The IRS continues to experience delays mailing backlogged notices due to the volume and restart of issuing notices during the pandemic. The delay impacts some, but not all, IRS notices dated from Nove...
The IRS has reminded employers of filing file Form W-2, Wage and Tax Statement, and other wage statements by Monday, February 1, 2021, to avoid penalties and help the IRS prevent fraud. Due to the us...
Employers that hired a designated community resident or a qualified summer youth employee under Code Sec. 51(d)(5) or (d)(7) who began work on or after January 1, 2018, and before January 1, 2021,...
The IRS has announced that the applicable dollar amount used to calculate the fees imposed by Code Secs. 4375 and 4376 for policy and plan years that end on or after October 1, 2020, and before Oc...
The IRS has announced that it is revising Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code, to allow electronic filing for the first time, as...
A taxpayer’s application for rehearing was overruled as the taxpayer failed to substantiate the claimed deductions concerning Alabama sales and use tax assessment. In this matter, the taxpayer claim...
A hospital operator (taxpayer) was not entitled to a Louisiana local sales tax exclusion, exemption, or refund for prescription drugs, implants, and medical supplies purchased from a wholesaler and ad...
The Mississippi Department of Revenue has issued a notice discussing the Children’s Promise Act, which provides for a corporate income or insurance premium tax credit for businesses that donate to a...
A Texas district court erred in dismissing the taxpayer’s appeal for lack of jurisdiction because the taxpayer could seek judicial review of its tax assessment without full prepayment of taxes. The ...
Businesses received several favorable tax breaks in the COVID-19 relief bill that was recently signed into law. Here are just two of them.
The COVID-19 relief bill, signed into law on December 27, 2020, provides a further response from the federal government to the pandemic. It also contains numerous tax breaks for businesses. Here are some highlights of the Consolidated Appropriations Act of 2021 (CAA), which also includes other laws within it. Business meal deduction increased The new law includes a provision that removes the 50% limit on deducting business meals provided by restaurants and makes those meals fully deductible. As background, ordinary and necessary food and beverage expenses that are incurred while operating your business are generally deductible. However, for 2020 and earlier years, the deduction is limited to 50% of the allowable expenses. The new legislation adds an exception to the 50% limit for expenses of food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022. The use of the word “by” (rather than “in”) a restaurant clarifies that the new tax break isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also 100% deductible. Note: Other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for business meal deductions. All the other existing requirements continue to apply when you dine with current or prospective customers, clients, suppliers, employees, partners and professional advisors with whom you deal with (or could engage with) in your business. Therefore, to be deductible: The food and beverages can’t be lavish or extravagant under the circumstances, and You or one of your employees must be present when the food or beverages are served. If food or beverages are provided at an entertainment activity (such as a sporting event or theater performance), either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible. PPP loans The new law authorizes more money towards the Paycheck Protection Program (PPP) and extends it to March 31, 2021. There are a couple of tax implications for employers that received PPP loans: Clarifications of tax consequences of PPP loan forgiveness. The law clarifies that the non-taxable treatment of PPP loan forgiveness that was provided by the 2020 CARES Act also applies to certain other forgiven obligations. Also, the law makes clear that taxpayers, whose PPP loans or other obligations are forgiven, are allowed deductions for otherwise deductible expenses paid with the proceeds. In addition, the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness. Waiver of information reporting for PPP loan forgiveness. Under the CAA, the IRS is allowed to waive information reporting requirements for any amount excluded from income under the exclusion-from-income rule for forgiveness of PPP loans or other specified obligations. (The IRS had already waived information returns and payee statements for loans that were guaranteed by the Small Business Administration). Much more These are just a couple of the provisions in the new law that are favorable to businesses. The CAA also provides extensions and modifications to earlier payroll tax relief, allows changes to employee benefit plans, includes disaster relief and much more. Contact us if you have questions about your situation. © 2021
Businesses face a variety of tax-related deadlines in the first quarter of 2021. Here are some of them.
Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. January 15 Pay the final installment of 2020 estima ted tax. Farmers and fishermen: Pay estimated tax for 2020. February 1 (The usual deadline of January 31 is a Sunday) File 2020 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees. Provide copies of 2020 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required. File 2020 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS. File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2020. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return. File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2020. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”) File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2020 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return. March 1 (The usual deadline of February 28 is a Sunday) File 2020 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.) March 16 If a calendar-year partnership or S corporation, file or extend your 2020 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2020 contributions to pension and profit-sharing plans. © 2020
The fourth estimated tax payment deadline for 2020 is coming up. Here are the details of when it is and whether you’re required to make a payment.
If you’re self-employed and don’t have withholding from paychecks, you probably have to make estimated tax payments. These payments must be sent to the IRS on a quarterly basis. The fourth 2020 estimated tax payment deadline for individuals is Friday, January 15, 2021. Even if you do have some withholding from paychecks or payments you receive, you may still have to make estimated payments if you receive other types of income such as Social Security, prizes, rent, interest, and dividends. Pay-as-you-go system You must make sufficient federal income tax payments long before the April filing deadline through withholding, estimated tax payments, or a combination of the two. If you fail to make the required payments, you may be subject to an underpayment penalty, as well as interest. In general, you must make estimated tax payments for 2020 if both of these statements apply: You expect to owe at least $1,000 in tax after subtracting tax withholding and credits, and You expect withholding and credits to be less than the smaller of 90% of your tax for 2020 or 100% of the tax on your 2019 return — 110% if your 2019 adjusted gross income was more than $150,000 ($75,000 for married couples filing separately). If you’re a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return. Quarterly due dates Estimated tax payments are spread out through the year. The due dates are April 15, June 15, September 15 and January 15 of the following year. However, if the date falls on a weekend or holiday, the deadline is the next business day. Estimated tax is calculated by factoring in expected gross income, taxable income, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher or by credit or debit card. Seasonal businesses Most individuals make estimated tax payments in four installments. In other words, you can determine the required annual payment, divide the number by four and make four equal payments by the due dates. But you may be able to make smaller payments under an “annualized income method.” This can be useful to people whose income isn’t uniform over the year, perhaps because of a seasonal business. You may also want to use the annualized income method if a large portion of your income comes from capital gains on the sale of securities that you sell at various times during the year. Determining the correct amount Contact us if you think you may be eligible to determine your estimated tax payments under the annualized income method, or you have any other questions about how the estimated tax rules apply to you. © 2020
As we wind down 2020, be aware that December 31 is an important date when it comes to filing your tax return. Whether you’re married or unmarried on that date will affect how you file. Check out the 5 federal tax filing statuses and who can claim them.
When it comes to taxes, December 31 is more than just New Year’s Eve. That date will affect the filing status box that will be checked on your 2020 tax return. When filing a return, you do so with one of five tax filing statuses. In part, they depend on whether you’re married or unmarried on December 31. More than one filing status may apply, and you can use the one that saves the most tax. It’s a lso possible that your status could change during the year. Here are the filing statuses and who can claim them: Single. This is generally used if you’re unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law. Married filing jointly. If you’re married, you can file a joint tax return with your spouse. If your spouse passes away, you can generally file a joint return for that year. Married filing separately. As an alternative to filing jointly, married couples can choose to file separate tax returns. In some cases, this may result in less tax owed. Head of household. Certain unmarried taxpayers may qualify to use this status and potentially pay less tax. Special requirements are described below. Qualifying widow(er) with a dependent child. This may be used if your spouse died during one of the previous two years and you have a dependent child. Other conditions also apply. How to qualify as “head of household” In general, head of household status is more favorable than filing as a single taxpayer. To qualify, you must “maintain a household” that, for more than half the year, is the principal home of a “qualifying child” or other relative that you can claim as your dependent. A “qualifying child” is defined as one who: Lives in your home for more than half the year, Is your child, stepchild, foster child, sibling, stepsibling or a descendant of any of these, Is under 19 years old or under age 24 if enrolled as a student, and Doesn’t provide over half of his or her own support for the year. If a child’s parents are divorced, different rules may apply. Also, a child isn’t eligible to be a “qualifying child” if he or she is married and files a joint tax return or isn’t a U.S. citizen or resident. There are other head of household requirements. You’re considered to maintain a household if you live in it for the tax year and pay more than half the cost. This includes property taxes, mortgage interest, rent, utilities, property insurance, repairs, upkeep, and food consumed in the home. Don’t include medical care, clothing, education, life insurance or transportation. Under a special rule, you can qualify as head of household if you maintain a home for a parent even if you don’t live with him or her. To qualify, you must claim the parent as your dependent. Determining marital status You must generally be unmarried to claim head of household status. If you’re married, you must generally file as either married filing jointly or married filing separately — not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year, a qualifying child lives with you and you “maintain” the household, you’re treated as unmarried. In this case, you may qualify as head of household. Contact us if you have questions about your filing status. Or ask us when we prepare your return. © 2020
If you become disabled and are fortunate enough to receive disability income, you may have to pay federal tax on it. Here are the basic rules.
Many Americans receive disability income. You may wonder if — and how — it’s taxed. As is often the case with tax questions, the answer is … it depends. The key factor is who paid for the benefit. If the income is paid directly to you by your employer, it’s taxable to you as ordinary salary would be. (Taxable benefits are also subject to federal income tax withholding, although depending on the e mployer’s disability plan, in some cases aren’t subject to the Social Security tax.) Frequently, the payments aren’t made by the employer but by an insurance company under a policy providing disability coverage or, under an arrangement having the effect of accident or health insurance. If this is the case, the tax treatment depends on who paid for the coverage. If your employer paid for it, then the income is taxed to you just as if paid directly to you by the employer. On the other hand, if it’s a policy you paid for, the payments you receive under it aren’t taxable. Even if your employer arranges for the coverage, (in other words, it’s a policy made available to you at work), the benefits aren’t taxed to you if you pay the premiums. For these purposes, if the premiums are paid by the employer but the amount paid is included as part of your taxable income from work, the premiums are treated as paid by you. A couple of examples Let’s say your salary is $1,000 a week ($52,000 a year). Additionally, under a disability insurance arrangement made available to you by your employer, $10 a week ($520 for the year) is paid on your behalf by your employer to an insurance company. You include $52,520 in income as your wages for the year: the $52,000 paid to you plus the $520 in disability insurance premiums. In this case, the insurance is treated as paid for by you. If you become disabled and receive benefits, they aren’t taxable income to you. Now, let’s look at an example with the same facts as above. Except in this case, you include only $52,000 in income as your wages for the year because the amount paid for the insurance coverage qualifies as excludable under the rules for employer-provided health and accident plans. In this case, the insurance is treated as paid for by your employer. If you become disabled and receive benefits, they are taxable income to you. Note: There are special rules in the case of a permanent loss (or loss of the use) of a part or function of the body, or a permanent disfigurement. Social Security benefits This discussion doesn’t cover the tax treatment of Social Security disability benefits. These benefits may be taxed to you under different rules. How much coverage is needed? In deciding how much disability coverage you need to protect yourself and your family, take the tax treatment into consideration. If you’re buying the policy yourself, you only have to replace your after tax, “take-home” income because your benefits won’t be taxed. On the other hand, if your employer pays for the benefit, you’ll lose a percentage to taxes. If your current coverage is insufficient, you may wish to supplement an employer benefit with a policy you take out. Contact us if you’d like to discuss this in more detail. © 2020
There are a number of tax obligations that must be met when a business closes its doors. Sadly, because of COVID-19, many businesses are facing this reality. Here are the basic requirements.
Unfortunately, the COVID-19 pandemic has forced many businesses to shut down. If this is your situation, we’re here to assist you in any way we can, including taking care of the various tax obligations that must be met. Of course, a business must file a final income tax return and some other related forms for the year it closes. The type of return to be filed depends on the type of business you h ave. Here’s a rundown of the basic requirements. Sole Proprietorships. You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year you close the business. You may also need to report self-employment tax. Partnerships. A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedules K-1, “Partner’s Share of Income, Deductions, Credits, Etc.” All Corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock. C Corporations. File Form 1120, “U.S. Corporate Income Tax Return,” for the year you close. Report capital gains and losses on Schedule D. Indicate this is the final return. S Corporations. File Form 1120-S, “U.S. Income Tax Return for an S Corporation” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1. All Businesses. Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business. Employees and contract workers If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty. If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.” Other tax issues If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees. We can assist you with many other complicated tax issues related to closing your business, including Paycheck Protection Plan (PPP) loans, the COVID-19 employee retention tax credit, employment tax deferral, debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues. We can advise you on the length of time you need to keep business records. You also must cancel your Employer Identification Number (EIN) and close your IRS business account. If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these issues and get answers to any questions. © 2020
Employees pay Social Security tax on their wages up to the current tax year’s “wage base.” The Social Security Administration just announced the base amount for 2021.
If your small business is planning for payroll next year, be aware that the “Social Security wage base” is increasing. The Social Security Administration recently announced that the maximum earnings subject to Social Security tax will increase from $137,700 in 2020 to $142,800 in 2021. For 2021, the FICA tax rate for both employers and employees is 7.65% (6.2% for Social Security and 1.45% for M edicare). For 2021, the Social Security tax rate is 6.2% each for the employer and employee (12.4% total) on the first $142,800 of employee wages. The tax rate for Medicare is 1.45% each for the employee and employer (2.9% total). There’s no wage base limit for Medicare tax so all covered wages are subject to Medicare tax. In addition to withholding Medicare tax at 1.45%, an employer must withhold a 0.9% additional Medicare tax from wages paid to an employee in excess of $200,000 in a calendar year. Employees working more than one job You may have employees who work for your business and who also have a second job. They may ask if you can stop withholding Social Security taxes at a certain point in the year because they’ve already reached the Social Security wage base amount. Unfortunately, you generally can’t stop the withholding, but the employees will get a credit on their tax returns for any excess withheld. Older employees If your business has older employees, they may have to deal with the “retirement earnings test.” It remains in effect for individuals below normal retirement age (age 65 to 67 depending on the year of birth) who continue to work while collecting Social Security benefits. For affected individuals, $1 in benefits will be withheld for every $2 in earnings above $18,960 in 2021 (up from $18,240 in 2020). For working individuals collecting benefits who reach normal retirement age in 2021, $1 in benefits will be withheld for every $3 in earnings above $46,920 (up from $48,600 in 2020), until the month that the individual reaches normal retirement age. After that month, there’s no limit on earnings. Contact us if you have questions. We can assist you with the details of payroll taxes and keep you in compliance with payroll laws and regulations. © 2020
Entrepreneurs: Don’t ignore saving for retirement. Here are the basics of tax-favored plans to help build your nest egg.
If you recently launched a business, you may want to set up a tax-favored retirement plan for yourself and your employees. There are several types of qualified plans that are eligible for these tax advantages: A current deduction from income to the employer for contributions to the plan, Tax-free buildup of the value of plan investments, and The deferral of income (augmented by inve stment earnings) to employees until funds are distributed. There are two basic types of plans. Defined benefit pension plans A defined benefit plan provides for a fixed benefit in retirement, based generally upon years of service and compensation. While defined benefit plans generally pay benefits in the form of an annuity (for example, over the life of the participant, or joint lives of the participant and his or her spouse), some defined benefit plans provide for a lump sum payment of benefits. In certain “cash balance plans,” the benefit is typically paid and expressed as a cash lump sum. Adoption of a defined benefit plan requires a commitment to fund it. These plans often provide the greatest current deduction from income and the greatest retirement benefit, if the business owners are nearing retirement. However, the administrative expenses associated with defined benefit plans (for example, actuarial costs) can make them less attractive than the second type of plan. Defined contribution plans A defined contribution plan provides for an individual account for each participant. Benefits are based solely on the amount contributed to the participant’s account and any investment income, expenses, gains, losses and forfeitures (usually from departing employees) that may be allocated to a participant’s account. Profit-sharing plans and 401(k)s are defined contribution plans. A 401(k) plan provides for employer contributions made at the direction of an 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: On a pre-tax basis, saving employees current income tax on the amount contributed, or On an after-tax basis. This includes Roth 401(k) contributions (if permitted), which will allow distributions (including earnings) to be made to the employee tax-free in retirement, if conditions are satisfied. Automatic-deferral provisions, if adopted, require employees to opt out of participation. An employer may, or may not, provide matching contributions on behalf of employees who make elective deferrals to the plan. Matching contributions may be subject to a vesting schedule. While 401(k) plans are subject to testing requirements, so that “highly compensated” employees don’t contribute too much more than non-highly-compensated employees, these tests can be avoided if you adopt a “safe harbor” 401(k) plan. A highly compensated employee in 2020 is defined as one who earned more than $130,000 in the preceding year. There are other types of tax-favored retirement plans within these general categories, including employee stock ownership plans (ESOPs). Other plans Small businesses can also adopt a Simplified Employee Pension (SEP), and receive similar tax advantages to “qualified” plans by making contributions on behalf of employees. And a business with 100 or fewer employees can establish a Savings Incentive Match Plan for Employees (SIMPLE). Under a SIMPLE, generally an IRA is established for each employee and the employer makes matching contributions based on contributions elected by employees. There may be other options. Contact us to discuss the types of retirement plans available to you. © 2020
Did you file an extension until Oct. 15 to file your 2019 tax return? After finishing, you may find yourself with piles of tax-related documents. You might not want to toss them out for fear of trashing something important. Here are some tax recordkeeping guidelines.
