taxpayer is no longer itemizing, and is required to take an RMD, and ends up giving part or all of the RMD to charity, it’s not a very nice outcome: The taxpayer has taxable income and no charitable deduction.

Hence the need to consider the direct gift to charity from the IRA. There are a few “ifs” to this, but follow through and see if this might apply to your situation: If there is no benefit to itemizing, and if a taxpayer intends to support a charity in any event, and is required to take a required minimum distribution (RMD) from an individual retirement account, making a gift directly from the IRA to the charity makes perfect sense. A gift so made – directly from the IRA to the charity (without going through the hands of the taxpayer) – is not considered as taxable income (and, conversely, no tax deduction is allowed). Up to $100,000 can be donated in this manner on an annual basis. That keeps the taxpayer’s adjusted gross income lower as well, which can help if phaseouts of credits, deductions, or exclusions occur due to a higher AGI. There are very specific rules on how this transaction can be made, the type of charities that qualify (donor advised funds and certain foundations do not quality), and certain custodians may not accommodate a taxpayer’s wishes. Special rules apply as well if the taxpayer has historically made nondeductible contributions to the IRA.

Again, this is a great tool to use, under the right circumstances.

2019 Year End Tax Ideas for Individuals

Fri, 13 Dec 2019 18:29:39 GMT

The following is an excerpt from the Dowell Group year-end newsletter, which covered a range of topics for businesses and individuals.

2019 YEAR-END CHECKLISTS

Individuals – Year-End Tax Planning

Flexible Spending Account – Consider where you stand for this year, and determine if you need to adjust the deductions for next year in your employer’s health flexible spending account (FSA).
Health Savings Account – Make sure you have maximized contributions to your health savings account (HSA).
401(k) plans – check current amounts set aside and fully fund, if you are able, for 2019.
Capital gains and losses – Determine the net short and long-term capital gains and losses recognized thus far; also consider any significant capital gain distributions you might receive from mutual funds or partnership investments, and take into account any capital loss carryovers. Once you understand the overall amounts of net gains and losses, strategize what action you may want to take by the end of this year. It may be appropriate to “harvest” capital losses in your account to offset gains (however, see discussion immediately following on “wash” sales). Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the “maximum zero rate amount” (e.g., $78,750 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year, there is no benefit to selling stocks at a loss, as there is no taxable gain to offset.
“Wash” sales – You might have a stock or bond that shows a loss, but you want to continue to hold that security because you think the price will recover. That security can be sold and the loss recognized, as long as the security is not repurchased for 30 days; if purchased before 30 days, the sale is deemed to be a “wash” sale and the loss is disallowed.
Make an estimate of this year’s tax liabilities – If your situation has been volatile this year, make a quick projection of your Federal and State income taxes to see if you have paid in an adequate amount of Federal and State income taxes. If you are short, you may be able to increase withholdings or bump up the estimated tax payments before year-end. If you look to be overpaid, you can reduce the final quarterly installments.
Using a distribution from a retirement plan to pay a shortfall before year end – Take an eligible rollover distribution from a qualified retirement plan before the end of 2019 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2019. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2019, but the withheld tax will be applied pro rata over the full 2019 tax year to reduce previous underpayments of estimated tax.
Postpone or accelerate income and deductions – Postpone income until 2020 and accelerate deductions into 2019 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2019 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2019. For example, that may be the case where a person will have a more favorable filing status this year than next (for example, head of household versus individual filing status), or expects to be in a higher tax bracket next year.
Defer a bonus – It may be advantageous to try to arrange with your employer to defer, until early 2020, a bonus that may be coming your way. This could cut as well as defer your tax.
Charitable contributions – Consider making any additional charitable gifts by the end of the year. Gifts are only deductible if made to an organized 501(c)3 charity. Be sure to get a receipt from the charity as evidence of the timely gift.
Charitable contributions of appreciated stock – Donating appreciated securities is an effective way of meeting the desire to support a charity while allowing the donor to deduct the full fair market value of the gift. The donor will not pay tax on the capital gain of those securities that were gifted.
Non-cash charitable contributions – Consider making additional noncash charitable gifts by the end of the year, but pay particular attention to the substantiation rules if you are claiming that the fair market value of your gifts exceeded $250. Make a detailed dated list of the donated items and their condition, and affix the list to the receipt; it’s a good idea to take a picture of the goods as well.
Prepay expenses – Consider using a credit card to prepay expenses that can generate deductions for this year (charitable, business, and medical expenses are good examples), even if you do not pay the credit card bill until 2020.
State income taxes – If you expect to owe state and local income taxes when you file your return next year and fear you could incur a penalty for underpayment, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments) before year-end. Be aware that doing so, however, could push your total state and local taxes paid over the $10,000 limit for the year.
AMT – In many cases, AMT will not apply in situations where it has applied in the past for individuals, due to limits on the deductions for state and local taxes and the elimination of miscellaneous itemized deductions. If it does apply, estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2019.
Itemized deductions and “bunching” deductions in one year – Many taxpayers who claimed itemized deductions will no longer be able to do so, due to the increase in the basic standard deduction (to $24,400 for joint filers, $12,200 for singles and married filing separately, and $18,350 for heads of household), and the elimination and restriction of some itemized deductions. The cap on deducting state and local income tax and real estate tax is set at no more than $10,000, and miscellaneous itemized deductions and unreimbursed employee expenses are no longer deductible. You can still itemize medical expenses to the extent they exceed 10% of your adjusted gross income, charitable contributions, and interest (also capped) on qualifying residence debt, but those deductions will not result in a benefit if they do not cumulatively exceed the new, higher standard deduction referenced above. Some taxpayers may be able to work around the new reality by applying a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer will benefit by making two years’ worth of charitable contributions this year, instead of spreading out donations over 2019 and 2020.
Roth conversion – If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA in 2019 if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2019, and possibly reduce tax breaks geared to AGI (or modified AGI).
Required Minimum Distributions (RMDs) – RMDs must be taken from your IRA, 401(k) plan, or other employer-sponsored retirement plan if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70 ½ in 2019, you can delay the first required distribution to 2020, but if you do, you will have to take a double distribution in 2020 (the amount required for 2019 plus the amount required for 2020).
Gifting RMD to charity – If you are age 70-½ or older by the end of 2019, have traditional IRAs, and particularly if you can’t itemize your deductions, consider making 2019 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, which can result in tax savings.
Gifting RMD to charity in the future, if you think you will not be able to itemize – If you were younger than age 70-½ at the end of 2019, you anticipate that in the year that you turn 70-½ and/or in later years you will not itemize your deductions, contribute as much as you can to one or more traditional IRAs in 2019. Then, when you reach age 70-½, do the steps in the immediately preceding bullet point. Doing all of this will allow you to, in effect, convert nondeductible charitable contributions that you make in the year you turn 70-½ and later years, into deductible IRA contributions and reductions of gross income from age 70-½ and later year distributions from the IRAs.
Gifts to family or friends – Make gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $15,000 in 2019 to each of an unlimited number of individuals. You can also gift $30,000 to one person by using your spouse’s exclusion, but note that the IRS requires you to file a gift tax return in this situation.
Education funding – If educational funding is an issue in your family, consider funding 529 plans by the end of the year.
Marriage or divorced during the year – If you married or divorced in the current year, don’t be surprised by the income taxes. If you married during the year, no matter what date, you and your spouse will file either as married with a joint return or as married filing separately. In most cases, it is advantageous to file married joint. Your incomes and deductions will be combined, and that often leads to increased tax liabilities for the year, compared to when you were both single. If divorced during the year, you will file as single or head of household, and you will need to make sure you have paid adequate taxes. If you had a change in marital status, we suggest you call your tax professional.
Dispose of passive activities – The owner of a business should consider disposing of a passive activity in 2019 if doing so will allow the owner to deduct suspended passive activity losses.
Increase basis – The owner of an interest in a partnership or an S corporation may need to increase the basis in the entity so that the owner can deduct a loss from it for 2019.

Individuals – Other Considerations at Year-End

Review your portfolio – The end of the year is a perfect time to analyze your holdings and determine if the risk tolerances and asset allocations are still appropriate for your investment objectives. Consider your age, health, and family issues.
Review the beneficiary designations – Review the beneficiaries named on retirement accounts or insurance policies; consider if assets are titled correctly; determine if a family member should be added as a signer on an account.
Wills and Trusts – If you have not set up wills and trusts, then contact your attorney; call us if you need a reference. If it has been many years since you had your wills and trusts drafted, set up a meeting with your attorney or CPA to review the documents, including the named beneficiaries, guardians, and executors.
Estate planning – For decedents dying from 2019 to 2025, the TCJA increased the amount that is exempt from Federal estate taxes. The exempt amount in 2019 is $11.4 million per individual, and $22.8 million per married couple. States, in some cases, may have lower thresholds for the amounts that are subject to state inheritance taxes.
Grantor (“Living”) trusts – If you have substantial assets, you should consider creating a grantor (also known as living or revocable) trust. If you have a grantor trust, be sure that all assets are held in that trust; brokerage accounts should be titled in the name of the trust.
Power of Attorney – As part of the review of wills and trusts, also consider powers-of-attorney and health care powers-of-attorney you have in force (or should have in force) for all of your family members.
Insurance – Review the various types of insurance coverages you have in place and re-examine your needs. This includes homeowner’s, auto, life, health, disability, umbrella liability, and long-term care.
Family meeting – Consider having a family meeting to give an overview of your investments and objectives, charitable giving strategies and desires, the location of key documents, and names of your key advisors (CPAs, attorneys, bankers, insurance agents, investment advisors, etc.).
Safe deposit box – Make a special point to visit your safe deposit box and inventory (and organize) the contents. Make sure your executor, spouse, or other key person knows where the key is kept.

2019 Year End Tax Newsletter for Businesses

Thu, 12 Dec 2019 15:17:04 GMT

December 12, 2019

The following is excerpted from the Dowell Group newsletter for 2019, which covered a range of topics for individuals and businesses.

