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Business Planning for a Pandemic January 13, 2021

Posted by bradstreetblogger in : Business consulting, General, Tax Planning Tips, Tax Rules, Tax Tip, Taxes , add a comment

Not sure how to even begin this article. What I believe today I can practically guarantee you will change tomorrow. We have made some good decisions. We have made some bad decisions. We have also been overly reactive at times. But I suppose most of our decisions were sound based upon the information available at that moment. Turns out that a lot of that information was false or speculative. But who knew?

Many of our clients are prospering in this pandemic. Several clients are having a record year. A few clients through absolutely no fault of their own are suffering. A vaccine is on the horizon. I hope that that is a game changer. 

The following article is how some CFOs across the country are dealing with the pandemic. I hope it is of value.

            -Mark Bradstreet

Three experienced finance leaders share what they have learned and what they are doing to deal with turmoil and uncertainty.

The ongoing economic crisis caused by the coronavirus pandemic is forcing businesses to re-evaluate their spending, staffing, and structure. Company leaders are looking to their CFOs and management accountants to advise them on how to navigate the unique financial challenges they face as a result of the outbreak.

Three financial leaders with experience guiding companies through times of economic turmoil, including the 2008 recession, say there are specific ways CFOs and other leaders can handle the coronavirus crisis moving forward.

On matters from communications to cash flow, the experts offered advice about how to react quickly, stay calm, focus on what’s important, and be willing to let some things go. The advice is especially important for leaders experiencing their first financial disaster.

Save more cash

“Cash is king. … Never, ever in my career, and I’ve been doing this for 35 years, has that statement been more true than right now,” said Brenda Morris CPA (inactive), CGMA, who lives in the Seattle area and is a partner with CSuite Financial Partners based in Manhattan Beach, Calif. She is on the Association’s Americas Regional Advisory Panel, and also serves as a consultant and coach for several public and private businesses, including Boot Barn and Duluth Trading Company.

Morris works with Fortune 500 and Fortune 1000 companies, some of which “have a lot of cash on the balance sheet”, she said, but fixed costs such as payroll and building rent and mortgages can add up quickly, eating into those reserves.

“It’s pretty amazing how fast companies can burn through what seemed to be a very adequate balance sheet,” she said.

Morris advises companies to create a robust cash sensitivity model and run as many scenarios as possible to see how much money would be needed in a crisis. Some of the models might include the financial impacts of furloughing employees, figuring out ways to quickly drive up sales, getting more aggressive in negotiations, or finding more investors.

“You step it up and figure it out,” Morris said. “React quickly. Don’t languish too long in making some of the hard decisions. Those are the [companies] that’ll make it through.”

Bob Sannerud, CPA, CGMA, the CFO of the air medical company Life Link III, and chair of the Association’s Americas Regional Advisory Panel, knows the stress of not having enough cash on hand. He joined Life Link III during the 2008 financial crisis and found the business “in dire straits.”

“We had four days of cash when I came on board and came in to turn around the company,” he said.

Since then, he has done some financial engineering to correct the company’s cash flow, working with leaders of various departments to discuss business challenges and priorities. Today, the company is stronger financially and will likely survive the uncertainty of the coronavirus outbreak, Sannerud said.

“If it goes on for a year, well, all bets are off. But in the short term, we feel we can handle it,” he said.

Create a disaster recovery plan

Companies should create disaster recovery plans and select a task force of leaders to discuss the what-ifs, Morris said. If possible, they should test out their plans, but “it’s rare for companies to actually do exercises or dry runs. [Some] companies don’t have the bandwidth to run catastrophic scenarios as exercises and just sort of see what happens,” she said. “That’s an investment.”

Her work with various businesses and boards has allowed her to see how different companies are responding to the coronavirus crisis. That insight has convinced her how important it is for companies to have a team of people investigating what is working and what isn’t before, during, and after an economic crisis.

She is leading a coronavirus crisis response team for one of the boards she sits on and said her goal is to limit distractions for company leaders so they can focus on the priority areas of the business.

Having a disaster plan is essential in the broadcast company says Ralph Bender, CPA, CGMA, who serves as CFO.

“We’ve been through floods, hurricanes, [and] now this,” he said, noting the financial and logistical challenges the media industry is facing during the coronavirus outbreak. Bender is the CFO of Manship Media, a family-owned broadcasting group that runs TV stations in Baton Rouge, La., and the Rio Grande Valley in Texas.

“Things are going to be dire. … But most people will find ways to get through this,” Bender said. “It’s important to have a disaster recovery plan … to not just have something on paper, but to have tried things out.”

Build trust

Life Link III transports more than 2,000 patients a year by helicopter and airplane ambulance in Minnesota and Wisconsin.

Some of the company’s first responders have been on the front lines of the coronavirus pandemic, leading them to ask questions about their own personal safety when dealing with sick patients, what protective gear they will have access to, and whether their jobs are in jeopardy, according to Sannerud.

The company saw a decreased flight volume in March, partly due to weather but mostly due to the coronavirus outbreak, he said, but there are no plans to let go of staff or close any of the eight bases where they are located.

“For us, the challenge has been really making sure our people are being taken care of and making sure that they’re assured that we’ve got their best interests in mind as we go forward,” Sannerud said.

Providing employees, stakeholders, and customers with timely, transparent communication is vital during tumultuous times like these, Sannerud said. Companies need to establish a central communications hub and make sure the various leaders are speaking with one voice.

“It helps build the trust, because we are able to clearly state what we know, what we don’t know, and what we’re doing,” Sannerud said, noting that communication shouldn’t be too negative or overly optimistic.

Life Link III leaders decided to reach out to employees’ family members as well to assure them that the company cares and to acknowledge the stress they are under. That kind of personal touch can help build credibility and calm any fears spouses or other family members might have, Sannerud said.

Be prepared to pivot, but don’t panic

When Bender and his company, Manship Media, first realized how big the coronavirus outbreak might be, they quickly pivoted to a new plan to prepare for the possibility that staff might need to work from home.

Using some of the company’s cash reserves, they bought 30 Google Chromebooks for employees to take home. The decision paid off as businesses across the country, including news media, moved to more remote work in an effort to stop the coronavirus from spreading.

“It was under a $7,500 investment, and look at the rewards,” Bender said. “People are working. But more importantly, people are working safely.”

CFOs and other financial leaders need to think of themselves as chief strategists and not just tell company leaders not to spend any money during a crisis, according to Bender.

“Be calm and do not panic,” he said. “You calmly look into details. What’s essential? What’s not?”

Sannerud agreed and said it’s crucial that financial leaders “be prepared to pivot.”

“Just because you made a plan yesterday doesn’t mean it’s going to hold water today,” he said. “Be adaptable, and be willing to make a change based on information.”

The best way to get that information is to talk with employees on the front lines of the work, Sannerud said. Take time to ask them what they are seeing and experiencing and use that information to guide your business plans during times of VUCA (volatility, uncertainty, complexity and ambiguity), according to Sannerud.

Focus on what’s important and what you can control, and forget the rest

Sannerud is used to forecasting long-term operations for Life Link III, but the coronavirus pandemic has made budgeting nearly impossible with the uncertainty his business and others are facing.

“I can’t forecast operations out much more than the next three months, and even that’s not exactly crystal-clear,” he said.

Instead, Sannerud has tried to focus on the limited things he can control, such as providing calm and steady leadership during a crisis, being transparent with employees about the state of the business, and keeping a set routine even while working from home.

He is usually in the office by 6 a.m., so he decided to keep the same hours while working from home. When he is finished with work, he makes sure to exercise, usually by biking or taking a walk with his wife. He also tries to find humor in each day, limit the amount of media he consumes, and focus on his mental and physical health.

“Those are all things you can control,” he said.

Morris’s biggest piece of advice for financial leaders is to determine what’s most important to your business and not get distracted by outside noise. Ask yourself: What is the biggest and most impactful issue facing the company?

“Have a course of action that keeps you focused each day,” she said.

Bender suggested focusing on what your company does well and where it can have the most success. For his company, that meant letting go of a newspaper and radio stations it owned several years ago and focusing on its two TV stations. Downsizing the company caused it to be more profitable and workable, he said.

Now, as he and his company navigate the coronavirus pandemic, they are again looking at what their focus should be to get through this crisis. This time, it has less to do with the bottom line.

“As CPAs, we hate to say, ‘Who cares about the bottom line?’ But right now, that’s not the most important thing to us,” Bender said. “There’s an opportunity for companies to show their employees that their values are not just about a bottom line, but they’re about welfare of employees, stockholders, and customers.”

Bender said he understands some CFOs and leaders don’t have the same financial advantages as his company. To them, he has this message: “Stay focused. Stay safe. For God’s sake, keep a sense of humor. This has all of us on edge.”

Credit given to: Kelly Hinchcliffe is a freelance writer based in North Carolina. Published on June 15, 2020.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

A Checklist of Business Deductions January 6, 2021

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, Section 168, Section 179, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes, Taxes , add a comment

Sara Sugar has created a list of small business deductions as shown below.  It is a great list to scan through and see if you have been overlooking any tax deductions.  Always fine to call us with any questions or comments you may have.

                                 -Mark Bradstreet

THE ULTIMATE LIST OF SMALL BUSINESS TAX DEDUCTIONS

Every small business owner wants to save money — and small business tax deductions are one way to do exactly that.

This list of 37 deductions will take you from “Ugh, taxes” to “Taxes? I got this.”

1. Vehicle Expenses.
Keep records during the year to prove the use of your car, truck or van, for business, especially if you also use the vehicle for personal reasons. When it’s time to pay taxes, you can choose to deduct your actual expenses (including gasoline, maintenance, parking, and tolls), or you can take the more straightforward route of using the IRS standard mileage rate — 58 cents per mile in 2019.

