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Premium Tax Credit Repayments Suspended April 28, 2021

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

The American Rescue Plan Act of 2021 suspends the requirement that taxpayers increase their tax liability by all or a portion of their excess advance payments of the Premium Tax Credit (excess APTC) for tax year 2020. A taxpayer’s excess APTC is the amount by which the taxpayer’s advance payments of the Premium Tax Credit (APTC) exceed his or her Premium Tax Credit (PTC).

The Internal Revenue Service announced today that taxpayers with excess APTC for 2020 are not required to file Form 8962, Premium Tax Credit, or report an excess advance Premium Tax Credit repayment on their 2020 Form 1040 or Form 1040-SR, Schedule 2, Line 2, when they file.

Eligible taxpayers may claim a PTC for health insurance coverage in a qualified health plan purchased through a Health Insurance Marketplace. Taxpayers use Form 8962, Premium Tax Credit to figure the amount of their PTC and reconcile it with their APTC. This computation lets taxpayers know whether they must increase their tax liability by all or a portion of their excess APTC, called an excess advance Premium Tax Credit repayment, or may claim a net PTC.

Taxpayers can check with their tax professional or use tax software to figure the amount of allowable PTC and reconcile it with APTC received using the information from Form 1095-A, Health Insurance Marketplace Statement.

The process remains unchanged for taxpayers claiming a net PTC for 2020. They must file Form 8962 when they file their 2020 tax return. See the Instructions for Form 8962 for more information. Taxpayers claiming a net PTC should respond to an IRS notice asking for more information to finish processing their tax return.

Taxpayers who have already filed their 2020 tax return and who have excess APTC for 2020 do not need to file an amended tax return or contact the IRS. The IRS will reduce the excess APTC repayment amount to zero with no further action needed by the taxpayer. The IRS will reimburse people who have already repaid any excess advance Premium Tax Credit on their 2020 tax return. Taxpayers who received a letter about a missing Form 8962 should disregard the letter if they have excess APTC for 2020. The IRS will process tax returns without Form 8962 for tax year 2020 by reducing the excess advance premium tax credit repayment amount to zero.

Again, IRS is taking steps to reimburse people who filed Form 8962, reported, and paid an excess advance Premium Tax Credit repayment amount with their 2020 tax return before the recent legislative changes were made. Taxpayers in this situation should not file an amended return solely to get a refund of this amount. The IRS will provide more details on IRS.gov. There is no need to file an amended tax return or contact the IRS.

As a reminder, this change applies only to reconciling tax year 2020 APTC. Taxpayers who received the benefit of APTC prior to 2020 must file Form 8962 to reconcile their APTC and PTC for the pre-2020 year when they file their federal income tax return even if they otherwise are not required to file a tax return for that year. The IRS continues to process prior year tax returns and correspond for missing information. If the IRS sends a letter about a 2019 Form 8962, they need more information from the taxpayer to finish processing their tax return. Taxpayers should respond to the letter so that the IRS can finish processing the tax return and, if applicable, issue any refund the taxpayer may be due.

See the  Form 8962, Premium Tax Credit and Fact Sheet 2021-08, More details about changes for taxpayers who received advance payments of the 2020 Premium Tax Credit.

Published on the IRS website April 9, 2021.

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, Bobbie Haines

–until next week.

The New Child Tax Credit April 21, 2021

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

When President Joe Biden signed the $1.9 trillion-dollar American Rescue Plan last month, he launched a new and improved Child Tax Credit. The Child Tax Credit has been around since the Clinton Administration, yet this new version may have a positive effect on Americans who have been trying to find financial stability through the Covid-19 pandemic.

As with all new legislation, there are a lot of moving parts. From determining income requirements to who is a qualifying child, it is a dizzying array of details to determine which taxpayers will be allowed to take the credit. 

Here is what we know so far:

The Credit Is a Monthly Payment In 2021

The new Child Tax Credit is currently for 2021 only.  For families that qualify, it will be a $3,600 credit for each child under age 6. For children ages 6 to 17, the credit is $3,000. The big difference from previous year is that half of the credit will pay out monthly from July through December.

In each of those months, the IRS will deposit the Child Tax Credit into taxpayers’ bank accounts – $300 for each child under age 6 and $250 for each child ages 6 to 17.

The remaining half of the credit will then be an adjustment – a “true up”- on the 2021 income tax return to be filed in April of 2022.