2019 YEAR-END CHECKLISTS

Businesses – Year-End Tax Planning

Tax planning at year-end – virtually every business will benefit by doing some year-end tax planning. Bring in your CPA in the analysis; any money spent will help to avoid large surprises, cash flow crises, or penalties.
20% qualified business income deduction – Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. If taxable income exceeds $321,400 for a married couple filing jointly, or $160,725 for all other taxpayers, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in for joint filers with taxable income between $321,400 and $4421,400 and for all other taxpayers with taxable income between $160,700 and $210,700.
20% qualified business income deduction income planning – Considering the above, taxpayers may be able to achieve significant savings by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2019. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don’t make a move in this area without consulting your tax adviser.
Cash basis of accounting – More “small businesses” are able to use the cash (as opposed to accrual) method of accounting in 2019 and later years than were allowed to do so in earlier years. To qualify as a “small business” a taxpayer must, among other things, satisfy a gross receipts test. The gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don’t exceed $26 million. Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.
Expensing equipment purchases under Code Section 179 – In 2018, the expensing limit is $1,020,000, and the investment ceiling limit is $2,550,000. Most depreciable property (not buildings) and off-the-shelf computer software qualify. Expensing also is available for qualified improvement property (generally, any interior improvement to a building’s interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. Many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. The expensing deduction is not prorated for the time that the asset is in service during the year. Property acquired and placed in service in the last days of 2019, rather than at the beginning of 2020, can result in a full expensing deduction for 2019.
Filing due dates – Remember from last year that C corporation and partnership filing deadlines have been swapped. Partnership returns will be due March 15th, while C corporation returns are due on April 15th.
Bonus depreciation – Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment—bought used (with some exceptions) or new—if purchased and placed in service this year. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2019.
Expensing low-cost assets – Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (an AFS is a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, consider purchasing such qualifying items before the end of 2019.
Reasonable compensation – Shareholder-employees must take reasonable compensation for their services, and this continues to be a focus of the IRS. On the positive side, taking reasonable compensation can also open the door to larger retirement plan contributions for the employee-owners. However, the level of compensation can effect the 20% qualified business income deduction, referenced above.
Retirement plans – It is too late to set up a 401k or a Simple plan for 2019, but some options may still available to save on a business owner’s 2019 taxes. If you are self-employed and haven’t done so yet, consider setting a self-employed retirement plan. This is also a good time to consider which retirement plan is the right one for your business for 2020 and future years.
Cancellation of debt – Analyze the specific facts and consider the effect on income and income taxes if debt is cancelled in 2019 or 2020.
Research and development credit – The calculation for the R&D credit is complicated and will typically require a great deal of analysis. However, it provides a credit for every qualifying dollar spent on research and development activity. Historically, the credit has had limited immediate impact to start-up businesses because it was only helpful if the entity had taxable income. The credit can now be used (in a diminished capacity) as a refund to offset payroll taxes. In another change, privately-held businesses can now claim the R&D credit against the AMT. This is important because many new businesses have net operating losses in the early years, which pushes the business into AMT, limiting their ability to benefit from the R&D credit.

Businesses – Other Considerations

Corporate records – update annual resolutions and officer elections.
Good standing – verify that the annual franchise tax return has been filed with the State of incorporation or organization.
Insurance – consult with your advisors, executive team, and insurance agent to determine if your business, and key officers, are adequately insured.
Buy-sell agreement – if your business has multiple shareholders, consider adopting an agreement to orderly transfer those shares in the event of a sale, retirement, or death.
Budget – every business should have a budget or a forecast in place. Assemble your trusted team, pull the data together, study the most recent results, consider objectives for the coming year, and create the budget or forecast.
Benefits – many businesses would benefit by checking their benefit package annually, to be sure that it is competitive with the marketplace. This includes retirement accounts offered, insurance options, as well as “soft” benefits like remote work and flex-time.
Compensation – consider if the level of pay of your current employees is competitive. In today’s competitive environment, it is often much easier to retain a key employee than recruit one.
Security – cyber security should rank at the top of everyone’s list. Discuss weaknesses in your server, systems, or procedures with internal staff and with experts in the field. Also consider physical security; is your building secured with proper alarms, cameras, etc.?
Entity type – even though making a change is not likely, sit down with your attorney and CPA to discuss entity type; maybe your business would benefit by considering a different structure. Limited liability companies have grown in popularity, but there is also a place for S corporations, and C corporations may still offer some advantages.
Ownership structure – there may be a number of reasons to consider the ownership of a business, including the need to reward and retain key employees, to gain income tax or estate tax advantages.
Acquisitions – expanding in the marketplace may offer strategic advantages to a business, whether to open up new markets, access new customers, or gain skill sets. Identifying key targets may be something to consider in the new year, if it fits with the goals of ownership

Gift Tax Return Basics

Mon, 02 Dec 2019 18:27:27 GMT

by Gregory S. Dowell

December 2, 2019

It comes as a surprise to some people to learn that they may have to file a gift tax return to report the funds they gave to their daughter to buy a house. Because we tax the recipient of income from an income tax perspective, it further comes as a surprise to some people when they find out that it is the giver of the gift (usually called the “donor”) who must report and pay any gift tax that is due, rather than the recipient (often referred to as the “donee”). While this is just a brief overview, hopefully this article will shed some light on when gift tax returns must be filed.

To avoid allowing the transfer of wealth to be completely untaxed from generation to generation, US laws require that gift tax (and estate tax) must be paid under certain conditions. Generally, a citizen or resident of the United States must file a gift tax return if gifts were made that totaled more than $15,000 in any one year to someone. While gifts under $15,000 to a recipient are not subject to gift tax return reporting, a donor must total up all of the gifts to any one recipient made during the year to see if the $15,000 threshold has been reached. An exception to this rule is for most gifts to a spouse (although different rules apply if the spouse is not a US citizen and if total gifts exceed $155,000 in 2019). Gift tax returns are also filed individually, even in the case of married couples, although married couples can file gift tax returns that allow the splitting of gifts between them. Some other important notes on filing gift tax returns:

Certain gifts, called future interests, are not subject to the $15,000 annual exclusion and you must file Form 709 even if the gift was under $15,000.
If a gift is of community property, it is considered made one-half by each spouse. For example, a gift of $100,000 of community property is considered a gift of $50,000 made by each spouse, and each spouse must file a gift tax return.
Likewise, each spouse must file a gift tax return if they have made a gift of property held by them as joint tenants or tenants by the entirety.
Only individuals are required to file gift tax returns. If a trust, estate, partnership, or corporation makes a gift, the individual beneficiaries, partners, or stockholders are considered donors and may be liable for the gift and GST taxes.
The donor is responsible for paying the gift tax. However, if the donor does not pay the tax, the person receiving the gift may have to pay the tax.
If a donor dies before filing a return, the donor’s executor must file the return.

Most gifts to charities do not trigger the need to file a gift tax return, regardless of the amount that is donated. This is true as long as the entire interest in the property was transferred to a qualifying charities. If only a partial interest was transferred to a charity, a gift tax return must be filed.

If a gift tax return is required to be filed, it is filed annually on form 709 with the Internal Revenue Service. It is due to be filed on April 15th of the year following the year of the gift. An extension of time to file the gift tax return is automatically received if the individual extends her individual income tax return. If the individual income tax return is not extended, then a 6-month extension can be obtained to file the gift tax return by filing form 8892. Just like the individual income tax return rules, extending the time to file the gift tax returns does not extend the time for paying any gift tax that might be due, and penalties and interest will be assessed for the gift taxes not paid by the original due date of the return. In the case of death of the taxpayer, the due date for filing the return is either the due date for filing the donor’s estate tax return on form 706, or the April 15th (or extended) date for filing the decedent-donor’s gift tax return.

Generally, the federal gift tax applies to any transfer by gift of real or personal property (whether tangible or intangible) that was made directly or indirectly, in trust, or by any other means.

The gift tax applies not only to the free transfer of any kind of property, but also to sales or exchanges, not made in the ordinary course of business, where value of the money (or property) received is less than the value of what is sold or exchanged. The gift tax is in addition to any other tax, such as federal income tax, paid or due on the transfer.

The exercise or release of a general power of appointment may be a gift by the individual possessing the power. General powers of appointment are those in which the holders of the power can appoint the property under the power to themselves, their creditors, their estates, or the creditors of their estates. To qualify as a power of appointment, it must be created by someone other than the holder of the power.

The gift tax may also apply to forgiving a debt, to making an interest-free or below-market interest rate loan, to transferring the benefits of an insurance policy, to certain property settlements in divorce cases, and to giving up some amount of annuity in exchange for the creation of a survivor annuity.

The gift tax applies to any digital asset, such as an electronic record, content, or data stored or existing in a binary format, in which the donor transfers a right to use or possess, including virtual currency or other digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value; domain names; images; multimedia; and textual content files.

Bonds that are exempt from federal income taxes are not exempt from federal gift taxes.

There are four types of transfers to third parties that are not considered gifts, do not trigger the gift tax rules, and should not be reported on the form 709:

Transfers to political organizations,
Transfers to certain exempt organizations,
Payments that qualify for the educational exclusion
Payments that qualify for the medical exclusion.

To expand on the above, the following is taken directly from the instructions to form 709, as printed by the IRS:

Political organizations.

The gift tax does not apply to a transfer to a political organization (defined in section 527(e)(1)) for the use of the organization.

Certain exempt organizations.

The gift tax does not apply to a transfer to any civic league or other organization described in section 501(c)(4); any labor, agricultural, or horticultural organization described in section 501(c)(5); or any business league or other organization described in section 501(c)(6) for the use of such organization, provided that such organization is exempt from tax under section 501(a).

Educational exclusion.

The gift tax does not apply to an amount you paid on behalf of an individual to a qualifying domestic or foreign educational organization as tuition for the education or training of the individual. A qualifying educational organization is one that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. See section 170(b)(1)(A)(ii) and its regulations.

The payment must be made directly to the qualifying educational organization and it must be for tuition. No educational exclusion is allowed for amounts paid for books, supplies, room and board, or other similar expenses that are not direct tuition costs. To the extent that the payment to the educational organization was for something other than tuition, it is a gift to the individual for whose benefit it was made, and may be offset by the annual exclusion if it is otherwise available.

Contributions to a qualified tuition program (QTP) on behalf of a designated beneficiary do not qualify for the educational exclusion. See Line B. Qualified Tuition Programs (529 Plans or Programs) in the instructions for Schedule A, later.

Medical exclusion.

The gift tax does not apply to an amount you paid on behalf of an individual to a person or institution that provided medical care for the individual. The payment must be to the care provider. The medical care must meet the requirements of section 213(d) (definition of medical care for income tax deduction purposes). Medical care includes expenses incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, or for transportation primarily for and essential to medical care. Medical care also includes amounts paid for medical insurance on behalf of any individual.

The medical exclusion does not apply to amounts paid for medical care that are reimbursed by the donee’s insurance. If payment for a medical expense is reimbursed by the donee’s insurance company, your payment for that expense, to the extent of the reimbursed amount, is not eligible for the medical exclusion and you are considered to have made a gift to the donee of the reimbursed amount.

To the extent that the payment was for something other than medical care, it is a gift to the individual on whose behalf the payment was made and may be offset by the annual exclusion if it is otherwise available.

The medical and educational exclusions are allowed without regard to the relationship between you and the donee. For examples illustrating these exclusions, see Regulations section 25.2503-6(c).

While the above will not cover all cases and eventualities, hopefully it serves to answer some general questions about gift taxes.

Retirement Plan Contribution Limits for 2020

Thu, 14 Nov 2019 18:35:08 GMT

by Gregory S. Dowell

November 14, 2019

The IRS recently released the following limits for 2020 retirement plans:

401(k) plans, 403(b) plans, most 457 plans, and the Federal government’s Thrift Savings Plan elective deferrals – maximum is $19,500 (up from $19,000 in 2019).
Catch-up contribution limit for those over age 50 – increases to $6,500 (up from $6,000).
IRAs – maximum deductible contribution remains the same at $6,000.
IRAs – ability to make a deductible contribution will phase out for singles and head of household filers between $65,000 and $75,000; phase-out will be between $104,000 and $124,000 for married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan; $196,000 to $206,000 when married-filing-joint IRA contributor is not covered by a workplace retirement plan but is married to someone who is.
Roth IRAs – phaseout range for determining the maximum contribution will be $196,000 to $206,000 for married filing jointly; $124,000 to $139,000 for singles and heads of household.
AGI limit for the saver’s credit – increases to $65,000 for married couples filing jointly; $48,750 for heads of household; $32,500 for single taxpayers and for married individuals filing separately.