Whether you’re running errands in your own car or making deliveries in your bakery van, track the mileage and run some numbers to see which method gives you the higher deduction. If you drive a lot of miles each year, it makes more sense to use the standard mileage deduction when filing taxes. However, if you have an older vehicle that regularly needs maintenance, or isn’t fuel efficient, you might be able to get a larger deduction by using your actual expenses vs. the IRS mileage rate.

Either way, we all know that gas, repairs, parking, and mileage add up, so taking advantage of the standard mileage rate, or deducting your actual expenses, is a no-brainer way to put some of that money back in your pocket. Just make sure you keep records diligently to avoid mixing personal expenses with business ones.

2. Home Office.
Do you run part of your small business out of your home, maybe doing the books in the evenings after you’ve parked your food truck for the night? Or perhaps you run an entirely home-based business. For many self-employed individuals and sole proprietors, it’s pretty standard to have a space at home that’s devoted to your work. The key here is the word devoted. Sometimes doing work on at the kitchen table while your kids do their homework doesn’t count as a home office. You must have a specific room that’s dedicated to being your office in order for it to be tax deductible.

Calculating the size of your deduction is primarily related to the amount of your home that’s used as an office. For example:

Total square footage of your home / divided into square footage used as an office = the percentage of direct and indirect expenses (rent, utilities, insurance, repairs, etc.) that can be deducted.

We highly recommend that you read the IRS’ literature on this particular tax deduction, and/or speak with a tax professional before filing taxes with this deduction. It’s one of the more complicated ones available to small business owners, and there have been numerous court cases and controversies over the years. When dealing with the potential for a costly audit, it pays to be safe by consulting a professional tax preparer rather than sorry.

3. Bonus Depreciation.
If you buy new capital equipment, such as a new oven for your pizzeria, you get a depreciation tax break that lets you deduct 100 percent of your costs upon purchase. Under the Tax Cuts and Jobs Act, 100% bonus depreciation only pertains to equipment purchased and placed in use between September 27, 2017 and January 1, 2023 — something to keep in mind as you plan for new equipment purchases in the next few years.

It’s important to note that according to the IRS, the asset you purchase must meet the following three requirements:

A few things that don’t count as assets include:

4. Professional Services.
As a small business, you don’t have in-house accountants or attorneys, but that doesn’t mean you can’t deduct their services. If you hire a consultant to help you grow your gift shop’s outreach, the fees and overall expense you pay for those services are deductible. Make sure the fees you’re paying are reasonable and necessary for the deduction to count by checking with the appropriate IRS publication or a tax professional. But you’d do that anyway, wouldn’t you?

5. Salaries and Wages.
If you’re a sole proprietor or your company is an LLC, you may not be able to deduct draws and income that you take from your business. However, salaries and wages that you pay to those faithful part-time and full-time employees behind the cash register are indeed deductible.

However, this doesn’t just stop at standard salaries and wages. Other payments like bonuses, meals, lodging, per diem, allowances, and some employer-paid taxes are also deductible. You can even deduct the cost of payroll software and systems in many cases.

6. Work Opportunity Tax Credit.
Have you hired military veterans or other long-term unemployed people to work behind your counter? If so, you may be eligible to take advantage of the Work Opportunity Tax Credit of 40 percent of your first $6,000 in wages.

7. Office Supplies and Expenses.
If you’re running a frozen yogurt shop, when you hear the word “supplies,” you probably think of plastic spoons. However, even if your business doesn’t have a traditional office, you can still deduct conventional business supplies and office expenses, as long as they are used within the year they’re purchased, so set up a file for your receipts. Many times, you can also deduct the cost of postage, shipping, and delivery services so if mail-order is a part of your business, be sure to keep track of this cost.

8. Client and Employee Entertainment.
Yes, you can take small business deductions for schmoozing your clients, as long as you do indeed discuss business with them, and as long as the entertainment occurs in a business setting and for business purposes. In some cases, you can’t deduct the full amount of your entertainment expenses, but every bit helps.

Here are some tips to guide when and what you can deduct:

(Please note:  the TCJA affected Meals & Entertainment deductions beginning in 2018.)

9. Freelance/Independent Contractor Labor.
If you bring in independent contractors to keep your checkout lines moving during the holidays or to create new marketing materials for your shop, you can deduct your costs. Make sure you issue Form 1099-NEC to anyone who earned $600 or more from you during the tax year.

10. Furniture and Equipment.
Did you buy new chairs for your eat-in bakery or new juicing blenders for your juice bar this year? You have a choice regarding how you take your small business tax deduction for furniture and equipment. You can either deduct the entire cost for the tax year in which it was purchased, or you can depreciate the purchases over a seven-year period. The IRS has specific regulations that govern your choices here, so make sure you’re following the rules and make the right choice between depreciation and full deduction.

11. Employee Benefits.
The benefits that businesses like yours offer to employees do more than attract high-quality talent to your team. They also have tax benefits. Keep track of all contributions you make to your employees’ health plans, life insurance, pensions, profit-sharing, education reimbursement programs, and more. They’re all tax-deductible.

12. Computer Software.
You can now deduct the full cost of business software as a small business tax deduction, rather than depreciating it as in years past. This includes your POS software and all software you use to run your business.

13. Rent on Your Business Location.
You undoubtedly pay rent for your pet store or candy shop. Make sure you deduct it.

14. Startup Expenses.
If you’ve just opened your gift shop or convenience store, you may be able to deduct up to $5,000 in start-up costs and expenses that you incurred before you opened your doors for business. These can include marketing and advertising costs, travel, and employee pay for training.

15. Utilities.
Don’t miss the small business tax deductions for your electricity, mobile phone, and other utilities. If you use the home office deduction, your landline must be dedicated to your business to be deductible.

16. Travel Expenses.
Most industries offer some form of trade show or professional event where similar businesses can gather to discuss trends, meet with vendors, sell goods and discuss industry news. If you’re traveling to a trade show, you can take a small business deduction for all your expenses, including airfare, hotels, meals on the road, automobile expenses – whether you use the IRS standard mileage rate or actual expenses – and even tipping your cab driver.

There are also deductions for expenses that might not immediately come to mind, like:

In order for your trip to qualify for a travel deduction, it must meet the following criteria:

As with all deductions, it’s imperative that you keep receipts and records of all business travel expenses you plan to deduct in case of an audit.

17. Taxes.
Deducting taxes is a little tricky because the small business deduction depends on the type of tax. Deduct all licenses and fees, as well as taxes on any real estate your business owns. You should also deduct all sales taxes that you have collected from the customers at your deli. You can also deduct your share of the FICA, FUTA, and state unemployment taxes that you pay on behalf of your employees.

18. Commissions.
If you have salespeople working on commission, those payments are tax-deductible. You can also take a small business tax deduction for third-party commissions, such as those you might pay in an affiliate marketing set-up.

19. Machinery and Equipment Rental.
Sometimes renting equipment for your coffee shop or concession stand is beneficial to your bottom line, since you can deduct these business expenses in the year they occur with no depreciation.

20. Interest on Loans.
If you take out a business line of credit, the interest you pay is completely deductible as a small business tax deduction. If you take out a personal loan and funnel some of the proceeds into your business, however, the tax application becomes somewhat more complicated.

21. Inventory for Service-Based Businesses.
Inventory normally isn’t deductible. However, if you’re a service-based business and you use the cash method of accounting (instead of the standard accrual method typically used for businesses with inventory), you can treat some inventory as supplies and deduct them. For instance, if you’re an ice cream shop but you sell your special hot fudge sauce as a product, your inventory may be deductible. Consult a tax professional to see if you qualify.

22. Bad Debts.
Did you advance money to an employee or vendor, and then not receive repayment or the goods or services you thought you were contracting for? If so, you may be able to treat this bad business debt as a small business deduction.

23. Employee Education and Child Care Assistance.
If you go above and beyond with your employee benefits, you may be able to take small business tax deductions for education assistance and dependent care assistance. The IRS is pretty much rewarding you here for being a great employer. So, take a bow, and the deduction.

24. Mortgage Interest.
If your business owns its own building, even if it’s just a hot dog stand, you can deduct all your mortgage interest.

25. Bank Charges.
Don’t forget to deduct the fees your bank charges you for your business accounts. Even any ATM fees are deductible.

26. Disaster and Theft Losses.
If your business is unfortunate enough to suffer theft or to be the victim of a natural disaster during the year, you may be able to turn any losses that your insurance company didn’t reimburse into a small business tax deduction.

27. Carryovers From Previous Years.
Some small business tax deductions carry over from year to year. For instance, if you had a capital loss in a previous year, you may be able to take it in the current year. Specifics often change from year to year, so make sure you’re up to date on the latest IRS regulations.

28. Insurance.
The insurance premiums you pay for coverage on your business is all tax-deductible. To qualify, your insurance must provide coverage that is “ordinary and necessary.”

This could include coverage for:

There are a few insurance types that you can’t deduct, the most common being life insurance. If you’re not sure whether you can deduct a certain type of insurance, and that deduction is an important factor in your decision, please speak with a tax professional first and save yourself any unnecessary expenses.

29. Home Renovations and Insurance.
Did you take a deduction for a home office already? If so, business expenses related to any renovations to that part of your home are also deductible, and so is the percentage of your homeowner’s insurance that covers that part of your home. Remember, all small business deductions related to home offices only apply if you use part of your home exclusively for business.

