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Tax-favored ways to build up a college fund

If you’re a parent with a college-bound child, you may be concerned about being able to fund future tuition and other higher education costs. You want to take maximum advantage of tax benefits to minimize your expenses. Here are some possible options.

Savings bonds

Series EE U.S. savings bonds offer two tax-saving opportunities for eligible families when used to finance college:
  • You don’t have to report the interest on the bonds for federal tax purposes until the bonds are cashed in, and
  • Interest on “qualified” Series EE (and Series I) bonds may be exempt from federal tax if the bond proceeds are used for qualified education expenses.
To qualify for the tax exemption for college use, you must purchase the bonds in your name (not the child’s) or jointly with your spouse. The proceeds must be used for tuition, fees and certain other expenses — not room and board. If only part of the proceeds is used for qualified expenses, only that part of the interest is exempt.

The exemption is phased out if your adjusted gross income (AGI) exceeds certain amounts.

529 plans

A qualified tuition program (also known as a 529 plan) allows you to buy tuition credits for a child or make contributions to an account set up to meet a child’s future higher education expenses. Qualified tuition programs are established by state governments or private education institutions.

Contributions aren’t deductible. The contributions are treated as taxable gifts to the child, but they’re eligible for the annual gift tax exclusion ($15,000 for 2021). A donor who contributes more than the annual exclusion limit for the year can elect to treat the gift as if it were spread out over a five-year period.

The earnings on the contributions accumulate tax-free until college costs are paid from the funds. Distributions from 529 plans are tax-free to the extent the funds are used to pay “qualified higher education expenses.” Distributions of earnings that aren’t used for qualified expenses will be subject to income tax plus a 10% penalty tax.

Coverdell education savings accounts (ESAs)

You can establish a Coverdell ESA and make contributions of up to $2,000 annually for each child under age 18.

The right to make contributions begins to phase out once your AGI is over a certain amount. If the income limitation is a problem, a child can contribute to his or her own account.

Although the contributions aren’t deductible, income in the account isn’t taxed, and distributions are tax-free if used on qualified education expenses. If the child doesn’t attend college, the money must be withdrawn when he or she turns 30, and any earnings will be subject to tax and penalty. But unused funds can be transferred tax-free to a Coverdell ESA of another member of the child’s family who hasn’t reached age 30. (Some ESA requirements don’t apply to individuals with special needs.)

Plan ahead

These are just some of the tax-favored ways to build up a college fund for your children. Once your child is in college, you may qualify for tax breaks such as the American Opportunity Tax Credit or the Lifetime Learning Credit. Contact us if you’d like to discuss any of the options.

6/18/21
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2021 Q3 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the third 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.

Monday, August 2
  • Employers report income tax withholding and FICA taxes for second quarter 2021 (Form 941) and pay any tax due.
  • Employers file a 2020 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

Tuesday, August 10
  • Employers report income tax withholding and FICA taxes for second quarter 2021 (Form 941), if you deposited all associated taxes that were due in full and on time.

Wednesday, September 15
  • Individuals pay the third installment of 2021 estimated taxes, if not paying income tax through withholding (Form 1040-ES).
  • If a calendar-year corporation, pay the third installment of 2021 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic extension:
    • File a 2020 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
    • Make contributions for 2020 to certain employer-sponsored retirement plans.

6/15/21
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Retiring soon? 4 tax issues you may face

If you’re getting ready to retire, you’ll soon experience changes in your lifestyle and income sources that may have numerous tax implications.

Here’s a brief rundown of four tax and financial issues you may deal with when you retire:

Taking required minimum distributions. This is the minimum amount you must withdraw from your retirement accounts. You generally must start taking withdrawals from your IRA, SEP, SIMPLE and other retirement plan accounts when you reach age 72 (70½ before January 1, 2020). Roth IRAs don’t require withdrawals until after the death of the owner.
You can withdraw more than the minimum required amount. Your withdrawals will be included in your taxable income except for any part that was taxed before or that can be received tax-free (such as qualified distributions from Roth accounts).

Selling your principal residence. Many retirees want to downsize to smaller homes. If you’re one of them and you have a gain from the sale of your principal residence, you may be able to exclude up to $250,000 of that gain from your income. If you file a joint return, you may be able to exclude up to $500,000.

To claim the exclusion, you must meet certain requirements. During a five-year period ending on the date of the sale, you must have owned the home and lived in it as your main home for at least two years.

If you’re thinking of selling your home, make sure you’ve identified all items that should be included in its basis , which can save you tax.

Engaging in new work activities. After retirement, many people continue to work as consultants or start new businesses. Here are some tax-related questions to ask:
  • Should the business be a sole proprietorship, S corporation, C corporation, partnership or limited liability company?
  • Are you familiar with how to elect to amortize start-up expenditures and make payroll tax deposits?
  • What expenses can you deduct and can you claim home office deductions?
  • How should you finance the business?
Taking Social Security benefits. If you continue to work, it may have an impact on your Social Security benefits. If you retire before reaching full Social Security retirement age (65 years of age for people born before 1938, rising to 67 years of age for people born after 1959) and the sum of your wages plus self-employment income is over the Social Security annual exempt amount ($18,960 for 2021), you must give back $1 of Social Security benefits for each $2 of excess earnings.

If you reach full retirement age this year, your benefits will be reduced $1 for every $3 you earn over a different annual limit ($50,520 in 2021) until the month you reach full retirement age. Then, your earnings will no longer affect the amount of your monthly benefits, no matter how much you earn.

Speaking of Social Security, you may have to pay federal (and possibly state) tax on your benefits. Depending on how much income you have from other sources, you may have to report up to 85% of your benefits as income on your tax return and pay the resulting federal income tax.
Many decisions

As you can see, tax planning is still important after you retire. We can help maximize the tax breaks you’re entitled to so you can keep more of your hard-earned money.

6/11/21
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Recordkeeping DOs and DON’Ts for business meal and vehicle expenses

If you’re claiming deductions for business meals or auto expenses, expect the IRS to closely review them. In some cases, taxpayers have incomplete documentation or try to create records months (or years) later. In doing so, they fail to meet the strict substantiation requirements set forth under tax law. Tax auditors are adept at rooting out inconsistencies, omissions and errors in taxpayers’ records, as illustrated by one recent U.S. Tax Court case.

Facts of the case

In the case, the taxpayer ran a notary and paralegal business. She deducted business meals and vehicle expenses that she allegedly incurred in connection with her business.