IRS Releases Warning on Social Security Cancellation Scam

Fri, 25 Oct 2019 17:33:49 GMT

October 25, 2019

by Gregory S. Dowell

I f it’s not broke, don’t fix it – and it appears that even the bad guys know this adage as well. In its Tax Tip 2019-49 released on October 24, 2019, the IRS warns taxpayers to be on the lookout for a revived scam. In this case, the bad guys contact unsuspecting taxpayers using robo-calls and voice messages, claiming to be able to suspend or cancel the taxpayer’s social security number if the robo-calls are not returned. In addition to threats to cancel the individual’s social security number, the con artists may also mention that taxes are overdue as well.

The IRS advises that if taxpayers receive a phone call wherein they are threatened with having their social security number suspended or cancelled, the taxpayers should just hang up. Never give out sensitive personal information over the telephone.

While the IRS does authorize some private collection agencies to act in its debt collection process, the IRS and its collection agencies will never do the following:

Call to demand immediate payment using a specific payment method such as a prepaid debit card, iTunes gift card or wire transfer. The IRS does not use these methods for tax payments.
Ask a taxpayer to make a payment to a person or organization other than the U.S. Treasury.
Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
Demand taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.

In their Tax Tip, the IRS further indicates that taxpayers who do not owe any back taxes and who receive these scam calls should:

Report the call to the Treasury Inspector General for Tax Administration .
Report the caller ID and callback number to the IRS by sending it to phishing@irs.gov . The taxpayer should write “IRS Phone Scam” in the subject line.
Report the call to the Federal Trade Commission . When reporting it, they should add “IRS Phone Scam” in the notes.

On the other hand, if a taxpayer who happens to receive a scam phone call knows that they have unpaid taxes, after hanging up on the scam caller, the taxpayer should:

View tax account information online at IRS.gov to see the actual amount owed and review their payment options.
Call the number on the billing notice
Call the IRS at 800-829-1040.

Foreign Accounts – Know When Reporting is Required

Mon, 23 Sep 2019 17:37:18 GMT

September 23, 2019

by Gregory S. Dowell (reprinted with permission by Thomson Reuters)

E ach U.S. person who has a financial interest in or signature or other authority over foreign financial accounts must electronically file a Foreign Bank Account Report (FBAR) on Form 114 if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. A foreign financial account is a financial account located outside the U.S. An account maintained with a branch of a U.S. bank that is physically located outside of the U.S. is a foreign financial account. A financial account includes a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution. A financial account also includes a commodity futures or options account, an insurance policy or annuity policy with a cash value, and shares in a mutual fund or similar pooled fund. In addition, a debit card account is a financial account, and a credit card account may be treated as a financial account under certain circumstances. The FBAR is generally due by April 15 following the calendar year for which it applies. An automatic extension to Oct. 15 each year is provided.

The penalties for failure to file a FBAR are onerous. The civil penalties for a non-willful violation may not exceed $12,459 per violation. Civil penalties for a willful violation may not exceed the greater of $124,588 or 50% of the amount in the account at the time of the violation. The criminal penalty for willful violations is a fine of not more than $250,000, or imprisonment for not more than five years, or both.

In addition, a specified individual must file Form 8938 (Statement of Specified Foreign Financial Assets) if the individual has an interest in one or more specified foreign financial assets having an aggregate value exceeding either $50,000 on the last day of the tax year or $75,000 at any time during the tax year ($100,000 and $150,000, respectively, for married individuals filing a joint annual return). For a specified individual living outside of the U.S., who is a qualified individual under Code Sec. 911(d)(1) , Form 8938 must be filed if the aggregate value of the specified foreign financial assets in which the taxpayer has an interest exceeds $200,000 ($400,000 if a joint return is filed) on the last day of the tax year or $300,000 ($600,000 if a joint return is filed) at any time during the tax year. An individual isn’t required to file Form 8938 for any tax year for which he isn’t required to file an annual return.

A specified individual is a U.S. citizen, a U.S. resident alien for any part of the tax year, a nonresident alien who makes an election to be treated as a U.S. resident alien, and a nonresident alien who is a bona fide resident of Puerto Rico or American Samoa.

Specified foreign financial assets include financial accounts maintained by foreign financial institutions and other assets not held in accounts maintained by financial institutions, such as stock or securities issued by non-U.S. persons (including stock or securities issued by a person organized under the laws of a U.S. possession), financial instruments or contracts with issuers or counterparties that are non-U.S. persons (including financial instruments issued by a person organized under the laws of a U.S. possession), and interests in certain foreign entities. A specified foreign financial interest does not include foreign real estate, the direct ownership of foreign currency, shares in a U.S. mutual fund that owns foreign stock and securities, or brokerage accounts maintained by U.S. financial institutions.

The penalty for failing to report specified foreign financial assets for a tax year is $10,000. However, if this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, additional penalties of $10,000 are imposed for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period, with a maximum penalty of $50,000.

If an FBAR or form 8938 remain unfiled from a prior year, or if there is a concern that exposure exists, taxpayers are advised to contact their tax professional.

Illinois Tax Amnesty Program

Wed, 28 Aug 2019 17:41:02 GMT

by Gregory S. Dowell

August 28, 2019

T he Illinois Tax Delinquency Amnesty Act, which was signed into law in June of 2019, allows taxpayers to pay outstanding eligible tax liabilities in full during the period from October 1, 2019 to November 15, 2019 and to have eligible penalties and interest forgiven. This Act broadly covers all taxes due from periods ending after June 30, 2011 and prior to July 1, 2018. if a taxpayer filed an incorrect return for a tax assessed during this period, an amended return will need to be filed. If the taxpayer has nonfiled returns for taxes in this period, the returns must be filed. Interestingly, if only penalties and interest are owed at this time, the taxpayer will not qualify for the amnesty program under the Act.

Taxes covered by this Act are taxes that are collected by the Illinois Department of Revenue (IDOR) for balances due on returns for the period June 30, 2011 through June 30,, 2018. Property, estate, franchise, insurance, and local taxes are not collected by IDOR and are thus not subject to the Act. Other expenses that do not qualify are the International Fuel Tax Agreement liabilities, Motor Fuel Use Tax, as well as any expense that is not a tax (licensing fees, tire user fees, motor fuel violations, permits, etc.).

A few interesting bullet points from the Act:

Can I use an income tax credit or an increase in net operating loss deduction as a payment toward an amnesty liability? Income tax credits and net operating losses (including federal capital losses) may be used to reduce tax liabilities. However, the credit or loss may not reduce the tax liability to zero. To qualify for amnesty, some tax must be owed and payments must be made by cash, check, guaranteed remittance, credit card, or ACH debit.
Can I use a credit that results from the use of the Manufacturer’s Purchase Credit (MPC) as a payment toward amnesty?MPC may be used to reduce tax liabilities. However, the credit may not reduce the tax liability to zero.To qualify for amnesty, payments must be made by cash, check, guaranteed remittance, credit card, or ACH debit. The application of a credit is not a payment that qualifies under amnesty.
What if I estimate my tax liability for an amnesty period and determine later that I paid more than I owe?If you overpaid your amnesty liability, you can receive a refund of the overpayment, or in some cases a credit, but we will not pay interest on any overpayment.
What if an eligible period was recently audited or is currently under audit?
If an audit was recently completed, or will be completed prior to the close of the amnesty program on November 15, 2019, you must pay the full amount of audit tax liability.
If an audit is currently in process and cannot be completed prior to the close of the amnesty program on November 15, 2019, estimate the tax liability due, file the appropriate return, and pay the tax balance in full. Contact your IDOR auditor for additional information. Please note, if the final audit tax liability exceeds the paid estimate, penalties and interest may apply.
Can I use a pending refund to pay an amnesty liability?No. To receive the benefits of the tax amnesty program you must make a payment, even if you have a pending refund.

Illinois provides the following information on how and where to make payments under the Act:

How do I make my payment for debt that has already been reported or assessed?

Mail:

Send your payment to us at the address below. Do not mail cash.

Illinois Department of Revenue PO Box 19011 Springfield IL 62794-9011

Make your payment payable to “Illinois Department of Revenue.” To qualify for the 2019 Illinois Tax Amnesty Program, mail must be postmarked with a date between October 1, 2019, and November 15, 2019.

In person:

Checks or guaranteed remittances are accepted at any Illinois Department of Revenue office location.

District offices: For a list of locations visit our website at tax.illinois.gov or call us at 1 800 732-8866.

JRTC Building: 7th Floor, 100 West Randolph Street, Chicago, IL 60601.

Willard Ice Building: Lobby, 101 West Jefferson Street, Springfield, IL 62702. NOTE: Cash is accepted only at IDOR’s Springfield and Chicago offices.

MyTax Illinois:

Pay with a bank account debit online at mytax.illinois.gov. You may schedule this payment now to be debited during the amnesty period — October 1, 2019, through November 15, 2019.

If you have a MyTax account, log in and direct your payment to the eligible liability.

If you are not registered, click the “sign up now” button and follow the instructions.

Note for individuals paying an IndividualIncome Tax liability: If you are not registered, you mayneed to request a letter of registration from IDOR during the registration process, which can take about a week to receive. If you do not receive the letter and complete the registration process before November 15, 2019, you should select another method of payment.Payments for 2016 or 2017 Individual Income Tax liabilities may be made using a “non-login” option.

Credit cards (individual income tax, only):

Pay using your VISA, MasterCard, Discover, or American Express. The credit card service provider will charge a convenience fee. We encourage you to make your payment online at https://www2.illinois.gov/rev/individuals/pay/Pages/creditcard.aspx

Credit card payments can also be made by phone. Have your credit card ready before you call.Link2Gov/FIS — 1 877-57-TAXES (1 877 578-2937) Official Payments Corporation — 1 800 2PAYTAX (1 800 272-9829) — Use Jurisdiction Code 2300. Value Payments System — 1 888 9-PAY-ILS (1 888 972-9457)

Email scam artists are at it again

Mon, 26 Aug 2019 18:10:19 GMT

by Gregory S. Dowell

August 26, 2019

I t’s not the first time this has happened, but scammers are once again using emails to pose as the IRS in an attempt to steal and extort money from the public. The emails mimic the look and feel of the IRS’ communications and bear subject lines such as “Automatic Income Tax Reminder” and “Electronic Tax Return Reminder”. This most recent scam just turned up in the last week or so, and the IRS and its security partner, Security Summit, are eager to get the word out to taxpayers. The Security Summit, by the way, is a partnering between the IRS, major tax preparation chains, tax preparation software providers, and state taxing authorities to combat tax scams and identity theft.

It has been widely reported, but bears repeating again: The IRS does not send unsolicited emails to taxpayers, and the IRS never emails taxpayers about the status of their returns. The latest scam has embedded links to what appear to be an IRS.gov website. The website tries to lure the visitor to sign on by using a one-time or temporary password to access files, tempting the visitor with access to a refund. The goal is to get the visitor to access the files, which turn out to be a strategy to transfer malware and other viruses to the visitor’s computer. Once there, the malware does it thing – collecting personal data and financial information.