30. Tools.
The IRS distinguishes between tools and equipment. While you may have to capitalize on equipment rather than deducting it in one year, you can deduct tools that aren’t expensive or that have a life of only a year or less. And for the IRS, “tools” doesn’t just refer to hammers or screwdrivers; your spatulas and cookie sheets are tools as well.

31. Unpaid Goods.
If your business produces goods rather than providing a service, you can deduct the cost of any goods that you haven’t been paid for yet.

32. Education.
Did you attend any seminars, workshops or classes in the past year that were designed to help you improve your job skills? Your work-related educational expenses may be deductible, especially if they’re required to keep up or renew a professional license. Remember, they have to be work-related. If you own a bar or cafe, you won’t be able to deduct skiing lessons.

33. Advertising and Marketing.
You already know that providing amazing goods and services isn’t enough to make your business succeed. You also need to advertise so your potential customers can find you. Advertising and marketing dollars can add up fast, but fortunately, they are all tax-deductible.

This is great news since advertising and marketing are often of the biggest business expenses that small businesses need to deal with as they get off the ground. Rest assured, you can deduct everything from flyers to billboards to business cards, and even a new website. Political advertising is the biggest exception to this rule. Those expenses are not deductible.

34. Charitable Deductions.
Yes, your small business can donate to charity and take a deduction for it. It can donate supplies, money, or property to a recognized charity, but pay attention to the rules before you go crazy giving stuff away. Donations of your time don’t count, and you can’t wipe out your business income with donations. Also, check with the IRS before you make a charitable deduction to make sure the organization you want to support qualifies for the deduction.

35. Cleaning and Janitorial Expenses.
You know all too well that the workday isn’t over when you flip the sign on the door to say “Closed.” If you hire any type of cleaning service, make sure you take your small business tax deduction.

36. Moving Expenses.
Did you need to move to start your business? If you’re a sole proprietor or self-employed worker and you had to move more than 50 miles for business, you may be able to deduct some of your moving expenses from your taxes. Specifically, you may be able to deduct packing and transportation costs, utility and service connection fees, and travel costs. However, you can’t deduct the cost of any meals or security deposits you’ve had to pay.

Lastly, to qualify for these deductions, you will need to remain a full-time employee of the business that required you to move for at least 78 weeks out of the following two years.

37. Intangibles like Licenses, Trademarks, and other Intellectual Property.
Most of the time, expenses related to the registering or protection of intellectual property are deductible. However, the process you go about it can differ depending on what you’re trying to deduct. Some costs must be depreciated over multiple years, while others can be fully deducted within the year in which they were incurred. For example, licensing fees are typically considered capital expenses that must be depreciated. However, trademarks can often be deducted in the same tax year. If you’re uncertain, we recommend working with a tax professional to ensure you’re in compliance with the regulations governing your specific situation.

No matter what type of small business entity you have, you have to pay quarterly estimated taxes if the business owes income taxes of $1,000 or more. Corporations only have to pay quarterly estimated taxes if they expect to owe $500 or more in tax for the year.

Before you owned a business, filing taxes was a one-time thing. But as a small business owner, you’ll have to pay the IRS four times per year. On one hand, that’s four more tax deadlines you might miss. But on the bright side, by the time your yearly tax deadline comes around, you’ll have already paid three-quarters of your tax return.

To make things even more complicated, businesses must deposit federal income tax withheld from employees, federal unemployment taxes, and both the employer and employee social security and Medicare taxes. Depositing can be on a semi-weekly or monthly schedule.

Whether you’re filing your taxes quarterly or holding off for the next annual deadline, you should begin preparing for your taxes by keeping records of your expenses as of January of each year. Make sure to document each of these small business tax deductions by keeping physical receipts and writing down the business reason for the expense on your receipts as soon as you receive it.

With this comprehensive list of small business tax deductions, you’ll be well on your way to saving on your taxes this year. However, deductions can be tricky, it’s always best to consult a tax expert for any questions that might arise to ensure you are complying with all regulation and avoid any penalties.

Credit given to Sara Sugar. Published in MONEY & PROFITS on Jan 21, 2020.  

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Special Holiday Edition December 23, 2020

Posted by bradstreetblogger in : Business consulting, Depreciation options, General, Retirement, tax changes, Tax Planning Tips, Tax Rules, Tax Tip, Taxes, Uncategorized , add a comment

Enjoy the Holidays!

We are going to take a break from our tax and business tips this week.  Instead, the family of Bradstreet & Company would like to wish you and your family the most joyous holiday season and best wishes for 2021.

We hope you enjoy the Tax Tip of The Week.  As always, your topic suggestions and questions are always appreciated.

Is the Tax Tip of the Week real?

While your kids are questioning if Santa is real, we continue to receive some interesting feedback that some of you don’t realize this is really Bradstreet CPAs reaching out each week (… some suspect this is a “packaged” communication to which we add our logo.) Well, rest assured it’s us and we love to hear from you.
Enjoy the week and, “Yes Virgina, there is a Santa Claus”.

Wishing you all great things,

The Staff at Bradstreet & Company

Tax Loss – Harvesting December 16, 2020

Posted by bradstreetblogger in : Business consulting, Depreciation options, General, tax changes, Tax Rules, Tax Tip , add a comment

I am not a financial planner nor a stockbroker. And, as we have heard a million times over, “Past performance is no guarantee of future results.” Having gotten these typical disclaimers out of the way, let’s discuss what tax-loss harvesting is all about.

The long story short is that tax-loss harvesting is often referred to as selling securities at a loss to offset a capital gains tax liability. Usually, the end goal is to limit the taxation of short-term capital gains. This is important since higher federal income taxes are imposed on short-term capital gains as opposed to long-term gains.

Some cautions –

  1. Wash rule – some investors may sell a security for harvesting purposes but later wish to add it back to their investment portfolio. That is fine BUT wait 31 days for the purchase or the original loss will be disallowed by the IRS. 
  2. Harvesting tax losses will defer paying the capital gain tax. When you die the tax basis on your stocks (current tax law) will be “stepped-up” to their fair market value. Thusly, the untaxed capital gains will go untaxed. 
  3. Capital losses are limited to an annual $3,000 deduction. The good news is that unlike many other carryforwards, capital loss carryforwards never expire during one’s life. However, they do not survive your death.  In the year that a spouse dies and a return is filed jointly, the losses from one spouse’s brokerage account may be used to offset the other spouse’s gains. 

Ideas and excerpts above came from a WSJ article, 2020 Was Perfect for Tax-Loss Harvesting. It was written by Mr. Neal Templin and published in the WSJ on November 9, 2020. It contains additional planning points and offers greater in-depth explanations. This article is reprinted below for further reading.

                                   -Mark Bradstreet



This is the kind of year that was made for tax-loss harvesting.

The tactic, used to legally reduce or avoid altogether capital-gains taxes, is especially useful in years when a jarring market slide is followed by a strong rebound. That’s why this year, with the market’s plunge in March and subsequent recovery to record highs, was ideal for this strategy.

In January and February, New York money manager David Frisch sold winning stock positions in the brokerage account of client Mike Soffer, generating $20,000 in capital gains. In March, as the market plummeted, Mr. Frisch sold losing positions in Mr. Soffer’s account, creating tax losses to offset the gain. Plus, he banked an additional $15,000 in tax losses that Mr. Soffer can use in the future to offset gains.

Mr. Soffer, a commercial mortgage broker in Old Bethpage, N.Y., can also use the banked tax losses to offset up to $3,000 a year in ordinary income. “It’s money earned by not paying taxes,” he says.

If you didn’t sell stocks during the March market slide, it’s too late to create tax losses from it now. But fret not. There will be more opportunities in the future. Even in up years for the market, there are dips where investors can book tax losses.

When those opportunities come around, here are a few things to keep in mind about harvesting tax losses.

1. Don’t run afoul of the wash rule.

If you sell something and repurchase it or a substantially similar security within 30 days, the Internal Revenue Service won’t allow you to count it as a tax loss. That’s called the wash rule.

Money managers typically don’t want to spend 30 days out of the market when they create a tax loss for a client. They could miss out on upswings, like April of this year. So as soon as they sell an investment to create a tax loss, they buy an equivalent investment that is different enough to satisfy the wash rule.

When money manager Joseph Favorito of Melville, N.Y., sold S&P 500 index funds in March to create a tax loss for clients, he frequently bought Russell 1000 index funds. Both types of funds own large-cap stocks and they perform similarly.

The switch allowed his clients to stay invested in the market. “After the market bottomed out in March, we had the 50 best days in market history,” Mr. Favorito says. “If you missed that, you missed a lot.”

2. Try to accomplish other goals as you create tax losses.

It’s a good practice to rebalance your holdings regularly, selling stocks or funds that have climbed and buying ones that have lagged behind. That’s a great time to create tax losses. To do this efficiently, you need to know the cost basis of your holdings (generally the price at which you bought a security), so you know if you’re creating a loss or a gain when you sell them. If you bought shares of a certain company at various times, you will create a greater tax loss by selling the shares you acquired at the highest price.

If you’ve spent years working for a single company, your portfolio may be concentrated in a single stock. That’s risky. Advisers would tell you to sell at least part of your holdings and replace it with a diversified portfolio of stocks. If you do this during a downturn, you may be able to create a tax loss that you can use to offset gains for years to come.

3. Harvesting tax losses can allow you to defer paying capital-gains taxes, and in some cases to never pay them.

Suppose you buy shares in Mutual Fund A for $100,000 and their value falls to $50,000. You sell the shares and buy $50,000 of Mutual Fund B and book a $50,000 tax loss. You use it to offset a $50,000 gain on the sale of a second home.