For dependents over 18, the credit will be $500.

It Is Income Based and There Is A Phase Out

Like the stimulus checks for the Covid-19 pandemic, the new Child Tax Credit will be based on adjusted gross income (In each of those months, the IRS will deposit the Child Tax Credit into taxpayers’ bank accounts – $300 for each child under age 6 and $250 for each child ages 6 to 17.

The remaining half of the credit will then be an adjustment – a “true up”- on the 2021 income tax return to be filed in April of 2022.GI). For single taxpayers, that is an AGI of $75,000 or less. For head of household, that is an AGI of $112,500 or less. Finally, for those filing married filing joint, it is an AGI of $150,000 or less.

But keep in mind that the credit is subject to a phase out. That means for every $1,000 a taxpayer earns over the AGI limit, their credit will be reduced by $50. For instance, if the taxpayer is a single filer with an AGI of $85,000, their credit will be reduced by $500 per child.

How to Qualify

The new Child Tax Credit is a 2021 tax credit, which means it will be based on your 2021 income. However, in order to quickly begin providing relief to taxpayers, the IRS will look at your 2020 income tax, as they did with the stimulus programs. If the taxpayer has not yet filed for 2020, they will look back to the 2019 return. One benefit for many taxpayers is that they still have until May 17, 2021 to file their tax return without an extension, which also gives them an additional opportunity to provide the IRS with direct deposit instructions.

As this is an AGI-based program, if a taxpayer’s 2020 income is within the AGI to qualify, but their 2021 income exceeds the limitations and phase out, the taxpayer will need to pay back the credit on their 2021 tax return.

The IRS Is Embracing Technology

While the new credit might be straightforward for some families, it won’t be for others. Situations where a new baby is born, a divorce occurs or a family might have too high an income in 2021 create challenges. While the IRS initially indicated that getting a portal set up in time for the July 1st launch was unlikely, in comments to the Senate Finance Committee on Tuesday, April 13th, IRS Commissioner Charles Rettig stated that, “We will launch by July 1 with the absolute best product we are able to put together.”

As a result, for taxpayers that have unique situations, they should keep an eye out for the new IRS portal to open so they can enter key data in regards to the tax credit.

Unique Situations Where A Child Hits Age Threshold

As the program is based on AGI and age, there will be situations where a child changes age groups during 2021. As a result, taxpayers will need to consider the child’s age on December 31, 2021. For instance, if a taxpayer’s 5-year-old turns 6 before the end of the year, they will qualify for the $3,000 credit not the $3,600. Similarly, if a 17-year-old turns 18 before December 31, 2021, they will only receive a $500 credit instead of $3,000.

The Existing Child Tax Credit Is Still Available

There will be many taxpayers who will not qualify for the new Child Tax Credit. However, keep in mind, the Child Tax Credit that was established in the Tax Cuts and Jobs Act of 2017 (TCJA), will still be available. This is a tax credit for single taxpayers with an AGI of $200,000 or less or taxpayers filing married with an AGI of $400,000 or less. This group of taxpayers will still qualify for a $2,000 tax credit for each child under age 17.

Keep in mind this group might also need to access the portal if their 2020 income would have them qualify for the higher credit.

More to Come

As we get closer to the July 1 rollout date, more details on the plan will be available, along with the IRS portal. In the meantime, taxpayers should focus on filing their 2020 income tax return as well as estimating their 2021 income to make sure that they qualify for this tax credit. It may be prudent to seek the help of a professional or use one of the new Child Tax Credit calculators that are available.

Credit Given to:  Megan Gorman. This article was published in Forbes on April 14, 2021.

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, Bobbie Haines

–until next week.

IRS to Issue Refunds for Unemployment Benefits April 14, 2021

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

Normally, any unemployment compensation someone receives is taxable. However, a recent law change allows some recipients to not pay tax on some 2020 unemployment compensation.

The IRS will automatically refund money to eligible people who filed their tax return reporting unemployment compensation before the recent changes made by the American Rescue Plan. These refunds are expected to begin in May and continue into the summer.

Under the new law, taxpayers who earned less than $150,000 in modified adjusted gross income can exclude some unemployment compensation from their income. This means they don’t have to pay tax on some of it. People who are married filing jointly can exclude up to $20,400 – up to $10,200 for each spouse who received unemployment compensation. All other eligible taxpayers can exclude up to $10,200 from their income.