The IRS notes that these scams are growing more and more sophisticated, not only in the look and feel of the fictitious communication from the government, but also in the way the scam is deployed across numerous websites, making the scam very difficult to shut down, even after it has been detected.

Taxpayers should bear a very simple rule in mind: The IRS will not contact a taxpayer via email or social media or the phone in an unsolicited attempt to demand payment or financial information. The IRS sends notices via the US mail. Another simple rule that is equally important is that the recipient of an unsolicited email should never open an attachment on that email. This includes emails that appear to be from friends, family, attorneys, accountants, business partners, the IRS, etc. If there is enough concern that the email and attachment might be valid, pick up the phone and call the sender to validate the email. Those rogue emails should be permanently and immediately deleted (not just deleted or sent to trash) from the computer.

Eligible taxpayers get automatic 2018 individual taxpayer estimated tax penalty relief

Wed, 21 Aug 2019 18:12:21 GMT

by Alex Gershengorn

August 21, 2019

In some good news for taxpayers, the IRS announced that the relief announced earlier this year, with respect to the individual taxpayer estimated tax penalty for 2018, will be expanded and automatically applied to taxpayers who filed their 2018 returns.

F or some background, if a certain minimum amount of estimated taxes is not paid each year, the tax code imposes a penalty on individuals, which is commonly referred to as an underpayment penalty. To avoid the penalty, each of four required installments must equal 25% of the “required annual payment,” which generally is the lesser of: (1) 90% of the tax shown on the individual’s return for that year (or, if no return is filed, 90% of his or her tax for that year), or (2) if the individual filed a valid return for the immediately preceding tax year, 100% of the tax shown on that return, or 110% if a taxpayer’s adjusted gross income was more than $150,000 ($75,000 if married and filing a separate return).

The problem that arose in 2018 was that the Tax Cuts and Jobs Act (TCJA) greatly altered the way that taxes were calculated and also changed the amount of income taxes that were withheld from wages. TCJA was a comprehensive tax overhaul that dramatically changed the rules governing the taxation of individuals, providing new income tax rates and brackets, increasing the standard deduction, suspending personal exemptions, increasing the child tax credit, limiting the state and local tax deduction, and temporarily reducing the medical expense threshold, among many other changes. TCJA also provided a new deduction for non-corporate taxpayers with qualified business income from pass-throughs. Many of the TCJA’s changes impacted the amount of income taxes that were withheld from a taxpayer’s wages. These changes to withholding, coupled with multiple other changes from TCJA, caused many taxpayers to potentially be subject to underpayment penalties.

Under pressure from members of Congress and other groups about the issue of under-withholding, the IRS provided that the estimated tax penalty for the 2018 tax year was waived for individuals whose total withholding and estimated tax payments made by January 15, 2019, equaled or exceed 85% of the tax shown on their 2018 returns. In an acknowledgment that the previous attempt at fairness was inadequate, in March 2019 the IRS expanded the estimated tax penalty waiver that it previously announced, so that it applied to taxpayers who had withholding and estimated tax payments made by January 15, 2019 that were 80% or more of their 2018 taxes, down from 85%.

While that attempt at fairness from the IRS was appreciated, it came too late in the filing season to be completely effective. In the most recent announcement, the IRS indicates that relief will automatically apply to those taxpayers who already filed their 2018 federal income tax returns, and will mail checks to those taxpayers who were affected by the late action taken by the IRS.

The IRS has advised that it will mail notices to taxpayers to grant relief to affected taxpayers. Eligible taxpayers will receive a refund check. The IRS urges persons who have not yet filed for 2018 to claim the waiver on their return. This group includes those with tax-filing extensions due to run out on October 15, 2019.

Massive Payroll Fraud Should Concern All Business Owners

Tue, 30 Jul 2019 15:40:35 GMT

July 30, 2019

by Gregory S. Dowell

A s reported by several news outlets, a lawsuit has been filed by KeyBank, claiming that the bank is the victim of a massive payroll fraud that was perpetrated by a payroll processing company. According to the lawsuit, KeyBank is out about $122 million dollars, which was to be covered by funds drawn on another bank (Lake City Bank), but the checks bounced when the account at Lake City Bank was overdrawn. It appears that other businesses are out funds as well. Several businesses have been advised by employees that payroll funds did not hit their accounts, and businesses have had to use additional funds to cover the shortfalls. Presumably, taxes were not deposited with the Federal and State governments as well. It remains to be seen who will suffer the ultimate losses (insurance may pick up some of the brunt of the fraud), but businesses will certainly be impacted.

The payroll processing company, IOI, has been in business for several years and claims to have some 6,000 clients across the country. Its owner, Najeeb Khan, is well-known and sits on several corporate boards. Apparently, he is also a lover of the good things in life, and has an extensive collection of cars, boats, and planes.

While there is more information needed to complete this story, businesses can learn some lessons from this experience.

If the fraud charges are accurate, the lavish lifestyle of the owner served as a tip.
Businesses should have a process to check every payroll period to be sure that taxes were deposited with the proper authorities.
Mailing addresses for payroll should not be changed from the business’ address, so that delinquent notices will come to the attention of management.
While IOI was relatively large, businesses should also think twice before using a payroll service that is unknown or too small; in those cases, it may be very difficult to have any semblance of internal controls, the owners may have unfettered access to the employer’s cash, and it may be impossible to recover any funds.

Supreme Court Puts the Brakes on Aggressive Attempt by State to Tax Trust

Thu, 27 Jun 2019 15:35:29 GMT

by Gregory S. Dowell

June 27, 2019

In a win for taxpayers against overly-aggressive efforts by states to tax any and all income, the US Supreme Court unanimously ruled that a state cannot tax a trust when the trust’s only connection to that state is because of the residency of a beneficiary. In this case (North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust), North Carolina attempted to tax a trust and relied on its statute that allows a trust to be taxed solely because it has a North Carolina beneficiary. Earlier in the litigation process, the North Carolina Supreme Court ruled that the statute was unconstitutional. Ultimately, the US Supreme Court ruled that because the trust lacked minimum contacts with the State of NC, taxing the trust in NC would be a violation of the Due Process Clause of the 14th Amendment.

I n the case, the trust had no connection with NC, other than the fact that a beneficiary of the trust was a resident. NC assessed more than $1.3 million of taxes on income earned by the trust for tax years 2005 through 2008. During that same period, the beneficiary had no right to receive any distributions from the trust and, in fact, did not receive any distributions. The trustee has absolute determination as to whether any amounts were to be paid to the beneficiaries. The trustee paid the assessment under protest, and then filed suit in state court. The US Supreme Court, in agreeing with North Carolina courts that the assessment of tax violated due process, noted that the beneficiary “received no income from the trust in the relevant tax year, had no right to demand income from the trust in that year, and could not count on ever receiving income from the trust”. The US Supreme Court applied a 2-part test to determine if due process had been violated: 1) There must be some definite link or minimum connection between a state and the person, property, or transaction it seeks to tax, so as not to violate notions of fairness; 2) the income attributed to the state for tax purposes must be rationally related to values connected to the taxing state. The US Supreme Court said that the 2nd part of the test was not as relevant and focused on the first part. The Court determined that “When a tax is premised on the in-state residence of a beneficiary, the Constitution requires that the resident have some degree of possession, control, or enjoyment of the trust property or a right to receive that property before the State can tax the asset”. The Court held that “the presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it”.

The North Carolina statute in question (N.C. Gen. Stat. Section 105-160.2) allows for the assessment of tax on any trust income that “is for the benefit of” a North Carolina resident. Very broadly, North Carolina has interpreted this to mean that it applies whether or not the beneficiary actually receives any income from the trust.

Foreign Accounts: Take the FBAR Requirements Seriously

Tue, 25 Jun 2019 18:14:46 GMT

By Gregory S. Dowell

June 25, 2019

When taxpayers have foreign assets (bank and brokerage accounts, real estate, collectibles), they are required to file foreign financial reporting forms on an annual basis. Filing is required when the value of the assets is equal to or greater than $10,000 at any time during the year. The filing is made on form FinCEN 114, which is more commonly referred to as the FBAR form. The filing requirements have existed for several years now, and there are significant penalties for failing to file the form. The penalty for failure to timely file an FBAR varies according to the level of the taxpayer’s culpability. A willful violation can result in a civil penalty of up to 50% of the balance of each foreign account or $100,000, whichever is greater. A claim by the Government to collect civil penalties for a willful violation consists of seven elements: (1) the defendant was a U.S. citizen at the time of the filing; (2) the defendant had a financial interest in or signatory authority over the account at issue; (3) the account balance exceeded $10,000; (4) the account was in a foreign country; (5) the defendant failed to disclose the account; (6) the failure was willful; and (7) the amount of the proposed penalty is proper. In the past, when these filing requirements were newer and were being emphasized, the IRS has been very willing to accept late-filed FBAR returns in many circumstances, as a way to gain voluntary compliance.

Taxpayers, however, would be wise to heed the findings of the US District court that held that a US citizen willfully failed to file FBARs regarding his Swiss bank accounts. In a recent case, the court found that the taxpayer’s testimony was not credible; he was financially sophisticated and had created financial structures to evade taxes.

Some background: Edward Flume was a US citizen and an experienced businessman who lived and worked in Mexico. As his foreign holdings grew, Flume used a Mexican tax preparation firm, and incorporated his business in the Bahamas initially, and then reincorporated it in Belize. Flume also opened a Swiss account under the corporation’s name with UBS in 2005; only his wife and he had signature authority and they held all of the stock. Flume signed a waiver of a right to invest in US securities, which the IRS later said was evidence that they wanted to hide the activity from US authorities. Flume failed to report his interest in the foreign UBS account to the IRS in 2007 and 2008, in accordance with the FBAR filing requirements, although he did report the interest income on a Mexican bank account. Separately, UBS was under investigation by the IRS on a charge of a broad tax-evasion scheme it was conducting for its US clients. Upon learning of the investigation by the IRS into UBS, Flume moved his account, first to another Mexican bank account, and then back to the US. Finally, in 2010 UBS agreed to comply with the IRS and released the names of its American clients, including Flume.

In June of 2010, Flume filed the delinquent FBAR tax returns for 2006 through 2009, although the value of the accounts he reported were significantly understated. Even though he was eligible, Flume did not apply to the IRS’s Offshore Voluntary Disclosure Initiative (OVDI), which might have reduced his liability if he had disclosed the Swiss bank account. In 2014, the IRS determined that Flume had made a willful attempt to avoid US taxes and assessed penalties in excess of $450,000. Flume claimed the failures were inadvertent, as he had no knowledge of the FBAR requirement until 2010.