Five years later, the value of your Mutual Fund B shares has climbed to $100,000. You sell them. Your cost basis is $50,000, because that’s what you paid for Mutual Fund B. If you sell it for $100,000, you will owe taxes on a $50,000 capital gain. What you’ve done is to defer the capital-gains tax you avoided five years earlier when you sold the home.

Even better is finding new opportunities to create tax losses during those five years to offset your $50,000 gain on Mutual Fund B so that it, too, is untaxed.

When you die, under current law your heirs will inherit your assets with a “stepped up” cost basis, meaning that any untaxed capital gains have been erased as far as the IRS is concerned. That’s another reason why avoiding taxation on capital gains during your life is a smart strategy. That tax may never be paid.

4. When you expire, so do your tax losses.

A tax loss can be used anytime over the lifetime of the account holder, but not beyond. But there is an important wrinkle in the tax law that married couples should keep in mind. During the final year that a couple files jointly after one spouse dies, the losses from one spouse’s brokerage account can be used to offset gains by the other spouse.

5. Will the election change the calculus?

President-elect Joe Biden has said he supports raising the top capital-gains tax rate to 39.6% and taxing appreciated assets at the time of death. Both would mean big tax increases over the current regimen, where the top capital-gains rate is 23.8% and appreciated assets are passed tax-free to heirs. Some investors may sell winners, figuring they’re better off biting the bullet before tax rates rise.

Marianela Collado, a Plantation, Fla., money manager, says she won’t tell her clients to take gains based on a Biden win. Even if the law changes under Mr. Biden, it could change back under the next president, she says.

For now, Ms. Collado is making hay under the current rules. She has a client who sold a building in January, generating a $1 million capital gain. She told her client to set aside $238,000 to cover taxes.

Then, in March, she sold mutual funds owned by the client and immediately bought different funds with similar aims. In doing so she created a $500,000 tax loss, which will offset half of her client’s capital gain from the building sale.

“What we did in those few weeks is going to save him about half that tax,” she says.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Home Ownership – Unmarried Partners December 9, 2020

Posted by bradstreetblogger in : Depreciation options, General, Section 168, Section 179, tax changes, Tax Planning Tips, Tax Rules, Tax Tip , add a comment

Owning a home may be difficult under the best of conditions. Added complexities occur when buying a residence with an unmarried partner.  Home purchases are nearing a 14 year high in the USA. And, the number of unmarried partners living together has almost tripled in the last twenty (20) years.

Many of the concerns of purchasing a home with another individual may best be solved by viewing this transaction as a business venture (which it really is).  Partnership agreements are best addressed by a real estate and business attorney. The attorney will address an operating agreement that includes what happens if the partnership breaks up or someone dies. Also, included will be in whose name will the home be titled, credit scores, who has and deducts the mortgage interest expense, how you and your partner are going to share ongoing expenses including repairs and real estate taxes. As in any business – having a joint banking account solely for the home expenses is a great idea.

Many of the above ideas were taken from the following article, How to Buy a Home Together When You’re Not Married, by Veronica Dagher which was published in the WSJ on November 4, 2020. 

                                         -Mark Bradstreet


As U.S. home sales rise to a 14-year high and families search for larger spaces in quarantine, more unmarried couples may be considering buying a house together. For them, there is a different set of risks, both financial and practical, to consider.

The number of unmarried partners living together nearly tripled in the past two decades to 17 million, with a notable increase among those aged 65 or older, according to the U.S. Census Bureau. In turn, some financial advisers are getting more requests for advice from couples of all ages who want to buy a home together but have no interest in getting married.

For example, Andrew Feldman, a financial planner in Chicago, recently received a call from one of his clients who is living with her boyfriend and his two children. They are running out of space and she intends to buy a house within a few weeks and have him pay rent to help cover the mortgage.

While this would work out well for everyone in the short-term, it is risky because, on her current budget, it would be very difficult for her to keep the house without his help.

“The upside is easy but the downside is a big unknown,” said Mr. Feldman.

Here’s a guide for what to consider before you buy a place together.

How do you know if you and your partner are financially ready to buy a house?

If you haven’t discussed how you and your partner share money and expenses, you’ll want to do that first before committing to buying a house, said Mark Reyes, a financial planner at Albert, a financial-planning app.

Make sure you discuss your finances with full transparency, including any debts or income that the other partner isn’t aware of. You’ll also need to decide if and to what extent you’ll share finances going forward, he said.

It will be important to discuss how repairs, property taxes and other home expenses will be shared or handled. Having a joint bank account dedicated to house expenses such as repairs may be a good idea, he said.

Who should apply for the mortgage?

Unmarried couples buying a home together can benefit from greater flexibility when applying for a mortgage, said Bill Banfield, executive vice president of capital markets at Rocket Mortgage.

They have the opportunity to put their “best foot forward” by having the individual with the most income, best FICO and best debt-to-income go through the application process, he said.

The buyer who is more qualified can be the only one on the mortgage and this could result in a favorable interest rate and mortgage terms if the other partner has a low credit score, for example.

The mortgage holder will be solely responsible for the entire debt, so if you break up and you hold the mortgage, you’ll owe all the money, he said.

Lenders also let both partners apply for the mortgage together—allowing incomes and debts to be combined. The lowest of the two FICO scores, however, will be used. Applying together could allow the couple to borrow more, depending on their financial situation.

Who should hold the title to the house?

How the house is titled is crucial.

Depending on your situation, you’ll want to make sure that you and your partner discuss the legality of homeownership with your respective, independent lawyers, said Mr. Reyes, the financial planner at Albert. Titling options include sole ownership, joint tenancy with rights of survivorship, or tenants in common.

Titling can play a crucial role during a breakup or when one partner dies. It will also determine who gets how much equity in the house. For example, if the higher earner in the relationship is listed as the sole owner of the house, the other partner is basically “renting” to live there and has no ownership stake in the house if they break up, he said.

If the couple own property as tenants in common and the deceased partner doesn’t name the surviving partner as the beneficiary of the house, the survivor could become a co-owner with their late partner’s relatives or heirs, said Tom McLean, a financial planner in Olympia, Wash.

For younger couples, tenants in common tends to be the most common form of titling, as each often wants to have an ownership stake but may not want the other person to inherit that stake (as would be the case if they owned the home in joint tenancy with rights of survivorship), said Avi Kestenbaum, a partner at Meltzer, Lippe, Goldstein & Breitstone.

What if we break up?

If the relationship doesn’t work out, there are some key questions the couple will need to answer, Mr. Kestenbaum said, such as will there be a forced sale (where the couple is forced to sell the home even though one party may not wish to), or can one partner buy out the other and for what price, and how will the proceeds be split?

Mr. Kestenbaum recommends a written and signed legal agreement, such as a simple partnership agreement solely dealing with the home, to answer these questions and to also spell out each of the parties’ rights and obligations, even if the relationship continues.

What are the tax benefits?

One of the benefits to buying a home as an unmarried couple is the ability to bunch itemized deductions on one person’s tax return and take the standard deduction on the partner’s tax return, said Alexandra Demosthenes, a certified public accountant and financial planner in Boca Raton, Fla.

If the couple were married but filing separate tax returns, they’d have to either both itemize or both take the standard deduction. However, when the couple isn’t married, one individual can itemize their deductions (if the total is higher than the standard), claiming the mortgage interest, property taxes and all other allowable deductions, while their partner can choose to take the standard deduction.

This could maximize deductions for the couple over and above what they could claim as a married couple, resulting in maximum tax savings, she said.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

9 Best Practices for Small Business Taxes December 2, 2020

Posted by bradstreetblogger in : Business consulting, Depreciation options, General, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip , add a comment

Not sure there are only 9 “best practices” for small businesses as the below article suggest.  But, the 9 “best practices” that follow are valid points and a decent start.

                                -Mark Bradstreet

Running a business is hard enough without adding the complexity of filing taxes each year. The key, experts say, is to work with your accountant throughout the year, not just when you prepare your tax return. Making financial decisions without consulting an accountant or financial adviser can put you at risk and cost you more money in the long run, says John Blake, CPA, in Hamilton, N.J.

Here are nine best practices for small business when it comes to tax preparation and small business accounting, and working with an accountant or financial professional.

1. Hire the right accountant

Your accountant should offer to do more than just prepare financial statements and do your taxes, says Chandra Bhansali, co-founder and CEO of Accountants World. If that’s all they offer to do, then they aren’t the right accountant for a small business, Bhansali says.

Your accountant should work with you throughout the year to track income and spending, to make sure you don’t have a cash flow problem, and to monitor your gross and net profits, Bhansali says. Work with your accountant from day one of opening your business, not just in March and April for tax season. “Most small businesses don’t understand the importance of accounting for the survival and growth of their businesses,” he says.

2. Claim all income that is reported to the IRS

The IRS gets a copy of the 1099-MISC forms you receive so they can match the income you’ve reported against what they know you’ve received. Make sure the income you report to the IRS matches the amount of income reported in the 1099s you received, Blake says. Not doing so is a red flag for the IRS. Even if a client doesn’t send out a 1099, you still need to report that income. The same rules apply with state taxes, he says.

3. Keep adequate records

Keeping thorough and accurate records throughout the year will ensure your tax return is correct. With inadequate record keeping, Blake says, you could be leaving deductions on the table or, worse, you could be putting yourself at risk for an audit. Blake recommends every business invest in a basic version of an accounting software because it is user friendly, inexpensive, and helps you keep track of all your income and expenses.

4. Separate business from personal expenses

If the IRS audits your business and finds personal expenses mixed with business expenses, regardless of whether you reported business expenses correctly, the IRS could start looking at your personal accounts because of commingled money, Blake says. Always get a separate bank account and credit card for your business and run only business expenses through those accounts.