The deductions were denied by the IRS and the court. Tax law “establishes higher substantiation requirements” for these and certain other expenses, the court noted. No deduction is generally allowed “unless the taxpayer substantiates the amount, time and place, business purpose, and business relationship to the taxpayer of the person receiving the benefit” for each expense with adequate records or sufficient evidence.

The taxpayer in this case didn’t provide adequate records or other sufficient evidence to prove the business purpose of her meal expenses. She gave vague testimony that she deducted expenses for meals where she “talked strategies” with people who “wanted her to do some work.” The court found this was insufficient to show the connection between the meals and her business.

When it came to the taxpayer’s vehicle expense deductions, she failed to offer credible evidence showing where she drove her vehicle, the purpose of each trip and her business relationship to the places visited. She also conceded that she used her car for both business and personal activities. (TC Memo 2021-50)

Best practices for business expenses

This case is an example of why it’s critical to maintain meticulous records to support business expenses for meals and vehicle deductions. Here’s a list of “DOs and DON'Ts” to help meet the strict IRS and tax law substantiation requirements for these items:

DO keep detailed, accurate records. For each expense, record the amount, the time and place, the business purpose, and the business relationship of any person to whom you provided a meal. If you have employees who you reimburse for meals and auto expenses, make sure they’re complying with all the rules.

DON’T reconstruct expense logs at year end or wait until you receive a notice from the IRS. Take a moment to record the details in a log or diary or on a receipt at the time of the event or soon after. Require employees to submit monthly expense reports.

DO respect the fine line between personal and business expenses. Be careful about combining business and pleasure. Your business checking account shouldn’t be used for personal expenses.

DON’T be surprised if the IRS asks you to prove your deductions. Meal and auto expenses are a magnet for attention. Be prepared for a challenge.

With organization and guidance from us, your tax records can stand up to scrutiny from the IRS. There may be ways to substantiate your deductions that you haven’t thought of, and there may be a way to estimate certain deductions (“the Cohan rule”), if your records are lost due to a fire, theft, flood or other disaster.

6/8/21
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Hiring your minor children this summer? Reap tax and nontax benefits

If you’re a business owner and you hire your children this summer, you can obtain tax breaks and other nontax benefits. The kids can gain on-the-job experience, spend time with you, save for college and learn how to manage money. And you may be able to:
 
  • Shift your high-taxed income into tax-free or low-taxed income,
  • Realize payroll tax savings (depending on the child’s age and how your business is organized), and
  • Enable retirement plan contributions for the children.
A legitimate job

If you hire your child, you get a business tax deduction for employee wage expenses. In turn, the deduction reduces your federal income tax bill, your self-employment tax bill (if applicable), and your state income tax bill (if applicable). However, in order for your business to deduct the wages as a business expense, the work performed by the child must be legitimate and the child’s salary must be reasonable.

For example, let’s say you operate as a sole proprietor and you’re in the 37% tax bracket. You hire your 16-year-old daughter to help with office work on a full-time basis during the summer and part-time into the fall. Your daughter earns $10,000 during 2021 and doesn’t have any other earnings.

You save $3,700 (37% of $10,000) in income taxes at no tax cost to your daughter, who can use her 2021 $12,550 standard deduction to completely shelter her earnings.

Your family’s taxes are cut even if your daughter’s earnings exceed her standard deduction. Why? The unsheltered earnings will be taxed to the daughter beginning at a rate of 10%, instead of being taxed at your higher rate.

How payroll taxes might be saved

If your business isn’t incorporated, your child’s wages are exempt from Social Security, Medicare and FUTA taxes if certain conditions are met. Your child must be under age 18 for this to apply (or under age 21 in the case of the FUTA tax exemption). Contact us for how this works.

Be aware that there’s no FICA or FUTA exemption for employing a child if your business is incorporated or a partnership that includes nonparent partners. And payments for the services of your child are subject to income tax withholding, regardless of age, no matter what type of entity you operate.

Begin saving for retirement

Your business also may be able to provide your child with retirement benefits, depending on the type of plan you have and how it defines qualifying employees. And because your child has earnings from his or her job, he can contribute to a traditional IRA or Roth IRA and begin to build a nest egg. For the 2021 tax year, a working child can contribute the lesser of his or her earned income, or $6,000, to an IRA or a Roth.

Keep accurate records 

As you can see, hiring your child can be a tax-smart idea. Be sure to keep the same records as you would for other employees to substantiate the hours worked and duties performed (such as timesheets and job descriptions). Issue your child a Form W-2. Contact us if you have questions about how these rules apply to your situation.

6/1/21
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Many parents will receive advance tax credit payments beginning July 15

Eligible parents will soon begin receiving payments from the federal government. The IRS announced that the 2021 advance child tax credit (CTC) payments, which were created in the American Rescue Plan Act (ARPA), will begin being made on July 15, 2021.

How have child tax credits changed?

The ARPA temporarily expanded and made CTCs refundable for 2021. The law increased the maximum CTC — for 2021 only — to $3,600 for each qualifying child under age 6 and to $3,000 per child for children ages 6 to 17, provided their parents’ income is below a certain threshold.

Advance payments will receive up to $300 monthly for each child under 6, and up to $250 monthly for each child 6 and older. The increased credit amount will be reduced or phased out, for households with modified adjusted gross income above the following thresholds:
  • $150,000 for married taxpayers filing jointly and qualifying widows and widowers;
  • $112,500 for heads of household; and
  • $75,000 for other taxpayers.
Under prior law, the maximum annual CTC for 2018 through 2025 was $2,000 per qualifying child but the income thresholds were higher and some of the qualification rules were different.

Important: If your income is too high to receive the increased advance CTC payments, you may still qualify to claim the $2,000 CTC on your tax return for 2021.

What is a qualifying child?

For 2021, a “qualifying child” with respect to a taxpayer is defined as one who is under age 18 and who the taxpayer can claim as a dependent. That means a child related to the taxpayer who, generally, lived with the taxpayer for at least six months during the year. The child also must be a U.S. citizen or national or a U.S. resident.

How and when will advance payments be sent out?

Under the ARPA, the IRS is required to establish a program to make periodic advance payments which in total equal 50% of IRS’s estimate of the eligible taxpayer’s 2021 CTCs, during the period July 2021 through December 2021. The payments will begin on July 15, 2021. After that, they’ll be made on the 15th of each month unless the 15th falls on a weekend or holiday. Parents will receive the monthly payments through direc
t deposit, paper check or debit card.
Who will benefit from these payments and do they have to do anything to receive them?

According to the IRS, about 39 million households covering 88% of children in the U.S. “are slated to begin receiving monthly payments without any further action required.” Contact us if you have questions about the child tax credit.