The District Court concluded that Flume’s 2007 and 2008 FBAR filing failures were willful, noting the following reasons:

Flume’s testimony was not credible and contained numerous contradictions.
Flume changed his account of when and how he first learned of the FBAR reporting requirement at least twice.
Flume’s account of the discrepancies between his delinquent FBARs and the actual balance of his UBS account strained credulity.
Particularly when viewed in light of his disingenuous testimony, Flume’s financial structure reflected a sophisticated tax-evasion scheme.
Flume’s testimony about the 2001 transfer of Wilshire Holdings, Inc. from the Bahamas to Belize further demonstrated his familiarity with international tax laws.
Flume’s tax preparer’s testimony that Flume was sent an annual reminder of the foreign-account reporting requirements was credible.
The fact that Flume disclosed his Mexican account on Schedule B of his tax returns suggests that he was aware of the foreign-account reporting requirement and made a conscious choice not to disclose his Swiss account.
Together, UBS’s client-contact records and Flume’s trial testimony establish that Flume was aware of the IRS investigation into UBS by mid-2008. However, Flume did not file any FBARs until after UBS agreed to turn over its American clients’ records to the IRS. This timing strongly suggested that Flume knew he was breaking the law but continued to believe he could get away with it until it became clear that U.S. authorities would learn of his Swiss account.
Even if the Court accepted Flume’s claim that he did not know about the FBAR requirement until 2010, his testimony at trial clearly established that he acted with extreme recklessness by failing to review his tax returns before signing them.

Tax-Exempt Organizations Can Not Be Run To Only Benefit A Few Individuals

Tue, 25 Jun 2019 17:21:57 GMT

June 25, 2019

By Gregory S. Dowell

To gain the designation as a public charity that is exempt under Internal Revenue Code Section 501(c)(3), tax-exempt organizations must pay attention to the need to benefit the general public, rather than just a few individuals. 501(c)(3) organizations are those organizations that are exempt from Federal income tax because they are organized and operated exclusively for charitable, religious, or educational purposes. To qualify, none of the organization’s earnings can inure to the benefit of a private shareholder or individual.

I n a Private Letter Ruling (PLR 201923026) recently released, the IRS denied exempt status to an organization that it deemed was serving only a select few individuals, rather than the general public. In this case, an organization was formed to host a fundraiser for five orphaned siblings. These five siblings were orphaned when their parents died within one year of each other. The intent was that the fundraiser would raise enough resources to help offset some of the living expenses of the children. An exempt organization was formed, with the underlying organizational document limiting its purpose to the exempt purposes found under Internal Revenue Code Section 501(c)(3). On the application form seeking exempt status that was prepared and submitted to the IRS, the organization specifically stated that it would not further non-exempt purposes, such as those that are conducted for the benefit of private individuals.

In its review, the IRS concluded that the organization was formed to benefit the five orphans exclusively, rather than the general public. Given the facts in this case, it was relatively easy for the IRS to note the obvious, which was that the beneficiaries were all from the same family and were predetermined. Accordingly, the IRS deemed that the organization was formed and operated to serve only private, rather than public, purposes. The IRS denied the application for exempt status that was filed.

While this private letter ruling relates to a relatively small organization that was making an application to be exempt, existing and larger organizations would be wise to understand the fundamental principal involved, which is that the organization can not be in the business of benefiting only specific individuals. Failure to do so could put the organization’s tax-exempt status in jeopardy.

2019 Depreciation Deduction Limits

Tue, 21 May 2019 18:16:23 GMT

May 21, 2019

T he IRS recently released the depreciation deduction limits for passenger autos (includes trucks and vans as well) that were placed in service in 2019.

If bonus first-year depreciation was taken (also known as Section 168(k) additional depreciation), the new limits are as follows:

Passenger autos acquired before 9-28-17 and first placed in service in 2019: $14,900 for the first tax year; $16,100 for the second tax year; $9,700 for the third tax year; and $5,760 for each succeeding year.
Passenger autos acquired after 9-27-17 and first placed in service in 2019: $18,100 for the first tax year; $16,100 for the second tax year; $9,700 for the third tax year; and $5,760 for each succeeding year.

If no bonus first-year depreciation was taken, the depreciation limit is $10,100 for the first tax year; $16,100 for the second tax year; $9,700 for the third tax year; and $5,760 for each succeeding year.

If an auto is leased rather than purchased (this also includes trucks and vans), Internal Revenue Code Section 280F(c) places a limit on the amount of the lease cost of an automobile that may be deducted. An amount is required to be included in income as an offset (“income inclusion amount”). Table 4 of Revenue Procedure 2019-26 reflects the amount of income that must be included for lessees of passenger automobiles that were initially leased during 2019, based on a range of fair market values for each tax year after the automobile is first leased.

S Corporation’s Employee Stock Compensation Plan Deemed Not to Have Violated 2nd Class of Stock Rule

Tue, 21 May 2019 14:19:25 GMT

May 21, 2019

by Gregory S. Dowell

A corporation may make an election under Internal Revenue Code Section 1361 to be taxed as an S corporation for Federal income tax purposes. One of the restrictions of being an S corporation is that the S corporation can only have one class of stock. That one class of stock must confer identical rights to all shareholders. However, bona fide agreements to redeem or repurchase stock when a shareholder dies, is divorced, becomes disabled or ends employment are disregarded when determining whether the shares issued to the plan confer identical rights to shares issued outside the plan. ( Reg. §1.1361-1(l)(2)(iii) ). In a recent Private Letter Ruling (PLR 201918013), the IRS determined that an S corporation’s employee stock compensation plan did not create a second class of stock.

In the situation addressed by the PLR, the S corporation adopted an employee stock compensation plan. The plan authorized the corporation to sell shares of stock to certain employees or grant shares or options to purchase shares to such employees. As is the case with many employee stock compensation plans, the shares acquired under the plan were subject to certain restrictions. Those shares could not be transferred without the prior written consent of the taxpayer’s chairman of the board, and the corporation could repurchase the shares under certain circumstances, including upon the termination of employment, either at fair market value or the forfeiture repurchase price.

The restrictions on transfer and repurchase in this situation were determined by the IRS to be bona fide agreements to redeem or repurchase stock

under Reg. §1.1361-1(l)(2)(iii)(B) . Thus, those restrictions were disregarded when determining whether the shares so awarded under the employee stock compensation plan conferred identical rights to other stock issued by the S corporation. Because those restrictions were disregarded and the shares were identical, it was deemed that only one class of stock existed.

IRS Provides More Relief (Again) for Individuals Who Underpaid in 2018

Fri, 22 Mar 2019 18:20:19 GMT

by Gregory S. Dowell

The TCJA adjusted the withholding tables in 2018 by reducing the amount of Federal income taxes withheld with each paycheck, putting more cash into the pockets of employees, but creating some surprises for those same employees at tax filing time, who have much smaller refunds than anticipated, or who actually owe tax because the revised tables withheld too little. In response to taxpayers who have been surprised by the amounts they owe when filing their individual tax returns, in January the IRS released Notice 2019-11. This lowered to 85% the amount of tax that an individual must have paid during the course of the year in order to avoid a penalty for underpaying estimated tax. Today (March 22nd), the IRS released Notice 2019-25, which further lowered the percentage to 80%.

As background, the Internal Revenue Code requires that a taxpayer must make certain minimum payments of income tax during the course of the year (a taxpayer is rarely allowed to pay the entire balance due when filing a return). Taxpayers make these payments by having taxes withheld from their wages (if they’re employees), or by making quarterly estimated income tax installments (if they’re self-employed or have substantial investment income). The minimum amount that an individual taxpayer must pay in order to avoid penalties for underpayment is the lesser of 1) 90% of the tax shown on the return for the tax year, or 2) 100% of the tax shown on the taxpayer’s return for the preceding tax year (110% if the individual’s adjusted gross income on the previous year’s return exceeded $150,000). The most recent notice from the IRS effectively lowers the 90% to 80%, so that a taxpayer will not be subject to the underpayment penalty if they had total withholding and/or estimated tax payments made by January 15, 2019 that equal or exceed 80% of the tax shown on the 2018 return. To use this provision, an individual taxpayer must file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with the 2018 income tax return, and check the box in Part II, box A, of the form and include the statement “80% waiver” on the return. If a 2018 return has already been filed for a taxpayer who would have had relief, an amended return will likely need to be filed to remove the penalty.

Pritzker’s Illinois “Fair Tax” Calculator

Fri, 15 Mar 2019 18:18:22 GMT

March 15, 2019

by Gregory S. Dowell

Candidate Pritzker’s campaign platform for governor in 2018 included a plank that proposed changing Illinois’ flat rate tax system on annual income, currently at 4.95%, to a progressive income tax system. Under a progressive income tax, the marginal tax rates increase as income increases. While this is touted as a progressive tax system, the proposed tax system actually reverts back into a flat tax on those with income in excess of $1 million. The proposal includes a low rate of 4.75% for earnings up to $10,000, and a top rate of 7.95% on income of more than $1 million. Many media outlets have reported on the “fair tax” calculator that was recently released by Governor J.B. Pritzker’s office. The calculator can be found at this website, which you can also cut and paste into your browser:

www.illinois.gov/fairtaxcalculator

Pritzker’s office has claimed that families making about $250,000 or less will not see a tax increase under the proposal, and some will have a slight reduction in taxes. Interestingly, those whose income exceeds $1 million will be subject to a flat tax (with no benefit of lower rate brackets) of 7.95% on every dollar of income. The brackets are as follows:

Taxable income of $0 to $10,000 would be taxed at 4.75%
$10,001 to $100,000 would be taxed at 4.9%
$100,001 to $250,000 would be taxed at 4.95%
$250,001 to $500,000 would be taxed at 7.75%
$500,001 to $1 million would be taxed at 7.85%
Taxable income exceeding $1 million would be taxed at a flat rate of 7.95% on all income

Illinois Department of Revenue Addresses Identity Theft

Sat, 02 Mar 2019 19:23:01 GMT

March 2, 2019

O n February 27, 2019, the Illinois Department of Revenue issued a statement that they are continuing their efforts to prevent identity theft and tax refund fraud. The Department reminds taxpayers to use common sense and to use the following basic guidelines:

use software with firewall and anti-virus protection;
beware of phishing emails and phone scams;
and do not leave personal information lying around.

If taxpayers receive an identity verification letter in the mail, they should authenticate their information through MyTax Illinois, the Department’s free online account management program.

The deadline for filing a 2018 individual income tax return or automatic extension payment is Monday, April 15, 2019.

Beneficiaries Liable for Unpaid Estate Tax

Thu, 28 Feb 2019 16:37:37 GMT

by Gregory S. Dowell

February 28, 2019

T he lesson would seem to be clear but, surprisingly, this one had to end up in district court: Don’t think you can receive assets from an estate, and then be allowed to stiff the federal government on the federal estate taxes.

A recent district court case concluded that beneficiaries of an estate were liable for the estate’s unpaid estate tax liability. Internal Revenue Code Section 6324(a)(2) states:

If the estate tax imposed by chapter 11 is not paid when due, then the spouse, transferee, trustee (except the trustee of an employees’ trust which meets the requirements of section 401(a) ), surviving tenant, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent’s death, property included in the gross estate under sections 2034 to 2042 , inclusive, to the extent of the value, at the time of the decedent’s death, of such property, shall be personally liable for such tax.