5. Understand the difference between net and gross income

If your product costs more money to make than you charge for it, you will lose money regardless of how many units you sell. Small business owners often forget to take into account the difference between their net and gross income, Bhansali says. 

For instance, if it costs $100 to make your product and you sell it for $150, your gross income is $50. But, he says, after you deduct your expenses, your net income might drop to $10. “It’s important to know what your gross and net profits are so you can be more profitable and grow your business,” Bhansali says.

6. Correctly classify your business

Failing to properly classify your business could result in overpaying taxes, Blake says. Deciding whether to classify your company as either a C Corporation, S Corporation, Limited Liability Partnership, Limited Liability Company, Single Member LLC or Sole Proprietor will have a different effect on your taxes. It’s important that small businesses consult with an attorney and accountant to determine how their businesses should be classified.

7. Manage payroll

Blake recommends hiring a company to assist with payroll – but be sure that the company is reputable. To save money, some business owners will hire a lesser-known payroll service, only to find out later the service wasn’t remitting payroll taxes for the company. If that happens, Blake says, the business owners are on the hook for the payroll taxes. The IRS typically checks every quarter to see if payroll taxes have been paid.

8. Seek your accountant’s advice on your business plan

A good accountant gives you advice on how to grow your business, Bhansali says. Seek their advice to determine how much to contribute to your retirement fund and whether you should take a bonus or delay it a year. Your accountant can tell you if buying a small space for your store or business – rather than renting – could save you money.

9. Take advantage of capitalization rules

If you acquire a tangible piece of property or equipment for your business, you may be able to take a significant deduction. Make sure your accountant understands the rules around capitalization.

Credit given to: Conning, 2014; Conning Strategic Study: The Small Business Sector for Property-Casualty Insurance: Market Shift Coming.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Amended Tax Returns November 25, 2020

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, tax changes, Tax Deadlines, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip , add a comment

Filing an amended tax return is far from uncommon. In 2018, 3,500,000 were filed with the IRS. Amended tax returns are often needed for a large number of wide-ranging reasons. Some of the more common ones include receiving a late Form 1099 or a late Schedule K-1 or any other relevant information after your tax return was filed. Or, the cause for amending may be as simple as a math error which was not discovered until a later date. Keep in mind, that filing an amended return with the IRS often prompts filing amended returns for other tax entities such as your state, city and school district. For the most part today, these tax entities are linked. So, if an amended return is filed with the IRS – the other tax entities are notified of that change. So, they are now expecting an amended return as well. Not filing it with them usually prompts some nasty correspondence. Refunds created from filing amended returns are often a pleasant surprise; not so much fun if they cause a tax balance due. Many tax entities limit the time for which a refund claim may be filed. The IRS says the amended return for a refund must generally be filed within three years after the date the original return was filed or within two years after the date the tax was paid whichever is later. 

An article, If You Want to File an Amended Tax Return, authored by Tom Herman as published in the WSJ on September 14, 2020 follows.


                                     -Mark Bradstreet


Much to their chagrin, millions of taxpayers each year discover significant errors, omissions and other miscues on returns they already have filed.

Mastering all the details of knowing how to handle problems such as these can be surprisingly tricky. But the Internal Revenue Service recently took an important step toward making the process of filing an amended federal income-tax return easier.

Until recently, taxpayers who wanted to amend their federal income-tax return had to file Form 1040-X the old-fashioned paper way—even if they had filed their original return electronically. Then, in August, the IRS reversed course and said taxpayers generally can file amended returns electronically for last year with tax-preparation software.

“This is a significant and a very welcome development,” says Stephen W. DeFilippis, owner of DeFilippis Financial Group, a wealth-management and tax firm in Wheaton, Ill., and an enrolled agent (a tax specialist authorized to represent taxpayers at all levels of the IRS). This will make the amending process “easier for everyone: taxpayers, practitioners and the IRS,” he says.

“E-filed returns are generally processed faster, more efficiently and contain fewer errors than paper-filed returns,” says Alison Flores, principal tax research analyst at the Tax Institute at H&R Block Inc. “Similar results are likely to extend to Form 1040-X.” She says H&R Block has already begun e-filing amended returns for customers.

The IRS received nearly 3.5 million amended income-tax returns in 2018.

The e-filing option is also a timely change. Because of the coronavirus pandemic and other issues, IRS workers have been struggling to open and process unusually large mountains of mail. But it remains to be seen how much this new e-filing option will affect how long it takes for the IRS to respond to amended returns. The waiting time can vary significantly based on the facts, circumstances and complexity of each taxpayer’s situation.

As with so many tax issues, there are important exceptions and other fine print to consider for amended returns, filed electronically or on paper. If you’re planning to make amends, here are a few points to consider:

Limited scope
At this stage, the e-filing option for amended returns applies only for Forms 1040 and 1040-SR for the 2019 tax year. “Additional improvements are planned for the future,” the IRS said. Also, only taxpayers who e-filed their original Form 1040 or 1040-SR for 2019 can e-file an amended return, notes Ms. Flores of H&R Block.

Taxpayers who want to amend returns for more than one tax year must file for each year separately, says Eric Smith, an IRS spokesman. “So, for example, if you are amending multiple years and one of them is 2019, we urge you to e-file for 2019 and then send separate 1040-X forms” in separate envelopes for each of the other years, he says. “However, you decide to send it, it’s a good idea to keep any receipt or other evidence you do have that it was sent, whether it’s through one of the mailing or shipping options offered by the U.S. Postal Service or one of the authorized private delivery services,” he adds. “Also, be sure to keep a copy of your return.”

For refunds claimed in amended returns filed electronically, as with the paper 1040-X form, “we don’t currently offer direct deposit, but that’s one of the further enhancements we hope to make in the future,” Mr. Smith says.

Time limits
Generally, to claim a refund, you must file Form 1040-X “within three years after the date you filed your original return or within two years after the date you paid the tax, whichever is later,” regardless of how you file, the IRS says. “Returns filed before the due date (without regard to extensions) are considered filed on the due date, and withholding is deemed to be tax paid on the due date.”

But there are special rules for “refund claims relating to net operating losses, foreign tax credits, bad debts, and other issues.” For example, the IRS says a Form 1040-X based on a “bad debt or worthless security” generally must be filed “within seven years after the due date of the return for the tax year in which the debt or security became worthless.”

Common flubs
Among the classic reasons for amending: You forgot to include taxable income. You didn’t realize you were eligible for various credits, deductions or other valuable breaks. You claimed breaks you now realize you weren’t entitled to take. You need to correct your tax-filing status, or perhaps you received new information from a partnership or a financial institution that differs significantly from what you originally were told.

Another possible reason is that you were affected by a natural disaster in a place later designated as a federally declared disaster area. In such cases, victims have the option of claiming unreimbursed casualty losses for the year in which the disaster occurred—or on the previous year’s return (which typically would mean amending the return for that year).

For example, those who suffered losses from Hurricane Laura or California wildfires this year could deduct those losses on their returns for 2020 or 2019, whichever works out better. The Federal Emergency Management Agency provides a list of disaster declarations.

Some people also may benefit from several tax laws enacted near the end of 2019 that could affect their returns for prior tax years.

Other considerations
Some errors don’t require an amended return. The IRS says it may correct math or clerical errors on a return and even accept returns filed “without certain required forms or schedules.”

There are other circumstances when you shouldn’t file Form 1040-X. For example, the IRS says you shouldn’t amend to ask for “a refund of penalties and interest that you have already paid.” Instead, file Form 843.

In certain other cases, such as where criminal issues might be involved, consider consulting a skilled tax pro.

Lastly, if you amend your federal return, check to see whether you also may need to amend state tax returns and how to do so.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Final Rules on Business & Entertainment Deductions November 18, 2020

Posted by bradstreetblogger in : Deductions, General, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes , add a comment

The IRS has still not cashed many of our clients checks BUT they have found the time to issue final rules on business meals and entertainment.  Small wonder the government is running short on cash.  Interesting times!

Long story short – not much changed on business meals and entertainment deductions unless you get down deep into the weeds.  Entertainment is still nondeductible.  Go figure!

                                -Mark Bradstreet

IRS releases final rules on business meals and entertainment

The IRS on Wednesday issued final regulations (T.D. 9925) implementing provisions of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, that disallow a business deduction for most entertainment expenses. The regulations also clarify the treatment of business deductions for food and beverages that remain deductible, generally limited to 50% of qualifying expenditures, and how taxpayers may distinguish those expenditures from entertainment.

The final regulations adopt, with a number of clarifications in response to comments, proposed regulations issued in February 2020 (REG-100814-19; see also “Proposed Regs. Issued on Meal and Entertainment Expense Deductions,” JofA, Feb. 24, 2020). The proposed regulations were based, in turn, on Notice 2018-76, published in October 2018.

Sec. 274(a)(1)(A) generally disallows a deduction for any activity of a type generally considered entertainment, amusement, or recreation. Before their deletion by the TCJA, effective for amounts paid or incurred after Dec. 31, 2017, the subsection allowed several exceptions, including for entertainment that was preceded or followed by substantial and bona fide business discussions. The TCJA did not repeal other exceptions under Secs. 274(e)(1) through (9), including, for example, certain recreational activities for the benefit of employees, reimbursed expenses, and entertainment treated as compensation to an employee or includible in gross income of a nonemployee as compensation for services or as a prize or award (and reported by the taxpayer as such).

