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Energy Credit Incentives for Individuals February 24, 2021

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

The below information regarding home energy credits was taken directly from the IRS website. I was reluctant to pull the same information from a contractor’s website. Not always, but sometimes, they are a bit over-zealous in their interpretation of the tax law when it comes to business. Buyer beware!

Please remember that a tax credit typically reduces your income taxes dollar for dollar. A tax deduction reduces your taxable income. Your federal income tax is based upon your taxable income. So, all things being the same a federal credit is typically worth more than a federal tax deduction.

If you are considering some home energy improvements of some sort, please be sure to do your homework on whether they may qualify. Also, please pay particular attention to the expiration dates below for different types of home energy improvements. 

                                               -Mark Bradstreet

Q. Are there incentives for making your home energy efficient by installing alternative energy equipment?

A. Yes, the residential energy efficient property credit allows for a credit equal to the applicable percent of the cost of qualified property. Qualifying properties are solar electric property, solar water heaters, geothermal heat pumps, small wind turbines and fuel cell property. Only fuel cell property is subject to a limitation, which is $500 with respect to each half kilowatt of capacity of the qualified fuel cell property. Generally, this credit for alternative energy equipment terminates for property placed in service after December 31, 2021. The applicable percentages are:

  1. In the case of property placed in service after December 31, 2016, and before January 1, 2020, 30 percent.
  2. In the case of property placed in service after December 31, 2019, and before January 1, 2021, 26 percent.
  3. In the case of property placed in service after December 31, 2020, and before January 1, 2022, 22 percent.

Q. Is a roof eligible for the residential energy efficient property tax credit?

A. In general, traditional roofing materials and structural components do not qualify for the credit. However, some solar roofing tiles and solar roofing shingles serve as solar electric collectors while also performing the function of traditional roofing, serving both the functions of solar electric generation and structural support and such items may qualify for the credit. Components such as a roof’s decking or rafters that serve only a roofing or structural function do not qualify for the credit.

Q. Does any guidance issued for the energy credit under section 48 of the Internal Revenue Code apply to the residential energy efficient property tax credit under section 25D of the Internal Revenue Code?

A. IRS guidance issued with respect to the energy credit under section 48 in publication items such as Notice 2018-59, has no applicability to the residential energy efficient property credit under section 25D.

Q. What improvements qualify for the residential energy property credit for homeowners?

A. In 2018, 2019 and 2020, an individual may claim a credit for (1) 10 percent of the cost of qualified energy efficiency improvements and (2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during the taxable year (subject to the overall credit limit of $500).

Qualified energy efficiency improvements include the following qualifying products:

Residential energy property expenditures include the following qualifying products:

Please note that qualifying property must meet the applicable standards in the law.

The residential energy property credit, which expired at the end of December 2014, was extended for two years through December 2016 by the Protecting Americans from Tax Hikes Act of 2015. The Consolidated Appropriations Act, 2018 extended the credit through December 2017. The nonbusiness energy property credit expired on December 31, 2017 but was retroactively extended for tax years 2018, 2019 and 2020 on December 20, 2019 as part of the Further Consolidated Appropriations Act.  The credit had previously been extended by legislation several times. See Notice 2013-70 PDF for more information on this credit as well as the credit for alternative energy equipment.

Q. Who qualifies to claim a residential energy property credit? Are there limitations?

A. You may be able to take these credits if you made energy saving improvements to your principal residence during the taxable year. In 2018, 2019 and 2020, the residential energy property credit is limited to an overall lifetime credit limit of $500 ($200 lifetime limit for windows). There are also other individual credit limitations:

The residential energy property credit is nonrefundable. A nonrefundable tax credit allows taxpayers to lower their tax liability to zero, but not below zero.

Published on the IRS Website – October 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.