5/28/21
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The IRS has announced 2022 amounts for Health Savings Accounts

The IRS recently released guidance providing the 2022 inflation-adjusted amounts for Health Savings Accounts (HSAs).

Fundamentals of HSAs

An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).

A high deductible health plan (HDHP) is generally a plan with an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage. In addition, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) can’t exceed $5,000 for self-only coverage, and $10,000 for family coverage.

Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation adjustments for next year

In Revenue Procedure 2021-25, the IRS released the 2022 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limitation. For calendar year 2022, the annual contribution limitation for an individual with self-only coverage under a HDHP will be $3,650. For an individual with family coverage, the amount will be $7,300. This is up from $3,600 and $7,200, respectively, for 2021.

High deductible health plan defined. For calendar year 2022, an HDHP will be a health plan with an annual deductible that isn’t less than $1,400 for self-only coverage or $2,800 for family coverage (these amounts are unchanged from 2021). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $7,050 for self-only coverage or $14,100 for family coverage (up from $7,000 and $14,000, respectively, for 2021).

Many advantages

There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax free year after year and be can be withdrawn tax free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. If you have questions about HSAs at your business, contact your employee benefits and tax advisors.

5/25/21
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Congratulations to Angela Reed

Congratulations to Angela Reed of @TarbellCPA, ISCPA's 2021-22 Outstanding Committee Chair Award recipient for her outstanding leadership of the Taxation Committee. #IowaCPAs https://t.co/LUuZbnPoZW

5/18/21
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An S corporation could cut your self-employment tax

If your business is organized as a sole proprietorship or as a wholly owned limited liability company (LLC), you’re subject to both income tax and self-employment tax. There may be a way to cut your tax bill by conducting business as an S corporation.

Fundamentals of self-employment tax

The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for Social Security up to a certain maximum ($142,800 for 2021) and at a 2.9% rate for Medicare. No maximum tax limit applies to the Medicare tax. An additional 0.9% Medicare tax is imposed on income exceeding $250,000 for married couples ($125,000 for married persons filing separately) and $200,000 in all other cases.

What if you conduct your business as a partnership in which you’re a general partner? In that case, in addition to income tax, you’re subject to the self-employment tax on your distributive share of the partnership’s income. On the other hand, if you conduct your business as an S corporation, you’ll be subject to income tax, but not self-employment tax, on your share of the S corporation’s income.

An S corporation isn’t subject to tax at the corporate level. Instead, the corporation’s items of income, gain, loss and deduction are passed through to the shareholders. However, the income passed through to the shareholder isn’t treated as self-employment income. Thus, by using an S corporation, you may be able to avoid self-employment income tax.

Keep your salary “reasonable”

Be aware that the IRS requires that the S corporation pay you reasonable compensation for your services to the business. The compensation is treated as wages subject to employment tax (split evenly between the corporation and the employee), which is equivalent to the self-employment tax. If the S corporation doesn’t pay you reasonable compensation for your services, the IRS may treat a portion of the S corporation’s distributions to you as wages and impose Social Security taxes on the amount it considers wages.

There’s no simple formula regarding what’s considered reasonable compensation. Presumably, reasonable compensation is the amount that unrelated employers would pay for comparable services under similar circumstances. There are many factors that should be taken into account in making this determination.

Converting from a C corporation

There may be complications if you convert a C corporation to an S corporation. A “built-in gains tax” may apply when you dispose of appreciated assets held by the C corporation at the time of the conversion. However, there may be ways to minimize its impact.

Many factors to consider

Contact us if you’d like to discuss the factors involved in conducting your business as an S corporation, and how much the business should pay you as compensation.

5/18/21
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Tax filing deadline is coming up: What to do if you need more time

“Tax day” is just around the corner. This year, the deadline for filing 2020 individual tax returns is Monday, May 17, 2021. The IRS postponed the usual April 15 due date due to the COVID-19 pandemic. If you still aren’t ready to file your return, you should request a tax-filing extension. Anyone can request one and in some special situations, people can receive more time without even asking.

Taxpayers can receive more time to file by submitting a request for an automatic extension on IRS Form 4868. This will extend the filing deadline until October 15, 2021. But be aware that an extension of time to file your return doesn’t grant you an extension of time to pay your taxes. You need to estimate and pay any taxes owed by your regular deadline to help avoid possible penalties. In other words, your 2020 tax payments are still due by May 17.

Victims of certain disasters

If you were a victim of the February winter storms in Texas, Oklahoma and Louisiana, you have until June 15, 2021, to file your 2020 return and pay any tax due without submitting Form 4868. Victims of severe storms, flooding, landslides and mudslides in parts of Alabama and Kentucky have also recently been granted extensions. For eligible Kentucky victims, the new deadline is June 30, 2021, and eligible Alabama victims have until August 2, 2021.

That’s because the IRS automatically provides filing and penalty relief to taxpayers with addresses in federally declared disaster areas. Disaster relief also includes more time for making 2020 contributions to IRAs and certain other retirement plans and making 2021 estimated tax payments. Relief is also generally available if you live outside a federally declared disaster area, but you have a business or tax records located in the disaster area. Similarly, relief may be available if you’re a relief worker assisting in a covered disaster area.

Located in a combat zone

Military service members and eligible support personnel who are serving in a combat zone have at least 180 days after they leave the combat zone to file their tax returns and pay any tax due. This includes taxpayers serving in Iraq, Afghanistan and other combat zones.

These extensions also give affected taxpayers in a combat zone more time for a variety of other tax-related actions, including contributing to an IRA. Various circumstances affect the exact length of time available to taxpayers.

Outside the United States

If you’re a U.S. citizen or resident alien who lives or works outside the U.S. (or Puerto Rico), you have until June 15, 2021, to file your 2020 tax return and pay any tax due.

The special June 15 deadline also applies to members of the military on duty outside the U.S. and Puerto Rico who don’t qualify for the longer combat zone extension described above.

While taxpayers who are abroad get more time to pay, interest applies to any payment received after this year’s May 17 deadline. It’s currently charged at the rate of 3% per year, compounded daily.

We can help

If you need an appointment to get your tax return prepared, contact us. We can also answer any questions you may have about filing an extension.

5/7/21
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Providing education assistance to employees? Follow these rules

Many businesses provide education fringe benefits so their employees can improve their skills and gain additional knowledge. An employee can receive, on a tax-free basis, up to $5,250 each year from his or her employer for educational assistance under a “qualified educational assistance program.”

For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, including those normally taken by an individual pursuing a program leading to a business, medical, law or other advanced academic or professional degree.