The TCJA similarly removed a reference to entertainment in Sec. 274(n)(1) with respect to the 50% limitation of deductibility of food or beverages, but it left that provision otherwise intact. Also remaining with respect to food or beverage expenses are the Sec. 274(k) general requirements that they not be lavish or extravagant under the circumstances and that the taxpayer or an employee of the taxpayer is present when food or beverages are served. Food and beverages must also be an ordinary and necessary business expense under Sec. 162(a).

The TCJA also applied the 50% limitation on food or beverages to de minimis fringe employee benefits under Sec. 132(e) (unless another exception under Sec. 274(e) applies), which formerly were not subject to it.

Thus, business taxpayers must separate deductible meal expenses from nondeductible entertainment expenses, and the regulations address how this is done in a variety of circumstances.

The regulations clarify that “entertainment” for purposes of Sec. 274(a) does not include food or beverages unless they are provided at or during an entertainment activity and their costs are not separately stated from the entertainment costs.

The final regulations provide that the food or beverages must be provided to a “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”

Accordingly, the final regulations apply this definition to employer-provided food or beverage expenses by considering employees as a type of business associate, as well as to the deduction for expenses for meals provided by a taxpayer to both employees and nonemployee business associates at the same event.

The final regulations added several new examples to the proposed regulations and slightly modified others in response to comments asking for clarification.

The final regulations are effective upon their publication in the Federal Register. Taxpayers may also rely upon the proposed regulations for expenses paid or incurred after Dec. 31, 2017.

Credit Given to:  Paul Bonner (Paul.Bonner@aicpa-cima.com) a Journal of Accountancy senior editor.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This week’s Author – Mark Bradstreet, CPA

–until next week.

Do Trust Beneficiaries Pay Taxes? November 11, 2020

Posted by bradstreetblogger in : Business consulting, Depreciation options, General, Tax Planning Tips, Tax Rules, Tax Tip, Uncategorized , add a comment

Trusts are commonly used for estate planning purposes and numerous other reasons.  So it makes sense that there are also numerous types of trusts.  The article below describes the two main categories of trusts, revocable and irrevocable, but does not mention types of trusts, a discussion of which would be beyond the scope of this article.

Generally, revocable trusts are set up to avoid probate.  However, control of the assets during the grantor’s lifetime remains with the grantor.  As such, revocable trusts generally do not file their own returns, nor do they have their own identification number, and the income is reported in the grantor’s individual returns as if the trust didn’t exist.  A commonly used term for these types of trusts is “disregarded entity”.

Irrevocable trusts, on the other hand, do need to file returns if trust assets produce income.  These types of trusts are considered separate entities, and have their own federal tax identification number.  Who pays the tax is determined by the trust agreement.  The article below discusses the taxes paid, who pays them, and also mentions trust tax rates.  Keep in mind that trust tax rates are the same as individual tax rates, but the brackets are much smaller, resulting in significantly higher taxes if the trust pays them.  If you are considering setting up a trust, first, be sure you need one by consulting with a reputable attorney and / or tax advisor, and second, be sure to structure the trust to create the best tax solution.

                                   -Norm Hicks

“Beneficiaries of a trust typically pay taxes on the distributions they receive from the trust’s income, rather than the trust itself paying the tax. However, such beneficiaries are not subject to taxes on distributions from the trust’s principal.

When a trust makes a distribution, it deducts the income distributed on its own tax return and issues the beneficiary a tax form called a K-1. The K-1 indicates how much of the beneficiary’s distribution is interest income versus principal and, thus, how much the beneficiary is required to claim as taxable income when filing taxes.

KEY TAKEAWAYS
•             Trusts are subject to different taxation than ordinary investment accounts.
•             Trust beneficiaries must pay taxes on income and other distributions that they receive from the trust, but not on returned principal.
•             IRS forms K-1 and 1041 are required for filing tax returns that receive trust disbursements.

Understanding Trusts and Beneficiaries

A trust is a fiduciary relationship whereby the trustor or grantor gives another party–the trustee–the right to hold property or assets for the benefit of a third party (usually the beneficiary).

Trusts are established to provide legal protection and to safeguard assets usually done as part of estate planning. Trusts can be used to ensure the assets are properly distributed to the beneficiaries according to the wishes of the grantor. Trusts can also help to reduce estate and inheritance taxes as well as avoid probate, which is the legal court process of distributing assets upon the death of the owner.

Although there are several types of trusts, they typically fall into one of two categories. A revocable trust can be changed or closed at any time during the grantor’s lifetime. Conversely, an irrevocable trust cannot be amended or closed once it has been opened, including those trusts that become irrevocable upon the grantor’s death. The grantor–by establishing an irrevocable trust–essentially has transferred all ownership or title of the assets in the trust. There are various tax rules for beneficiaries of income from trusts, depending on whether the trust is revocable or irrevocable–as well as the type of income received from the trust.

Interest vs. Principal Distributions

When trust beneficiaries receive distributions from the trust’s principal balance, they do not have to pay taxes on the distribution. The Internal Revenue Service (IRS) assumes this money was already taxed before it was placed into the trust. Once money is placed into the trust, the interest it accumulates is taxable as income, either to the beneficiary or the trust itself.

The trust must pay taxes on any interest income it holds and does not distribute past year-end. Interest income the trust distributes is taxable to the beneficiary who receives it.

The amount distributed to the beneficiary is considered to be from the current-year income first, then from the accumulated principal. This is usually the original contribution plus subsequent ones and is income in excess of the amount distributed. Capital gains from this amount may be taxable to either the trust or the beneficiary. All the amount distributed to and for the benefit of the beneficiary is taxable to him or her to the extent of the distribution deduction of the trust.

If the income or deduction is part of a change in the principal or part of the estate’s distributable income, income tax is paid by the trust and not passed on to the beneficiary. An irrevocable trust that has discretion in the distribution of amounts and retains earnings pays a trust tax that is $3,011.50 plus 37% of the excess over $12,950 (updated for 2020).

Tax Forms

The two most important tax forms for trusts are the 1041 and the K-1. Form 1041 is similar to Form 1040. On this form, the trust deducts from its own taxable income any interest it distributes to beneficiaries.

At the same time, the trust issues a K-1, which breaks down the distribution, or how much of the distributed money came from principal versus interest. The K-1 is the form that lets the beneficiary know the tax liability from the trust’s distributions.

The K-1 schedule for taxing distributed amounts is generated by the trust and handed over to the IRS. The IRS, in turn, delivers the document to the beneficiary to pay the tax. The trust then completes Form 1041 to determine the income distribution deduction that is accorded on the distributed amount.”

Article credit given to – Greg Depersio (Investopedia – February 8, 2020)

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Norman Hicks, CPA

–until next week.

Year End Tax Planning November 4, 2020

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip , add a comment

This year has been unlike any other in recent memory. Front and center, the COVID-19 pandemic has touched virtually every aspect of daily living and business activity in 2020. In addition to other financial consequences, the resulting fallout is likely to have a significant impact on year-end tax planning for both individuals and small businesses.

Furthermore, the national elections will affect tax issues for the rest of the year and well beyond.  

In response to the pandemic, Congress authorized economic stimulus payments and favorable business loans as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act also features key changes relating to income and payroll taxes. This new law follows close on the heels of the massive Tax Cuts and Jobs Act (TCJA) of 2017. The TCJA revised whole sections of the tax code and includes notable provisions for both individuals and businesses.

This is the time to paint your overall tax picture for 2020. By developing a year-end plan, you can maximize the tax breaks currently on the books and avoid potential pitfalls. 

For your convenience, this 2020 Year-End Tax Tip of the Week is divided into three sections:

* Individual Tax Planning

* Business Tax Planning

* Financial Tax Planning

Be aware that the concepts discussed in this letter are intended to provide only a general overview of year-end tax planning. It is recommended that you review your personal situation with a tax professional.

                                       – Mark Bradstreet 

INDIVIDUAL TAX PLANNING

Charitable Donations
Generally, itemizers can deduct amounts donated to qualified charitable organizations, as long as substantiation requirements are met. Be aware that the TCJA increased the annual deduction limit on monetary contributions from 50% of adjusted gross income (AGI) to 60% for 2018 through 2025. Even better, the CARES Act raises the threshold to 100% for 2020.

In addition, the CARES Act authorizes an above-the-line deduction of up to $300 for monetary contributions made by a non-itemizer in 2020 ($600 for a married couple). 

YEAR-END MOVE: In most cases, you should try to “bunch” charitable donations in the year they will do you the most tax good. For instance, if you will be itemizing in 2020, boost your gift giving at the end of the year. Conversely, if you expect to claim the standard deduction this year, you may decide to postpone contributions to 2021.

For donations of appreciated property that you have owned longer than one year, you can generally deduct an amount equal to the property’s fair market value (FMV). Otherwise, the deduction is typically limited to your initial cost. Also, other special rules may apply to gifts of property. Notably, the annual deduction for property donations generally cannot exceed 30% of AGI.

Note: If you donate to a charity by credit card in December—for example, you make an online contribution—you can still write off the donation on your 2020 return, even if you do not actually pay the credit card charge until January.

Family Income-Splitting
The time-tested technique of family income-splitting still works. Currently, the top ordinary income tax rate is 37%, while the rate for taxpayers in the lowest income tax bracket is only 10%. Thus, the tax rate differential between you and a low-taxed family member, such as a child or grandchild, could be as much as 27%—not even counting the 3.8% net investment income tax (more on this later).

YEAR-END MOVE: Shift income-producing property, such as securities, to family members in low tax brackets through direct gifts or trusts. This will lower the overall family tax bill. But remember that you are giving up control over those assets. In other words, you no longer have any legal claim to the property.