October 15 is the deadline for individual taxpayers who extended their 2019 tax returns. (The original April 15 filing deadline was extended this year to July 15 due to the COVID-19 pandemic.) If you’re finally done filing last year’s return, you might wonder: Which tax records can you toss once you’re done? Now is a good time to go through old tax records and see what you can discard. The genera l rules At minimum, you should keep tax records for as long as the IRS has the ability to audit your tax return or assess additional taxes, which generally is three years after you file your return. This means you potentially can get rid of most records related to tax returns for 2016 and earlier years. However, the statute of limitations extends to six years for taxpayers who understate their adjusted gross income (AGI) by more than 25%. What constitutes an understatement may go beyond simply not reporting items of income. So a general rule of thumb is to save tax records for six years from filing, just to be safe. Keep some records longer You need to hang on to some tax-related records beyond the statute of limitations. For example: Keep the tax returns themselves indefinitely, so you can prove to the IRS that you actually filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or if you filed a fraudulent one.) Retain W-2 forms until you begin receiving Social Security benefits. Questions might arise regarding your work record or earnings for a particular year, and your W-2 helps provide the documentation needed. Keep records related to real estate or investments for as long as you own the assets, plus at least three years after you sell them and report the sales on your tax return (or six years if you want extra protection). Keep records associated with retirement accounts until you’ve depleted the accounts and reported the last withdrawal on your tax return, plus three (or six) years. Other reasons to retain records Keep in mind that these are the federal tax record retention guidelines. Your state and local tax record requirements may differ. In addition, lenders, co-op boards and other private parties may require you to produce copies of your tax returns as a condition to lending money, approving a purchase or otherwise doing business with you. Contact us if you have questions or concerns about recordkeeping. © 2020
Are you an investor or a trader? While trader status is difficult to achieve, if a taxpayer qualifies, he or she can deduct investment-related expenses.
In some cases, investors have significant related expenses, such as the cost of subscriptions to financial periodicals and clerical expenses. Are they tax deductible? Under the Tax Cut and Jobs Act, these expenses aren’t deductible through 2025 if they’re considered expenses for the production of income. But they are deductible if they’re considered trade or business expenses. (For tax years befor e 2018, production-of-income expenses were deductible, but were included in miscellaneous itemized deductions, which were subject to a 2%-of-adjusted-gross-income floor.) In order to deduct investment-related expenses as business expenses, you must figure out if you’re an investor or a trader — and be aware that it’s more advantageous (and difficult) to qualify for trader status. To qualify, you must be engaged in a trade or business. The U.S. Supreme Court held many years ago that an individual taxpayer isn’t engaged in a trade or business merely because the individual manages his or her own securities investments, regardless of the amount of the investments or the extent of the work required. However, if you can show that your investment activities rise to the level of carrying on a trade or business, you may be considered a trader engaged in a trade or business, rather than an investor. As a trader, you’re entitled to deduct your 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, isn’t 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 U.S. 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 if both of the following are true: The taxpayer’s trading is substantial (in other words, sporadic trading isn’t 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, you must show that you buy and sell securities with reasonable frequency in an effort to profit on a short-term basis. In one case, even a taxpayer who made more than 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. Contact us if you have questions about whether your investment-related expenses are deductible. We can also help explain how to help keep capital gains taxes low when you sell investments. © 2020
Have you lost your job and collecting unemployment? Or are you fortunate to be working from home because of the pandemic? Both of these situations could have tax implications.
COVID-19 has changed our lives in many ways, and some of the changes have tax implications. Here is basic information about two common situations. 1. Working from home. Many employees have been told not to come into their workplaces due to the pandemic. If you’re an employee who “telecommutes” — that is, you work at home, and communicate with your employer mainly by telephone, videoconferencing, email, etc. — you should know about the strict rules that govern whether you can deduct your home office expenses. Unfortunately, employee home office expenses aren’t currently deductible, even if your employer requires you to work from home. Employee business expense deductions (including the expenses an employee incurs to maintain a home office) are miscellaneous itemized deductions and are disallowed from 2018 through 2025 under the Tax Cuts and Jobs Act. However, if you’re self-employed and work out of an office in your home, you can be eligible to claim home office deductions for your related expenses if you satisfy the strict rules. 2. Collecting unemployment Millions of Americans have lost their jobs due to COVID-19 and are collecting unemployment benefits. Some of these people don’t know that these benefits are taxable and must be reported on their federal income tax returns for the tax year they were received. Taxable benefits include the special unemployment compensation authorized under the Coronavirus Aid, Relief and Economic Security (CARES) Act. In order to avoid a surprise tax bill when filing a 2020 income tax return next year, unemployment recipients can have taxes withheld from their benefits now. Under federal law, recipients can opt to have 10% withheld from their benefits to cover part or all their tax liability. To do this, complete Form W4-V, Voluntary Withholding Request, and give it to the agency paying benefits. (Don’t send it to the IRS.) We can help We can assist you with advice about whether you qualify for home office deductions, and how much of these expenses you can deduct. We can also answer any questions you have about the taxation of unemployment benefits as well as any other tax issues that you encounter as a result of COVID-19. © 2020
Back to school in the COVID-19 era may mean remote learning for your college student. But parents may be able to take advantage of one of these tax breaks for their education expenses.
Despite the COVID-19 pandemic, students are going back to school this fall, either remotely, in-person or under a hybrid schedule. In any event, parents may be eligible for certain tax breaks to help defray the cost of education. Here is a summary of some of the tax breaks available for education. 1. Higher education tax credits. Generally, you may be able to claim either one of two tax credits for higher education expenses — but not both. With the American Opportunity Tax Credit (AOTC), you can save a maximum of $2,500 from your tax bill for each full-time college or grad school student. This applies to qualified expenses including tuition, room and board, books and computer equipment and other supplies. But the credit is phased out for moderate-to-upper income taxpayers. No credit is allowed if your modified adjusted gross income (MAGI) is over $90,000 ($180,000 for joint filers). The Lifetime Learning Credit (LLC) is similar to the AOTC, but there are a few important distinctions. In this case, the maximum credit is $2,000 instead of $2,500. Furthermore, this is the overall credit allowed to a taxpayer regardless of the number of students in the family. However, the LLC is also phased out under income ranges even lower than the AOTC. You can’t claim the credit if your MAGI is $68,000 or more ($136,000 or more if you file a joint return). For these reasons, the AOTC is generally preferable to the LLC. But parents have still another option. 2. Tuition-and-fees deduction. As an alternative to either of the credits above, parents may claim an above-the-line deduction for tuition and related fees. This deduction is either $4,000 or $2,000, depending on the taxpayer’s MAGI, before it is phased out. No deduction is allowed for MAGI above $80,000 for single filers and $160,000 for joint filers. The tuition-and-fees deduction, which has been extended numerous times, is currently scheduled to expire after 2020. However, it’s likely to be revived again by Congress. In addition to these tax breaks, there are other ways to save and pay for college on a tax advantaged basis. These include using Section 529 plans and Coverdell Education Savings Accounts. There are limits on contributions to these saving vehicles. Note: Thanks to a provision in the Tax Cuts and Jobs Act, a 529 plan can now be used to pay for up to $10,000 annually for a child’s tuition at a private or religious elementary or secondary school. Final lesson Typically, parents are able to take advantage of one or more of these tax breaks, even though some benefits are phased out above certain income levels. Contact us to maximize the tax breaks for your children’s education. © 2020
Tax liabilities don’t go away if left unaddressed. Here’s a look at what happens in the event you (or someone you know) can’t pay taxes on time.
While you probably don’t have any problems paying your tax bills, you may wonder: What happens in the event you (or someone you know) can’t pay taxes on time? Here’s a look at the options. Most importantly, don’t let the inability to pay your tax liability in full keep you from filing a tax return properly and on time. In addition, taking certain steps can keep the IRS from instituting punitive c ollection processes. Common penalties The “failure to file” penalty accrues at 5% per month or part of a month (to a maximum of 25%) on the amount of tax your return shows you owe. The “failure to pay” penalty accrues at only 0.5% per month or part of a month (to 25% maximum) on the amount due on the return. (If both apply, the failure to file penalty drops to 4.5% per month (or part) so the combined penalty remains at 5%.) The maximum combined penalty for the first five months is 25%. Thereafter, the failure to pay penalty can continue at 0.5% per month for 45 more months. The combined penalties can reach 47.5% over time in addition to any interest. Undue hardship extensions Keep in mind that an extension of time to file your return doesn’t mean an extension of time to pay your tax bill. A payment extension may be available, however, if you can show payment would cause “undue hardship.” You can avoid the failure to pay penalty if an extension is granted, but you’ll be charged interest. If you qualify, you’ll be given an extra six months to pay the tax due on your return. If the IRS determines a “deficiency,” the undue hardship extension can be up to 18 months and in exceptional cases another 12 months can be added. Borrowing money If you don’t think you can get an extension of time to pay your taxes, borrowing money to pay them should be considered. You may be able to get a loan from a relative, friend or commercial lender. You can also use credit or debit cards to pay a tax bill, but you’re likely to pay a relatively high interest rate and possibly a fee. Installment agreement Another way to defer tax payments is to request an installment payment agreement. This is done by filing a form and the IRS charges a fee for installment agreements. Even if a request is granted, you’ll be charged interest on any tax not paid by its due date. But the late payment penalty is half the usual rate (0.25% instead of 0.5%), if you file by the due date (including extensions). The IRS may terminate an installment agreement if the information provided in applying is inaccurate or incomplete or the IRS believes the tax collection is in jeopardy. The IRS may also modify or terminate an installment agreement in certain cases, such as if you miss a payment or fail to pay another tax liability when it’s due. Avoid serious consequences Tax liabilities don’t go away if left unaddressed. It’s important to file a properly prepared return even if full payment can’t be made. Include as large a partial payment as you can with the return and work with the IRS as soon as possible. The alternative may include escalating penalties and having liens assessed against your assets and income. Down the road, the collection process may also include seizure and sale of your property. In many cases, these nightmares can be avoided by taking advantage of options offered by the IRS. © 2020
Do you have a nanny, housekeeper or other household worker? If you pay him or her cash wages of $2,200 in 2020, you must withhold and pay Social Security and Medicare taxes. Learn about this and other tax obligations for household workers.
In the COVID-19 era, many parents are hiring nannies and babysitters because their daycare centers and summer camps have closed. This may result in federal “nanny tax” obligations. Keep in mind that the nanny tax may apply to all household workers, including housekeepers, babysitters, gardeners or others who aren’t independent contractors. If you employ someone who’s subject to the nanny tax, yo u aren’t required to withhold federal income taxes from the individual’s pay. You only must withhold if the worker asks you to and you agree. (In that case, ask the nanny to fill out a Form W-4.) However, you may have other withholding and payment obligations. Withholding FICA and FUTA You must withhold and pay Social Security and Medicare taxes (FICA) if your nanny earns cash wages of $2,200 or more (excluding food and lodging) during 2020. If you reach the threshold, all of the wages (not just the excess) are subject to FICA. However, if your nanny is under 18 and childcare isn’t his or her principal occupation, you don’t have to withhold FICA taxes. Therefore, if your nanny is really a student/part-time babysitter, there’s no FICA tax liability. Both employers and household workers have an obligation to pay FICA taxes. Employers are responsible for withholding the worker’s share of FICA and must pay a matching employer amount. FICA tax is divided between Social Security and Medicare. Social Security tax is 6.2% for the both the employer and the worker (12.4% total). Medicare tax is 1.45% each for both the employer and the worker (2.9% total). If you prefer, you can pay your nanny’s share of Social Security and Medicare taxes, instead of withholding it from pay. Note: It’s unclear how these taxes will be affected by the executive order that President Trump signed on August 8, which allows payroll taxes to be deferred from September 1 through December 31, 2020. You also must pay federal unemployment (FUTA) tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter of this year or last year. FUTA tax applies to the first $7,000 of wages. The maximum FUTA tax rate is 6%, but credits reduce it to 0.6% in most cases. FUTA tax is paid only by the employer. Reporting and paying You pay nanny tax by increasing your quarterly estimated tax payments or increasing withholding from your wages — rather than making an annual lump-sum payment. You don’t have to file any employment tax returns, even if you’re required to withhold or pay tax (unless you own a business, see below). Instead, you report employment taxes on Schedule H of your tax return. On your return, you include your employer identification number (EIN) when reporting employment taxes. The EIN isn’t the same as your Social Security number. If you need an EIN, you must file Form SS-4. However, if you own a business as a sole proprietor, you must include the taxes for your nanny on the FICA and FUTA forms (940 and 941) that you file for your business. And you use the EIN from your sole proprietorship to report the taxes. You also must provide your nanny with a Form W-2. Recordkeeping Maintain careful tax records for each household employee. Keep them for at least four years from the later of the due date of the return or the date the tax was paid. Records include: employee name, address, Social Security number; employment dates; wages paid; withheld FICA or income taxes; FICA taxes paid by you for your worker; and copies of forms filed. Contact us for help or with questions about how to comply with these requirements. © 2020
Employer-provided group term life insurance can be a nice employee benefit. But depending on the amount of coverage, it may cause an unwanted tax result. Here’s why.
Does your employer provide you with group term life insurance? If so, and if the coverage is higher than $50,000, this employee benefit may create undesirable income tax consequences for you. “Phantom income” The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesn’t add anything to your income tax bill. But the employer-paid c ost of group term coverage in excess of $50,000 is taxable income to you. It’s included in the taxable wages reported on your Form W-2 — even though you never actually receive it. In other words, it’s “phantom income.” What’s worse, the cost of group term insurance must be determined under a table prepared by IRS even if the employer’s actual cost is less than the cost figured under the table. Under these determinations, the amount of taxable phantom income attributed to an older employee is often higher than the premium the employee would pay for comparable coverage under an individual term policy. This tax trap gets worse as the employee gets older and as the amount of his or her compensation increases. Check your W-2 What should you do if you think the tax cost of employer-provided group term life insurance is undesirably high? First, you should establish if this is actually the case. If a specific dollar amount appears in Box 12 of your Form W-2 (with code “C”), that dollar amount represents your employer’s cost of providing you with group-term life insurance coverage in excess of $50,000, less any amount you paid for the coverage. You’re responsible for federal, state and local taxes on the amount that appears in Box 12 and for the associated Social Security and Medicare taxes as well. But keep in mind that the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2, and it’s the Box 1 amount that’s reported on your tax return Consider some options If you decide that the tax cost is too high for the benefit you’re getting in return, you should find out whether your employer has a “carve-out” plan (a plan that carves out selected employees from group term coverage) or, if not, whether it would be willing to create one. There are several different types of carve-out plans that employers can offer to their employees. For example, the employer can continue to provide $50,000 of group term insurance (since there’s no tax cost for the first $50,000 of coverage). Then, the employer can either provide the employee with an individual policy for the balance of the coverage, or give the employee the amount the employer would have spent for the excess coverage as a cash bonus that the employee can use to pay the premiums on an individual policy. Contact us if you have questions about group term coverage or how much it is adding to your tax bill.