Additional requirements

The educational assistance must be provided under a separate written plan that’s publicized to your employees, and must meet a number of conditions, including nondiscrimination requirements. In other words, it can’t discriminate in favor of highly compensated employees. In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals who (including their spouses or dependents) who own 5% or more of the business.

No deduction or credit can be taken by the employee for any amount excluded from the employee’s income as an education assistance benefit.

Job-related education

If you pay more than $5,250 for educational benefits for an employee during the year, he or she must generally pay tax on the amount over $5,250. Your business should include the amount in income in the employee’s wages. However, in addition to, or instead of applying, the $5,250 exclusion, an employer can satisfy an employee’s educational expenses, on a nontaxable basis, if the educational assistance is job-related. To qualify as job-related, the educational assistance must:
 
  • Maintain or improve skills required for the employee’s then-current job, or
  • Comply with certain express employer-imposed conditions for continued employment.

“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for qualification in his or her employment or other trade or business.

Educational assistance meeting the above “job-related” rules is excludable from an employee’s income as a working condition fringe benefit.

Student loans

In addition to education assistance, some employers offer student loan repayment assistance as a recruitment and retention tool. Recent COVID-19 relief laws may provide your employees with tax-free benefits. Contact us to learn more about setting up an education assistance or student loan repayment plan at your business.

5/4/21
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Know the ins and outs of “reasonable compensation” for a corporate business owner

Owners of incorporated businesses know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Thus, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.

However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.

Determining reasonable compensation

There’s no easy way to determine what’s reasonable. In an audit, the IRS examines the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.

There are some steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:
 
  • Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay). 
  • In the minutes of your corporation’s board of directors, contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.) Cite any executive compensation or industry studies that back up your compensation amounts. 
  • Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by IRS.
  • If the business is profitable, pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.

You can avoid problems and challenges by planning ahead. If you have questions or concerns about your situation, contact us.

4/20/21
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Simple retirement savings options for your small business

Are you thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved in providing a traditional pension plan? Two options to consider are a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).

SEPs are intended as an alternative to “qualified” retirement plans, particularly for small businesses. The relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions, are features that are appealing.

Uncomplicated paperwork

If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.

When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $58,000 for 2021. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.

There are other requirements you’ll have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans.

The detailed records that traditional plans must maintain to comply with the complex nondiscrimination regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.

SIMPLE Plans

Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (SIMPLE). Under these plans, a “SIMPLE IRA” is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a “simple” 401(k) plan, with similar features to a SIMPLE plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.

For 2021, SIMPLE deferrals are up to $13,500 plus an additional $3,000 catch-up contributions for employees age 50 and older.

Contact us for more information or to discuss any other aspect of your retirement planning.

4/13/21
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How to ensure life insurance isn’t part of your taxable estate

If you have a life insurance policy, you may want to ensure that the benefits your family will receive after your death won’t be included in your estate. That way, the benefits won’t be subject to federal estate tax.

Current exemption amounts

For 2021, the federal estate and gift tax exemption is $11.7 million ($23.4 million for married couples). That’s generous by historical standards but in 2026, the exemption is set to fall to about $6 million ($12 million for married couples) after inflation adjustments — unless Congress changes the law.

In or out of your estate

Under the estate tax rules, insurance on your life will be included in your taxable estate if:
  • Your estate is the beneficiary of the insurance proceeds, or
  • You possessed certain economic ownership rights (called “incidents of ownership”) in the policy at your death (or within three years of your death).
It’s easy to avoid the first situation by making sure your estate isn’t designated as the policy beneficiary.

The second rule is more complicated. Just having someone else possess legal title to the policy won’t prevent the proceeds from being included in your estate if you keep “incidents of ownership.” Rights that, if held by you, will cause the proceeds to be taxed in your estate include:
  • The right to change beneficiaries,
  • The right to assign the policy (or revoke an assignment),
  • The right to pledge the policy as security for a loan,
  • The right to borrow against the policy’s cash surrender value, and
  • The right to surrender or cancel the policy.
Be aware that merely having any of the above powers will cause the proceeds to be taxed in your estate even if you never exercise them.

Buy-sell agreements and trusts

Life insurance obtained to fund a buy-sell agreement for a business interest under a “cross-purchase” arrangement won’t be taxed in your estate (unless the estate is the beneficiary).

An irrevocable life insurance trust (ILIT) is another effective vehicle that can be set up to keep life insurance proceeds from being taxed in the insured’s estate. Typically, the policy is transferred to the trust along with assets that can be used to pay future premiums. Alternatively, the trust buys the insurance with funds contributed by the insured. As long as the trust agreement doesn’t give the insured the ownership rights described above, the proceeds won’t be included in the insured’s estate.

The three-year rule

If you’re considering setting up a life insurance trust with a policy you own currently or simply assigning away your ownership rights in such a policy, consult with us to ensure you achieve your goals. Unless you live for at least three years after these steps are taken, the proceeds will be taxed in your estate. (For policies in which you never held incidents of ownership, the three-year rule doesn’t apply.)

Contact us if you have questions or would like assistance with estate planning and taxation.

4/2/21
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Need a new business vehicle? Consider a heavy SUV

Are you considering buying or replacing a vehicle that you’ll use in your business? If you choose a heavy sport utility vehicle (SUV), you may be able to benefit from lucrative tax rules for those vehicles.

Bonus depreciation

Under current law, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in a calendar year. New and pre-owned heavy SUVs, pickups and vans acquired and put to business use in 2021 are eligible for 100% first-year bonus depreciation. The only requirement is that you must use the vehicle more than 50% for business. If your business usage is between 51% and 99%, you can deduct that percentage of the cost in the first year the vehicle is placed in service. This generous tax break is available for qualifying vehicles that are acquired and placed in service through December 31, 2022.

The 100% first-year bonus depreciation write-off will reduce your federal income tax bill and self-employment tax bill, if applicable. You might get a state tax income deduction, too.

Weight requirement

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

Note: These tax benefits are subject to adjustment for non-business use. And if business use of an SUV doesn’t exceed 50% of total use, the SUV won’t be eligible for the expensing election, and would have to be depreciated on a straight-line method over a six-tax-year period.

Detailed, contemporaneous expense records are essential — in case the IRS questions your heavy vehicle’s claimed business-use percentage.

That means you’ll need to keep track of the miles you’re driving for business purposes, compared to the vehicle’s total mileage for the year. Recordkeeping is much simpler today, now that there are apps and mobile technology you can use. Or simply keep a small calendar or mileage log in your car and record details as business trips occur.