Information for people who already filed their 2020 tax return

This law change occurred after some people filed their 2020 taxes. For taxpayers who already have filed and figured their 2020 tax based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation. Any resulting overpayment of tax will be either refunded or applied to other taxes owed.

The agency will do these recalculations in two phases.

Taxpayers only need to file an amended return if the recalculations make them newly eligible for additional federal tax credits or deductions not already included on their original tax return.

For example, the IRS can adjust returns for taxpayers who claimed the earned income tax credit and, because the exclusion changed their income level, may now be eligible for an increase in the EITC amount.

However, taxpayers would have to file an amended return if they did not originally claim the EITC or other credits but are now eligible to claim them following the change in the tax law. Taxpayers can use the EITC Assistant to see if they qualify for this credit based upon their new taxable income amount. If they now qualify, they should consider filing an amended return to claim this money.

These taxpayers may want to review their state tax returns as well.

Information for people who haven’t filed their 2020 tax return

Tax preparation software has been updated to reflect these changes. People who haven’t yet filed and choose to file electronically, simply need to respond to the related questions when preparing their tax returns. These taxpayers should read New Exclusion of up to $10,200 of Unemployment Compensation for information and examples. For those who choose to file a paper return, instructions and an updated worksheet about the exclusion are available on IRS.gov.

Published on April 8, 2021 on IRS.Gov.

Side Note: As of the publishing of this article, Ohio has yet to issue guidance on Unemployment Benefits refunds.

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, Bobbie Haines

–until next week.

Will the Sale of Your Home be Taxable? April 7, 2021

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

We all expect that no tax will be due some day when we sell our homes. At least, that is what all of our friends and family tell us. And, there is a good chance that they will be correct at least under today’s rules which are always subject to change. The below article gives us the story from the 30,000 foot view. And, as long as you have lived in your home for at least two (2) years out of the last five (5) years and your gain is below $250,000 – single / $500,000 – married filing jointly; then, you may not even need to report the transaction on your return, much less pay any taxes. 

But when the transaction involves anything out of the ordinary such as a gain in excess of $250,000 / $500,000; the property was formerly a rental; was used as your business property; used as an office in the home; you or your spouse are in the military or an involuntary conversion occurs – just to mention a few, things can get complicated very quickly and a lot of tax money may be potentially due. So do your homework BEFORE you sell your home to help avoid any unpleasant surprises.

The article below was written by Mr. Geoff Williams. It takes a deeper dive into some tax consequences of selling your home. 

– Mark Bradstreet

The IRS is often more benevolent than you would think in these matters.

If you’re thinking about selling your home, here’s what you need to know about the taxes you may owe.

YOU MAY HAVE THOUGHT about the tax benefits of buying a home, but you probably haven’t thought much about the taxes you’ll pay when you sell your home. As you can imagine, the taxes on a home sale could theoretically be a small fortune, enough to almost scare you away from selling at all.

So, if you’re looking to be proactive and prepared, here are answers to some questions you may have.

Can I Avoid Paying Taxes on a Sale of a Home?

Yes. There is a very good chance that you won’t pay taxes on your home sale. In fact, if you’ve been worrying about this, it may be for nothing.

When you make money from the sale of your home, the IRS typically lets home sellers keep the first $250,000 they earn from the sale of the house. (That’s $250,000 if you’re single; if you’re married and filing jointly, you get to keep $500,000 of capital gains.)

So, What Happens if the Capital Gains Are Higher Than the $250,000 or $500,000 Thresholds?

In that case, you may be subject to capital gains taxes.

Here’s a hypothetical scenario to give you a sense of how much you might pay if you sell a home for well over $500,000 as a married couple filing jointly.

According to David Reyes, financial advisor and CEO of Reyes Financial Architecture in San Diego, if you bought a house 10 years ago for $350,000 and sell it now for $1 million (a relatively reasonable hypothetical in California), “you would owe taxes on any amount over the $500,000 – which would be $150,000.”

As in, you would owe taxes on that $150,000 (rather than having a $150,000 tax bill).

That said, you can probably get that $150,000 number to shrink a bit. “The IRS allows you to deduct certain closing costs such as title insurance and attorney fees. You can also deduct the commission that you pay your real estate agent. You may also deduct any home improvements that you made to the property. This figure becomes your cost basis,” Reyes says.