Small Business Tax Deduction Checklist February 3, 2021

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

We receive a ton of questions regarding what is tax deductible. If the expense is associated with your business then it is most likely deductible. As a side note, many people are unaware that upon starting a new business, your personal assets that are now used in the new business may be deducted as an expense or as depreciation expense. Those personal assets have now been converted to from personal use to business use. They may be deducted at their fair market value at the time they were placed into service. Fair market value is typically defined as “garage sale” value. These assets may include computers, faxes, phones, copiers, printers, desks, chairs, tables, etc. The article that follows drills down further with a list of some common business tax deductions.

The not-so-good news? Every business needs to file taxes. The great news? There are many expenses you can apply to your income to help alleviate your tax burden. These deductions will reduce your profits, meaning that you will pay lower overall taxes. While the IRS does not specifically list what you can claim, they do state that if a cost you’ve incurred is “ordinary and necessary” to running your business, then you can deduct it.

We’ve created a checklist below of most of the deductions you can claim for your small business. As always, check with your accountant or tax preparer if you have any questions or need clarification. Note that some of the expenses listed below will need to be “depreciated” or expensed over several years. Speak to your tax preparer for more information.

Rent, Mortgage, and Utility Tax Deductions

These tax deductions include costs associated with renting a building for business, using part of your home as an office, utility bills, and other factors. 

Rent and Mortgage Expenses

Utility Bills Expenses

You cannot claim a telephone landline unless it is specifically dedicated to your business. You can claim a percentage of your mobile phone bill depending on how much you use your mobile phone for business.

Office Expenses and Tax Deductions

You can take additional deductions on money you spend for your business office.

Office Furniture Expenses

Office Computer Expenses

Office Software Expenses

Office Equipment Expenses

Office Supplies and Sundries Expenses

Office Maintenance and Repairs Expenses

Employee Expenses and Tax Deductions

If you pay a salary to employees, then you can deduct some of those costs from your business revenue. Employee expenses and taxes can be complex, so we recommend speaking to an accountant or tax preparer to understand what you can deduct.

Freelance, Contractor, and Professional Tax Deductions

You can claim costs for professional services like tax preparation or legal fees, and for paying freelancers or other contractors to complete work for your business.

Accountancy Expenses

Legal Expenses

Freelance and Contractor Expenses

Car and Vehicle Tax Deductions

If you use a vehicle in part or exclusively for your business, you can deduct those costs. You can either track everything individually, or use the IRS mileage rates.

Advertising and Marketing Tax Deductions

You can deduct any money you spend on promoting your business.

Travel and Accommodation Tax Deductions

If you travel or stay away from home for business, those costs are deductible.

Loan Interest and Bad Debt Tax Deductions

If you have taken out loans for your business, you can deduct the interest.

Education and Training Tax Deductions

When you provide training to yourself or your staff, those costs can be deducted.

Payment and Bank Fee Tax Deductions

Your bank is likely to charge you for business services, and you’ll also pay a fee for accepting charge, credit, or debit cards.

Insurance Tax Deductions

You can deduct insurance premiums incurred by your business:

Qualified Business Income Tax Deductions

Depending on the type of business you run, and subject to certain limits, you can claim up to 20% of your profits as a tax deduction. Speak to your accountant about this, as it can be a complex area.

Miscellaneous Tax Deductions

Depending on the type of business you run, there are potentially dozens of other areas you can expense. 

We hope you’ve found this small business tax deductions checklist useful. This list is not exhaustive, but it will give you a good starting point for your expenses. As always, talk to a professional tax preparer or accountant about your unique tax circumstances to ensure you’re claiming expenses correctly.

Credit given to Lisa Xiong and published on March 6, 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.

What You Need to File your Taxes January 20, 2021

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

Our job includes minimizing your income tax liability both in the short-term and long-term. Our ability to do so is closely tied to the accuracy and completeness of the information given us. Our client tax organizer and checklist are designed to help you report your income and deductions to us.  When your tax organizer and checklist are not completed, we may not know what we don’t know. Always, a good idea to call, mail, text or email any new events or questions during the year so we may either give you immediate suggestions and/or be on the alert during your tax preparation.