If you’re considering buying an eligible vehicle, doing so and placing it in service before the end of this tax year could deliver a big write-off on your 2021 tax return. Before signing a sales contract, consult with us to help evaluate the right tax moves for your business.

3/30/21
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Is an S corporation the best choice of entity for your business?

Are you thinking about launching a business with some partners and wondering what type of entity to form? An S corporation may be the most suitable form of business for your new venture. Here’s an explanation of the reasons why.

The biggest advantage of an S corporation over a partnership is that as S corporation shareholders, you won’t be personally liable for corporate debts. In order to receive this protection, it’s important that the corporation be adequately financed, that the existence of the corporation as a separate entity be maintained and that various formalities required by your state be observed (for example, filing articles of incorporation, adopting by-laws, electing a board of directors and holding organizational meetings).

Anticipating losses

If you expect that the business will incur losses in its early years, an S corporation is preferable to a C corporation from a tax standpoint. Shareholders in a C corporation generally get no tax benefit from such losses. In contrast, as S corporation shareholders, each of you can deduct your percentage share of these losses on your personal tax returns to the extent of your basis in the stock and in any loans you make to the entity. Losses that can’t be deducted because they exceed your basis are carried forward and can be deducted by you when there’s sufficient basis.

Once the S corporation begins to earn profits, the income will be taxed directly to you whether or not it’s distributed. It will be reported on your individual tax return and be aggregated with income from other sources. To the extent the income is passed through to you as qualified business income, you’ll be eligible to take the 20% pass-through deduction, subject to various limitations. Your share of the S corporation’s income won’t be subject to self-employment tax, but your wages will be subject to Social Security taxes.

Are you planning to provide fringe benefits such as health and life insurance? If so, you should be aware that the costs of providing such benefits to a more than 2% shareholder are deductible by the entity but are taxable to the recipient.

Be careful with S status

Also be aware that the S corporation could inadvertently lose its S status if you or your partners transfers stock to an ineligible shareholder such as another corporation, a partnership or a nonresident alien. If the S election were terminated, the corporation would become a taxable entity. You would not be able to deduct any losses and earnings could be subject to double taxation — once at the corporate level and again when distributed to you. In order to protect you against this risk, it’s a good idea for each of you to sign an agreement promising not to make any transfers that would jeopardize the S election.

Consult with us before finalizing your choice of entity. We can answer any questions you have and assist in launching your new venture.

3/23/21
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New law: Parents and other eligible Americans to receive direct payments

The American Rescue Plan Act, signed into law on March 11, provides a variety of tax and financial relief to help mitigate the effects of the COVID-19 pandemic. Among the many initiatives are direct payments that will be made to eligible individuals. And parents under certain income thresholds will also receive additional payments in the coming months through a greatly revised Child Tax Credit.

Here are some answers to questions about these payments.

What are the two types of payments?

Under the new law, eligible individuals will receive advance direct payments of a tax credit. The law calls these payments “recovery rebates.” The law also includes advance Child Tax Credit payments to eligible parents later this year.

How much are the recovery rebates?

An eligible individual is allowed a 2021 income tax credit, which will generally be paid in advance through direct bank deposit or a paper check. The full amount is $1,400 ($2,800 for eligible married joint filers) plus $1,400 for each dependent.

Who is eligible?

There are several requirements but the most important is income on your most recently filed tax return. Full payments are available to those with adjusted gross incomes (AGIs) of less than $75,000 ($150,000 for married joint filers and $112,500 for heads of households). Your AGI can be found on page 1 of Form 1040.

The credit phases out and is no longer available to taxpayers with AGIs of more than $80,000 ($160,000 for married joint filers and $120,000 for heads of households).

Who isn’t eligible?

Among those who aren’t eligible are nonresident aliens, individuals who are the dependents of other taxpayers, estates and trusts.

How has the Child Tax Credit changed?

Before the new law, the Child Tax Credit was $2,000 per “qualifying child.” Under the new law, the credit is increased to $3,000 per child ($3,600 for children under age 6 as of the end of the year). But the increased 2021 credit amounts are phased out at modified AGIs of over $75,000 for singles ($150,000 for joint filers and $112,500 for heads of households).

A qualifying child before the new law was defined as an under-age-17 child, whom the taxpayer could claim as a dependent. The $2,000 Child Tax Credit was phased out for taxpayers with modified AGIs of over $400,000 for joint filers, and $200,000 for other filers.

Under the new law, for 2021, the definition of a qualifying child for purposes of the Child Tax Credit includes one who hasn’t turned 18 by the end of this year. So 17-year-olds qualify for the credit for 2021 only.

How are parents going to receive direct payments of the Child Tax Credit this year?

Unlike in the past, you don’t have to wait to file your tax return to fully benefit from the credit. The new law directs the IRS to establish a program to make monthly advance payments equal to 50% of eligible taxpayers’ 2021 Child Tax Credits. These payments will be made from July through December 2021.

What if my income is above the amounts listed above?

Taxpayers who aren’t eligible to claim an increased Child Tax Credit, because their incomes are too high, may be able to claim a regular credit of up to $2,000 on their 2021 tax returns, subject to the existing phaseout rules.

Much more

There are other rules and requirements involving these payments. This article only describes the basics. Stay tuned for additional details about other tax breaks in the new law.

3/19/21
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Business highlights in the new American Rescue Plan Act

President Biden signed the $1.9 trillion American Rescue Plan Act (ARPA) on March 11. While the new law is best known for the provisions providing relief to individuals, there are also several tax breaks and financial benefits for businesses.

Here are some of the tax highlights of the ARPA.

The Employee Retention Credit (ERC). This valuable tax credit is extended from June 30 until December 31, 2021. The ARPA continues the ERC rate of credit at 70% for this extended period of time. It also continues to allow for up to $10,000 in qualified wages for any calendar quarter. Taking into account the Consolidated Appropriations Act extension and the ARPA extension, this means an employer can potentially have up to $40,000 in qualified wages per employee through 2021.

Employer-Provided Dependent Care Assistance. In general, an eligible employee’s gross income doesn’t include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program (DCAP).

Previously, the amount that could be excluded from an employee’s gross income under a DCAP during a tax year wasn’t more than $5,000 ($2,500 for married individuals filing separately), subject to certain limitations. However, any contribution made by an employer to a DCAP can’t exceed the employee’s earned income or, if married, the lesser of employee’s or spouse’s earned income.

Under the ARPA, for 2021 only, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 (from $2,500 to $5,250 for married individuals filing separately).