If you have medical expenses and you pay Medicare premiums, you know it can be expensive to get the coverage you want. But if you qualify, you can deduct the cost of premiums, along with other medical expenses, on your tax return. Here are the rules
If you’re age 65 and older, and you have basic Medicare insurance, you may need to pay additional premiums to get the level of coverage you want. The premiums can be costly, especially if you’re married and both you and your spouse are paying them. But there may be a silver lining: You may qualify for a tax break for paying the premiums. Tax deductions for Medicare premiums You can combine prem iums for Medicare health insurance with other qualifying health care expenses for purposes of claiming an itemized deduction for medical expenses on your tax return. This includes amounts for “Medigap” insurance and Medicare Advantage plans. Some people buy Medigap policies because Medicare Parts A and B don’t cover all their health care expenses. Coverage gaps include co-payments, co-insurance, deductibles and other costs. Medigap is private supplemental insurance that’s intended to cover some or all gaps. Many people no longer itemize Qualifying for a medical expense deduction may be difficult for a couple of reasons. For 2020 (and 2019), you can deduct medical expenses only if you itemize deductions and only to the extent that total qualifying expenses exceeded 7.5% of AGI. The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts for 2018 through 2025. As a result, fewer individuals are claiming itemized deductions. For 2020, the standard deduction amounts are $12,400 for single filers, $24,800 for married couples filing jointly and $18,650 for heads of household. (For 2019, these amounts were $12,200, $24,400 and $18,350, respectively.) However, if you have significant medical expenses, including Medicare health insurance premiums, you may itemize and collect some tax savings. Note: Self-employed people and shareholder-employees of S corporations can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums. So, they don’t need to itemize to get the tax savings from their premiums. Medical expense deduction basics In addition to Medicare premiums, you can deduct various medical expenses, including those for dental treatment, ambulance services, dentures, eyeglasses and contacts, hospital services, lab tests, qualified long-term care services, prescription medicines and others. There are also many items that Medicare doesn’t cover that can be written off for tax purposes, if you qualify. In addition, you can deduct transportation expenses to get to medical appointments. If you go by car, you can deduct a flat 17-cents-per-mile rate for 2020 (down from 20 cents for 2019), or you can keep track of your actual out-of-pocket expenses for gas, oil and repairs. We can help Contact us if you have additional questions about Medicare coverage options or claiming medical expense deductions on your personal tax return. We can help determine the optimal overall tax-planning strategy based on your situation. © 2020
The CARES Act has provided some help for people with student loans. And if you do make some payments this year, you may be able to deduct the interest on your tax return. Here are the rules.
Many taxpayers with student loans have been hard hit by the economic impact of COVID-19. The CARES Act contains some help. It allows borrowers with federal student loans to stop making monthly payments until Sept. 30, 2020. If you do make student loan payments, you may be able to deduct the interest on your tax return, depending on your income and subject to certain requirements. The maximum amoun t of student loan interest you can deduct each year is $2,500. For 2020, the deduction is phased out for married taxpayers filing jointly with adjusted gross income (AGI) between $140,000-$170,000 ($70,000-$85,000 for single filers). The deduction is unavailable for taxpayers with AGIs above that.
A big tax bill or a large refund may mean you don’t have the correct amount of tax withheld from your paycheck. Here’s how to avoid this next year.
Did you recently file your federal tax return and were surprised to find you owed money? You might want to change your withholding so that this doesn’t happen next year. You might even want to do that if you got a big refund. Receiving a tax refund essentially means you’re giving the government an interest-free loan. Withholding changes In 2018, the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks. In general, the amount withheld was reduced. This was done to reflect changes under the Tax Cuts and Jobs Act — including an increase in the standard deduction, suspension of personal exemptions and changes in tax rates. The tables may have provided the correct amount of tax withholding for some individuals, but they might have caused other taxpayers to not have enough money withheld to pay their ultimate tax liabilities. Review and possibly adjust The IRS is advising taxpayers to review their tax situations for this year and adjust withholding, if appropriate. The tax agency has a withholding calculator to assist you in conducting a paycheck checkup. The calculator reflects tax law changes in areas such as available itemized deductions, the increased child credit, the new dependent credit and the repeal of dependent exemptions. You can access the IRS calculator here: target="_blank">https://bit.ly/2OqnUod. Changes may be needed if… There are some situations when you should check your withholding. In addition to tax law changes, the IRS recommends that you perform a checkup if you: Adjusted your withholding in 2019, especially in the middle or later part of the year, Owed additional tax when you filed your 2019 return, Received a refund that was smaller or larger than expected, Got married or divorced, had a child or adopted one, Purchased a home, or Had changes in income. You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically go into effect several weeks after a new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly estimated payments are due. The next payments are due on July 15 and September 15.) Good time to plan ahead There’s still time to remedy any shortfalls to minimize taxes due for 2020, as well as any penalties and interest. Contact us if you have any questions or need assistance. We can help you determine if you need to adjust your withholding. © 2020
If you’re married and you don’t work outside the home, you still may be able to contribute to an IRA. Here are the rules for spousal IRAs.
It’s often difficult for married couples to save as much as they need for retirement when one spouse doesn’t work outside the home — perhaps so that spouse can take care of children or elderly parents. In general, an IRA contribution is allowed only if a taxpayer has compensation. However, an exception involves a “spousal” IRA. It allows a contribution to be made for a nonworking spouse. Under th e spousal IRA rules, the amount that a married couple can contribute to an IRA for a nonworking spouse in 2020 is $6,000, which is the same limit that applies for the working spouse. Two main benefits As you may be aware, IRAs offer two types of benefits for taxpayers who make contributions to them. Contributions of up to $6,000 a year to an IRA may be tax deductible. The earnings on funds within the IRA are not taxed until withdrawn. (Alternatively, you may make contributions to a Roth IRA. There’s no deduction for Roth IRA contributions, but, if certain requirements are met, distributions are tax-free.) As long as the couple together has at least $12,000 of earned income, $6,000 can be contributed to an IRA for each, for a total of $12,000. (The contributions for both spouses can be made to either a regular IRA or a Roth IRA, or split between them, as long as the combined contributions don’t exceed the $12,000 limit.) Catching up In addition, individuals who are age 50 or older can make “catch-up” contributions to an IRA or Roth IRA in the amount of $1,000. Therefore, in 2020, for a taxpayer and his or her spouse, both of whom will have reached age 50 by the end of the year, the combined limit of the deductible contributions to an IRA for each spouse is $7,000, for a combined deductible limit of $14,000. There’s one catch, however. If, in 2020, the working spouse is an active participant in either of several types of retirement plans, a deductible contribution of up to $6,000 (or $7,000 for a spouse who will be 50 by the end of the year) can be made to the IRA of the non-participant spouse only if the couple’s AGI doesn’t exceed $104,000. This limit is phased out for AGI between $196,000 and $206,000. Contact us if you’d like more information about IRAs or you’d like to discuss retirement planning. © 2020
Once your 2019 tax return has been filed, there still may be some issues to consider. We’re often asked about refund status, record retention and amended tax returns. Here are some answers.
The tax filing deadline for 2019 tax returns has been extended until July 15 this year, due to the COVID-19 pandemic. After your 2019 tax return has been successfully filed with the IRS, there may still be some issues to bear in mind. Here are three considerations.
1. Some tax records can now be thrown away
You should keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2016 and earlier years. (If you filed an extension for your 2016 return, hold on to your records until at least three years from when you filed the extended return.)
However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.
You’ll need to hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)
When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)
2. You can check up on your refund
The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status” to find out about yours. You’ll need your Social Security number, filing status and the exact refund amount.
3. You can file an amended return if you forgot to report something
In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2019 tax return that you file on July 15, 2020, you can generally file an amended return until July 15, 2023.
However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.
We can help
Contact us if you have questions about tax record retention, your refund or filing an amended return. We’re not just available at tax filing time — we’re here all year!
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If you need money due to COVID-19, you may be able to take a tax-free “coronavirus-related distribution” from a retirement plan. The IRS has released guidance explaining who qualifies for one of these distributions.
As you may have heard, the Coronavirus Aid, Relief and Economic Security (CARES) Act allows “qualified” people to take certain “coronavirus-related distributions” from their retirement plans without paying tax. So how do you qualify? In other words, what’s a coronavirus-related distribution? Early distribution basics In general, if you withdraw money from an IRA or eligible retirement plan befo re you reach age 59½, you must pay a 10% early withdrawal tax. This is in addition to any tax you may owe on the income from the withdrawal. There are several exceptions to the general rule. For example, you don’t owe the additional 10% tax if you become totally and permanently disabled or if you use the money to pay qualified higher education costs or medical expenses New exception Under the CARES Act, you can take up to $100,000 in coronavirus-related distributions made from an eligible retirement plan between January 1 and December 30, 2020. These coronavirus-related distributions aren’t subject to the 10% additional tax that otherwise generally applies to distributions made before you reach age 59½. What’s more, a coronavirus-related distribution can be included in income in installments over a three-year period, and you have three years to repay it to an IRA or plan. If you recontribute the distribution back into your IRA or plan within three years of the withdrawal date, you can treat the withdrawal and later recontribution as a totally tax-free rollover. In new guidance (Notice 2020-50) the IRS explains who qualifies to take a coronavirus-related distribution. A qualified individual is someone who: Is diagnosed (or whose spouse or dependent is diagnosed) with COVID-19 after taking a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or Experiences adverse financial consequences as a result of certain events. To qualify under this test, the individual (or his or her spouse or member of his or her household sharing his or her principal residence) must: Be quarantined, be furloughed or laid off, or have work hours reduced due to COVID-19; Be unable to work due to a lack of childcare because of COVID-19; Experience a business that he or she owns or operates due to COVID-19 close or have reduced hours; Have pay or self-employment income reduced because of COVID-19; or Have a job offer rescinded or start date for a job delayed due to COVID-19. Favorable rules As you can see, the rules allow many people — but not everyone — to take retirement plan distributions under the new exception. If you decide to take advantage of it, be sure to keep good records to show that you qualify. Be careful: You’ll be taxed on the coronavirus-related distribution amount that you don’t recontribute within the three-year window. But you won’t have to worry about owing the 10% early withdrawal penalty if you’re under 59½. Other rules and restrictions apply. Contact us if you have questions or need assistance. © 2020
Another coronavirus (COVID-19) law has been enacted and it provides some relief to businesses and employers that are suffering. This article provides some highlights.
On March 27, President Trump signed into law another coronavirus (COVID-19) law, which provides extensive relief for businesses and employers. Here are some of the tax-related provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Employee retention credit
The new law provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis.
Employer eligibility. The credit is available to employers with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers that have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
The credit isn’t available to employers receiving Small Business Interruption Loans under the new law.
Wage eligibility. For employers with an average of 100 or fewer full-time employees in 2019, all employee wages are eligible, regardless of whether an employee is furloughed. For employers with more than 100 full-time employees last year, only the wages of furloughed employees or those with reduced hours as a result of closure or reduced gross receipts are eligible for the credit.
No credit is available with respect to an employee for whom the employer claims a Work Opportunity Tax Credit.
The term “wages” includes health benefits and is capped at the first $10,000 paid by an employer to an eligible employee. The credit applies to wages paid after March 12, 2020 and before January 1, 2021.
The IRS has authority to advance payments to eligible employers and to waive penalties for employers who don’t deposit applicable payroll taxes in anticipation of receiving the credit.
Payroll and self-employment tax payment delay
Employers must withhold Social Security taxes from wages paid to employees. Self-employed individuals are subject to self-employment tax.
The CARES Act allows eligible taxpayers to defer paying the employer portion of Social Security taxes through December 31, 2020. Instead, employers can pay 50% of the amounts by December 31, 2021 and the remaining 50% by December 31, 2022.
Self-employed people receive similar relief under the law.
Temporary repeal of taxable income limit for NOLs
Currently, the net operating loss (NOL) deduction is equal to the lesser of 1) the aggregate of the NOL carryovers and NOL carrybacks, or 2) 80% of taxable income computed without regard to the deduction allowed. In other words, NOLs are generally subject to a taxable-income limit and can’t fully offset income.
The CARES Act temporarily removes the taxable income limit to allow an NOL to fully offset income. The new law also modifies the rules related to NOL carrybacks.
Interest expense deduction temporarily increased
The Tax Cuts and Jobs Act (TCJA) generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income.
The CARES Act temporarily and retroactively increases the limit on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020. There are special rules for partnerships.
Bonus depreciation for qualified improvement property
The TCJA amended the tax code to allow 100% additional first-year bonus depreciation deductions for certain qualified property. The TCJA eliminated definitions for 1) qualified leasehold improvement property, 2) qualified restaurant property, and 3) qualified retail improvement property. It replaced them with one category called qualified improvement property (QIP). A general 15-year recovery period was intended to have been provided for QIP. However, that period failed to be reflected in the language of the TCJA. Therefore, under the TCJA, QIP falls into the 39-year recovery period for nonresidential rental property, making it ineligible for 100% bonus depreciation.
The CARES Act provides a technical correction to the TCJA, and specifically designates QIP as 15-year property for depreciation purposes. This makes QIP eligible for 100% bonus depreciation. The provision is effective for property placed in service after December 31, 2017.
Careful planning required
This article only explains some of the relief available to businesses. Additional relief is provided to individuals. Be aware that other rules and limits may apply to the tax breaks described here. Contact us if you have questions about your situation.
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The IRS announced it is opening the 2019 individual income tax return filing season on January 27. Even if you typically don’t file until much closer to the April 15 deadline (or you file for an extension), consider filing as soon as you can this year. The reason: You can potentially protect yourself from tax identity theft — and you may obtain other benefits, too. Tax identity theft explained In a tax identity theft scam, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund. The legitimate taxpayer discovers the fraud when he or she files a return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the valid one, tax identity theft can cause major headaches to straighten out and significantly delay a refund. Filing early may be your best defense: If you file first, it will be the tax return filed by a would-be thief that will be rejected, rather than yours. Note: You can get your individual tax return prepared by us before January 27 if you have all the required documents. It’s just that processing of the return will begin after IRS systems open on that date. Your W-2s and 1099s To file your tax return, you must have received all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2019 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2019 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors). If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help. Other advantages of filing early Besides protecting yourself from tax identity theft, another benefit of early filing is that, if you’re getting a refund, you’ll get it faster. The IRS expects most refunds to be issued within 21 days. The time is typically shorter if you file electronically and receive a refund by direct deposit into a bank account. Direct deposit also avoids the possibility that a refund check could be lost or stolen or returned to the IRS as undeliverable. And by using direct deposit, you can split your refund into up to three financial accounts, including a bank account or IRA. Part of the refund can also be used to buy up to $5,000 in U.S. Series I Savings Bonds. What if you owe tax? Filing early may still be beneficial. You won’t need to pay your tax bill until April 15, but you’ll know sooner how much you owe and can plan accordingly. Be an early-bird filer If you have questions about tax identity theft or would like help filing your 2019 return early, please contact us. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you. © 2020
If you’re married and file a joint return, what happens if your spouse doesn’t disclose all of his or her income or otherwise doesn’t pay the correct tax owed? You’re generally liable for the full amount but there may be “innocent spouse” relief.
When a married couple files a joint tax return, each spouse is liable for the full amount of tax on the couple’s combined income. Therefore, the IRS can come after either spouse to collect the entire tax, not just the part that’s attributed to that spouse. This includes any tax deficiency that the IRS assesses after an audit, as well as any penalties and interest. In some cases, spouses are eligible for “innocent spouse relief.” Generally, these spouses were unaware of a tax understatement that was attributable to the other spouse. If you’re interested in trying to obtain relief, paperwork must be filed and deadlines must be met. Contact us. We can assist you with the details.
When a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full amount of tax on the couple’s combined income. Therefore, the IRS can come after either spouse to collect the entire tax — not just the part that’s attributed to one spouse or the other. This includes any tax deficiency that the IRS assesses after an audit, as well as any penalties and interest. (However, the civil fraud penalty can be imposed only on spouses who’ve actually committed fraud.)
Innocent spouses
In some cases, spouses are eligible for “innocent spouse relief.” This generally involves individuals who were unaware of a tax understatement that was attributable to the other spouse.
To qualify, you must show not only that you didn’t know about the understatement, but that there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax. This relief is available even if you’re still married and living with your spouse.
In addition, spouses may be able to limit liability for any tax deficiency on a joint return if they’re widowed, divorced, legally separated or have lived apart for at least one year.
Election to limit liability
If you make this election, the tax items that gave rise to the deficiency will be allocated between you and your spouse as if you’d filed separate returns. For example, you’d generally be liable for the tax on any unreported wage income only to the extent that you earned the wages.
The election won’t provide relief from your spouse’s tax items if the IRS proves that you knew about the items when you signed the return — unless you can show that you signed the return under duress. Also, the limitation on your liability is increased by the value of any assets that your spouse transferred to you in order to avoid the tax.
An “injured” spouse
In addition to innocent spouse relief, there’s also relief for “injured” spouses. What’s the difference? An injured spouse claim asks the IRS to allocate part of a joint refund to one spouse. In these cases, an injured spouse has all or part of a refund from a joint return applied against past-due federal tax, state tax, child or spousal support, or a federal nontax debt (such as a student loan) owed by the other spouse. If you’re an injured spouse, you may be entitled to recoup your share of the refund.
Whether, and to what extent, you can take advantage of the above relief depends on the facts of your situation. If you’re interested in trying to obtain relief, there’s paperwork that must be filed and deadlines that must be met. We can assist you with the details.
Also, keep “joint and several liability” in mind when filing future tax returns. Even if a joint return results in less tax, you may choose to file a separate return if you want to be certain of being responsible only for your own tax. Contact us with any questions or concerns.
© 2019
If you’re married and file a joint return, what happens if your spouse doesn’t disclose all of his or her income or otherwise doesn’t pay the correct tax owed? You’re generally liable for the full amount but there may be “innocent spouse” relief.