Also, be aware of potential complications caused by the “kiddie tax.” Generally, unearned income above $2,200 received in 2020 by a child younger than age 19, or a child who is a full-time student younger than age 24, is taxed at the top marginal tax rate of the child’s parents. (Recent legislation reverses a TCJA change on the tax treatment.) The kiddie tax could affect family income-splitting strategies at the end of the year

Note: If there is a danger that the kiddie tax could be triggered in 2020, some of the same income deferral strategies that are available to adults may be used for dependent children. For example, you may arrange for a child to postpone a large capital gain from a securities sale to 2021 or realize a capital loss at year-end to offset previous capital gains (see page 8). 

Higher Education Expenses
The tax law provides tax breaks to parents of children in college, subject to certain limits. This often includes a choice between one of two higher education credits and a tuition-and-fees deduction.

YEAR-END MOVE: When appropriate, pay qualified expenses for next semester by the end of this year. Generally, the costs will be eligible for a credit or deduction in 2020, even if the semester does not begin until 2021.

Typically, you can claim either the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC). The maximum AOTC of $2,500 is available for qualified expenses of each student, while the maximum $2,000 LLC is claimed on a per-family basis. Thus, the AOTC is usually preferable. Both credits are phased out based on modified adjusted gross income (MAGI).

Alternatively, you may claim the tuition-and-fees deduction, which is either $4,000 or $2,000 before it is phased out based on MAGI, as shown below

Filing StatusMAGI Tuition-and-Fees
Deduction
SingleUp to $65,000$4,000
Single$65,001 – $80,000$2,000
Married filing jointlyUp to $130,000$4,000
Married filing jointly$130,001 – $160,000$2,000

Note: The tuition-and-fees deduction, which has expired and been revived several times, is scheduled to end after 2020, but could be reinstated again by Congress.

Medical and Dental Expenses
Previously, taxpayers could only deduct unreimbursed medical and dental expenses above 10% of their AGI. But the TCJA temporarily lowered the threshold to 7.5% of AGI for 2017 and 2018. Subsequent legislation extended this tax break through 2020.

YEAR-END MOVE: When it is possible, accelerate non-emergency expenses into this year to benefit from the lower threshold. For instance, if you expect to itemize deductions and have already surpassed the 7.5%-of-AGI threshold this year, or you expect to clear it soon, accelerate elective expenses into 2020. Of course, the 7.5%-of-AGI threshold may be extended again, but you should maximize the tax deduction when you can.  

To qualify for a deduction, the expense must be for the diagnosis, cure, mitigation, treatment or prevention of disease or payments for treatments affecting any structure or function of the body. But any costs for your general health or well-being are nondeductible.

Note: Don’t forget to count unreimbursed medical and dental expenses you have paid for your immediate family members, as well as other tax dependents such as an elderly parent or in-law. These extra expenses can push you over the 7.5%-of-AGI mark for the year or boost an existing deduction.

Estimated Tax Payments
The IRS requires you to pay federal income tax through any combination of quarterly installments and tax withholding. Otherwise, it may impose an “estimated tax” penalty.

YEAR-END MOVE: No estimated tax penalty is assessed if you meet one of these three “safe harbor” exceptions under the tax law.

1. Your annual payments equal at least 90% of your current liability;

2. Your annual payments equal at least 100% of the prior year’s tax liability (110% if your AGI for the prior year exceeded $150,000); or

3. You make installment payments under an “annualized income” method. This option may be available to taxpayers who receive most of their income during the holiday season.

Note: If you have received unemployment benefits in 2020—for example, if you lost your job due to the COVID-19 pandemic—remember that those benefits are subject to income tax. Factor this into your estimated tax calculations for the year.

Miscellaneous
* Watch out for the alternative minimum tax (AMT). The AMT applies if a separate complex calculation involving “tax preference items” and certain adjustments exceeds your regular tax liability. Have an assessment of your AMT liability made to determine your year-end approach. 

   * Make home improvements that qualify for mortgage interest deductions as acquisition debt. This includes loans made to substantially improve your principal residence or one other home. Note that the TCJA suspended deductions for home equity debt for 2018 through 2025.

   * With a Section 529 plan, you can set up an account for a child’s college education that can grow without any current tax erosion. Distributions used to pay for qualified expenses are exempt from tax. Beginning in 2018, the TCJA expanded the use of 529 plans for tuition payments of up to $10,000 a year for a child’s kindergarten, elementary or secondary school education.

   * Consider the tax impact of a divorce or separation. The TCJA repealed the deduction for alimony expenses for payers and the corresponding inclusion in income for recipients, for divorce and separation agreements executed after 2018. Note that deductions may still be available for pre-2019 agreements that are modified after 2018.

   * Meet student loan obligations. Under the CARES Act, payment on many student loans was suspended tax-free until September 30 and then through December 31 by an executive order. Barring any further developments, you must resume required payments in 2021. 

   * If you own property that was damaged in a federal disaster area in 2020, you may qualify for quick casualty loss relief by filing an amended 2019 return. The TCJA suspended the deduction for casualty losses for 2018 through 2025, but retained a current deduction for disaster-area losses.

BUSINESS TAX PLANNING

Depreciation-Related Deductions
Under current law, a business may benefit from a combination of three depreciation-based tax breaks: (1) The Section 179 deduction, (2) “bonus” depreciation and (3) regular depreciation.

YEAR-END MOVE: Place qualified property in service before the end of the year. Typically, a small business can write off most, if not all, of the cost in 2020 as shown below.

1. Section 179 deductions: This tax code section allows you to “expense” (i.e., currently deduct) the cost of qualified property placed in service anytime during the year. The maximum annual deduction is phased out on a dollar-for-dollar basis above a specified threshold.

The maximum Section 179 allowance has been gradually raised over the last decade since it was doubled to $500,000 in 2010. As shown below, the TCJA increased the amount again in 2018.

Tax yearDeduction limitPhase-out threshold
2010–2015$500,000$2 million
2016$500,000$2.01 million
2017$510,000$2.03 million
2018$1 million$2.50 million
2019$1.02 million$2.55 million
2020$1.04 million$2.59 million

However, be aware that the Section 179 deduction cannot exceed the taxable income from all your business activities this year. This could limit your deduction for 2020.

2. Bonus depreciation: The TCJA doubled the 50% first-year bonus depreciation deduction to 100% for property placed in service after September 27, 2017 and expanded the definition of qualified property to include used, not just new, property. However, the TCJA gradually phases out bonus depreciation after 2022.

3. Regular depreciation: Finally, if there is any remaining acquisition cost, the balance may be deducted over time under the Modified Accelerated Cost Recovery System (MACRS).

Note: The CARES Act fixes a glitch in the TCJA relating to “qualified improvement property” (QIP). Under the new law, QIP is eligible for bonus depreciation, retroactive to 2018. Therefore, your business may choose to file an amended return for the appropriate tax year.

Payroll Tax Deferral
Normally, employers must deposit payroll taxes with the IRS under a schedule based on the size of the prior period payroll taxes. Most small businesses are on a monthly schedule.  

YEAR-END MOVE: Take advantage of a payroll tax deferral break. Under the CARES Act, an employer can defer payment of the 6.2% Social Security tax portion of payroll taxes for the period spanning March 27, 2020, through December 31, 2020.

Half of the deferred amount is due at the end of 2021. The employer must pay the other half by the end of 2022. If you choose this approach, make sure you will have the funds needed to meet your company’s obligations in the future. 

Note: Don’t confuse the payroll tax deferral with the “payroll tax holiday” for employees created by an executive order in August. The payroll tax deferral discussed above refers to a separate provision in the CARES Act applying to employers.

Business Interest
Prior to 2018, business interest was fully deductible. But the TCJA generally limited the deduction for business interest to 30% of adjusted taxable income (ATI). Now the CARES Act raises the deduction to 50% of ATI, but only for 2019 and 2020.

YEAR-END MOVE: Determine if you qualify for a special exception. The 50%-of-ATI limit does not apply to a business with average gross receipts of $25 million (indexed for inflation) or less for the three prior years. The threshold for 2020 is $26 million.

For these purposes, ATI is defined as your business income without regard to any income, deduction, gain or loss not properly allocable to a business; business interest income and expense; net operating losses (NOLs); the 20% qualified business income (QBI) deduction; and, for tax years beginning before 2022, depreciation, amortization or depletion.

Note: If the business interest limit applies, you can carry forward the excess indefinitely until it is exhausted.

Employee Retention Credit
Many small businesses have been unable to continue regular operations during the COVID-19 pandemic. Frequently, they are facing difficult decisions concerning employment of workers.

YEAR-END MOVE: Consider keeping employees, if you can, through the end of 2020. The CARES Act authorizes an employee retention credit (ERC) to offset some of the cost.

The ERC equals 50% of the qualified wages an employer pays to employees after March 12, 2020 and before January 1, 2021. For these purposes, “qualified wages” are limited to the first $10,000 of wages paid to each worker during this time period.

Your business qualifies for the credit if it fully or partially suspended operation during any calendar quarter in 2020 due to government orders relating to the COVID-19 outbreak or if it experienced a significant decline in gross receipts (i.e., gross receipts equal to less than 50% of the gross receipts for the same calendar quarter in 2019).

Note: The Families First Coronavirus Response Act (FFCRA), which followed soon after the CARES Act, also provides a tax credit to certain small businesses that have provided emergency paid leave due to the COVID-19 pandemic. The FFCRA provision initially offsets the Social Security tax component of payroll tax. Any excess credit is refundable.

Bad Debt Deduction
During this turbulent year, many small businesses are struggling to stay afloat, resulting in large numbers of outstanding receivables and collectibles.