This provision is effective for tax years beginning after December 31, 2020.

Paid Sick and Family Leave Credits. Changes under the ARPA apply to amounts paid with respect to calendar quarters beginning after March 31, 2021. Among other changes, the law extends the paid sick time and paid family leave credits under the Families First Coronavirus Response Act from March 31, 2021, through September 30, 2021. It also provides that paid sick and paid family leave credits may each be increased by the employer’s share of Social Security tax (6.2%) and employer’s share of Medicare tax (1.45%) on qualified leave wages.

Grants to restaurants. Under the ARPA, eligible restaurants, food trucks, and similar businesses that provide food and drinks may receive restaurant revitalization grants from the Small Business Administration. For tax purposes, amounts received as restaurant revitalization grants aren’t included in the gross income of the person who receives the money.

Much more

These are only some of the provisions in the ARPA. There are many others that may be beneficial to your business. Contact us for more information about your situation.

3/16/21
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Estimated tax payments: The deadline for the first 2021 installment is coming ups

April 15 is not only the deadline for filing your 2020 tax return, it’s also the deadline for the first quarterly estimated tax payment for 2021, if you’re required to make one.

You may have to make estimated tax payments if you receive interest, dividends, alimony, self-employment income, capital gains, prize money or other income. If you don’t pay enough tax during the year through withholding and estimated payments, you may be liable for a tax penalty on top of the tax that’s ultimately due.

Four due dates

Individuals must pay 25% of their “required annual payment” by April 15, June 15, September 15, and January 15 of the following year, to avoid an underpayment penalty. If one of those dates falls on a weekend or holiday, the payment is due on the next business day.

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

Most people who receive the bulk of their income in the form of wages satisfy these payment requirements through the tax withheld by their employers from their paychecks. Those who make estimated tax payments generally do so in four installments. After determining the required annual payment, they divide that number by four and make four equal payments by the due dates.

The annualized method

But you may be able to use the annualized income method to make smaller payments. This method is useful to people whose income flow isn’t uniform over the year, perhaps because they’re involved in a seasonal business.
If you fail to make the required payments, you may be subject to a penalty. However, the underpayment penalty doesn’t apply to you:
  • If the total tax shown on your return is less than $1,000 after subtracting withholding tax paid;
  • If you had no tax liability for the preceding year, you were a U.S. citizen or resident for that entire year, and that year was 12 months;
  • For the fourth (Jan. 15) installment, if you file your return by that January 31 and pay your tax in full; or
  • If you’re a farmer or fisherman and pay your entire estimated tax by January 15, or pay your entire estimated tax and file your tax return by March 1
In addition, the IRS may waive the penalty if the failure was due to casualty, disaster, or other unusual circumstances and it would be inequitable to impose it. The penalty may also be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.

Stay on track

Contact us if you have questions about how to calculate estimated tax payments. We can help you stay on track so you aren’t liable for underpayment penalties.

3/12/21
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Retiring soon? Recent law changes may have an impact on your retirement savings

If you’re approaching retirement, you probably want to ensure the money you’ve saved in retirement plans lasts as long as possible. If so, be aware that a law was recently enacted that makes significant changes to retirement accounts. The SECURE Act, which was signed into law in late 2019, made a number of changes of interest to those nearing retirement.

You can keep making traditional IRA contributions if you’re still working

Before 2020, traditional IRA contributions weren’t allowed once you reached age 70½. But now, an individual of any age can make contributions to a traditional IRA, as long as he or she has compensation, which generally means earned income from wages or self-employment. So if you work part time after retiring, or do some work as an independent contractor, you may be able to continue saving in your IRA if you’re otherwise eligible.

The required minimum distribution (RMD) age was raised from 70½ to 72.

Before 2020, retirement plan participants and IRA owners were generally required to begin taking RMDs from their plans by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the early 1960s and, until recently, hadn’t been adjusted to account for increased life expectancies.

For distributions required to be made after December 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plans or IRAs is increased from 70½ to 72.

“Stretch IRAs” have been partially eliminated

If a plan participant or IRA owner died before 2020, their beneficiaries (spouses and non-spouses) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the life or life expectancy of the beneficiaries. This was sometimes called a “stretch IRA.”

However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most non-spouse beneficiaries are generally required to be distributed within 10 years following a plan participant’s or IRA owner’s death. Therefore, the “stretch” strategy is no longer allowed for those beneficiaries.

There are some exceptions to the 10-year rule. For example, it’s still allowed for: the surviving spouse of a plan participant or IRA owner; a child of a plan participant or IRA owner who hasn’t reached the age of majority; a chronically ill individual; and any other individual who isn’t more than 10 years younger than a plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancies.

More changes may be ahead

These are only some of the changes included in the SECURE Act. In addition, there’s bipartisan support in Congress to make even more changes to promote retirement saving. Last year, a law dubbed the SECURE Act 2.0 was introduced in the U.S. House of Representatives. At this time, it’s unclear if or when it could be enacted. We’ll let you know about any new opportunities. In the meantime, if you have questions about your situation, don’t hesitate to contact us.
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Work Opportunity Tax Credit extended through 2025

Are you a business owner thinking about hiring? Be aware that a recent law extended a credit for hiring individuals from one or more targeted groups. Employers can qualify for a tax credit known as the Work Opportunity Tax Credit (WOTC) that’s worth as much as $2,400 for each eligible employee ($4,800, $5,600 and $9,600 for certain veterans and $9,000 for “long-term family assistance recipients”). The credit is generally limited to eligible employees who began work for the employer before January 1, 2026.

Generally, an employer is eligible for the credit only for qualified wages paid to members of a targeted group. These groups are:
  • Qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program,
  • Qualified veterans,
  • Qualified ex-felons,
  • Designated community residents,
  • Vocational rehabilitation referrals,
  • Qualified summer youth employees,
  • Qualified members of families in the Supplemental Nutritional Assistance Program (SNAP),
  • Qualified Supplemental Security Income recipients,
  • Long-term family assistance recipients, and
  • Long-term unemployed individuals.

You must meet certain requirements

There are a number of requirements to qualify for the credit. For example, for each employee, there’s also a minimum requirement that the employee must have completed at least 120 hours of service for the employer. Also, the credit isn’t available for certain employees who are related to or who previously worked for the employer.

There are different rules and credit amounts for certain employees. The maximum credit available for the first-year wages is $2,400 for each employee, $4,000 for long-term family assistance recipients, and $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000.

For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth employees is $1,200 per employee.