When a married couple files a joint tax return, each spouse is liable for the full amount of tax on the couple’s combined income. Therefore, the IRS can come after either spouse to collect the entire tax, not just the part that’s attributed to that spouse. This includes any tax deficiency that the IRS assesses after an audit, as well as any penalties and interest. In some cases, spouses are eligible for “innocent spouse relief.” Generally, these spouses were unaware of a tax understatement that was attributable to the other spouse. If you’re interested in trying to obtain relief, paperwork must be filed and deadlines must be met. Contact us. We can assist you with the details.
When a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full amount of tax on the couple’s combined income. Therefore, the IRS can come after either spouse to collect the entire tax — not just the part that’s attributed to one spouse or the other. This includes any tax deficiency that the IRS assesses after an audit, as well as any penalties and interest. (However, the civil fraud penalty can be imposed only on spouses who’ve actually committed fraud.)
Innocent spouses
In some cases, spouses are eligible for “innocent spouse relief.” This generally involves individuals who were unaware of a tax understatement that was attributable to the other spouse.
To qualify, you must show not only that you didn’t know about the understatement, but that there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax. This relief is available even if you’re still married and living with your spouse.
In addition, spouses may be able to limit liability for any tax deficiency on a joint return if they’re widowed, divorced, legally separated or have lived apart for at least one year.
Election to limit liability
If you make this election, the tax items that gave rise to the deficiency will be allocated between you and your spouse as if you’d filed separate returns. For example, you’d generally be liable for the tax on any unreported wage income only to the extent that you earned the wages.
The election won’t provide relief from your spouse’s tax items if the IRS proves that you knew about the items when you signed the return — unless you can show that you signed the return under duress. Also, the limitation on your liability is increased by the value of any assets that your spouse transferred to you in order to avoid the tax.
An “injured” spouse
In addition to innocent spouse relief, there’s also relief for “injured” spouses. What’s the difference? An injured spouse claim asks the IRS to allocate part of a joint refund to one spouse. In these cases, an injured spouse has all or part of a refund from a joint return applied against past-due federal tax, state tax, child or spousal support, or a federal nontax debt (such as a student loan) owed by the other spouse. If you’re an injured spouse, you may be entitled to recoup your share of the refund.
Whether, and to what extent, you can take advantage of the above relief depends on the facts of your situation. If you’re interested in trying to obtain relief, there’s paperwork that must be filed and deadlines that must be met. We can assist you with the details.
Also, keep “joint and several liability” in mind when filing future tax returns. Even if a joint return results in less tax, you may choose to file a separate return if you want to be certain of being responsible only for your own tax. Contact us with any questions or concerns.
© 2019
Prudently planning how to take money out of your traditional IRA can mean more money for you and your heirs. Here are three areas to understand in order to maximize your retirement savings.
f you’re like many people, you’ve worked hard to accumulate a large nest egg in your traditional IRA (or a SEP-IRA). It’s critical to carefully plan for withdrawals. For example, if you need to take money out of your traditional IRA before age 59-1/2, the distribution will generally be taxable. In addition, distributions before age 59-1/2 may be subject to a 10% penalty tax. (However, several exceptions may allow you to avoid the penalty tax but not the regular income tax.) And once you reach age 70-1/2, distributions from a traditional IRA must begin. If you don’t withdraw the minimum amount each year, you may have to pay a 50% penalty tax on what should have been taken but wasn’t.
If you’re like many people, you’ve worked hard to accumulate a large nest egg in your traditional IRA (including a SEP-IRA). It’s even more critical to carefully plan for withdrawals from these retirement-savings vehicles.
Knowing the fine points of the IRA distribution rules can make a significant difference in how much you and your family will get to keep after taxes. Here are three IRA areas to understand:
- Taking early distributions. If you need to take money out of your traditional IRA before age 59½, any distribution to you will be generally taxable (unless nondeductible contributions were made, in which case part of each payout will be tax-free). In addition, distributions before age 59½ may be subject to a 10% penalty tax.
However, there are several ways that the penalty tax (but not the regular income tax) can be avoided. These exceptions include paying for unreimbursed medical expenses, paying for qualified educational expenses and buying a first home (up to $10,000). - Naming your beneficiary (or beneficiaries). This decision affects the minimum amounts you must withdraw from the IRA when you reach age 70½; who will get what remains in the account at your death; and how that IRA balance can be paid out. What’s more, a periodic review of the individuals you’ve named as IRA beneficiaries is critical to assure that your overall estate planning objectives will be achieved. Review them when circumstances change in your personal life, finances and family.
- Taking required distributions. Once you reach age 70½, distributions from your traditional IRAs must begin. It doesn’t matter if you haven’t retired. If you don’t withdraw the minimum amount each year, you may have to pay a 50% penalty tax on what should have been taken — but wasn’t. In planning for required minimum distributions, your income needs must be weighed against the desirable goal of keeping the tax shelter of the IRA going for as long as possible for both yourself and your beneficiaries.
Keep more of your money
Prudently planning how to take money out of your traditional IRA can mean more money for you and your heirs. Keep in mind that Roth IRAs operate under a different set of rules than traditional IRAs. Contact us to review your traditional and Roth IRAs, and to analyze other aspects of your retirement planning.
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If you’re fortunate enough to hit a sizable jackpot in the lottery or while gambling, there are tax implications. Here’s a rundown of the basics.
If you’re lucky enough to be a winner at gambling or the lottery, congratulations! But be aware there are tax consequences. You must report 100% of your winnings as taxable income. If you itemize deductions, you can deduct losses but only up to the amount of winnings. You report lottery winnings as income in the year you actually receive them. In the case of noncash prizes (such as a car), this would be the year the prize is received. With cash, if you take the winnings in annual installments, you only report each year’s installment as income for that year. These are just the basic rules. Contact us with questions. We can help you minimize taxes and stay in compliance with all requirements.
If you’re lucky enough to be a winner at gambling or the lottery, congratulations! After you celebrate, be ready to deal with the tax consequences of your good fortune.
Winning at gambling
Whether you win at the casino, a bingo hall, or elsewhere, you must report 100% of your winnings as taxable income. They’re reported on the “Other income” line on Schedule 1 of your 1040 tax return. To measure your winnings on a particular wager, use the net gain. For example, if a $30 bet at the race track turns into a $110 win, you’ve won $80, not $110.
You must separately keep track of losses. They’re deductible, but only as itemized deductions. Therefore, if you don’t itemize and take the standard deduction, you can’t deduct gambling losses. In addition, gambling losses are only deductible up to the amount of gambling winnings. So you can use losses to “wipe out” gambling income but you can’t show a gambling tax loss.
Maintain good records of your losses during the year. Keep a diary in which you indicate the date, place, amount and type of loss, as well as the names of anyone who was with you. Save all documentation, such as checks or credit slips.
Winning the lottery
The chances of winning the lottery are slim. But if you don’t follow the tax rules after winning, the chances of hearing from the IRS are much higher.
Lottery winnings are taxable. This is the case for cash prizes and for the fair market value of any noncash prizes, such as a car or vacation. Depending on your other income and the amount of your winnings, your federal tax rate may be as high as 37%. You may also be subject to state income tax.
You report lottery winnings as income in the year, or years, you actually receive them. In the case of noncash prizes, this would be the year the prize is received. With cash, if you take the winnings in annual installments, you only report each year’s installment as income for that year.
If you win more than $5,000 in the lottery or certain types of gambling, 24% must be withheld for federal tax purposes. You’ll receive a Form W-2G from the payer showing the amount paid to you and the federal tax withheld. (The payer also sends this information to the IRS.) If state tax withholding is withheld, that amount may also be shown on Form W-2G.
Since your federal tax rate can be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments — and you may be assessed a penalty if you fail to do so. In addition, you may be required to make state and local estimated tax payments.
We can help
If you’re fortunate enough to hit a sizable jackpot, there are other issues to consider, including estate planning. This article only covers the basic tax rules. Different rules apply to people who qualify as professional gamblers. Contact us with questions. We can help you minimize taxes and stay in compliance with all requirements.
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If you meet certain requirements, you may be eligible for a tax break on summer day camp expenses you pay for your child. Here is a rundown of the rules.
Now that most schools are out for the summer, you might be sending your children to day camp. The good news: You might be eligible for a tax break for the cost. Day camp is a qualified expense under the child and dependent care credit, which is worth 20% to 35% of qualifying expenses, up to a maximum of $3,000 for one qualifying child and $6,000 for two or more. Note: Sleep-away camp doesn’t qualify. Eligible costs for care must be employment-related. In other words, they must enable you to work or look for work if you’re unemployed. Additional rules apply. Contact us if you have questions about your eligibility for this credit and other tax breaks for parents.
Now that most schools are out for the summer, you might be sending your children to day camp. It’s often a significant expense. The good news: You might be eligible for a tax break for the cost.
The value of a credit
Day camp is a qualified expense under the child and dependent care credit, which is worth 20% to 35% of qualifying expenses, subject to a cap. Note: Sleep-away camp does not qualify.
For 2019, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more. Other expenses eligible for the credit include payments to a daycare center, nanny, or nursery school.
Keep in mind that tax credits are especially valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax.
For example, if you’re in the 32% tax bracket, $1 of deduction saves you only $0.32 of taxes. So it’s important to take maximum advantage of all tax credits available to you.
Work-related expenses
For an expense to qualify for the credit, it must be related to employment. In other words, it must enable you to work — or look for work if you’re unemployed. It must also be for the care of your child, stepchild, foster child, or other qualifying relative who is under age 13, lives in your home for more than half the year and meets other requirements.
There’s no age limit if the dependent child is physically or mentally unable to care for him- or herself. Special rules apply if the child’s parents are divorced or separated or if the parents live apart.
Credit vs. FSA
If you participate in an employer-sponsored child and dependent care Flexible Spending Account (FSA), you can’t use expenses paid from or reimbursed by the FSA to claim the credit.
If your employer offers a child and dependent care FSA, you may wish to consider participating in the FSA instead of taking the credit. With an FSA for child and dependent care, you can contribute up to $5,000 on a pretax basis. If your marginal tax rate is more than 15%, participating in the FSA is more beneficial than taking the credit. That’s because the exclusion from income under the FSA gives a tax benefit at your highest tax rate, while the credit rate for taxpayers with adjusted gross income over $43,000 is limited to 20%.
Proving your eligibility
On your tax return, you must include the Social Security number of each child who attended the camp or received care. There’s no credit without it. You must also identify the organizations or persons that provided care for your child. So make sure to obtain the name, address and taxpayer identification number of the camp.
Additional rules apply to the child and dependent care credit. Contact us if you have questions. We can help determine your eligibility for the credit and other tax breaks for parents.
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Are you still working after age 70½ and don’t want to take required minimum distributions from your 401(k) account? You might not have to. Here are the details.
If you participate in a qualified retirement plan, such as a 401(k), you must generally begin taking required minimum distributions (RMDs) no later than April 1 of the year after which you turn age 70½. The penalty for withdrawing less than the RMD is 50% of the portion that should have been withdrawn but wasn’t. However, there’s an exception that may apply to certain people if they’re still working for the entire year in which they turn 70½. The RMD rules are complex. Contact us to customize a plan based on your individual retirement and estate planning goals.
If you participate in a qualified retirement plan, such as a 401(k), you must generally begin taking required withdrawals from the plan no later than April 1 of the year after which you turn age 70½. However, there’s an exception that applies to certain plan participants who are still working for the entire year in which they turn 70½.
The basics of RMDs
Required minimum distributions (RMDs) are the amounts you’re legally required to withdraw from your qualified retirement plans and traditional IRAs after reaching age 70½. Essentially, the tax law requires you to tap into your retirement assets — and begin paying taxes on them — whether you want to or not.
Under the tax code, RMDs must begin to be taken from qualified pension, profit sharing and stock bonus plans by a certain date. That date is April 1 of the year following the later of the calendar year in which an employee:
- Reaches age 70½, or
- Retires from employment with the employer maintaining the plan under the “still working” exception.
Once they begin, RMDs must generally continue each year. The tax penalty for withdrawing less than the RMD amount is 50% of the portion that should have been withdrawn but wasn’t.
However, there’s an important exception to the still-working exception. If owner-employees own at least 5% of the company, they must begin taking RMDs from their 401(k)s beginning at 70½, regardless of their work status.
The still-working rule doesn’t apply to distributions from IRAs (including SEPs or SIMPLE IRAs). RMDs from these accounts must begin no later than April 1 of the year following the calendar year such individuals turn age 70½, even if they’re not retired.
The law and regulations don’t state how many hours an employee needs to work in order to postpone 401(k) RMDs. There’s no requirement that he or she work 40 hours a week for the exception to apply. However, the employee must be doing legitimate work and receiving W-2 wages.
For a customized plan
The RMD rules for qualified retirement plans (and IRAs) are complex. With careful planning, you can minimize your taxes and preserve more assets for your heirs. If you’re still working after age 70½, it may be beneficial to delay taking RMDs but there could also be disadvantages. Contact us to customize the optimal plan based on your individual retirement and estate planning goals.
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Are you interested in joining the growing ranks of plug-in electric vehicle owners? Find out about the federal income tax credit you might be able to claim.
If you’re interested in purchasing an electric or hybrid vehicle, you may be eligible for a federal tax credit of up to $7,500. (Depending on where you live, there may also be state tax breaks.) However, the federal credit is subject to a phaseout rule that may reduce or eliminate the tax break based on how many sales are made by a manufacturer. The vehicles of 2 manufacturers (GM and Tesla) have already begun to be phased out, which means they now qualify for a partial tax credit. For a list of manufacturers and credit amounts, visit: https://bit.ly/2vqC8vM.
While the number of plug-in electric vehicles (EVs) is still small compared with other cars on the road, it’s growing — especially in certain parts of the country. If you’re interested in purchasing an electric or hybrid vehicle, you may be eligible for a federal income tax credit of up to $7,500. (Depending on where you live, there may also be state tax breaks and other incentives.)
However, the federal tax credit is subject to a complex phaseout rule that may reduce or eliminate the tax break based on how many sales are made by a given manufacturer. The vehicles of two manufacturers have already begun to be phased out, which means they now qualify for only a partial tax credit.
Tax credit basics
You can claim the federal tax credit for buying a qualifying new (not used) plug-in EV. The credit can be worth up to $7,500. There are no income restrictions, so even wealthy people can qualify.
A qualifying vehicle can be either fully electric or a plug-in electric-gasoline hybrid. In addition, the vehicle must be purchased rather than leased, because the credit for a leased vehicle belongs to the manufacturer.
The credit equals $2,500 for a vehicle powered by a four-kilowatt-hour battery, with an additional $417 for each kilowatt hour of battery capacity beyond four hours. The maximum credit is $7,500. Buyers of qualifying vehicles can rely on the manufacturer’s or distributor’s certification of the allowable credit amount.
How the phaseout rule works
The credit begins phasing out for a manufacturer over four calendar quarters once it sells more than 200,000 qualifying vehicles for use in the United States. The IRS recently announced that GM had sold more than 200,000 qualifying vehicles through the fourth quarter of 2018. So, the phaseout rule has been triggered for GM vehicles, as of April 1, 2019. The credit for GM vehicles purchased between April 1, 2019, and September 30, 2019, is reduced to 50% of the otherwise allowable amount. For GM vehicles purchased between October 1, 2019, and March 31, 2020, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for GM vehicles purchased after March 31, 2020.
The IRS previously announced that Tesla had sold more than 200,000 qualifying vehicles through the third quarter of 2018. So, the phaseout rule was triggered for Tesla vehicles, effective as of January 1, 2019. The credit for Tesla vehicles purchased between January 1, 2019, and June 30, 2019, is reduced to 50% of the otherwise allowable amount. For Tesla vehicles purchased between July 1, 2019, and December 31, 2019, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for Tesla vehicles purchased after December 31, 2019.
Powering forward
Despite the phaseout kicking in for GM and Tesla vehicles, there are still many other EVs on the market if you’re interested in purchasing one. For an index of manufacturers and credit amounts, visit this IRS Web page: target="_blank">https://bit.ly/2vqC8vM. Contact us if you want more information about the tax breaks that may be available for these vehicles.
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The rules for deducting personal casualty losses on a tax return have changed for 2018 to 2025. Specifically, you generally can’t deduct losses unless the casualty event qualifies as a federally declared disaster.
The rules for writing off personal casualty losses on a tax return have changed for 2018 to 2025. Specifically, taxpayers generally can’t deduct losses unless the casualty event qualifies as a federally declared disaster. (The rules for business or income-producing property are different.) Another factor that now makes it harder to claim a casualty loss is that you must itemize deductions to claim one. For 2018 to 2025, fewer people will itemize, because the standard deduction amounts have been significantly increased. We can help you navigate the complex rules.