The following article by the Taxslayer Blog Team is written from the 30,000 feet view. Our tax organizer and checklist are more comprehensive. But the article will give you a starting point for gathering your tax information. 
                                                                                                                                                                                                -Mark Bradstreet

Tax Prep Checklist: Everything You Need to File Your Taxes

If you’d rather do something – anything – other than filing your taxes, remember that the sooner you file, the sooner you’ll get your refund. To make the e-filing process quicker, gather your forms and documents before you begin. Below is a checklist of the basic forms and records you’ll need to make slaying your taxes a cinch. 

Personal Information 

Income and Investment Information 

Self-Employment and Business Records (where applicable) 

Medical Expense Receipts and Records 

Charitable Donations 

Other Homeownership Info 

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.

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.

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.

Income Tax Breaks for your Home October 28, 2020

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

It is a good time to chat about some tax breaks associated with a personal residence since the real estate market remains hot for a variety of reasons.  According to companies like SoFi, some people are motivated by the historic low mortgage rates either to buy a home or to refi an existing mortgage.  Others, having spent a lot of time working from home because of the pandemic, wish to enlarge and/or remodel their home.  Some people are also buying a second home.  Interestingly, mortgage interest paid for boats and motor homes may be deductible provided they have a toilet, and cooking and sleeping arrangements.  Of course, this interest must still meet the other deduction requirements.  As a side note, mortgage interest may not be deducted on more than two homes.

Mortgage interest is deducted as an itemized deduction.  Itemized deductions also include medical expenses, state and local taxes and charitable contributions – each subject to their own limitations.  It does not make sense to use your itemized deductions if your standard deduction is larger.  If you are unable to itemize or go “long form”, your mortgage interest may not be of any value on your tax return.  As for most tax deductions, limitations do exist on the size of the home loan and the use of the loan proceeds as to what may be deducted for the mortgage interest.

Business owners may deduct expenses associated with the regular and exclusive business use of their home.  Such expenses are deducted typically more favorably as a business deduction than as an itemized deduction.  These expenses may include improvements made to your home.

The deduction for working from home as an employee was unfortunately eliminated in 2017.  But you may have a win-win situation if your company reimburses you for your home expenses.  The reimbursement is not taxable income to you but is deductible to the company. 

Various ideas written above were taken from the August 8, 2020 WSJ article written by Laura Saunders titled “Home Is Where The Tax Breaks Are.”

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.

Understanding AGI and How to Calculate it October 21, 2020

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

What’s adjusted gross income? Here’s what to know about this important income tax calculation.

WHEN IT COMES TO filing income taxes, it’s essential to understand your adjusted gross income, or AGI, and its relationship to certain tax benefits.
“The reason it matters is because a lot of deductions, tax credits, whether or not you can contribute to certain retirement accounts depends on your AGI,” says Michele Cagan, certified public accountant and author of “Debt 101.” “A lot hangs on it.”

In fact, recently, Americans’ eligibility for COVID-19 stimulus checks was tied to adjusted gross income reported in 2018 or 2019. The final amount taxpayers receive will depend on their 2020 AGI.

Ready to understand this essential tax concept? Here’s what to know about AGI, how it’s calculated and strategies to reduce your adjusted gross income.

What Is Adjusted Gross Income, or AGI?

AGI is a calculation of income for tax purposes that measures taxable earnings while subtracting certain tax deductions. For 2020 income taxes, it’s marked on line 11 of your Form 1040, according to IRS draft forms.

“Basically it’s all of your income minus certain adjustments that are found on Schedule 1,” says Eva Rosenberg, a Los Angeles-based enrolled agent and founder of TaxMama.com.

Why Is AGI Important?

Your adjusted gross income is an important tax calculation because eligibility for many tax deductions, tax credits and other tax breaks are tied to it, Cagan says. “It can lock you out of tax benefits if your AGI is too high,” she says.

For example, your AGI impacts limitations on these itemized deductions:

It will also determine your eligibility for and amount received in certain tax credits, including the earned income credit and retirement savings contribution credit.