Those home improvements, incidentally, could add up to a lot. Did you replace the roof recently? Did you add a swimming pool to your backyard, or perhaps renovate the kitchen or add a room to the house? Hopefully you saved the receipts.

Reyes says that after all these deductions, you would pay taxes on the net proceeds.

“Let’s say that your total of all eligible deductions is $50,000. You would pay capital gains taxes on the (remaining) $100,000,” Reyes says. “Depending on your tax bracket, you could pay taxes of up to 20% federal income taxes, plus state taxes. This would be a tax of $20,000, plus state income tax.”

State Income Tax?

Yes, you may have to pay state income tax with the sale of your home – but you shouldn’t when the federal taxes are exempt. Still, check with your tax preparer just to be sure. “Every state is different,” Reyes says.

How Do I Report the Sale of My Home on My Income Taxes?

You may not have to. Says Reyes: “If you have a gain on your home that is under the exclusion, you do not have to report this on your tax return. If you do have a gain that is above the exclusion, you must report it on the Schedule D of your 1040.” For most people, yes, but there may be some complications to consider. We’ll run through some of the bigger ones.

The home is a rental. Is this a house that you don’t live in? Or maybe you did 10 years ago and then you rented it out, and now you’re selling the home? Even if you are making less than $250,000 or $500,000, you will be paying taxes on the sale. But keep in mind: If you lived in the house for a minimum of two years within the last five years, and you rented it out for the remainder of that period, you will avoid paying taxes if the profits are under the $250,000 or $500,000 thresholds.

The home is a vacation home or a second home. Again, you’ll be paying taxes on the house. It needs to be your primary residence.

Within the last two years, you sold a home – and claimed the $250,000 or $500,000 exclusion. So, you sold a house and didn’t have to pay the taxes on it? Awesome. But you did that 20 months ago? You will probably have to pay taxes.

Did You Say Probably?

You might be able to get an exclusion, or at least a partial one. This is one of those cases where it wouldn’t be a bad idea to talk to a tax preparer. In fact, whenever you are selling or buying, it’s generally a good idea to talk to a tax preparer to see how the home will affect your taxes. But if you sold a house 20 months ago and bought a new house with your spouse, and now you’re divorcing and selling the home to one or the other, you might be able to get an exclusion.

You may also be able to get an exclusion if your spouse died, and now you’re forced to sell the house.

If you lost your job and are now receiving unemployment benefits, you can probably get an exclusion.

But getting a partial or full exclusion doesn’t have to involve a tragic reason. For instance, if you and your spouse are having twins, triplets or even more kids, and you have suddenly outgrown the house, you may be able to get an exclusion. If that’s the case, you’ll want to talk to a tax preparer, and along with all of the parenting and baby books you’re buying, consult the IRS’s “Publication 523 (2019), Selling Your Home.”

Credit given to: Geoff Williams, Contributor for US News published May 20, 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.

IRS Announces Higher Estate and Gift Tax Limits for 2021 March 24, 2021

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

Many of our clients have the best of intentions of completing their estate planning. Not that I am perfect. Many of us have been fine-tuning our estate plan for decades. Granted this process is never really done. It is a work in process. But if you have a plan in place only in your head, your family may be surprised by the estate tax owed. Some rather painless steps may be taken with the help of an estate planning attorney to avoid these unpleasant surprises.


– Mark Bradstreet               

How much money should go to the tax collector when you die?

The Internal Revenue Service announced today the official estate and gift tax limits for 2021: The estate and gift tax exemption is $11.7 million per individual, up from $11.58 million in 2020. That means an individual could leave $11.7 million to heirs and pay no federal estate or gift tax, while a married couple could shield $23.4 million. 

(Speculative portion who may be our next President was omitted since this was written shortly before Election Day)

The IRS announced the new inflation-adjusted numbers in Rev. Proc. 2020-45. Forbes contributor Kelly Phillips Erb has all the details on 2021 tax brackets, standard deduction amounts and more. We have all the details on the 2021 retirement account limits, including the higher $58,000 overall 401(k) limit, too.

If you’re rich and you’re worried about the estate and gift tax exemption amounts going down, the time to start a gifting plan is now. The IRS finalized rules last year saying that it wouldn’t claw back lifetime gifts if/when the exemption is lowered.