Unforeseen disasters happen all the time and they may cause damage to your home or personal property. Before the Tax Cuts and Jobs Act, eligible casualty loss victims could claim a deduction on their tax returns. But there are new restrictions that make these deductions much more difficult to take.
What’s considered a casualty for tax purposes? It’s a sudden, unexpected or unusual event, such as a hurricane, tornado, flood, earthquake, or fire; an accident or act of vandalism; or even a terrorist attack.
Unfavorable change
For losses incurred in 2018 through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters. For example, during 2019, there were presidential declarations of major disasters in parts of Iowa and Nebraska after severe storms and flooding. So victims there would be eligible for casualty loss deductions.
Note: There’s an exception to the general rule of allowing casualty loss deductions only in federally declared disaster areas. If you have personal casualty gains because your insurance proceeds exceed the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.
Special timing election
If your casualty loss is due to a federally declared disaster, a special election allows you to deduct the loss on your tax return for the precedingyear. If you’ve already filed your return for the preceding year, you can file an amended return to make the election and claim the deduction in the earlier year. This can help you get extra cash when you need it.
This election must be made by no later than six months after the due date (without considering extensions) for filing your tax return for the year in which the disaster occurs. However, the election itself must be made on an original or amended return for the preceding year.
Calculating personal losses
To calculate the casualty loss deduction for personal-use property in an area declared a federal disaster, you must take the following three steps:
- Subtract any insurance proceeds.
- Subtract $100 per casualty event.
- Combine the results from the first two steps and then subtract 10% of your adjusted gross income (AGI) for the year you claim the loss deduction.
Important: Another factor that now makes it harder to claim a casualty loss is that you must itemize deductions to claim one. For 2018 through 2025, fewer people will itemize, because the TCJA significantly increased the standard deduction amounts. For 2019, they are $12,200 for single filers, $18,350 for heads of households, and $24,400 for married joint-filing couples.
So even if you qualify for a casualty deduction, you might not get any tax benefit, because you don’t have enough itemized deductions.
We can help
These are the rules for personal property. Keep in mind that the rules for business or income-producing property are different. If you have disaster-related losses, we can help you navigate the complex rules.
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In a tax identity theft scheme, a thief uses your personal information to file a fraudulent tax return electronically early in the tax filing season and claim a bogus refund. Here’s how to protect yourself.
The IRS opened the 2018 income tax return filing season on Jan. 28. Consider filing as soon as you can, even if you typically don’t file this early. It can help protect you from tax identity theft, in which a thief files a return using your Social Security number to claim a bogus refund. If you file first, it will be returns filed by any would-be thieves that are rejected by the IRS, not yours. Other benefits: You’ll get your refund sooner or, if you owe tax, you’ll know how much you owe sooner so you can be ready to pay it by April 15. Contact us with questions.
The IRS opened the 2018 income tax return filing season on January 28. Even if you typically don’t file until much closer to the April 15 deadline, this year consider filing as soon as you can. Why? You can potentially protect yourself from tax identity theft — and reap other benefits, too.
What is tax identity theft?
In a tax identity theft scheme, a thief uses your personal information to file a fraudulent tax return early in the tax filing season and claim a bogus refund.
You discover the fraud when you file your return and are informed by the IRS that the return has been rejected because one with your Social Security number has already been filed for the same tax year. While you should ultimately be able to prove that your return is the legitimate one, tax identity theft can cause major headaches to straighten out and significantly delay your refund.
Filing early may be your best defense: If you file first, it will be the tax return filed by a would-be thief that will be rejected — not yours.
What if you haven’t received your W-2s and 1099s?
To file your tax return, you must have received all of your W-2s and 1099s. January 31 was the deadline for employers to issue 2018 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2018 interest, dividend or reportable miscellaneous income payments.
If you haven’t received a W-2 or 1099, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.
What are other benefits of filing early?
Besides protecting yourself from tax identity theft, the most obvious benefit of filing early is that, if you’re getting a refund, you’ll get that refund sooner. The IRS expects more than nine out of ten refunds to be issued within 21 days.
But even if you owe tax, filing early can be beneficial. You still won’t need to pay your tax bill until April 15, but you’ll know sooner how much you owe and can plan accordingly. Keep in mind that some taxpayers who typically have gotten refunds in the past could find themselves owing tax when they file their 2018 return due to tax law changes under the Tax Cuts and Jobs Act (TCJA) and reduced withholding from 2018 paychecks.
Need help?
If you have questions about tax identity theft or would like help filing your 2018 return early, please contact us. While the new Form 1040 essentially does fit on a postcard, many taxpayers will also have to complete multiple schedules along with the form. And the TCJA has changed many tax breaks. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.
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There are three major changes that will impact many individual taxpayers, beginning when they file their 2018 income tax returns. And we’re not talking about tax rate cuts or reduced itemized deductions.
When you file your 2018 income tax return, you’ll likely find that some big tax law changes affect you, besides the much-discussed tax rate cuts and reduced itemize deductions. For 2018 through 2025, the TCJA: 1) eliminates personal exemptions, 2) increases the standard deduction and 3) expands the child credit. The degree to which these changes will affect you depends on whether you have dependents and, if so, how many. It also depends on whether you typically itemize deductions. We can help ensure you claim all of the breaks available to you on your 2018 return.
When you file your 2018 income tax return, you’ll likely find that some big tax law changes affect you — besides the much-discussed tax rate cuts and reduced itemized deductions. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) makes significant changes to personal exemptions, standard deductions and the child credit. The degree to which these changes will affect you depends on whether you have dependents and, if so, how many. It also depends on whether you typically itemize deductions.
1. No more personal exemptions
For 2017, taxpayers could claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. For families with children and/or other dependents, such as elderly parents, these exemptions could really add up.
For 2018 through 2025, the TCJA suspends personal exemptions. This will substantially increase taxable income for large families. However, enhancements to the standard deduction and child credit, combined with lower tax rates and other changes, might mitigate this increase.
2. Nearly doubled standard deduction
Taxpayers can choose to itemize certain deductions or take the standard deduction based on their filing status. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated.
For 2017, the standard deductions were $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly.
The TCJA nearly doubles the standard deductions for 2018 to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. For 2019, they’re $12,200, $18,350 and $24,400, respectively. (These amounts will continue to be adjusted for inflation annually through 2025.)
For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from enhancements to the child credit.
3. Enhanced child credit
Credits can be more powerful than exemptions and deductions because they reduce taxes dollar-for-dollar, rather than just reducing the amount of income subject to tax. For 2018 through 2025, the TCJA doubles the child credit to $2,000 per child under age 17.
The TCJA also makes the child credit available to more families. For 2018 through 2025, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for joint filers or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 and $75,000, respectively.
The TCJA also includes, for 2018 through 2025, a $500 credit for qualifying dependents other than qualifying children.
Maximize your tax savings
These are just some of the TCJA changes that may affect you when you file your 2018 tax return and for the next several years. We can help ensure you claim all of the breaks available to you on your 2018 return and implement TCJA-smart tax-saving strategies for 2019.
© 2019
Don’t take the substantiation requirements for charitable donation deductions lightly. If you made a gift last year and haven’t received a written acknowledgment from the charity, read this before claiming a deduction on your 2018 income tax return.
To claim an itemized deduction for a donation of more than $250, generally you need a contemporaneous written acknowledgment from the charity. “Contemporaneous” means the earlier of 1) the date you file your income tax return, or 2) the extended due date of your return. If you made a donation in 2018 but haven’t received substantiation and you’d like to deduct it, consider requesting a written acknowledgment from the charity and waiting to file your 2018 return until you receive it. Additional rules apply to certain types of donations. Contact us to learn more. 
If you’re like many Americans, letters from your favorite charities have been appearing in your mailbox in recent weeks acknowledging your 2018 year-end donations. But what happens if you haven’t received such a letter — can you still claim an itemized deduction for the gift on your 2018 income tax return? It depends.
Basic requirements
To support a charitable deduction, you need to comply with IRS substantiation requirements. This generally includes obtaining a contemporaneous written acknowledgment from the charity stating the amount of the donation, whether you received any goods or services in consideration for the donation, and the value of any such goods or services.
“Contemporaneous” means the earlier of 1) the date you file your tax return, or 2) the extended due date of your return. So if you made a donation in 2018 but haven’t yet received substantiation from the charity, it’s not too late — as long as you haven’t filed your 2018 return. Contact the charity and request a written acknowledgment.
Keep in mind that, if you made a cash gift of under $250 with a check or credit card, generally a canceled check, bank statement or credit card statement is sufficient. However, if you received something in return for the donation, you generally must reduce your deduction by its value — and the charity is required to provide you a written acknowledgment as described earlier.
Substantiation is serious business
Don’t take the substantiation requirements lightly. In one U.S. Tax Court case, the taxpayers substantiated a donation deduction with canceled checks and a written acknowledgment. The IRS denied the deduction, however, because the acknowledgment failed to state whether the taxpayers received goods or services in consideration for their donation.
The taxpayers obtained a second acknowledgment including the required statement. But the Tax Court didn’t accept it because it wasn’t contemporaneous (that is, it was obtained after the tax return was filed).
2018 and 2019 deductions
Additional substantiation requirements apply to some types of donations. We can help you determine whether you have sufficient substantiation for the donations you hope to deduct on your 2018 income tax return — and guide you on the substantiation you’ll need for gifts you’re planning this year to ensure you can enjoy the desired deductions on your 2019 return.
© 2019
Not as many people will benefit from the charitable deduction on their 2018 income tax returns. Find out why donations may no longer save you tax and what you can do to help ensure deductibility.
As the holidays approach and the year draws to a close, many taxpayers make charitable gifts — both in the spirit of the season and as a year-end tax planning strategy. But with the tax law changes that go into effect in 2018 and the many rules that apply to the charitable deduction, it’s a good idea to check deductibility before making any year-end donations.
Confirm you can still benefit from itemizing
Last year’s Tax Cuts and Jobs Act (TCJA) didn’t put new limits on or suspend the charitable deduction, like it did to many other itemized deductions. Nevertheless, it will reduce or eliminate the tax benefits of charitable giving for many taxpayers this year.
Itemizing saves tax only if itemized deductions exceed the standard deduction. For 2018 through 2025, the TCJA significantly increases the standard deduction, to $24,000 for married couples filing jointly, $18,000 for heads of households, and $12,000 for singles and married couples filing separately.
The nearly doubled standard deduction combined with the new limits or suspensions of some common itemized deductions means you may no longer have enough itemized deductions to exceed the standard deduction. And if that’s the case, your donations won’t save you tax.
So before you make any year-end charitable gifts, total up your potential itemized deductions for the year, including the donations you’re considering. If the total is less than your standard deduction, your year-end donations won’t provide a tax benefit.
You might, however, be able to preserve your charitable deduction by “bunching” donations into alternating years. This can allow you to exceed the standard deduction and claim a charitable deduction (and other itemized deductions) every other year.
Meet the delivery deadline
To be deductible on your 2018 return, a charitable gift must be made by Dec. 31, 2018. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:
Check. The date you mail it.
Credit card. The date you make the charge.
Stock certificate. The date you mail the properly endorsed stock certificate to the charity.
Make sure the organization is “qualified”
To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.
The IRS’s online search tool, Tax Exempt Organization Search, can help you easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access this tool at http://bit.ly/2gFacut Information about organizations eligible to receive deductible contributions is updated monthly. Remember that political donations aren’t deductible.
Consider other rules
We’ve discussed only some of the rules for the charitable deduction; many others apply. We can answer any questions you have about the deductibility of donations or changes to the standard deduction and itemized deductions.
© 2018
Assuming a charity is qualified, you may be able to deduct some of the out-of-pocket costs you incur when volunteering for the organization. But the rules are complex.
Because donations to charity of cash or property generally are tax deductible (if you itemize), it only seems logical that the donation of something even more valuable to you — your time — would also be deductible. Unfortunately, that’s not the case.
Donations of time or services aren’t deductible. It doesn’t matter if it’s simple administrative work, such as checking in attendees at a fundraising event, or if it’s work requiring significant experience and expertise that would be much more costly to the charity if it had to pay for it, such as skilled carpentry or legal counsel.
However, you potentially can deduct out-of-pocket costs associated with your volunteer work.
The basic rules
As with any charitable donation, for you to be able to deduct your volunteer expenses, the first requirement is that the organization be a qualified charity. You can use the IRS’s “Tax Exempt Organization Search” tool (formerly “Select Check”) at http://bit.ly/2KXWl5b to find out.
Assuming the charity is qualified, you may be able to deduct out-of-pocket costs that are:
- Unreimbursed,
- Directly connected with the services you’re providing,
- Incurred only because of your charitable work, and
- Not “personal, living or family” expenses.
Supplies, uniforms and transportation
A wide variety of expenses can qualify for the deduction. For example, supplies you use in the activity may be deductible. And the cost of a uniform you must wear during the activity may also be deductible (if it’s required and not something you’d wear when not volunteering).
Transportation costs to and from the volunteer activity generally are deductible, either the actual cost or 14 cents per charitable mile driven. But you have to be the volunteer. If, say, you drive your elderly mother to the nature center where she’s volunteering, you can’t deduct the cost.
You also can’t deduct transportation costs you’d be incurring even if you weren’t volunteering. For example, if you take a commuter train downtown to work, then walk to a nearby volunteer event after work and take the train back home afterwards, you won’t be able to deduct your train fares. But if you take a cab from work to the volunteer event, then you potentially can deduct the cab fare for that leg of your transportation.
Volunteer travel
Transportation costs may also be deductible for out-of-town travel associated with volunteering. This can include air, rail and bus transportation; driving expenses; and taxi or other transportation costs between an airport or train station and wherever you’re staying. Lodging and meal costs also might be deductible.
The key to deductibility is that there is no significant element of personal pleasure, recreation or vacation in the travel. That said, according to the IRS, the deduction for travel expenses won’t be denied simply because you enjoy providing services to the charitable organization. But you must be volunteering in a genuine and substantial sense throughout the trip. If only a small portion of your trip involves volunteer work, your travel expenses generally won’t be deductible.
Keep careful records
The IRS may challenge charitable deductions for out-of-pocket costs, so it’s important to keep careful records. If you have questions about what volunteer expenses are and aren’t deductible, please contact us.
Have you noticed in your mailbox any notifications from online vendors from whom you purchased items during 2017 reporting your total purchases from them during the year and wondered why? This is because they did not charge you sales tax on your online purchases. And now the State of Louisiana is requiring these vendors to report to them and to you the purchase amounts so the State can ultimately collect the sales tax (actually termed “use tax” at this point in the transaction).
Have you noticed in your mailbox any notifications from online vendors from whom you purchased items during 2017 reporting your total purchases from them during the year and wondered why? This is because they did not charge you sales tax on your online purchases. And now the State of Louisiana is requiring these vendors to report to them and to you the purchase amounts so the State can ultimately collect the sales tax (actually termed “use tax” at this point in the transaction).
Gov. John Bell Edwards signed House Bill 1121 in the summer of 2016 that established this filing requirement beginning in 2018 for the 2017 tax year. So right now as you are collecting all of your W2s, 1099s, and 1098s, you will need to be aware that you may be receiving a notice from each online retail vendor that did not charge you sales tax on your 2017 purchases. The notice from the online retailer will likely list the specific dates and amounts of your purchases.
The sales tax that you should have paid with the purchase but did not should be reported on your individual Louisiana income tax return each year as “use tax” and paid annually when you file. You may ask why the online vendor did not charge you sales tax at the time of purchase. They don’t actually have to if they have no presence in the state (for instance if they have no facility, no employees, no delivery trucks, etc.).
It is foreseeable that the LA Department of Revenue will match up the information provided to them from the online vendors with what each individual reports as use tax on his/her own income tax return. If there is a significant mismatch in the direction of use tax understatement on your income tax return, LDR could send a notice and/or assessment for the difference.
With online purchases becoming more frequent, and few people aware of the proper reporting of the use tax due on the transaction, Louisiana can only hope this new reporting requirement will encourage taxpayers to properly report and pay what is owed so the State can make up for lost revenue. However, this new requirement may come as an unwelcomed surprise to most Louisiana residents.
Please contact us if this prompts more questions that you would like to discuss.
On December 20, Congress completed passage of the Tax Cuts and Jobs Act. The new law means substantial changes for individual taxpayers. For example, it reduces tax rates for most brackets, nearly doubles the standard deduction and expands the child tax credit. And it provides alternative minimum tax (AMT) and estate tax relief. But it also reduces or eliminates many tax breaks. Most changes affecting individuals are only temporary, generally applying for 2018 through 2025.
On December 20, Congress completed passage of the largest federal tax reform law in more than 30 years. Commonly called the “Tax Cuts and Jobs Act” (TCJA), the new law means substantial changes for individual taxpayers.