In this case, U.S. vs Ringling (DC SD 2/21/2019), there was no dispute about the amount of the federal estate tax or that fact that it was unpaid, and there was no dispute that the beneficiaries had received property that had been properly includible in the estate. A quick overview of the facts show that there were three beneficiaries of an estate that primarily involved a family farm, life insurance proceeds and crops. A special bequest of estate assets was also made to the grandson of the decedent. Letters of representative were issued to the beneficiaries, and a special administrator was appointed over the probate proceeding. A federal estate tax return and an amended state inheritance tax return were filed. One of the beneficiaries, acting in her capacity as a representative, signed the federal estate tax return, which reported a tax due of just under $29,000. However, no payments were made on the balance due.

The IRS assessed the unpaid tax, as well as interest and penalties, bringing the total assessment to just under $66,000. When payment was not made, the IRS sent a notice of intent to levy. Ultimately, the IRS brought suit, seeking a judgment against each beneficiary. Only one response from a single beneficiary was received, which was in opposition to the motion for summary judgment. In what seems to have been a relatively clear case, the district court granted the IRS’ summary judgment and found that the beneficiaries were liable for the Estate’s unpaid tax liability, under Code Section 6324(a)(2).

Investments in Qualified Opportunity Zones

Fri, 22 Feb 2019 19:30:50 GMT

By Gregory S. Dowell

February 22, 2019

One area of the Tax Cuts and Jobs Act that is gaining more attention relates to investments in qualified opportunity zones. The basic advantages spelled out by Internal Revenue Code Section 1400Z-2 are as follows:

Treatment of gains

Temporary deferral – At the election of the taxpayer, gain from the sale or exchange of any property to an unrelated person is not included in gross income, to the extent of the investment in a qualified opportunity zone during the 180-day period beginning on the date of the sale or exchange. Gain from the temporary deferral is included in income in the earlier of:

The year in which the investment is sold or exchanged; or
December 31, 2026.

The amount of the gain that will be included is the lesser of the gain that was deferred, or the fair market value of the investment (in the event the value of the investment has depreciated).

Permanent exclusion – Gain from the sale or exchange of an investment in the qualified opportunity fund can be permanently excluded from income, again at the election of the taxpayer. To be eligible for permanent gain exclusion, the investment in a qualified opportunity fund must be held for at least 10 years. Separate from funding the original investment (see temporary deferral above), this permanent exclusion election looks to the ultimate sale by the taxpayer of the qualified opportunity zone fund investment.

As an example, if a taxpayer sells property and realizes a gain of $1 million on March 1, 2019, and on March 31, 2019 (a date within the 180-day period) makes an investment of the $1 million gain in a qualified opportunity fund, the taxpayer can make an election not to include the $1 million of realized gain in the taxpayer’s gross income for 2019.

This is a temporary deferral on the gains so invested in a qualified opportunity zone. If a taxpayer makes the election to defer gain, the taxpayer has to include the deferred gain in gross income at the end of the deferral period.

A few important notes to keep in mind:

No election can be made for sales or exchanges occurring after December 31, 2026.
The Code Section 1400Z-2 applies to gains from the sale or exchange of any property and is not limited to the gains from the sale or exchange of a capital asset.
There is no dollar limitation on the amount of the gain that can be deferred.
Ownership in the qualified opportunity fund must be acquired in the 180-day period, not just entering into a contract to acquire an interest.
Gains and funding could conceivably occur in two different years. In the case of a sales or exchanges that produce gains in the latter half of the year, a taxpayer may want to extend the filing date of the tax return until the investment in the qualified opportunity zone is made in the following year.
It appears that any taxpayer (estate, trust, individual, corporation, partnership, etc.) can make the temporary deferral election.
IRS has not yet made available specific instructions for making the temporary deferral election or the permanent exclusion election.
No election can be made with respect to a sale or exchange if an election previously made with respect to the sale or exchange is in effect. This area needs more interpretation by the IRS, but appears to prevent a taxpayer from making successive temporary deferral elections with respect to the reinvestment of part of any gains from a sale or exchange in a qualified opportunity fund and the latter reinvestment of the gains from that same sale into a different (or even the same) qualified opportunity fund. Potentially, this limitation could also apply to gains from an installment sale that are invested; the one-election limit might prevent the taxpayer from making a second temporary deferral election in the second tax year.

Basis in the investment – The taxpayer’s basis in the investment is zero. If an investment is held for at least 5 years, the basis is increased by 10% of the amount of the gain that was temporarily deferred. If an investment is held for at least 7 years, the basis is increased by 15% of the temporarily deferred gain. The basis in the investment is further increased by the amount of gain recognized when the temporary deferral period ends; accordingly, if the taxpayer holds the investment until at least December 31, 2026, the basis in the investment increases by the remaining 85% of the temporarily deferred gain.

Using mixed funds to invest – Predictably, in cases where a taxpayer invests by using “mixed” funds (that is, some of the funds invested were the result of gains realized, while other funds not resulting in gains realized were also invested), the temporary deferral election, the gain inclusion rules, and the permanent exclusion rules apply only to the investments that resulted from the realization of gains.

Consistent with other aspects of the TCJA, at this stage of the game information is relatively sparse on some nuances of the law. We expect more updates to come as this provision gets more play by investors and developers.

Increase in Illinois’ Minimum Wage to $15

Thu, 21 Feb 2019 15:21:54 GMT

by Gregory S. Dowell

February 21, 2019

A s one of the first acts of the Pritzker era, Senate Bill 0001 (Public Act 101-0001) increases the state minimum wage to $15 per hour by the year 2025. The current minimum wage in Illinois of $8.25 will increase to $9.25 as of January 1, 2020, and then increases to $10 per hour on July 1, 2020. Following an increase in Illinois’ minimum hourly wage to $11 on January 1, 2021, the hourly rate is increased by $1 every January 1st until reaching the hourly rate of $15 on January 1, 2025.

Employees who receive tips will continue to have a minimum wage of 60% of the Illinois minimum wage. This formula is effective if the wages plus tips at least equal the applicable minimum wage.

Workers under the age of 18 who work 650 hours or less in a calendar year may be paid $.50 less than the minimum wage until December 31, 2019. After that, those under age 18 must be paid $8 per hour on January 1, 2020, $8.50 per hour on January 1, 2021, $9.25 per hour by January 1, 2022, $10.50 per hour by January 1, 2023, $12 per hour by January 1, 2024, and then $13 per hour effective January 1, 2015.

Note, however, that employers in Chicago and Cook County currently are required to pay a higher minimum wage, due to previously enacted legislation.

The same legislation allows employers of 50 or fewer employees to take a credit for the Illinois taxes withheld, up to the tax liability, during the periods of January 1, 2020 to December 31, 2027. The credit is begins at 25% as of January 1, 2020, and decreases each year until it phases out for all employers of more than five employees in 2026, and finally phases out for employers of five or fewer employees on December 31, 2027. A credit may not be taken if an employee works less than 90 consecutive days immediately preceding the reporting period.

New penalties are a part of the legislation as well. Employers who fail to keep payroll records as required can be subject to a penalty of $100 per affected employee, payable to the state’s Wage Theft Enforcement Fund. The civil damages penalty for employers who fail to pay at the required minimum wage increases from 2% to 5% of the amount per month during which the underpayment occurred. An additional penalty of $1,500, on top of the current penalty of 20%, may also apply for willful disregard of the minimum wage law.

Qualified Opportunity Zones and Form 8996

Mon, 11 Feb 2019 15:23:40 GMT

by Gregory S. Dowell

February 11, 2019

A relatively quiet provision in the Tax Cuts and Jobs Act (TCJA) created “qualified opportunity zones” in certain designated low-income communities. Investors in Qualified Opportunity Funds (QOFs), which invest in these qualified opportunity zones, are allowed certain tax advantages for investing in these communities. Internal Revenue Code section 1400Z-2 provides for a temporary deferral of inclusion in gross income for capital gains reinvested in a QOF and the permanent exclusion of capital gains from the sale or exchange of an investment in the QOF. A QOF is, generally, an investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (other than another QOF), that holds at least 90% of its assets in qualified opportunity zone property. Qualified opportunity zone property includes any qualified opportunity zone stock, any qualified opportunity zone partnership interest, and any qualified opportunity zone business property.

IRS has issued new Form 8996 that is to be completed annually with the appropriate income tax return by corporations and partnerships that are organized as QOFs. A corporation or partnership uses Part I of Form 8996 to certify that it is organized to invest in qualified opportunity zone property; Part II is used to annually report information regarding the 90% investment standard; Part III is used to determine if it fails to meet the investment standard; and Part IV is completed to determine the amount of penalty for any such failure.

Overview of the 20% Pass-Through Deduction or QBID

Thu, 07 Feb 2019 19:26:48 GMT

by Gregory S. Dowell

February 7, 2019

O ne of the most lucrative tax benefits under the Tax Cuts and Jobs Act (TCJA), and one of the most challenging to calculate in certain cases, is the qualified business income deduction (QBID). This deduction is available to individuals who have qualified business income from S corps, partnerships, LLCs, or sole proprietorships. This has been referred to by a number of names, such as QBID, pass-through income deduction, and the 20% deduction for business income.

The deduction is generally equal to 20% of the “qualified business income” (QBI) from a partnership, S corporation, LLC, or sole proprietorship. QBI is defined as the net amount of items of income, gain, deduction, and loss with respect to a trade or business. The business must be conducted within the U.S. to qualify, and specified investment-related items are not included, such as capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business). The trade or business of being an employee does not qualify. Also, QBI does not include reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership’s business.

The deduction is taken “below the line,” which means that it reduces taxable income but not adjusted gross income. It is available regardless of whether one itemizes deductions or takes the standard deduction. In general, the deduction cannot exceed 20% of the excess of taxable income over net capital gain. If QBI is less than zero it is treated as a loss from a qualified business in the following year.

Rules are in place (discussed below) to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction.

These rules involve “thresholds,” that is taxable income of over $157,500 ($315,000 for joint filers). If taxable income is at least $50,000 above the threshold, or at least $207,500 ($157,500 + $50,000), all of the net income from a specified service trade or business is excluded from QBI. Joint filers would use an amount $100,000 above the $315,000 threshold, or $415,000. For taxable incomes that are between the threshold amounts and the $207,500/$415,000 amounts, the exclusion from QBI of income from specified service trades or businesses is phased in. Specified service trades or businesses are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.

Additionally, for taxpayers with taxable income more than the above thresholds, there is a limitation on the amount of the deduction that is based either on wages paid or wages paid plus a capital element. Here’s how it works: If taxable income is at least $207,500 ($415,000 for joint filers), the deduction for QBI cannot exceed the greater of (1) 50% of the allocable share of the W-2 wages paid with respect to the qualified trade or business, or (2) the sum of 25% of such wages plus 2.5% of the unadjusted basis immediately after acquisition of tangible depreciable property used in the business (including real estate). For taxable incomes that are between the threshold amounts and the $207,500/$415,000 amounts, a phase-in of the limitation applies.

Other limitations may apply in certain circumstances, for instance, in the cases of taxpayers with qualified cooperative dividends, qualified real estate investment trust (REIT) dividends, or income from publicly traded partnerships.

Obviously, the complexities surrounding this substantial new deduction can be formidable, especially if taxable income exceeds the thresholds discussed above. The issue is best studied on a case-by-case basis when a taxpayer has pass-through income.