The annual gift exclusion amount for 2021 stays the same at $15,000, according to the IRS announcement. What that means is that you can give away $15,000 to as many individuals—your kids, grandkids, their spouses—as you’d like with no federal gift tax consequences. A husband and wife can each make $15,000 gifts, doubling the impact.

Separately, you can make unlimited direct payments for medical and tuition expenses.

When you’re doing advanced estate planning—making gifts in excess of $15,000 annual exclusion gifts—you’re using your lifetime gift/estate tax exemption. With the new 2021 numbers, a couple who has used up every dollar of their exemption before the increase has another $240,000 of exemption value to pass on tax-free. For folks who are worried that that’s a lot to give, there are newfangled spousal lifetime asset trusts (aka a SLATs). They’re also IRS-tested advanced estate-freeze strategies like grantor-retained annuity trusts (GRATs) and installment sales to grantor trusts, where you give away the upside of assets transferred to the trust tax-free. For planning tips, see Trusts In The Age Of Trump.

Keep in mind the $23.4 million number per couple isn’t automatic. An unlimited marital deduction allows you to leave all or part of your assets to your surviving spouse free of federal estate tax. But to use your late spouse’s unused exemption—a move called “portability”—you must elect it on the estate tax return of the first spouse to die, even when no tax is due. The problem is if you don’t know what portability is and how to elect it, you could be hit with a surprise federal estate tax bill.

And note, if you live in one of the 17 states or the District of Columbia that levy separate estate and/or inheritance taxes, there’s even more at stake, with death taxes sometimes starting at the first dollar of an estate.

Here’s a look at the federal estate tax/gift tax exemption over the years, according to the Tax Policy Center:

2021: $11.7 million/$11.7 million
2018: $11.18 million/$11.18 million
2011: $5 million/$5 million
2009: $3.5 million/$1 million
2008: $2 million/$1 million
2003: $1 million/$1 million

Credit Given to: Ashlea Ebeling – a Senior Contributor for Forbes published on 10/26/20.

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.

Choice of Business Entity March 10, 2021

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

Entity choice is one of my favorite topics. It reminds me of a chess game. The choice of your business entity is the cornerstone of your tax and legal foundations. Not all entities are taxed in the same fashion, others treat the taxation of a sale of its assets differently, and still others will have varying types of owner’s compensation just to mention a few of the different entity attributes. Other entity choices make switching from one entity to another very expensive. For example, switching a C corporation to an LLC may be a very expensive proposition. But, going the other direction by switching an LLC to a C corporation is usually painless. Nellie Akalp in the following article does an excellent job of discussing more of the pros and cons of entity choice.
                                                                    -Mark Bradstreet

A lot is riding on the business entity type you choose. The business structure you decide on affects your legal liability as an owner, tax obligations, growth potential, and compliance requirements you’ll need to satisfy on an ongoing basis. To make matters more complex, the entity type that’s right at the beginning of a business’s existence may not continue to be the ideal choice as the company grows and evolves.

So, what’s an entrepreneur to do? First and foremost, I encourage business owners to consult with a licensed attorney and accountant or tax advisor to get professional guidance. Every situation is unique, so it’s critical to have expert advice before making the crucial decisions of choosing a business entity and assessing when it’s time for a change.

To help you prepare for your all-important discussions with your legal and financial advisors, the following is food for thought about some of the most popular business entity types.

Business entity basics

1. Sole proprietorship and general partnership

Many small businesses start as either a sole proprietorship (one owner or a married couple) or general partnership (multiple owners). When business owners don’t formally register their companies with the state, they are, by default, considered either a sole proprietorship or general partnership. There is no legal or financial separation between the business and its owners.

Pros of sole proprietorships and general partnerships:

Cons of sole proprietorships and general partnerships:

2. Limited liability company (LLC)

The LLC business structure may be described as a bit of a cross between a sole proprietorship or partnership and a corporation. By default, an LLC is considered the same tax-paying entity as its owners (“members”). However, the LLC is regarded as a separate legal entity from its members. Articles of Organization must be filed with the state to form an LLC. 

Pros of limited liability companies

Cons of LLCs

3. C Corporation

A C Corporation is regarded as a separate taxpayer and legal entity from its owners. Business income and expenses are tied to the business, and the corporate entity reports and pays taxes. Ownership of a C Corp is through purchasing shares of stock.