The following is a brief overview of some of the most significant provisions. Except where noted, these changes are effective for tax years beginning after December 31, 2017, and before January 1, 2026.
- Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
- Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately)
- Elimination of personal exemptions
- Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit
- Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018, and permanent
- Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018
- New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers)
- Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions
- Elimination of the deduction for interest on home equity debt
- Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters)
- Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses)
- Elimination of the AGI-based reduction of certain itemized deductions
- Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances)
- Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year — permanent
- AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers
- Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing)
Be aware that additional rules and limits apply. Also, there are many more changes in the TCJA that will impact individuals. If you have questions or would like to discuss how you might be affected, please contact us.
We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. 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 to make:
- Higher-income earners 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 modified adjusted gross income (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, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his 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 see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.
- The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). 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. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000.
- Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
- Postpone income until 2018 and accelerate deductions into 2017 to lower your 2017 tax bill. This strategy may be especially valuable if Congress succeeds in lowering tax rates next year in exchange for slimmed-down deductions. Regardless of what happens in Congress, this strategy could enable you to claim larger deductions, credits, and other tax breaks for 2017 that are phased out over varying levels of adjusted gross income (AGI). These include 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 2017. For example, this may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status).
- 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 if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2017.
- If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by recharacterizing the conversion-that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
- It may be advantageous to try to arrange with your employer to defer, until early 2018, a bonus that may be coming your way. This could cut as well as defer your tax if Congress reduces tax rates beginning in 2018.
- Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2017 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, 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 2017 if you won't be subject to alternative minimum tax (AMT) in 2017. Pulling state and local tax deductions into 2017 would be especially beneficial if Congress eliminates such deductions beginning next year.
- Estimate the effect of any year-end planning moves on the AMT for 2017, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. If you are subject to the AMT for 2017, or suspect you might be, these types of deductions should not be accelerated.
- You may be able to save taxes by applying a bunching strategy to pull "miscellaneous" itemized deductions, medical expenses and other itemized deductions into this year. This strategy would be especially beneficial if Congress eliminates such deductions beginning in 2018.
- You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
- You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
- Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70-½, the first distribution calendar year is the year in which the IRA owner attains age 70-½. Thus, if you turn age 70-½ in 2017, you can delay the first required distribution to 2018, but if you do, you will have to take a double distribution in 2018-the amount required for 2017 plus the amount required for 2018. Think twice before delaying 2017 distributions to 2018, as bunching income into 2018 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2018 if you will be in a substantially lower bracket that year.
- Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.
- If you become eligible in December of 2017 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2017.
- Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2017 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 affected by Hurricane Harvey, Irma, or Maria, keep in mind that you may be entitled to special tax relief under recently passed legislation, such as relaxed casualty loss rules and eased access to your retirement funds. In addition qualifying charitable contributions related to relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas aren't subject to the usual charitable deduction limitations.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.
Projecting your business income and expenses for this year and next can allow you to time when you recognize income and incur deductible expenses to your tax advantage. Typically, it’s better to defer tax. This might end up being especially true this year, if tax reform legislation is signed into law.
Timing strategies for businesses
Here are two timing strategies that can help businesses defer taxes:
1. Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.
2. Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before December 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.
Potential impact of tax reform
These deferral strategies could be particularly powerful if tax legislation is signed into law this year that reflects the nine-page “Unified Framework for Fixing Our Broken Tax Code” that President Trump and congressional Republicans released on September 27.
Among other things, the framework calls for reduced tax rates for corporations and flow-through entities as well as the elimination of many business deductions. If such changes were to go into effect in 2018, there could be a significant incentive for businesses to defer income to 2018 and accelerate deductible expenses into 2017.
But if you think you’ll be in a higher tax bracket next year (such as if your business is having a bad year in 2017 but the outlook is much brighter for 2018 and you don’t expect that tax rates will go down), consider taking the opposite approach instead — accelerating income and deferring deductible expenses. This will increase your tax bill this year but might save you tax over the two-year period.
Be prepared
Because of tax law uncertainty, in 2017 you may want to wait until closer to the end of the year to implement some of your year-end tax planning strategies. But you need to be ready to act quickly if tax legislation is signed into law. So keep an eye on developments in Washington and contact us to discuss the best strategies for you this year based on your particular situation.
© 2017
Did you know that if you’re self-employed you may be able to set up a retirement plan that allows you to contribute much more than you can contribute to an IRA or even an employer-sponsored 401(k)? There’s still time to set up such a plan for 2017, and it generally isn’t hard to do. So whether you’re a “full-time” independent contractor or you’re employed but earn some self-employment income on the side, consider setting up one of the following types of retirement plans this year.
Profit-sharing plan
This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. (As a self-employed person, you’re both the employer and the employee.) You can make deductible 2017 contributions as late as the due date of your 2017 tax return, including extensions — provided your plan exists on Dec. 31, 2017.
For 2017, the maximum contribution is 25% of your net earnings from self-employment, up to a $54,000 contribution. If you include a 401(k) arrangement in the plan, you might be able to contribute a higher percentage of your income. If you include such an arrangement and are age 50 or older, you may be able to contribute as much as $60,000.
Simplified Employee Pension (SEP)
This is a defined contribution plan that provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2018 and still make deductible 2017 contributions as late as the due date of your 2017 income tax return, including extensions. In addition, a SEP is easy to administer.
For 2017, the maximum SEP contribution is 25% of your net earnings from self-employment, up to a $54,000 contribution.
Defined benefit plan
This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2017 is generally $215,000 or 100% of average earned income for the highest three consecutive years, if less.
Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit. You can make deductible 2017 defined benefit plan contributions until your return due date, provided your plan exists on Dec. 31, 2017.
More to think about
Additional rules and limits apply to these plans, and other types of plans are available. Also, keep in mind that things get more complicated — and more expensive — if you have employees. Why? Generally, they must be allowed to participate in the plan, provided they meet the qualification requirements. To learn more about retirement plans for the self-employed, contact us.
© 2017
With kids back in school, it’s a good time for parents (and grandparents) to think about college funding. One option is a Section 529 plan. It offers the opportunity to build up a large college nest egg via tax-deferred compounding and can be particularly powerful if contributions begin when the child is quite young. Contributions aren’t deductible for federal purposes, but distributions used to pay qualified expenses are typically income-tax-free for both federal and state purposes, thus making the tax deferral a permanent savings.
With kids back in school, it’s a good time for parents (and grandparents) to think about college funding. One option, which can be especially beneficial if the children in question still have many years until they’ll be starting their higher education, is a Section 529 plan.
Tax-deferred compounding
529 plans are generally state-sponsored, and the savings-plan option offers the opportunity to potentially build up a significant college nest egg because of tax-deferred compounding. So these plans can be particularly powerful if contributions begin when the child is quite young. Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. In addition, some states offer tax incentives for contributing.
Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.
More pluses
529 plans offer other benefits as well:
- They usually have high contribution limits.
- There are no income-based phaseouts further limiting contributions.
- There’s generally no beneficiary age limit for contributions or distributions.
- You can control the account, even after the child is a legal adult.
- You can make tax-free rollovers to another qualifying family member.
Finally, 529 plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions, which means you can make up to a $70,000 contribution (or $140,000 if you split the gift with your spouse) in 2017. In the case of grandparents, this also can avoid generation-skipping transfer taxes.
Minimal minuses
One negative of a 529 plan is that your investment options are limited. Another is that you can make changes to your options only twice a year or if you change the beneficiary.
But whenever you make a new contribution, you can choose a different option for that contribution, no matter how many times you contribute during the year. Also, you can make a tax-free rollover to another 529 plan for the same child every 12 months.
We’ve focused on 529 savings plans here; a prepaid tuition version of 529 plans is also available. If you’d like to learn more about either type of 529 plan, please contact us. We can also tell you about other tax-smart strategies for funding education expenses.
© 2017
An estate tax repeal is one reform that’s been proposed by Congress, but a repeal may not affect you. Here’s why.
Among the taxes that are being considered for repeal as part of tax reform legislation is the estate tax. This tax applies to transfers of wealth at death, hence why it’s commonly referred to as the “death tax.” Its sibling, the gift tax — also being considered for repeal — applies to transfers during life. Yet most taxpayers won’t face these taxes even if the taxes remain in place.
Exclusions and exemptions
For 2017, the lifetime gift and estate tax exemption is $5.49 million per taxpayer. (The exemption is annually indexed for inflation.) If your estate doesn’t exceed your available exemption at your death, then no federal estate tax will be due.
Any gift tax exemption you use during life does reduce the amount of estate tax exemption available at your death. But every gift you make won’t use up part of your lifetime exemption. For example:
- Gifts to your U.S. citizen spouse are tax-free under the marital deduction. (So are transfers at death — that is, bequests.)
- Gifts and bequests to qualified charities aren’t subject to gift and estate taxes.
- Payments of another person’s health care or tuition expenses aren’t subject to gift tax if paid directly to the provider.
- Each year you can make gifts up to the annual exclusion amount ($14,000 per recipient for 2017) tax-free without using up any of your lifetime exemption.
What’s your estate tax exposure?
Here’s a simplified way to project your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death.
Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. (But keep in mind that there could be estate tax exposure on your surviving spouse’s death, depending on the size of his or her estate.) The net number represents your taxable estate.
You can then apply the exemption amount you expect to have available at death. Remember, any gift tax exemption amount you use during your life must be subtracted. But if your spouse predeceases you, then his or her unused estate tax exemption, if any, may be added to yours (provided the applicable requirements are met).
If your taxable estate is equal to or less than your available estate tax exemption, no federal estate tax will be due at your death. But if your taxable estate exceeds this amount, the excess will be subject to federal estate tax.
Be aware that many states impose estate tax at a lower threshold than the federal government does. So you could have state estate tax exposure even if you don’t need to worry about federal estate tax.
If you’re not sure whether you’re at risk for the estate tax or if you’d like to learn about gift and estate planning strategies to reduce your potential liability, please contact us. We also can keep you up to date on any estate tax law changes.
© 2017
Elementary and secondary school teachers and other eligible educators can deduct up to $250 for qualifying classroom supplies they pay for out of pocket. This is an “above-the-line” deduction, which means you don’t have to itemize. Before this special break became available, such expenditures could be deducted only as unreimbursed business expenses under the miscellaneous itemized deduction, subject to a 2% of adjusted gross income (AGI) floor, which could be a difficult threshold to meet.
At back-to-school time, much of the focus is on the students returning to the classroom — and on their parents buying them school supplies, backpacks, clothes, etc., for the new school year. But let’s not forget about the teachers. It’s common for teachers to pay for some classroom supplies out of pocket, and the tax code provides a special break that makes it a little easier for these educators to deduct some of their expenses.
The miscellaneous itemized deduction
Generally, your employee expenses are deductible if they’re unreimbursed by your employer and ordinary and necessary to your business of being an employee. An expense is ordinary if it is common and accepted in your business. An expense is necessary if it is appropriate and helpful to your business.
These expenses must be claimed as a miscellaneous itemized deduction and are subject to a 2% of adjusted gross income (AGI) floor. This means you’ll enjoy a tax benefit only if all your deductions subject to the floor, combined, exceed 2% of your AGI. For many taxpayers, including teachers, this can be a difficult threshold to meet.
The educator expense deduction
Congress created the educator expense deduction to allow more teachers and other educators to receive a tax benefit from some of their unreimbursed out-of-pocket classroom expenses. The break was made permanent under the Protecting Americans from Tax Hikes (PATH) Act of 2015. Since 2016, the deduction has been annually indexed for inflation (though because of low inflation it hasn’t increased yet) and has included professional development expenses.
Qualifying elementary and secondary school teachers and other eligible educators (such as counselors and principals) can deduct up to $250 of qualified expenses. (If you’re married filing jointly and both you and your spouse are educators, you can deduct up to $500 of unreimbursed expenses — but not more than $250 each.)
Qualified expenses include amounts paid or incurred during the tax year for books, supplies, computer equipment (including related software and services), other equipment and supplementary materials that you use in the classroom. For courses in health and physical education, the costs for supplies are qualified expenses only if related to athletics.
An added benefit
The educator expense deduction is an “above-the-line” deduction, which means you don’t have to itemize and it reduces your AGI, which has an added benefit: Because AGI-based limits affect a variety of tax breaks (such as the previously mentioned miscellaneous itemized deductions), lowering your AGI might help you maximize your tax breaks overall.
Contact us for more details about the educator expense deduction or tax breaks available for other work-related expenses.
If you own a home, be sure to claim all the home-related tax breaks you’re entitled to. But be aware that a couple expired at the end of 2016, and others might disappear in the future as part of tax reform.
Currently, home ownership comes with many tax-saving opportunities. Consider both deductions and exclusions when you’re filing your 2016 return and tax planning for 2017:
Property tax deduction. Property tax is generally fully deductible — unless you’re subject to the alternative minimum tax (AMT).
Mortgage interest deduction. You generally can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible.
Home equity debt interest deduction. Interest on home equity debt used for any purpose (debt limit of $100,000) may be deductible. But keep in mind that, if home equity debt isn’t used for home improvements, the interest isn’t deductible for AMT purposes.
Mortgage insurance premium deduction. This break expired December 31, 2016, but Congress might extend it.
Home office deduction. If your home office use meets certain tests, you generally can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, and the depreciation allocable to the space. Or you may be able to use a simplified method for claiming the deduction.
Rental income exclusion. If you rent out all or a portion of your principal residence or second home for less than 15 days, you don’t have to report the income. But expenses directly associated with the rental, such as advertising and cleaning, won’t be deductible.
Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain if you meet certain tests. Be aware that gain allocable to a period of “nonqualified” use generally isn’t excludable.
Debt forgiveness exclusion. This break for homeowners who received debt forgiveness in a foreclosure, short sale or mortgage workout for a principal residence expired December 31, 2016, but Congress might extend it.
The debt forgiveness exclusion and mortgage insurance premium deduction aren’t the only home-related breaks that might not be available in the future. There have been proposals to eliminate other breaks, such as the property tax deduction, as part of tax reform.
Whether such changes will be signed into law and, if so, when they’d go into effect is uncertain. Also keep in mind that additional rules and limits apply to these breaks. So contact us for information on the latest tax reform developments or which home-related breaks you’re eligible to claim.
© 2017
If you don’t have “minimum essential” health coverage, beware of potential tax penalties.
Now that Affordable Care Act (ACA) repeal and replacement efforts appear to have collapsed, at least for the time being, it’s a good time for a refresher on the tax penalty the ACA imposes on individuals who fail to have “minimum essential” health insurance coverage for any month of the year. This requirement is commonly called the “individual mandate.”
Penalty exemptions
Before we review how the penalty is calculated, let’s take a quick look at exceptions to the penalty. Taxpayers may be exempt if they fit into one of these categories for 2017:
- Their household income is below the federal income tax return filing threshold.
- They lack access to affordable minimum essential coverage.
- They suffered a hardship in obtaining coverage.
- They have only a short-term coverage gap.
- They qualify for an exception on religious grounds or have coverage through a health care sharing ministry.
- They’re not a U.S. citizen or national.
- They’re incarcerated.
- They’re a member of a Native American tribe.
Calculating the tax
So how much can the penalty cost? That’s a tricky question. If you owe the penalty, the tentative amount equals the greater of the following two prongs:
In terms of the percentage-of-income prong of the penalty, the applicable percentage of income is 2.5% for 2017.
In terms of the dollar-amount prong of the penalty, the applicable dollar amount for each uninsured household member is $695 for 2017. For a household member who’s under age 18, the applicable dollar amounts are cut by 50%, to $347.50. The maximum penalty under this prong for 2017 is $2,085 (300% of $695).
The final penalty amount per person can’t exceed the national average cost of “bronze coverage” (the cheapest category of ACA-compliant coverage) for your household. The important thing to know is that a high-income person or household could owe more than 300% of the applicable dollar amount but not more than the cost of bronze coverage.
If you have minimum essential coverage for only part of the year, the final penalty is calculated on a monthly basis using prorated annual figures.
Also be aware that the extent to which the penalty will continue to be enforced isn’t certain. The IRS has been accepting 2016 tax returns even if a taxpayer hasn’t completed the line indicating health coverage status. That said, the ACA is still the law, so compliance is highly recommended. For more information about this and other ACA-imposed taxes, contact us.
© 2017
The American Opportunity credit can provide valuable tax savings for families with a college student. But sometimes it makes sense for the student, rather than the parent, to claim the credit.
If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. If, however, your income is too high, you won’t qualify for the credit — but your child might. There’s one potential downside: If your dependent child claims the credit, you must forgo your dependency exemption for him or her. And the child can’t take the exemption.
The limits
The maximum American Opportunity credit, per student, is $2,500 per year for the first four years of postsecondary education. It equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses.
The ability to claim the American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) enters the applicable phaseout range ($160,000–$180,000 for joint filers, $80,000–$90,000 for other filers). It’s completely eliminated when MAGI exceeds the top of the range.