A valuable credit

There are additional rules and requirements. In some cases, employers may elect not to claim the WOTC. And in limited circumstances, the rules may prohibit the credit or require an allocation of it. However, for most employers hiring from targeted groups, the credit can be valuable. Contact us with questions or for more information about your situation.

3/2/21
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Didn’t contribute to an IRA last year? There still may be time

If you’re getting ready to file your 2020 tax return, and your tax bill is higher than you’d like, there might still be an opportunity to lower it. If you qualify, you can make a deductible contribution to a traditional IRA right up until the April 15, 2021 filing date and benefit from the tax savings on your 2020 return.

Who is eligible?
You can make a deductible contribution to a traditional IRA if:
  • You (and your spouse) aren’t an active participant in an employer-sponsored retirement plan, or
  • You (or your spouse) are an active participant in an employer plan, but your modified adjusted gross income (AGI) doesn’t exceed certain levels that vary from year-to-year by filing status.
For 2020, if you’re a joint tax return filer and you are covered by an employer plan, your deductible IRA contribution phases out over $104,000 to $124,000 of modified AGI. If you’re single or a head of household, the phaseout range is $65,000 to $75,000 for 2020. For married filing separately, the phaseout range is $0 to $10,000. For 2020, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with modified AGI of between $196,000 and $206,000.

Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59 1/2, unless one of several exceptions apply).

IRAs often are referred to as “traditional IRAs” to differentiate them from Roth IRAs. You also have until April 15 to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA aren’t. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you’re age 59 1/2 or older. (There are also income limits to contribute to a Roth IRA.)

Here are two other IRA strategies that may help you save tax.

1. Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2020? That may help you in the future when you take tax-free payouts from the account. However, the contribution isn’t deductible. If you realize you need the deduction that a traditional IRA contribution provides, you can change your mind and turn a Roth IRA contribution into a traditional IRA contribution via the “recharacterization” mechanism. The traditional IRA deduction is then yours if you meet the requirements described above.

2. Make a deductible IRA contribution, even if you don’t work. In general, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner and you are a homemaker. In this case, you may be able to take advantage of a spousal IRA.

What’s the contribution limit?

For 2020 if you’re eligible, you can make a deductible traditional IRA contribution of up to $6,000 ($7,000 if you’re 50 or over).

In addition, small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for their returns, including extensions. For 2020, the maximum contribution you can make to a SEP is $57,000.

If you want more information about IRAs or SEPs, contact us or ask about it when we’re preparing your return. We can help you save the maximum tax-advantaged amount for retirement.

2/26/21
Electric

The power of the tax credit for buying an electric vehicle

Although electric vehicles (or EVs) are a small percentage of the cars on the road today, they’re increasing in popularity all the time. And if you buy one, you may be eligible for a federal tax break.
The tax code provides a credit to purchasers of qualifying plug-in electric drive motor vehicles including passenger vehicles and light trucks. The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500.
The EV definition
For purposes of the tax credit, a qualifying vehicle is defined as one with four wheels that’s propelled to a significant extent by an electric motor, which draws electricity from a battery. The battery must have a capacity of not less than four kilowatt hours and be capable of being recharged from an external source of electricity.
The credit may not be available because of a per-manufacturer cumulative sales limitation. Specifically, it phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For example, Tesla and General Motors vehicles are no longer eligible for the tax credit.
The IRS provides a list of qualifying vehicles on its website and it recently added a number of models that are eligible. You can access the list here: https://bit.ly/2Yrhg5Z.
Here are some additional points about the plug-in electric vehicle tax credit:
  • It’s allowed in the year you place the vehicle in service.
  • The vehicle must be new.
  • An eligible vehicle must be used predominantly in the U.S. and have a gross weight of less than 14,000 pounds.
Electric motorcycles
There’s a separate 10% federal income tax credit for the purchase of qualifying electric two-wheeled vehicles manufactured primarily for use on public thoroughfares and capable of at least 45 miles per hour (in other words, electric-powered motorcycles). It can be worth up to $2,500. This electric motorcycle credit was recently extended to cover qualifying 2021 purchases.
These are only the basic rules. There may be additional incentives provided by your state. Contact us if you’d like to receive more information about the federal plug-in electric vehicle tax break.

2/5/21
File

THE CENTS-PER-MILE RATE FOR BUSINESS MILES DECREASES AGAIN FOR 2021


This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business decreased by one-and-one-half cents, to 56 cents per mile. As a result, you might claim a lower deduction for vehicle-related expenses for 2021 than you could for 2020 or 2019. This is the second year in a row that the cents-per-mile rate has decreased.

Deducting actual expenses vs. cents-per-mile
In general, businesses can deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.
The cents-per-mile rate is useful if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.
Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles extensively for business purposes. Why? Under current law, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.
If you do use the cents-per-mile rate, be aware that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.

The 2021 rate 
Beginning on January 1, 2021, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 56 cents per mile. It was 57.5 cents for 2020 and 58 cents for 2019.
The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. The rate partly reflects the current price of gas, which is down from a year ago. According to AAA Gas Prices, the average nationwide price of a gallon of unleaded regular gas was $2.42 recently, compared with $2.49 a year ago. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear.

When this method can’t be used
There are some situations when you can’t use the cents-per-mile rate. In some cases, it partly depends on how you’ve claimed deductions for the same vehicle in the past. In other cases, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.
As you can see, there are many factors to consider in deciding whether to use the mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2021 — or claiming them on your 2020 income tax return.

2/2/21
File 3

DON’T FORGET TO TAKE REQUIRED MINIMUM DISTRIBUTIONS THIS YEAR


If you have a traditional IRA or tax-deferred retirement plan account, you probably know that you must take required minimum distributions (RMDs) when you reach a certain age — or you’ll be penalized. The CARES Act, which passed last March, allowed people to skip taking these withdrawals in 2020 but now that we’re in 2021, RMDs must be taken again.

The basics
Once you attain age 72 (or age 70½ before 2020), you must begin taking RMDs from your traditional IRAs and certain retirement accounts, including 401(k) plans. In general, RMDs are calculated using life expectancy tables published by the IRS. If you don’t withdraw the minimum amount each year, you may have to pay a 50% penalty tax on what you should have taken out — but didn’t. (Roth IRAs don’t require withdrawals until after the death of the owner.)
You can always take out more than the required amount. In planning for 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.
In order to provide tax relief due to COVID-19, the CARES Act suspended RMDs for calendar year 2020 — but only for that one year. That meant that taxpayers could put off RMDs, not have to pay tax on them and allow their retirement accounts to keep growing tax deferred.