Underpayment Penalty Relief for Individuals

Thu, 24 Jan 2019 19:33:11 GMT

January 24, 2019

by Gregory S. Dowell

In what came as a surprise move to many, the IRS issued Notice 2019-11, which provides that individuals will be granted relief from the penalty for underpaying estimated income taxes if they have paid in at least 85% of their 2018 income tax liability via withholding and/or estimated tax payments. This relief was granted by the IRS as a nod to the difficulties and confusion taxpayers are encountering as they try to interpret the effects of the Tax Cut and Jobs Act (TCJA) on their individual situations. Many key provisions of the act – for instance, the qualified business income deduction – were lacking IRS interpretation until well into 2018, leaving a considerable amount of uncertainty for taxpayers. Business owners (those with S corps, partnerships, LLCs, and sole proprietors) as well as investors, in particular, will benefit from this news, as much of the uncertainties in the TCJA disproportionately fell on topics that were of concern to them.

W hile much of the delay on the part of the IRS was due to poorly drafted language in the TCJA, the Notice also indicates that the IRS is stepping up to take some of the blame for the confusion, in that the withholding calculator that it made available early in 2018, along with the withholding form W-4, were not as clear and instructive as they could have been.

For a little background on the underpayment topic, an individual taxpayer can be penalized if he or she fails to pay enough taxes during the course of the year, either through withholding (typically from wages, but also from retirement distributions or withholdings on dividends and interest) or by making timely quarterly estimated income tax payments. Section 6654 of the Internal Revenue Code indicates that the minimum amount that must be paid to avoid penalty is 90% of the tax shown on the income tax return for the year, or 100% of the tax shown on the taxpayer’s prior year income tax return (the 100% increases to 110% if the adjusted gross income on the return exceeds certain thresholds). This recently announced change in Notice 2019-11, which is only in effect for 2018, reduces the 90% benchmark above to 85%. To show that the taxpayer made the minimum payments during the course of the year, form 2210 is completed and attached to the taxpayer’s return.

While this was clearly the “right” thing to do, it is reassuring to see that the IRS has the ability to interpret laws equitably, and not just in a punitive fashion against taxpayers.

Investor Deductions Under the TCJA

Wed, 09 Jan 2019 19:35:02 GMT

by Gregory S. Dowell

January 9, 2019

S ome taxpayers spend a considerable amount of time managing their investments, and incur significant investment-related expenses, including the cost of subscriptions to financial periodicals, clerical expenses, etc. Under the Tax Cut and Jobs Act (TCJA), these expenses are not deductible for 2018 through 2025 if they are considered expenses for the production of income. To be deductible as trade or business expenses, the taxpayer would have to be considered as being in the trade or business of investing. Prior to TCJA, for years before 2018 and for years after 2025, production-of-income expenses would have been deductible, but were included in miscellaneous itemized deductions, subject to a 2%-of-adjusted-gross-income floor.

The bottom line is that these investment-related expenses are only deductible under TCJA if the taxpayer is engaged in a trade or business. As one might guess, qualifying as a trade or business in this setting is difficult. It is important to note that the Supreme Court held many years ago that an individual taxpayer is not engaged in a trade or business merely because the individual manages the taxpayer’s own securities investments, regardless of the amount of the investments or the extent of the work required.

The cards are initially stacked against any taxpayer trying to take the position that he or she is in the trade or business of investing. If a taxpayer can show that the investment activities rise to the level of carrying on a trade or business, however, the taxpayer may be considered a trader. As a trader, a taxpayer would be considered as engaged in a trade or business, compared to an investor. As a trader, a taxpayer is entitled to deduct investment-related expenses as business expenses. A trader is also entitled to deduct home-office expenses, if the home office is used exclusively on a regular basis as the trader’s principal place of business. An investor, on the other hand, is not entitled to home-office deductions, since the investment activities aren’t a trade or business.

Since the Supreme Court’s decision, there has been extensive litigation on the issue of whether a taxpayer is a trader or investor. The Tax Court has developed a two-part test that must be satisfied in order for a taxpayer to be a trader. Under this two-part test, a taxpayer’s investment activities are considered a trade or business only where both of the following are true:

the taxpayer’s trading is substantial (i.e., sporadic trading won’t be a trade or business), and
the taxpayer seeks to profit from short-term market swings, rather than from long-term holding of investments.

So, the fact that a taxpayer’s investment activities are regular, extensive, and continuous isn’t in itself sufficient for determining that a taxpayer is a trader. In order to be considered a trader, a taxpayer must show that securities are bought and sold with reasonable frequency in an effort to profit on a short-term basis. On a sobering note, one case found that even a taxpayer who made over 1,000 trades a year with trading activities averaging about $16 million annually was held to be an investor because the holding periods for stocks sold averaged about one year.

Business Meals Deductions Under TCJA

Tue, 08 Jan 2019 15:26:18 GMT

by Gregory S. Dowell

January 8, 2019

Following the Tax Cuts and Jobs Act (TCJA), there has been considerable confusion over the deductibility of expenses for business meals. Unfortunately, it is not crystal clear in all cases when business meals provided to clients and business associates are deductible. The confusion stems from the change brought about by the TCJA on January 1, 2018, when entertainment, amusement, or recreation expenses for clients and business associates are no longer allowed as business deductions.

While the IRS will continue to issue guidance, a taxpayer needs to understand some basics about deducting business meals, as well as the limitations:

Ordinary and necessary business expenses – All business expenses must meet the general deductibility requirement of being “ordinary and necessary” in carrying on the business. These terms have been fairly broadly defined to mean customary or usual, and appropriate or helpful. Thus, if it is reasonable in your business to take clients or other business people out to restaurants or otherwise provide them with meals or refreshments you should be able to pass this general test.
“Directly related” or “associated with” – A second level of tests specially applicable to meal expenses must also be satisfied. Under them, the business meal must be either “directly related to” or “associated with” the business.
“Directly related” means involving an “active” discussion aimed at getting “immediate” revenue. Thus, a specific, concrete business benefit is expected to be derived, not just general goodwill from making a client or associate view you favorably. And the principal purpose for the meal must be business. Also, you must have engaged actively during the meal, via a meeting, discussion, etc.
The directly related test can also be met if the meal takes place in a clear business setting directly furthering your business, i.e., where there is no meaningful personal or social relationship between you and the others involved. Meetings or discussions that take place at cocktail parties—which are essentially social events—wouldn’t meet this test.
If the “directly related” test can’t be met, the expense may qualify as “associated with” the active conduct of business if the meal precedes or follows (i.e., takes place on the same day as) a substantial and bona fide business discussion. This test is easier to satisfy. The “goodwill” type of meal at a restaurant can qualify. The meal will be considered associated with the active conduct of the business if its purpose is to get new business or encourage the continuation of a business relationship. You (or an employee of yours) must be present. That is, for example, if you simply cover the cost of a client’s meal after a business meeting but don’t join him at it, the expense doesn’t qualify.
Substantiation – Almost as important as qualifying for the deduction are the requirements for proving that it qualifies. The use of reasonable estimates isn’t sufficient to stand up to IRS challenge. You must be able to establish the amount spent, the time and place, the business purpose, and the business relationship of the individuals involved. Obviously, you must set up careful and detailed record-keeping procedures to keep track of each business meal and to justify its business connection. For expenses of $75 or more, documentary proof (receipts, etc.) is required.
Deduction limitations – Several additional limitations apply. First, expenses that are “lavish or extravagant” aren’t deductible. This is generally a “reasonableness” test and doesn’t impose any fixed limits on the cost of meals. Expenses incurred at first class restaurants or clubs can qualify as deductible.

Once the expenditure qualifies, it is important to note that it is only 50% deductible. Obviously, this rule severely reduces the tax benefit of business meals. If you spend about $50 a week on qualifying business meals, or $2,500 for the year, your deduction will only be $1,250, for tax savings of around $300 to $400.

Alimony under the Tax Cuts and Jobs Act

Fri, 28 Dec 2018 20:27:14 GMT

Gregory S. Dowell

December 28, 2018

T he Tax Cuts and Jobs Act (the Act) has made changes to the tax treatment of alimony. These changes take effect for divorce agreements and legal separation agreements executed after 2018 .

Under the current rules, an individual who pays alimony or separate maintenance may deduct an amount equal to the alimony or separate maintenance payments paid during the year as an “above-the-line” deduction. An “above-the-line” deduction (a deduction that a taxpayer need not itemize deductions to claim) is more valuable for the taxpayer than an itemized deduction. Conversely, under current rules, alimony and separate maintenance payments are taxable to the recipient spouse.

Under the new rules of the Act, there is no deduction for alimony for the payer. Furthermore, alimony is not gross income to the recipient. So for divorces and legal separations that are executed (i.e., that come into legal existence due to a court order) after 2018 , the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse doesn’t include them in gross income or pay federal income tax on them.

New rules don’t apply to existing divorces and separations. It’s important to emphasize that the current (pre-Act) rules continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019.

Some taxpayers may want the Act rules to apply to their existing divorce or separation. Under a special rule, if taxpayers have an existing (pre-2019) divorce or separation decree, and they have that agreement legally modified, then the new rules don’t apply to that modified decree, unless the modification expressly provides that the Act rules are to apply. There may be situations where applying the Act rules voluntarily is beneficial for the taxpayers, such as a change in the income levels of the alimony payer or the alimony recipient.

2018 Year End Tax Newsletter

Thu, 20 Dec 2018 19:37:34 GMT

December 10, 2018

Dear clients and friends,

Proper planning for taxes is key for many taxpayers. Each of us should take some time to assess our situation, and then to determine what steps should be taken to optimize the income tax picture. Many changes will impact individuals and businesses this year. For individuals, there are new, lower income tax rates, a substantially increased standard deduction, severely limited itemized deductions and no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT). For businesses, the corporate tax rate is cut to 21%, the corporate AMT is gone, there are new limits on business interest deductions, and significantly liberalized expensing and depreciation rules. In addition, there is a new deduction for non-corporate taxpayers with qualified business income from pass-through entities.

In this communication, we will provide checklists of actionable items you may wish to consider in the remaining days of 2018. Those checklists will be broken out between individuals and businesses for your ease of use. Please note that we have also included some non-tax matters for individuals to consider in these final days of 2018.

The Tax Cuts and Jobs Act that was passed a year ago is only now being interpreted by the IRS. While many parts of the new Act are clear, there are many parts that were written vaguely and without specificity, leaving tax professionals in the position of trying to interpret the intent of Congress. New regulations and rulings will be issued periodically, and we encourage you to check our website for updates that might be relevant to you ( www.dowellcpa.com ). We have many articles posted on the site that are specific to individuals, business owners, fiduciaries, and nonprofits.

Most importantly, please know that our professionals are here to serve you. If you have a question or concern, please call or email us. Whether you might be a client or a friend of the firm, we also want to take the time to thank you. In this busy world, we know that we do not say thanks often enough. We know that we would not be here without you.

Whatever your faith or spiritual beliefs, we wish you peace and good health this holiday season, and in the years ahead.