Running the numbers
If your American Opportunity credit is partially or fully phased out, it’s a good idea to assess whether there’d be a tax benefit for the family overall if your child claimed the credit. As noted, this would come at the price of your having to forgo your dependency exemption for the child. So it’s important to run the numbers.
Dependency exemptions are also subject to a phaseout, so you might lose the benefit of your exemption regardless of whether your child claims the credit. The 2016 adjusted gross income (AGI) thresholds for the exemption phaseout are $259,400 (singles), $285,350 (heads of households), $311,300 (married filing jointly) and $155,650 (married filing separately).
If your exemption is fully phased out, there likely is no downside to your child taking the credit. If your exemption isn’t fully phased out, compare the tax savings your child would receive from the credit with the savings you’d receive from the exemption to determine which break will provide the greater overall savings for your family.
We can help you run the numbers and can provide more information about qualifying for the American Opportunity credit.
© 2017
Do you know what individual income tax records are safe to toss? If not and you’d like to clear out your files (whether paper or electronic) of unnecessary documents, here are some guidelines.
Whether you filed your 2016 tax return by the April 18 deadline or you filed for an extension, you may be overwhelmed by the amount of documentation involved. While you need to hold on to all of your 2016 tax records for now, it’s a great time to take a look at your records for previous tax years to see what you can purge.
Consider the statute of limitations
At minimum, keep tax records for as long as the IRS has the ability to audit your return or assess additional taxes, which generally is three years after you file your return. This means you likely can shred and toss — or electronically purge — most records related to tax returns for 2013 and earlier years (2012 and earlier if you filed for an extension for 2013).
In some cases, the statute of limitations extends beyond three years. If you understate your adjusted gross income by more than 25%, for example, the limitations period jumps to six years. And there is no statute of limitations if you fail to file a tax return or file a fraudulent one.
Keep some documents longer
You’ll need to hang on to certain records beyond the statute of limitations:
Tax returns. Keep them forever, so you can prove to the IRS that you actually filed.
W-2 forms. Consider holding them until you begin receiving Social Security benefits. Why? In case a question arises regarding your work record or earnings for a particular year.
Records related to real estate or investments. Keep these as long as you own the asset, plus three years after you sell it and report the sale on your tax return (or six years if you’re concerned about the six-year statute of limitations).
This is only a sampling of retention guidelines for tax-related documents. If you have questions about other documents, please contact us.
© 2017
Final regulations clarify the definition of "real property" that qualifies for a like-kind exchange, including incidental personal property. Under the Tax Cuts and Jobs Act (TCJA, P.L. 115-97), like-kind exchanges occurring after 2017 are limited to real property used in a trade or business or for investment.
Final regulations clarify the definition of "real property" that qualifies for a like-kind exchange, including incidental personal property. Under the Tax Cuts and Jobs Act (TCJA, P.L. 115-97), like-kind exchanges occurring after 2017 are limited to real property used in a trade or business or for investment.
The final regulations largely adopt regulations that were proposed in June ( NPRM REG-117589-18). However, they also:
- add a " state or local law" test to define real property; and
- reject the “purpose and use” test in the proposed regulations.
In addition, the final regulations classify cooperative housing corporation stock and land development rights as real property. The final regulations also provide that a license, permit, or other similar right is generally real property if it is (i) solely for the use, enjoyment, or occupation of land or an inherently permanent structure; and (ii) in the nature of a leasehold, an easement, or a similar right.
General Definition
Under the final regulations, property is classified as "real property" for like-kind exchange purposes if, on the date it is transferred in the exchange, the property is real property under the law of the state or local jurisdiction in which it is located. The proposed regulations had limited this “state or local law” test to shares in a mutual ditch, reservoir, or irrigation company.
However, the final regulations also clarify that real property that was ineligible for a like-kind exchange before the TCJA remains ineligible. For example, intangible assets that could not be like-kind property before the TCJA (such as stocks, securities, and partnership interests) remain ineligible regardless of how they are characterized under state or local law.
Accordingly, under the final regulations, property is real property if it is:
- classified as real property under state or local law;
- specifically listed as real property in the final regulations; or
- considered real property based on all of the facts and circumstances, under factors provided in the regulations.
These tests mean that property that is not real property under state or local law might still be real property for like-kind exchange purposes if it satisfies the second or third test.
Types of Real Property
Under both the proposed and final regulations, real property for a like-kind exchange is:
- land and improvements to land;
- unsevered crops and other natural products of land; and
- water and air space superjacent to land.
Under both the proposed and final regulations, improvements to land include inherently permanent structures, and the structural components of inherently permanent structures. Each distinct asset must be analyzed separately to determine if it is land, an inherently permanent structure, or a structural component of an inherently permanent structure. The regulations identify several specific items, assets and systems as distinct assets, and provide factors for identifying other distinct assets.
The final regulations also:
- incorporate the language provided in Reg. §1.856-10(d)(2)(i) to provide additional clarity regarding the meaning of "permanently affixed;"
- modify the example in the proposed regulations concerning offshore drilling platforms; and
- clarify that the distinct asset rule applies only to determine whether property is real property, but does not affect the application of the three-property rule for identifying properties in a deferred exchange.
"Purpose or Use" Test
The proposed regulations would have imposed a "purpose or use" test on both tangible and intangible property. Under this test, neither tangible nor intangible property was real property if it contributed to the production of income unrelated to the use or occupancy of space.
The final regulations eliminate the purpose and use test for both tangible and intangible property. Consequently, tangible property is generally an inherently permanent structure—and, thus, real property—if it is permanently affixed to real property and will ordinarily remain affixed for an indefinite period of time. A structural component likewise is real property if it is integrated into an inherently permanent structure. Accordingly, items of machinery and equipment are real property if they comprise an inherently permanent structure or a structural component, or if they are real property under the state or local law test—irrespective of the purpose or use of the items or whether they contribute to the production of income.
Similarly, whether intangible property produces or contributes to the production of income is not considered in determining whether intangible property is real property for like-kind exchange purposes. However, the purpose of the intangible property remains relevant to the determination of whether the property is real property.
Incidental Personal Property
The incidental property rule in the proposed regulations provided that, for exchanges involving a qualified intermediary, personal property that is incidental to replacement real property (incidental personal property) is disregarded in determining whether a taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits of money or non-like-kind property held by the qualified intermediary are expressly limited as provided in Reg. §1.1031(k)-1(g)(6).
Personal property is incidental to real property acquired in an exchange if (i) in standard commercial transactions, the personal property is typically transferred together with the real property, and (ii) the aggregate fair market value of the incidental personal property transferred with the real property does not exceed 15 percent of the aggregate fair market value of the replacement real property (15-percent limitation).
This final regulations adopt these rules with some minor modifications to improve clarity and readability. For example, the final regulations clarify that the receipt of incidental personal property results in taxable gain; and the 15-percent limitation compares the value of all of the incidental properties to the value of all of the replacement real properties acquired in the same exchange.
Effective Dates
The final regulations apply to exchanges beginning after the date they are published as final in the Federal Register. However, a taxpayer may also rely on the proposed regulations published in the Federal Register on June 12, 2020, if followed consistently and in their entirety, for exchanges of real property beginning after December 31, 2017, and before the publication date of the final regulations. In addition, conforming changes to the bonus depreciation rules apply to tax years beginning after the final regulations are published.
The IRS has released rulings concerning deductions for eligible Paycheck Protection Program (PPP) loan expenses.
The IRS has released rulings concerning deductions for eligible Paycheck Protection Program (PPP) loan expenses. The rulings:
- deny a deduction if the taxpayer has not yet applied for PPP loan forgiveness, but expects the loan to be forgiven; and
- provide a safe harbor for deducting expenses if PPP loan forgiveness is denied or the taxpayer does not apply for forgiveness.
Background
In response to the COVID-19 (coronavirus) crisis, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) expanded Section 7(a) of the Small Business Act for certain loans made from February 15, 2020, through August 8, 2020 (PPP loans). An eligible PPP loan recipient may have the debt on a covered loan forgiven, and the cancelled debt will be excluded from gross income. To prevent double tax benefits, under Reg. §1.265-1, taxpayers cannot deduct expenses allocable to income that is either wholly excluded from gross income or wholly exempt from tax.
The IRS previously determined that businesses whose PPP loans are forgiven cannot deduct business expenses paid for by the loan ( Notice 2020-32, I.R.B. 2020-21, 837). The new guidance expands on the previous guidance, but provides a safe harbor for taxpayers whose loans are not forgiven.
No Business Deduction
In Rev. Rul. 2020-27, the IRS amplifies guidance in Notice 2020-32. A taxpayer that received a covered PPP loan and paid or incurred certain otherwise deductible expenses may not deduct those expenses in the tax year in which the expenses were paid or incurred if, at the end of the tax year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period. This is the case even if the taxpayer has not applied for forgiveness by the end of the tax year.
Safe Harbor
In Rev. Proc. 2020-51, the IRS provides a safe harbor allowing taxpayers to claim a deduction in the tax year beginning or ending in 2020 for certain otherwise deductible eligible expenses if:
- the eligible expenses are paid or incurred during the taxpayer’s 2020 tax year;
- the taxpayer receives a PPP covered loan that, at the end of the taxpayer’s 2020 tax year, the taxpayer expects to be forgiven in a subsequent tax year; and
- in a subsequent tax year, the taxpayer’s request for forgiveness of the covered loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the covered loan.
A taxpayer may be able to deduct some or all of the eligible expenses on, as applicable:
- a timely (including extensions) original income tax return or information return for the 2020 tax year;
- an amended return or an administrative adjustment request (AAR) under Code Sec. 6227 for the 2020 tax year; or
- a timely (including extensions) original income tax return or information return for the subsequent tax year.
Applying Safe Harbor
To apply the safe harbor, a taxpayer attaches a statement titled "Revenue Procedure 2020-51 Statement" to the return on which the taxpayer deducts the expenses. The statement must include:
- the taxpayer’s name, address, and social security number or employer identification number;
- a statement specifying whether the taxpayer is an eligible taxpayer under either section 3.01 or section 3.02 of Revenue Procedure 2020-51;
- a statement that the taxpayer is applying section 4.01 or section 4.02 of Revenue Procedure 2020-51;
- the amount and date of disbursement of the taxpayer’s covered PPP loan;
- the total amount of covered loan forgiveness that the taxpayer was denied or decided to no longer seek;
- the date the taxpayer was denied or decided to no longer seek covered loan forgiveness; and
- the total amount of eligible expenses and non-deducted eligible expenses that are reported on the return.
The IRS has issued final regulations under Code Sec. 274 relating to the elimination of the employer deduction of for transportation and commuting fringe benefits by the Tax Cuts and Jobs Act ( P.L. 115-97), effective for amounts paid or incurred after December 31, 2017. The final regulations address the disallowance of a deduction for the expense of any qualified transportation fringe (QTF) provided to an employee of the taxpayer. Guidance and methodologies are provided to determine the amount of QTF parking expenses that is nondeductible. The final regulations also address the disallowance of the deduction for expenses of transportation and commuting between an employee’s residence and place of employment.
The IRS has issued final regulations under Code Sec. 274 relating to the elimination of the employer deduction of for transportation and commuting fringe benefits by the Tax Cuts and Jobs Act ( P.L. 115-97), effective for amounts paid or incurred after December 31, 2017. The final regulations address the disallowance of a deduction for the expense of any qualified transportation fringe (QTF) provided to an employee of the taxpayer. Guidance and methodologies are provided to determine the amount of QTF parking expenses that is nondeductible. The final regulations also address the disallowance of the deduction for expenses of transportation and commuting between an employee’s residence and place of employment.
The final regulations adopt earlier proposed regulations with a few minor modifications in response to public comments ( REG-119307-19). Pending issuance of these final regulations, taxpayers had been allowed to apply to proposed regulations or guidance issued in Notice 2018-99, I.R.B. 2018-52, 1067. Notice 2018-99 is obsoleted on the publication date of the final regulations.
The final regulations clarify an exception for parking spaces made available to the general public to provide that parking spaces used to park vehicles owned by members of the general public while the vehicle awaits repair or service are treated as provided to the general public.
The category of parking spaces for inventory or which are otherwise unusable by employees is clarified to provide that such spaces may also not be usable by the general public. In addition, taxpayers will be allowed to use any reasonable method to determine the number of inventory/unusable spaces in a parking facility.
The definition of "peak demand period" for purposes of determining the primary use of a parking facility is modified to cover situations where a taxpayer is affected by a federally declared disaster.
The final regulations also provide that taxpayers using the cost per parking space methodology for determining the disallowance for parking facilities may calculate the cost per space on a monthly basis.
Effective Date
The final regulations apply to tax years beginning on or after the date of publication in the Federal Register. However, taxpayers can choose to apply the regulations to tax years ending after December 31, 2019.
As part of a series of reminders, the IRS has urged taxpayers get ready for the upcoming tax filing season. A special page ( https://www.irs.gov/individuals/steps-to-take-now-to-get-a-jump-on-next-years-taxes), updated and available on the IRS website, outlines steps taxpayers can take now to make tax filing easier in 2021.
As part of a series of reminders, the IRS has urged taxpayers get ready for the upcoming tax filing season. A special page ( https://www.irs.gov/individuals/steps-to-take-now-to-get-a-jump-on-next-years-taxes), updated and available on the IRS website, outlines steps taxpayers can take now to make tax filing easier in 2021.
Taxpayers receiving substantial amounts of non-wage income like self-employment income, investment income, taxable Social Security benefits and, in some instances, pension and annuity income, should make quarterly estimated tax payments. The last payment for 2020 is due on January 15, 2021. Payment options can be found at IRS.gov/payments. For more information, the IRS encourages taxpayers to review Pub. 5348, Get Ready to File, and Pub. 5349, Year-Round Tax Planning is for Everyone.
Income
Most income is taxable, so taxpayers should gather income documents such as Forms W-2 from employers, Forms 1099 from banks and other payers, and records of virtual currencies or other income. Other income includes unemployment income, refund interest and income from the gig economy.
Forms and Notices
Beginning in 2020, individuals may receive Form 1099-NEC, Nonemployee Compensation, rather than Form 1099-MISC, Miscellaneous Income, if they performed certain services for and received payments from a business. The IRS recommends reviewing the Instructions for Form 1099-MISC and Form 1099-NEC to ensure clients are filing the appropriate form and are aware of this change.
Taxpayers may also need Notice 1444, Economic Impact Payment, which shows how much of a payment they received in 2020. This amount is needed to calculate any Recovery Rebate Credit they may be eligible for when they file their federal income tax return in 2021. People who did not receive an Economic Impact Payment in 2020 may qualify for the Recovery Rebate Credit when they file their 2020 taxes in 2021.
Additional Information
To see information from the most recently filed tax return and recent payments, taxpayers can sign up to view account information online. Taxpayers should notify the IRS of address changes and notify the Social Security Administration of a legal name change to avoid delays in tax return processing.
This year marks the 5th Annual National Tax Security Awareness Week-a collaboration by the IRS, state tax agencies and the tax industry. The IRS and the Security Summit partners have issued warnings to all taxpayers and tax professionals to beware of scams and identity theft schemes by criminals taking advantage of the combination of holiday shopping, the approaching tax season and coronavirus concerns. The 5th Annual National Tax Security Awareness Week coincided with Cyber Monday, the traditional start of the online holiday shopping season.
This year marks the 5th Annual National Tax Security Awareness Week-a collaboration by the IRS, state tax agencies and the tax industry. The IRS and the Security Summit partners have issued warnings to all taxpayers and tax professionals to beware of scams and identity theft schemes by criminals taking advantage of the combination of holiday shopping, the approaching tax season and coronavirus concerns. The 5th Annual National Tax Security Awareness Week coincided with Cyber Monday, the traditional start of the online holiday shopping season.
The following are a few basic steps which taxpayers and tax professionals should remember during the holidays and as the 2021 tax season approaches:
- use an updated security software for computers and mobile phones;
- the purchased anti-virus software must have a feature to stop malware and a firewall that can prevent intrusions;
- don't open links or attachments on suspicious emails because this year, fraud scams related to COVID-19 and the Economic Impact Payment are common;
- use strong and unique passwords for online accounts;
- use multi-factor authentication whenever possible which prevents thieves from easily hacking accounts;
- shop at sites where the web address begins with "https" and look for the "padlock" icon in the browser window;
- don't shop on unsecured public Wi-Fi in places like a mall;
- secure home Wi-Fis with a password;
- back up files on computers and mobile phones; and
- consider creating a virtual private network to securely connect to your workplace if working from home.