Begin taking RMDs again
Many people hoped that the RMD suspension would be extended into 2021. However, the Consolidated Appropriations Act, which was enacted on December 27, 2020, to provide more COVID-19 relief, didn’t extend the RMD relief. That means if you’re required to take RMDs, you need to take them this year or face a penalty.
Note: The IRS may waive part or all of the penalty if you can prove that you didn’t take RMDs due to reasonable error and you’re taking steps to remedy the shortfall. In these cases, the IRS reviews the information a taxpayer provides and decides whether to grant a request for a waiver.

Keep more of your money
Feel free to contact us if have questions about calculating RMDs or avoiding the penalty for not taking them. We can help make sure you keep more of your money.
File 2

ONE REASON TO FILE YOUR 2020 TAX RETURN EARLY


    The IRS announced it is opening the 2020 individual income tax return filing season on February 12. (This is later than in past years because of a new law that was enacted late in December.) Even if you typically don’t file until much closer to the April 15 deadline (or you file for an extension), consider filing earlier this year. Why? You can potentially protect yourself from tax identity theft — and there may be other benefits, too.

    How is a person’s tax identity stolen?
    In a tax identity theft scheme, 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 real taxpayer discovers the fraud when he or she files a return and is told by the IRS that the return is being 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 legitimate one, tax identity theft can be a hassle 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 potential thief that will be rejected — not yours.
    Note: You can get your individual tax return prepared by us before February 12 if you have all the required documents. It’s just that processing of the return will begin after IRS systems open on that date.

    When will you receive your W-2s and 1099s?
    To file your tax return, you need all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2020 Form W-2 to employees and, generally, for businesses to issue Form 1099s to recipients of any 2020 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.

    How else can you benefit by filing early? 
    In addition to 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, stolen, returned to the IRS as undeliverable or caught in mail delays.
    If you haven’t received an Economic Impact Payment (EIP), or you didn’t receive the full amount due, filing early will help you to receive the amount sooner. EIPs have been paid by the federal government to eligible individuals to help mitigate the financial effects of COVID-19. Amounts due that weren’t sent to eligible taxpayers can be claimed on your 2020 return.

    Do you need help?
    If you have questions or would like an appointment to prepare your return, please contact us. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.
    File 1

    THE COVID-19 RELIEF LAW: WHAT’S IN IT FOR YOU?

      The new COVID-19 relief law that was signed on December 27, 2020, contains a multitude of provisions that may affect you. Here are some of the highlights of the Consolidated Appropriations Act, which also contains two other laws: the COVID-related Tax Relief Act (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act (TCDTR).

      Direct payments 
      The law provides for direct payments (which it calls recovery rebates) of $600 per eligible individual ($1,200 for a married couple filing a joint tax return), plus $600 per qualifying child. The U.S. Treasury Department has already started making these payments via direct bank deposits or checks in the mail and will continue to do so in the coming weeks.
      The credit payment amount is phased out at a rate of $5 per $100 of additional income starting at $150,000 of modified adjusted gross income for marrieds filing jointly and surviving spouses, $112,500 for heads of household, and $75,000 for single taxpayers.

      Medical expense tax deduction 
      The law makes permanent the 7.5%-of-adjusted-gross-income threshold on medical expense deductions, which was scheduled to increase to 10% of adjusted gross income in 2021. The lower threshold will make it easier to qualify for the medical expense deduction.

      Charitable deduction for non-itemizers 
      For 2020, individuals who don’t itemize their deductions can take up to a $300 deduction per tax return for cash contributions to qualified charitable organizations. The new law extends this $300 deduction through 2021 for individuals and increases it to $600 for married couples filing jointly. Taxpayers who overstate their contributions when claiming this deduction are subject to a 50% penalty (previously it was 20%).

      Allowance of charitable contributions 
      In response to the pandemic, the limit on cash charitable contributions by an individual in 2020 was increased to 100% of the individual’s adjusted gross income (AGI). (The usual limit is 60% of adjusted gross income.) The new law extends this rule through 2021.

      Energy tax credit 
      A credit of up to $500 is available for purchases of qualifying energy improvements made to a taxpayer’s main home. However, the $500 maximum allowance must be reduced by any credits claimed in earlier years. The law extends this credit, which was due to expire at the end of 2020, through 2021.

      Other energy-efficient provisions 
      There are a few other energy-related provisions in the new law. For example, the tax credit for a qualified fuel cell motor vehicle and the two-wheeled plug-in electric vehicle were scheduled to expire in 2020 but have been extended through the end of 2021.
      There’s also a valuable tax credit for qualifying solar energy equipment expenditures for your home. For equipment placed in service in 2020, the credit rate is 26%. The rate was scheduled to drop to 22% for equipment placed in service in 2021 before being eliminated for 2022 and beyond.
      Under the new law, the 26% credit rate is extended to cover equipment placed in service in 2021 and 2022 and the law also extends the 22% rate to cover equipment placed in service in 2023. For 2024 and beyond, the credit is scheduled to vanish.

      Maximize tax breaks 
      These are only a few tax breaks contained in the massive new law. We’ll make sure that you claim all the tax breaks you’re entitled to when we prepare your tax return.
      File 4

      NEW LAW DOUBLES BUSINESS MEAL DEDUCTIONS AND MAKES FAVORABLE PPP LOAN CHANGES

          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.
          File 6

          THE RIGHT ENTITY CHOICE: SHOULD YOU CONVERT FROM A C TO AN S CORPORATION?

              The best choice of entity can affect your business in several ways, including the amount of your tax bill. In some cases, businesses decide to switch from one entity type to another. Although S corporations can provide substantial tax benefits over C corporations in some circumstances, there are potentially costly tax issues that you should assess before making the decision to convert from a C corporation to an S corporation.

              Here are four issues to consider:

              1. LIFO inventories. C corporations that use last-in, first-out (LIFO) inventories must pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.

              2. Built-in gains tax. Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective, if those gains are recognized within five years after the conversion. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.

              3. Passive income. S corporations that were formerly C corporations are subject to a special tax. It kicks in if their passive investment income (including dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.

              4. Unused losses. If your C corporation has unused net operating losses, they can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.

              Other considerations
              When a business switches from C to S status, these are only some of the factors to consider. For example, shareholder-employees of S corporations can’t get all of the tax-free fringe benefits that are available with a C corporation. And there may be issues for shareholders who have outstanding loans from their qualified plans. These factors have to be taken into account in order to understand the implications of converting from C to S status.

              If you’re interested in an entity conversion, contact us. We can explain what your options are, how they’ll affect your tax bill and some possible strategies you can use to minimize taxes.

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