Recently, the stimulus checks designed to combat the coronavirus’ economic repercussions was tied to AGI. The full $1,200 per taxpayer is available to single filers earning less than $75,000 in adjusted gross income and married filers earning less than $150,000 in 2020. Reduced amounts are available to taxpayers earning an adjusted gross income of less than $99,000 if single or $198,000 if married filing jointly.

How Do I Calculate AGI?

AGI is calculated this way:

All income
– exclusions from income
= gross income
– deductions for AGI
= adjusted gross income

On a practical note, most tax software programs will take you through the steps to calculate adjusted gross income within their interfaces. A tax professional can also help you calculate this number.

Here are the elements of the calculation in more detail.

All income. To determine this, collect income statements from all sources, including businesses, unemployment compensation, insurance, wages, investments, gifts and other sources.

Exclusions from income. Certain types of income are excluded from gross income for the purposes of calculating adjusted gross income. Depending on the circumstances, those could include these sources of income:

If you’re not sure whether an income source is excluded, consult with a tax professional.

Deductions for AGI. To calculate adjusted gross income, you’ll be able to subtract certain above-the-line deductions from gross income. Those deductions include:

Additionally, taxpayers who don’t itemize may deduct $300 in cash donations to charity. This is due to the coronavirus stimulus bill and new for 2020 taxes.

Keep in mind that some of these deductions are capped at a certain level. Subtracting them will yield your AGI. It’s simple math, although identifying the appropriate income sources and deductions may be less simple.

How Do I Reduce AGI?

A key tax-planning strategy is to reduce adjusted gross income to make the taxpayer eligible for more generous tax benefits. Most of those strategies are best enacted before Dec. 31, Rosenberg says. “If you’re looking at AGI, and it’s starting to make you ineligible for some things, it’s important to do the planning before the end of the year,” she says.

For example, you may want to generate investment losses by selling off stocks or securities at a loss to reduce your AGI, she says. Or you could consider making a contribution to your IRA or self-employed retirement plan. Contribute to your health savings account if you’re eligible or consider taking the deduction for tuition and fees interest.

“Every little bit makes a difference when you’re trying to reduce AGI,” Cagan says.

What’s the Difference Between AGI and Modified Adjusted Gross Income, or MAGI?

Don’t confuse AGI with modified AGI. To calculate your eligibility for certain tax benefits, such as the deduction associated with contributions to an IRA, modified adjusted gross income may be used.

Rosenberg says that different credits and deductions require different calculations for modified AGI. “Sometimes modified adjusted gross income might not include certain deductions,” she says. “Sometimes it may include nontaxable income, so there are different elements.”

Take note of whether a tax benefit you’re eyeing is tied to AGI or MAGI. If it’s tied to MAGI, you may have to do some extra math to determine your eligibility. It is entirely possible, however, that depending your financial situation, your AGI and MAGI will be the same since some of these deductions and forms of income are uncommon.

Credit given to US News & World Report published on Sept 17, 2020 by Susannah Snider

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.

–until next week.

5 New Rules for Charitable Giving October 14, 2020

Posted by bradstreetblogger in : Charitable Giving, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Rules, Tax Tip, Taxes, Taxes , add a comment

New tax laws and strategies can help you maximize tax breaks for yourself and benefits for the charity.

THERE ARE SO MANY reasons to make charitable gifts this year – whether it’s to support nonprofits that help people and communities with challenges from the coronavirus pandemic, or to provide assistance after disasters such as the Beirut explosion or an active hurricane season.

Even though a lot of people are struggling financially right now, many people whose finances have stabilized want to do whatever they can to help out. And they’re not waiting until the end of the year to make their gifts. “A lot of things are driving people to be generous, and our numbers prove it,” says Kim Laughton, president of Schwab Charitable, which runs Schwab’s donor-advised funds. From January through June 2020, its donors recommended over $1.7 billion in 330,000 grants, almost a 50% increase in the dollars granted and the number of grants compared to the same period in 2019. “There’s great need out there, and people are stepping up.”