In addition, taxpayers can check out security recommendations for their specific mobile phone by reviewing the Federal Communications Commission's Smartphone Security Checker. The Federal Bureau of Investigation has issued warnings about fraud and scams related to COVID-19 schemes, anti-body testing, healthcare fraud, cryptocurrency fraud and others. COVID-related fraud complaints can be filed at the National Center for Disaster Fraud. Moreover, the Federal Trade Commission also has issued alerts about fraudulent emails claiming to be from the Centers for Disease Control or the World Health Organization. Taxpayers can keep atop the latest scam information and report COVID-related scams at www.FTC.gov/coronavirus.
The IRS has issued proposed regulations for the centralized partnership audit regime...
NPRM REG-123652-18
The IRS has issued proposed regulations for the centralized partnership audit regime that:
- clarify that a partnership with a QSub partner is not eligible to elect out of the centralized audit regime;
- add three new types of “special enforcement matters” and modify existing rules;
- modify existing guidance and regulations on push out elections and imputed adjustments; and
- clarify rules on partnerships that cease to exist.
The regulations are generally proposed to apply to partnership tax years ending after November 20, 2020, and to examinations and investigations beginning after the date the regs are finalized. However, the new special enforcement matters category for partnership-related items underlying non-partnership-related items is proposed to apply to partnership tax years beginning after December 20, 2018. In addition, the IRS and a partner could agree to apply any part of the proposed regulations governing special enforcement matters to any tax year of the partner that corresponds to a partnership tax year that is subject to the centralized partnership audit regime.
Centralized Audit Regime
The Bipartisan Budget Act of 2015 ( P.L. 114-74) replaced the Tax Equity and Fiscal Responsibility Act (TEFRA) ( P.L. 97-248) partnership procedures with a centralized partnership audit regime for making partnership adjustments and tax determinations, assessments and collections at the partnership level. These changes were further amended by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) ( P.L. 114-113), and the Tax Technical Corrections Act of 2018 (TTCA) ( P.L. 115-141). The centralized audit regime, as amended, generally applies to returns filed for partnership tax years beginning after December 31, 2017.
Election Out
A partnership with no more than 100 partners may generally elect out of the centralized audit regime if all of the partners are eligible partners. As predicted in Notice 2019-06, I.R.B. 2019-03, 353, the proposed regulations would provide that a qualified subchapter S subsidiary (QSub) is not an eligible partner; thus, a partnership with a QSub partner could not elect out of the centralized audit regime.
Special Enforcement Matters
The IRS may exempt “special enforcement matters” from the centralized audit regime. There are currently six categories of special enforcement matters:
- failures to comply with the requirements for a partnership-partner or S corporation partner to furnish statements or compute and pay an imputed underpayment;
- assessments relating to termination assessments of income tax or jeopardy assessments of income, estate, gift, and certain excise taxes;
- criminal investigations;
- indirect methods of proof of income;
- foreign partners or partnerships;
- other matters identified in IRS regulations.
The proposed regs would add three new types of special enforcement matters:
- partnership-related items underlying non-partnership-related items;
- controlled partnerships and extensions of the partner’s period of limitations; and
- penalties and taxes imposed on the partnership under chapter 1.
The proposed regs would also require the IRS to provide written notice of most special enforcement matters to taxpayers to whom the adjustments are being made.
The proposed regs would clarify that the IRS could adjust partnership-level items for a partner or indirect partner without regard to the centralized audit regime if the adjustment relates to termination and jeopardy assessments, if the partner is under criminal investigation, or if the adjustment is based on an indirect method of proof of income.
However, the proposed regs would also provide that the special enforcement matter rules would not apply to the extent the partner could demonstrate that adjustments to partnership-related items in the deficiency or an adjustment by the IRS were:
- previously taken into account under the centralized audit regime by the person being examined; or
- included in an imputed underpayment paid by a partnership (or pass-through partner) for any tax year in which the partner was a reviewed year partner or indirect partner, but only if the amount included in the deficiency or adjustment exceeds the amount reported by the partnership to the partner that was either reported by the partner or indirect partner or is otherwise included in the deficiency or adjustment determined by the IRS.
Push Out Election, Imputed Underpayments
The partnership adjustment rules generally do not apply to a partnership that makes a "push out" election to push the adjustment out to the partners. However, the partnership must pay any chapter 1 taxes, penalties, additions to tax, and additional amounts or the amount of any adjustment to an imputed underpayment. Thus, there must be a mechanism for including these amounts in the imputed underpayment and accounting for these amounts.
In calculating an imputed underpayment, the proposed regs would generally include any adjustments to the partnership’s chapter 1 liabilities in the credit grouping and treat them similarly to credit adjustments. Adjustments that do not result in an imputed underpayment generally could increase or decrease non-separately stated income or loss, as appropriate, depending on whether the adjustment is to an item of income or loss. The proposed regs would also treat a decrease in a chapter 1 liability as a negative adjustment that normally does not result in an imputed underpayment if: (1) the net negative adjustment is to a credit, unless the IRS determines to have it offset the imputed underpayment; or (2) the imputed underpayment is zero or less than zero.
Under existing regs for calculating an imputed underpayment, an adjustment to a non-income item that is related to, or results from, an adjustment to an item of income, gain, loss, deduction, or credit is generally treated as zero, unless the IRS determines that the adjustment should be included in the imputed underpayment. The proposed regs would clarify this rule and extend it to persons other than the IRS. Thus, a partnership that files an administrative adjustment request (AAR) could treat an adjustment to a non-income item as zero if the adjustment is related to, and the effect is reflected in, an adjustment to an item of income, gain, loss, deduction, or credit (unless the IRS subsequently determines in an AAR examination that both adjustments should be included in the calculation of the imputed underpayment).
A partnership would take into account adjustments to non-income items in the adjustment year by adjusting the item on its adjustment year return to be consistent with the adjustment. This would apply only to the extent the item would appear on the adjustment year return without regard to the adjustment. If the item already appeared on the partnership’s adjustment year return as a non-income item, or appeared as a non-income item on any return of the partnership for a tax year between the reviewed year and the adjustment year, the partnership does not create a new item on the partnership’s adjustment year return.
A passthrough partner that is paying an amount as part of an amended return submitted as part of a request to modify an imputed underpayment would take into account any adjustments that do not result in an imputed underpayment in the partners’ tax year that includes the date the payment is made. This provision, however, would not apply if no payment is made by the partnership because no payment is required.
Partnership Ceases to Exist
If a partnership ceases to exist before the partnership adjustments take effect, the adjustments are taken into account by the former partners of the partnership. The IRS may assess a former partner for that partner’s proportionate share of any amounts owed by the partnership under the centralized partnership audit regime. The proposed regs would clarify that a partnership adjustment takes effect when the adjustments become finally determined; that is, when the partnership and IRS enter into a settlement agreement regarding the adjustment; or, for adjustments reflected in an AAR, when the AAR is filed. The proposed regs would also make conforming changes to existing regs:
- A partnership ceases to exist if the IRS determines that the partnership does not have the ability to pay in full any amount that the partnership may become liable for under the centralized partnership audit regime.
- Existing regs that describe when the IRS will not determine that a partnership ceases to exist would be removed.
- Statements must be furnished to the former partners and filed with the IRS no later than 60 days after the later of the date the IRS notifies the partnership that it has ceased to exist or the date the adjustments take effect.
The proposed regs would also modify the definition of "former partners" to be partners of the partnership during the last tax year for which a partnership return or AAR was filed, or the most recent persons determined to be the partners in a final determination, such as a final court decision, defaulted notice of final partnership adjustment (FPA), or settlement agreement.
Comments Requested
Comments are requested on all aspects of the proposed regulations by January 22, 2021. The IRS strongly encourages commenters to submit comments electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-123652-18). Comments submitted on paper will be considered to the extent practicable.
The IRS has issued final regulations with guidance on how a tax-exempt organization can determine whether it has more than one unrelated trade or business, how it should identify its separate trades and businesses, and how to separately calculate unrelated business taxable income (UBTI) for each trade or business – often referred to as "silo" rules. Since 2018, under provisions of the Tax Cuts and Jobs Act (TCJA), the loss from one unrelated trade or business may not offset the income from another, separate trade or business. Congress did not provide detailed methods of determining when unrelated businesses are "separate" for purposes of calculating UBTI.
The IRS has issued final regulations with guidance on how a tax-exempt organization can determine whether it has more than one unrelated trade or business, how it should identify its separate trades and businesses, and how to separately calculate unrelated business taxable income (UBTI) for each trade or business – often referred to as "silo" rules. Since 2018, under provisions of the Tax Cuts and Jobs Act (TCJA), the loss from one unrelated trade or business may not offset the income from another, separate trade or business. Congress did not provide detailed methods of determining when unrelated businesses are "separate" for purposes of calculating UBTI.
On April 24, 2020, the IRS published a notice of proposed rulemaking ( REG-106864-18) that proposed guidance on how an exempt organization determines if it has more than one unrelated trade or business and, if so, how the exempt organization calculates UBTI under Code Sec. 512(a)(6). The final regulations substantially adopt the proposed regulations issued earlier this year, with modifications.
Separate Trades or Businesses
The proposed regulations suggested using the North American Industry Classification System (NAICS) six-digit codes for determining what constitutes separate trades or businesses. Notice 2018-67, I.R.B. 2018-36, 409, permitted tax-exempt organizations to rely on these codes. The first two digits of the code designate the economic sector of the business. The proposed guidance provided that organizations could make that determination using just the first two digits of the code, which divides businesses into 20 categories, for this purpose.
The proposed regulations provided that, once an organization has identified a separate unrelated trade or business using a particular NAICS two-digit code, the it could only change the two-digit code describing that separate unrelated trade or business if two specific requirements were met. The final regulations remove the restriction on changing NAICS two-digit codes, and instead require an exempt organization that changes the identification of a separate unrelated trade or business to report the change in the tax year of the change in accordance with forms and instructions.
QPIs
For exempt organizations, the activities of a partnership are generally considered the activities of the exempt organization partners. Code Sec. 512(c) provides that if a trade or business regularly carried on by a partnership of which an exempt organization is a member is an unrelated trade or business with respect to such organization, that organization must include its share of the gross income of the partnership in UBTI.
The proposed regulations provided that an exempt organization’s partnership interest is a "qualifying partnership interest" (QPI) if it meets the requirements of the de minimis test by directly or indirectly holding no more than two percent of the profits interest and no more than two percent of the capital interest. For administrative convenience, the de minimis test allows certain partnership investments to be treated as an investment activity and aggregated with other investment activities. Additionally, the proposed regulations permitted the aggregation of any QPI with all other QPIs, resulting in an aggregate group of QPIs.
Once an organization designates a partnership interest as a QPI (in accordance with forms and instructions), it cannot thereafter identify the trades or businesses conducted by the partnership that are unrelated trades or businesses with respect to the exempt organization using NAICS two-digit codes unless and until the partnership interest is no longer a QPI.
A change in an exempt organization’s percentage interest in a partnership that is due entirely to the actions of other partners may present significant difficulties for the exempt organization. Requiring the interest to be removed from the exempt organization’s investment activities in one year but potentially included as a QPI in the next would create further administrative difficulty. Therefore, the final regulations adopt a grace period that permits a partnership interest to be treated as meeting the requirements of the de minimis test or the participation test, respectively, in the exempt organization’s prior tax year if certain requirements are met. This grace period will allow an exempt organization to treat such interest as a QPI in the tax year that such change occurs, but the organization will need to reduce its percentage interest before the end of the following tax year to meet the requirements of either the de minimis test or the participation test in that succeeding tax year for the partnership interest to remain a QPI.
The IRS has modified Rev. Proc. 2007-32, I.R.B. 2007-22, 1322, to provide that the term of a Gaming Industry Tip Compliance Agreement (GITCA) is generally five years, and the renewal term of a GITCA is extended from three years to a term of up to five years. A GITCA executed under Rev. Proc. 2003-35, 2003-1 CB 919 and Rev. Proc. 2007-32 will remain in effect until the expiration date set forth in that agreement, unless modified by the renewal of a GITCA under section 4.04 of Rev. Proc. 2007-32 (as modified by section 3 of this revenue procedure).
The IRS has modified Rev. Proc. 2007-32, I.R.B. 2007-22, 1322, to provide that the term of a Gaming Industry Tip Compliance Agreement (GITCA) is generally five years, and the renewal term of a GITCA is extended from three years to a term of up to five years. A GITCA executed under Rev. Proc. 2003-35, 2003-1 CB 919 and Rev. Proc. 2007-32 will remain in effect until the expiration date set forth in that agreement, unless modified by the renewal of a GITCA under section 4.04 of Rev. Proc. 2007-32 (as modified by section 3 of this revenue procedure).
The modified provisions generally provide as follows:
- In general, a GITCA shall be for a term of five years. For new properties and properties that do not have a prior agreement with the IRS, however, the initial term of the agreement may be for a shorter period.
- A GITCA may be renewed for additional terms of up to five years, in accordance with Section IX of the model GITCA. Beginning not later than six months before the termination date of a GITCA, the IRS and the employer must begin discussions as to any appropriate revisions to the agreement, including any appropriate revisions to the tip rates described in Section VIII of the model GITCA. If the IRS and the employer have not reached final agreement on the terms and conditions of a renewal agreement, the parties may mutually agree to extend the existing agreement for an appropriate time to finalize and execute a renewal agreement.
Effective Date
This revenue procedure is effective November 23, 2020.
Final regulations issued by the Treasury and IRS coordinate the extraordinary disposition rule that applies with respect to the Code Sec. 245A dividends received deduction and the disqualified basis rule under the Code Sec. 951A global intangible low-taxed income (GILTI) regime. Information reporting rules are also finalized.
Final regulations issued by the Treasury and IRS coordinate the extraordinary disposition rule that applies with respect to the Code Sec. 245A dividends received deduction and the disqualified basis rule under the Code Sec. 951A global intangible low-taxed income (GILTI) regime. Information reporting rules are also finalized.
Extraordinary Disposition Rule and GILTI Disqualified Basis Rule
The extraordinary disposition rule (EDR) in Reg. §1.245A-5 and the GILTI disqualified basis rule (DBR) in Reg. §1.951A-2(c)(5) both address the disqualified period that results from the differences between dates for which the transition tax under Code Sec. 965 and the GILTI rules apply. GILTI applies to calendar year controlled foreign corporations (CFCs) on January 1, 2018. A fiscal year CFC may have a period from January 1, 2018, until the beginning of its first tax year in 2018 (the disqualified period) in which it can generate income subject to neither the transition tax under Code Sec. 965 nor GILTI.
The extraordinary disposition rule limits the ability to claim the Code Sec. 245A deduction for certain earnings and profits generated during the disqualified period. Specifically, Reg. §1.245A-5 provides that the deduction is limited for dividends paid out of an extraordinary disposition account. Final regulations issued under GILTI address fair market basis generated as a result of assets transferred to related CFCs during the disqualified period (disqualified basis). Reg. §1.951A-2(c)(5) allocates deductions or losses attributable to disqualified basis to residual CFC income, such as income other than tested income, subpart F income, or effectively connected taxable income. As a result, the deductions or losses will not reduce the CFC’s income subject to U.S. tax.
Coordination Rules
The coordination rules are necessary to prevent excess taxation of a Code Sec. 245A shareholder. Excess taxation can occur because the earnings and profits subject to the extraordinary disposition rule and the basis to which the disqualified basis rule applies are generally a function of a single amount of gain.
Under the coordination rules, to the extent that the Code Sec. 245A deduction is limited with respect to distributions out of an extraordinary disposition account, a corresponding amount of disqualified basis attributable to the property that generated that extraordinary disposition account through an extraordinary disposition is converted to basis that is not subject to the disqualified basis rule. The rule is referred to as the disqualified basis (DQB) reduction rule.
A prior extraordinary disposition amount is also covered under this rule. A prior extraordinary disposition amount generally represents the extraordinary disposition of earnings and profits that have become subject to U.S. tax as to a Code Sec. 245A shareholder other than by direct application of the extraordinary disposition rule (e.g., inclusions as a result of investment in U.S. property under Code Sec. 956).
Separate coordination rules are provided, depending upon whether the application of the rule is in a simple or complex case.
Reporting Requirements
Every U.S. shareholder of a CFC that holds an item of property that has disqualified basis during an annual accounting period and files Form 5471 for that period must report information about the items of property with disqualified basis held by the CFC during the CFC’s accounting period, as required by Form 5471 and its instructions.
Additionally, information must be reported about the reduction to an extraordinary disposition account made pursuant to the regulations and reductions made to an item of specified property’s disqualified basis pursuant to the regulations during the corporation’s accounting period, as required by Form 5471 and its instructions.
Applicability Dates
The regulations apply to tax years of foreign corporations beginning on or after the date the regulations are published in the Federal Register, and to tax years of Code Sec. 245A shareholders in which or with which such tax years end. Taxpayers may choose to apply the regulations to years before the regulations apply.