YEAR-END MOVE: Increase your collection activities now. For instance, you may issue a series of dunning letters to debtors asking for payment. Then, if you are still unable to collect the unpaid amount, you can generally write off the debt as a business bad debt in 2020 (if on the accrual basis).

Generally, business bad debts are claimed in the year they become worthless. To qualify as a business bad debt, a loan or advance must have been created or acquired in connection with your business operation and result in a loss to the business entity if it cannot be repaid.

Note: Keep detailed records of all your collection activities—including letters, telephone calls, e-mails and efforts of collection agencies—in your files. This documentation can help support your position claiming worthlessness of the debt if the IRS ever challenges the bad debt deduction.

Miscellaneous
   * Maximize the QBI deduction that is available for pass-through entities and self-employed individuals. Be aware you must observe special rules if you’re in a “specified service trade or business” (SSTB).

   * If you buy a heavy-duty SUV or van for business, you may claim a first-year Section 179 deduction of up to $25,000. The “luxury car” limits do not apply to certain heavy-duty vehicles.

   * If you pay year-end bonuses to employees in 2020, the bonuses are generally deductible by your company and taxable to the employees in 2020. A calendar-year company operating on the accrual basis may be able to deduct bonuses paid as late as March 15, 2021, on its 2020 return.

   * Generally, repairs are currently deductible, while capital improvements must be depreciated over time. Therefore, make minor repairs before 2021 to increase your 2020 deduction.

   * Switch to cash accounting. Under a TCJA provision, a C corporation may use this simplified method if average gross receipts for last year were less than $26 million (up from $5 million).

   * Hire disadvantaged workers eligible for the Work Opportunity Tax Credit (WOTC). The WOTC, which is generally a maximum of $2,400 per worker, is scheduled to expire after 2020.

   * Get a new business up-and-running to qualify for a maximum first-year deduction of $5,000 in start-up costs. Any remainder is amortized over 180 months.

   * An employer can claim a refundable credit for certain family and medical leaves provided to employees. The credit is currently scheduled to expire after 2020.

   * Investigate Paycheck Protection Program (PPP) forgiveness. Under the CARES Act, PPP loans may be fully or partially forgiven without tax being imposed. Despite recent guidance, this remains a complex procedure, so consult with your professional tax advisor about the details.

FINANCIAL TAX PLANNING

Capital Gains and Losses
Frequently, investors time sales of assets like securities at year-end to produce optimal tax results. For starters, capital gains and losses offset each other. If you show an excess loss for the year, it offsets up to $3,000 of ordinary income before being carried over to the next year. Long-term capital gains from sales of securities owned longer than one year are taxed at a maximum rate of 15% or 20% for certain high-income investors. Conversely, short-term capital gains are taxed at ordinary income rates reaching up to 37% in 2020.

YEAR-END MOVE: Review your investment portfolio. Depending on your situation, you may harvest capital losses to offset gains realized earlier in the year or cherry-pick capital gains that will be partially or wholly absorbed by prior losses.

Be aware of even more favorable tax treatment for certain long-term capital gains. Notably, a 0% rate applies to taxpayers below certain income levels, such as a young child. Furthermore, some taxpayers who ultimately pay ordinary income tax at higher rates due to their investments may qualify for the 0% tax rate on a portion of their long-term capital gains.

However, watch out for the “wash sale rule.” If you sell securities at a loss and reacquire substantially identical securities within 30 days of the sale, the tax loss is disallowed. A simple way to avoid this harsh result is to wait at least 31 days to reacquire substantially identical securities.

Note: The 0%/15%/20% rate structure for long-term capital gains also applies to qualified dividends you have received in 2020. These are dividends paid by U.S. companies or qualified foreign companies.

Net Investment Income Tax
In addition to capital gains tax, a special 3.8% tax applies to the lesser of your “net investment income” (NII) or the amount by which your modified adjusted gross income (MAGI) for the year exceeds $200,000 for single filers or $250,000 for joint filers. (These thresholds are not indexed for inflation.) The definition of NII includes interest, dividends, capital gains and income from passive activities, but not Social Security benefits, tax-exempt interest and distributions from qualified retirement plans and IRAs.

YEAR-END MOVE: Assess the amount of your NII and your MAGI at the end of the year. When it is possible, reduce your NII tax liability in 2020 or avoid it altogether.

For example, you might add municipal bonds (“munis”) to your portfolio. Interest income generated by munis does not count as NII, nor is it included in the calculation of MAGI. Similarly, if you turn a passive activity into an active business, the resulting income may be exempt from the NII tax. These rules are complex, so obtain professional assistance.

Note: When you add the NII tax to your regular tax plus any applicable state income tax, the overall tax rate may approach or even exceed 50%. Factor this into your investment decisions.

Required Minimum Distributions
As a general rule, you must receive “required minimum distributions” (RMDs) from qualified retirement plans and IRAs after reaching age 72 (70½ for taxpayers affected prior to 2020). The amount of the RMD is based on IRS life expectancy tables and your account balance at the end of last year. If you do not meet this obligation, you owe a tax penalty equal to 50% of the required amount (less any amount you have received) on top of your regular tax liability.

YEAR-END MOVE: Take RMDs in 2020 if you need the cash. Otherwise, you can skip them this year, thanks to a suspension of the usual rules by the CARES Act. There is no requirement to demonstrate any hardship relating to the pandemic.  

However, if you already received an RMD this year and did not return the money to a qualified plan or IRA by August 31, the distribution is generally taxable in 2020.

Typically, retirees wait until late in the year to arrange RMDs. If you still intend to take any of your RMDs in 2020, make sure you complete the arrangements in time to have this accommodated by the financial institution.  

Note: RMDs are not treated as NII for purposes of the 3.8% tax. Nevertheless, an RMD may still increase your MAGI used in the NII tax calculation.

IRA Rollovers
If you receive a distribution from a qualified retirement plan or IRA, it is generally subject to tax unless you roll it over into another qualified plan or IRA within 60 days. In addition, you may owe a 10% tax penalty on taxable distributions received before age 59½. However, some taxpayers may have more leeway to avoid tax liability in 2020 under a special CARES Act provision.

YEAR-END MOVE: Take your time redepositing the funds if it qualifies as a COVID-19 related distribution. The CARES Act gives you three years, instead of the usual 60 days, to redeposit up to $100,000 of funds in a plan or IRA without owing any tax.

To qualify for this tax break, you (or your spouse, if you are married) must have been diagnosed with COVID-19 or experienced adverse financial consequences due to the virus (e.g., being laid off, having work hours reduced or being quarantined or furloughed). If you do not replace the funds, the resulting tax is spread evenly over three years.

Note: This may be a good time to consider a conversion of a traditional IRA to a Roth IRA. With a Roth, future payouts are generally exempt from tax, but you must pay current tax on the converted amount. Have a tax professional help you determine if this makes sense for your situation.

Estate and Gift Taxes
Since the turn of the century, Congress has gradually increased the federal estate tax exemption, while eventually establishing a top estate tax rate of 40%. At one point, the estate tax was repealed—but only for 2010—while the unified estate and gift tax exclusion was severed and then subsequently reunified.

Finally, the TCJA doubled the exemption from $5 million to $10 million for 2018 through 2025, inflation-indexed to $11.58 million in 2020. The following table shows the progression of the estate tax exemption and top estate tax rate during the last decade.


Tax year
 
Estate tax exemption

Top estate tax rate
2011$5 million35%
2012$5.12 million35%
2013$5.25 million40%
2014$5.34 million40%
2015$5.43 million40%
2016$5.45 million40%
2017$5.49 million40%
2018$11.18 million40%
2019$11.40 million40%
2020$11.58 million40%

YEAR-END MOVE: Update your estate plan to reflect current law. For instance, you may revise wills and trusts to accommodate the rule allowing portability of the estate tax exemption.

Under the “portability provision” for a married couple, the unused portion of the estate tax exemption of the first spouse to die may be carried over to the estate of the surviving spouse. This tax break is now permanent, so incorporate it into your estate planning decisions.

Note: With the gift tax exclusion, you can give each recipient, like a young family member, up to $15,000 in 2020 without paying any federal gift tax. This exclusion is effectively doubled to $30,000 for joint gifts made by a married couple. These gifts reduce the size of your taxable estate.

Miscellaneous
   * Contribute up to $19,500 to a 401(k) in 2020 ($26,000 if you are age 50 or older). If you clear the 2020 Social Security wage base of $137,700 and promptly allocate the payroll tax savings to a 401(k), you can increase your deferral without any further reduction in your take-home pay.

   * Sell real estate on an installment basis. For payments over two years or more, you can defer tax on a portion of the sales price. Also, this may effectively reduce your overall tax liability.   

   * Invest in passive income generators (PIGs). Generally, you can only use losses from passive activities (e.g., most real estate investments) to offset income from other passive activities, with limited exceptions. With a PIG, you can absorb more of your passive activity losses.

   * From a tax perspective, it is often beneficial to sell mutual fund shares before the fund declares dividends (the ex-dividend date) and buy shares after the date the fund declares dividends.

   * Consider a qualified charitable distribution (QCD). If you are age 70½ or older, you can transfer up to $100,000 of IRA funds directly to a charity. Although the contribution is not deductible, the QCD is exempt from tax. This may benefit your overall tax picture.

CONCLUSION
This year-end tax-planning letter is based on the prevailing federal tax laws, rules and regulations. Of course, it is subject to change, especially if additional tax legislation is enacted by Congress before the end of the year.

Finally, remember that this letter is intended to serve only as a general guideline. Your personal circumstances will likely require careful examination. We would be glad to schedule a meeting with you to assist with all your tax-planning needs.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.