“Philanthropy and giving is on everyone’s mind,” says Dien Yuen, who holds the Blunt-Nickel Professorship in Philanthropy at the American College of Financial Services. Some nonprofits need help now just to stay afloat. “The donors who are quite active are making gifts now and not waiting until later in the year, because the nonprofit might not be there later on.”

New tax laws and strategies can help you maximize tax breaks for yourself and the benefits for the charity. Here’s what you need to know:

New $300 Charitable Deduction for Non-Itemizers

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, created several incentives for people to help charities right away, including a charitable deduction of up to $300 in 2020, even if you don’t itemize. Otherwise, you generally need to itemize to take the charitable deduction, which fewer people do since the standard deduction doubled a few years ago – now at $12,400 for single filers and $24,800 for married couples filing jointly in 2020.

“As a result of the Tax Cuts and Jobs Act of 2017, most taxpayers utilize the significantly higher standard deduction instead of itemizing deductions for mortgage interest, state taxes paid and charitable contributions,” says Mark Alaimo, a certified public accountant and certified financial planner in Lawrence, Massachusetts. “This special CARES Act provision now gives a tax incentive to all taxpayers to give at least $300 to charity during 2020.” To qualify, the gift must be made in cash and go directly to the charity, rather than to a donor-advised fund or private foundation.

“I think that the additional $300 provision in the CARES Act is really great, especially for the younger generation who may be just starting to work and may not be paying substantial mortgage interest,” says Kelsey Clair, tax strategist for Baird’s Private Wealth Management Group. “It allows them to give even in a small way and reap the tax benefit for it.”

The CARES Act also helps people who are in a financial position to make very large gifts. In 2020, you can deduct cash gifts of up to 100% of your adjusted gross income, rather than the usual 60% limit. To qualify for this higher limit, the gifts must go directly to the charities, rather than to a donor-advised fund or private foundation. This can help wealthy people reduce their taxable income significantly in 2020, and it may also help retirees who have money to give but bump up against the income limits for the deduction. “I see it in the older generation who have a lot of cash but don’t have a lot of income coming in and are trying to help out the community in any way they can,” says Clair.

Bunching Contributions and Donor-Advised Funds

Bunching contributions is a strategy that became popular after the standard deduction was increased. Instead of making smaller charitable contributions spread over several years, you can make larger contributions in one year so you can itemize your deductions (and claim the charitable deduction) that year, then take the standard deduction in the other years. “Rather than making a steady stream of charitable contributions from year to year, it may be beneficial instead to use a bunching strategy – give more and itemize in one year, and claim the standard deduction in other years,” says Clair.

Even though this can help you tax-wise, you might not want to give all of the money to the charities at one time and then neglect them over the next few years. But bunching can work well if you have a donor-advised fund. These funds are offered by brokerage firms, banks and community foundations, and you can take the charitable deduction in the year you give the money to the donor-advised fund, but then you have an unlimited amount of time to decide which charities to support. You can usually open a donor-advised fund with an initial contribution of $5,000 to $10,000 (it’s $5,000 at Schwab and Fidelity, $10,000 at T. Rowe Price, and $25,000 at Vanguard). You can make grants to charities of $50 or $100 up to thousands of dollars or more, and you can invest the money in a handful of mutual funds or investing pools until you make the grants. “It can be a great way to go ahead and make the contribution, without having to decide where that money goes right away,” says Clair.

Another benefit of the donor-advised fund is simplicity – you get one receipt for your tax records when you make the contribution and don’t have to wait for a variety of paperwork from each of the charities. “Donor-advised funds really help with the administrative side of things,” says Elliot Dole, a certified financial planner with Buckingham Strategic Wealth in St. Louis. “Itemizing charitable gifts is a hot button audit area. But with a donor-advised fund, it’s clear that you met the requirements.”