Dowell Group, LLP

2018 YEAR-END CHECKLISTS

Individuals – Year-End Tax Planning

Flexible Spending Account – Consider where you stand for this year, and determine if you need to adjust the deductions for next year in your employer’s health flexible spending account (FSA).
Health Savings Account – Make sure you have maximized contributions to your health savings account (HSA).
401(k) plans – fully fund, if you are able, for 2018.
Capital gains and losses – Determine the net short and long-term capital gains and losses recognized thus far; also consider any significant capital gain distributions you might receive from mutual funds or partnership investments, and take into account any capital loss carryovers. Once you understand the overall amounts of net gains and losses, strategize what action you may want to take by the end of this year. It may be appropriate to “harvest” capital losses in your account to offset gains (however, see discussion immediately following on “wash” sales). Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the “maximum zero rate amount” (e.g., $77,200 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year, there is no benefit to selling stocks at a loss, as there is no taxable gain to offset.
“Wash” sales – You might have a stock or bond that shows a loss, but you want to continue to hold that security because you think the price will recover. That security can be sold and the loss recognized, as long as the security is not repurchased for 30 days; if purchased before 30 days, the sale is deemed to be a “wash” sale and the loss is disallowed.
Make an estimate of this year’s tax liabilities – If your situation has been volatile this year, make a quick projection of your Federal and State income taxes to see if you have paid in an adequate amount of Federal and State income taxes. If you are short, you may be able to increase withholdings or bump up the estimated tax payments before year-end. If you look to be overpaid, you can reduce the final quarterly installments.
Using a distribution from a retirement plan to pay a shortfall before year end – Take an eligible rollover distribution from a qualified retirement plan before the end of 2018 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2018. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2018, but the withheld tax will be applied pro rata over the full 2018 tax year to reduce previous underpayments of estimated tax.
Postpone or accelerate income and deductions – Postpone income until 2019 and accelerate deductions into 2018 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2018 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2018. For example, that may be the case where a person will have a more favorable filing status this year than next (for example, head of household versus individual filing status), or expects to be in a higher tax bracket next year.
Defer a bonus – It may be advantageous to try to arrange with your employer to defer, until early 2019, a bonus that may be coming your way. This could cut as well as defer your tax.
Charitable contributions – Consider making any additional charitable gifts by the end of the year. Gifts are only deductible if made to an organized 501(c)3 charity. Be sure to get a receipt from the charity as evidence of the timely gift.
Charitable contributions of appreciated stock – Donating appreciated securities is an effective way of meeting the desire to support a charity while allowing the donor to deduct the full fair market value of the gift. The donor will not pay tax on the capital gain of those securities that were gifted.
Non-cash charitable contributions – Consider making additional noncash charitable gifts by the end of the year, but pay particular attention to the substantiation rules if you are claiming that the fair market value of your gifts exceeded $250. Make a detailed dated list of the donated items and their condition, and affix the list to the receipt; it’s a good idea to take a picture of the goods as well.
Prepay expenses – Consider using a credit card to prepay expenses that can generate deductions for this year (charitable, business, and medical expenses are good examples), even if you do not pay the credit card bill until 2019.
State income taxes – If you expect to owe state and local income taxes when you file your return next year and fear you could incur a penalty for underpayment, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments) before year-end. Be aware that doing so, however, could push your total state and local taxes paid over the $10,000 limit for the year.
AMT – Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2018. In many cases, AMT will not apply in situations where it has applied in the past for individuals, due to limits on the deductions for state and local taxes and the elimination of miscellaneous itemized deductions.
Itemized deductions and “bunching” deductions in one year – Beginning in 2018, many taxpayers who claimed itemized deductions will no longer be able to do so, due to the increase in the basic standard deduction (to $24,000 for joint filers, $12,000 for singles, $18,000 for heads of household, and $12,000 for marrieds filing separately), and the elimination and restriction of some itemized deductions. The cap on deducting state and local income tax and real estate tax is set at no more than $10,000, and miscellaneous itemized deductions and unreimbursed employee expenses are no longer deductible. You can still itemize medical expenses to the extent they exceed 7.5% of your adjusted gross income, charitable contributions, and interest (also capped) on qualifying residence debt, but those deductions will not result in a benefit if they do not cumulatively exceed the new, higher standard deduction referenced above. Some taxpayers may be able to work around the new reality by applying a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer will benefit by making two years’ worth of charitable contributions this year, instead of spreading out donations over 2018 and 2019.
Personal exemptions – Bear in mind that the Act eliminated personal exemptions.
Roth conversion – If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA in 2018 if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2018, and possibly reduce tax breaks geared to AGI (or modified AGI).
Required Minimum Distributions (RMDs) – RMDs must be taken from your IRA, 401(k) plan, or other employer-sponsored retirement plan if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70 ½ in 2018, you can delay the first required distribution to 2019, but if you do, you will have to take a double distribution in 2019 (the amount required for 2018 plus the amount required for 2019).
Gifting RMD to charity – If you are age 70-½ or older by the end of 2018, have traditional IRAs, and particularly if you can’t itemize your deductions, consider making 2018 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, which can result in tax savings.
Gifting RMD to charity in the future, if you think you will not be able to itemize – If you were younger than age 70-½ at the end of 2018, you anticipate that in the year that you turn 70-½ and/or in later years you will not itemize your deductions, and you don’t have any traditional IRAs, establish and contribute as much as you can to one or more traditional IRAs in 2018. If the immediately previous sentence applies to you, except that you already have one or more traditional IRAs, make maximum contributions to one or more traditional IRAs in 2018. Then, when you reach age 70-½, do the steps in the immediately preceding bullet point. Doing all of this will allow you to, in effect, convert nondeductible charitable contributions that you make in the year you turn 70-½ and later years, into deductible-in-2018 IRA contributions and reductions of gross income from age 70-½ and later year distributions from the IRAs.
Gifts to family or friends – Make gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $15,000 in 2018 to each of an unlimited number of individuals. You can also gift $30,000 to one person by using your spouse’s exclusion, but note that the IRS requires you to file a gift tax return in this situation.
Education funding – If educational funding is an issue in your family, consider funding 529 plans by the end of the year.
Marriage or divorced during the year – If you married during the year, no matter what date, you and your spouse will file either as married with a joint return or as married filing separately. In most cases, it is advantageous to file married joint. Your incomes and deductions will be combined, and that often leads to increased tax liabilities for the year, compared to when you were both single. If divorced during the year, you will file as single or head of household, and you will need to make sure you have paid adequate taxes. If you had a change in marital status, we suggest you call your tax professional.
Alimony – One of the changes in the Act was to eliminate the deduction for alimony (and inclusion as income) for divorces entered into after December 31, 2018.
Dispose of passive activities – The owner of a business should consider disposing of a passive activity in 2018 if doing so will allow the owner to deduct suspended passive activity losses.
Increase basis – The owner of an interest in a partnership or an S corporation may need to increase the basis in the entity so that the owner can deduct a loss from it for 2018.

Individuals – Other Considerations at Year-End

Review your portfolio – The end of the year is a perfect time to analyze your holdings and determine if the risk tolerances and asset allocations are still appropriate for your investment objectives. Consider your age, health, and family issues.
Review the beneficiary designations – Review the beneficiaries named on retirement accounts or insurance policies; consider if assets are titled correctly; determine if a family member should be added as a signer on an account.
Wills and Trusts – If you have not set up wills and trusts, then contact your attorney; call us if you need a reference. If it has been many years since you had your wills and trusts drafted, set up a meeting with your attorney or CPA to review the documents, including the named beneficiaries, guardians, and executors.
Estate planning – For decedents dying from 2018 to 2025, the Act increased the amount that is exempt from Federal estate taxes to $11.18 million per individual, and to $22.36 million per married couple. States, in some cases, may have lower thresholds for the amounts that are subject to state inheritance taxes.
Grantor (“Living”) trusts – If you have substantial assets, it is possible that you should have a grantor (also known as living or revocable) trust. Be sure that all of your brokerage accounts are re-titled in the name of the trust.
Power of Attorney – As part of the review of wills and trusts, also consider powers-of-attorney and health care powers-of-attorney you have in force (or should have in force) for all of your family members.
Insurance – Review the various types of insurance coverages you have in place and re-examine your needs. This includes homeowner’s, auto, life, health, disability, umbrella liability, and long-term care.
Family meeting – Consider having a family meeting to give an overview of your investments and objectives, charitable giving strategies and desires, the location of key documents, and names of your key advisors (CPAs, attorneys, bankers, insurance agents, investment advisors, etc.).
Safe deposit box – Make a special point to visit your safe deposit box and inventory (and organize) the contents. Make sure your executor, spouse, or other key person knows where the key is kept.

Businesses – Year-End Tax Planning

20% qualified business income deduction – For tax years beginning in 2018, taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. If taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in for joint filers with taxable income between $315,000 and $415,000 and for all other taxpayers with taxable income between $157,500 and $207,500.
20% qualified business income deduction income planning – Considering the above, taxpayers may be able to achieve significant savings by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2018. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don’t make a move in this area without consulting your tax adviser.
Cash basis of accounting – More “small businesses” are able to use the cash (as opposed to accrual) method of accounting in 2018 and later years than were allowed to do so in earlier years. To qualify as a “small business” a taxpayer must, among other things, satisfy a gross receipts test. The gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don’t exceed $25 million (the dollar amount used to be $5 million). Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.
Expensing equipment purchases under Code Section 179 – In 2018, the expensing limit is $1,000,000, and the investment ceiling limit is $2,500,000. Most depreciable property (not buildings) and off-the-shelf computer software. Expensing also is available for qualified improvement property (generally, any interior improvement to a building’s interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. Many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. The expensing deduction is not prorated for the time that the asset is in service during the year. Property acquired and placed in service in the last days of 2018, rather than at the beginning of 2019, can result in a full expensing deduction for 2018.
Filing due dates – Remember from last year that C corporation and partnership filing deadlines have been swapped. Partnership returns will be due March 15th, while C corporation returns are due on April 15th.
Bonus depreciation – Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment—bought used (with some exceptions) or new—if purchased and placed in service this year. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2018.
Reasonable compensation – Shareholder-employees must take reasonable compensation for their services, and this continues to be a focus of the IRS. On the positive side, taking reasonable compensation can also open the door to larger retirement plan contributions for the employee-owners.
Retirement plans – It is too late to set up a 401k or a Simple plan for 2018, but some options may still available to save on a business owner’s 2018 taxes. If you are self-employed and haven’t done so yet, consider setting a self-employed retirement plan. This is also a good time to consider which retirement plan is the right one for your business for 2019 and future years.
Cancellation of debt – Analyze the specific facts and consider the effect on income and income taxes if debt is cancelled in 2018 or 2019.
Research and development credit – The calculation for the R&D credit is complicated and will typically require a great deal of analysis. However, it provides a credit for every qualifying dollar spent on research and development activity. Historically, the credit has had limited immediate impact to start-up businesses because it was only helpful if the entity had taxable income. The credit can now be used (in a diminished capacity) as a refund to offset payroll taxes. In another change, privately-held businesses can now claim the R&D credit against the AMT. This is important because many new businesses have net operating losses in the early years, which pushes the business into AMT, limiting their ability to benefit from the R&D credit.