A Double Tax Break From Giving Appreciated Stock

Many people just write a check to the charity, but you may get a bigger tax benefit if you give appreciated stock. If you owned the stock for more than a year, you can deduct the value of the stock on the date you give it to the charity if you itemize. And even if you don’t itemize, you can avoid having to pay long-term capital gains taxes on your profits, which could have cost up to 20% if you sold the stock first. (Giving appreciated stock doesn’t qualify for the special $300 charitable deduction for non-itemizers for 2020; that only applies to cash.)

Most charities can accept appreciated stock, but the process can be easier if you have a donor-advised fund. “Given how volatile the stock market can be, many advisors recommend utilizing donor-advised funds due to the ease and speed that one can make a contribution,” says Alaimo. “This makes it easier to opportunistically gift highly appreciated securities, while regulating which charity receives how much of the donation, and when they receive it.”

It’s even easier if your brokerage account and donor-advised fund are with the same company. “When you log into your Schwab accounts, it shows your investment accounts, your bank accounts and your charitable account,” says Laughton. You can sort your investments by most highly appreciated or highly concentrated and see if you’re overweighted in one area. “We encourage people to rebalance their portfolios regularly, and when they see they’re overconcentrated, instead of selling those shares, they can just move them over to their charitable account,” says Laughton.

With so much stock market volatility this year, you may want to donate the stock when it reaches a target price, rather than giving at a certain time of year.

The donor-advised fund can also accept a variety of contributions – whether you write a check or you give appreciated stock, privately held stock, real estate, limited partnerships or even a horse farm. “It always makes sense for people who have highly appreciated non-cash assets to at least explore whether they could make good charitable gifts,” says Laughton. “Donor-advised funds can make that simple and easy.”

If you have investments that have lost value, however, it’s better to sell them first – and take a Charitable loss – and then give the cash to charity. “I’ve seen multiple times where people made mistakes of donating stocks that were in a loss,” says Clair. “It’s better to sell that and claim the loss on your return and donate the cash.” When you sell the losing stock, you can use the loss to offset your capital gains and can use up to $3,000 in losses to reduce your ordinary income, which you couldn’t do if you gave the stock directly to the charity.

Make a Tax-Free Transfer From Your IRA

People who are age 70½ and older can give up to $100,000 per year tax-free from their IRA to charity, a procedure called a qualified charitable distribution or QCD. The gift counts as their required minimum distribution but isn’t included in their adjusted gross income. (Even though the SECURE Act, another recent tax law, increased the age to start taking RMDs from 70½ to 72, you can still make a qualified charitable distribution any time after you turn age 70½.)

This is usually a great strategy for people who have to take RMDs and would like to give money to charity – they can help the charity and not have to pay taxes on the money they have to withdraw from their IRA. But because of the CARES Act, people are not required to take RMDs in 2020. However, you may still be able to benefit from making a QCD this year. “Some people who have been doing the QCD have been supporting a couple of charities every year, and they’re not going to stop, especially during this time of need,” says Yuen. The tax-free transfer takes money out of your IRA, which can help reduce future RMDs. “It’s great planning,” she says.

To keep the money out of your AGI, it must be transferred directly from your IRA to the charity – you can’t withdraw it first. Ask your IRA administrator about the procedure, and let the charity know the money is coming. You have to give this money directly to a charity; it can’t go to a donor-advised fund.

Make an Extra Effort to Research Charities This Year

Scam artists have been out in full force to take advantage of the coronavirus pandemic. It’s even more important now to check out charities before you give money, especially if they contact you first. You can look up charities at sites such as Charity Navigator and the Better Business Bureau’s Wise Giving Alliance. Local community foundations are also a great resource for aid focused on your community – see the Community Foundation Locator for links. If you have a donor-advised fund, you may have access to additional research tools, such as GuideStar.

Schwab Charitable can help its donors vet the charities and also provides lists of selected charities that focus on timely issues, such as COVID-19 relief and social justice. “We’re trying to develop short lists to help people narrow the charities down to ones we know are valid and doing good work,” says Laughton.

Credit given to US News & World Report published Aug 21, 2020 by Kimberly Lankford.

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.

–until next week.