Incorporating as a C Corp involves filing Articles of Incorporation (sometimes called Certificate of Incorporation) with the state. Other state requirements must also be met to start a corporation.

Pros of C Corporations

Most legal protection for owners—The C Corp structure provides the highest degree of liability protection for business owners. Under most circumstances, shareholders, directors, and employees have protection from lawsuits and debts of the corporation. 

Growth potential—C Corporations can have an unlimited number of shareholders and may issue multiple classes of stock. Typically, investors will be more interested in funding companies organized as corporations rather than those operating as other entity types.  

Tax flexibility—Eligible corporations may choose to be taxed as an S Corporation (see more about that in the next section). Often, corporations are eligible for more tax deductions than businesses operating as other business structures. 

Perpetual life—Ownership interests in a corporation may be transferred to others. Shareholders can sell, gift, or bequeath their shares of company stock, and the corporation continues to exist. Only when a C Corp is formally dissolved is its life ended. 

Cons of C Corporations

More compliance complexity and costs—In most states, it costs more to incorporate a business than to form an LLC. There are more internal and external rules to start and operate a C Corp, such as appointing a board of directors, drafting bylaws, filing an initial report, filing annual reports, etc.

Double taxation—A C Corporation’s profits get taxed at the federal corporate income tax rate. Then they are again taxed to shareholders when the corporation distributes those profits as dividends. This creates a double tax because the dividends paid do not qualify as tax deductions for the corporation. Another potential disadvantage from a shareholder’s individual tax perspective, is that they may not deduct any loss of the corporation on their personal tax returns.  

Overview of the S Corporation election for LLCs and corporations

The S Corporation is a tax election that qualifying LLCs and corporations can choose.

The benefit for LLCs is that S Corp election can reduce the amount of self-employment tax business owners must pay. An LLC taxed as an S Corp still gets pass-through tax treatment (tax obligations pass-through to the owners’ returns), but only the wages and salaries of business owners on the company’s payroll are subject to Social Security and Medicare taxes. Any profit distributions paid to owners do not have those taxes levied on them.

To request S Corporation election, an LLC must file IRS Form 8832 (to be taxed as a corporation) and IRS Form 2553 (to choose S Corporation election).

S Corp tax treatment allows corporations to avoid the sting of double taxation. As an S Corporation, a corporation’s profits and losses flow through to shareholders’ personal tax returns. The corporate entity does not pay income tax. Shareholders who are employed by the corporation pay Social Security and Medicare taxes on their wages or salaries from the company, but the dividend income paid to shareholders is not subject to those taxes.

Note that S Corporations may not exceed 100 shareholders. Therefore, corporations with more than that are not eligible for S Corp election.

Is your business entity type still the right one for you?

Business owners operating as a sole proprietor, general partnership, or LLC may find that their business is outgrowing the limitations of their entity type. A few things that might drive entrepreneurs to consider changing their business structure include:

The process to switch from one business entity type to another will vary by business structure and in which state the business is operating. An attorney and accountant can help determine whether a change may be beneficial. Also, a lawyer can advise on the correct steps to take to change business entities. Details are often available on states’ Secretary of State websites, as well. 

Ideally, when starting your business, it’s helpful to think both short-term and long-term about what structure will best serve your needs and vision. With some research, reaching out to the right resources for guidance, you will be empowered to make an informed decision. 

Credit Given to:  Nellie Akalp is a passionate entrepreneur, business expert, professional speaker, author, and mother of four. She is the Founder and CEO of CorpNet.com, a trusted resource and service provider for business incorporation, LLC filings, and corporate compliance services in all 50 states. Nellie and her team recently launched a partner program for legal, tax and business professionals to help them streamline the business incorporation and compliance process for their clients.

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.

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.

IRA and 401(k) Contribution Limits for 2021 January 27, 2021

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

Please find below the 2021 contribution ceilings for IRAs and 401(k) plans.  These ceilings and limitations for contributions to retirement plans are not to be taken lightly.  Penalties (excise taxes) for overfunding some retirement plans are absolutely shocking.  And, the penalties are incurred annually until the excess funds are removed. 
                                                                                                                                                                                               -Mark Bradstreet

Bad News on IRA and 401(k) Contribution Limits for 2021

Retirement savers will be disappointed with the contribution limits for next year, but at least more people will qualify for retirement tax breaks in 2021.

There’s good news and bad news from the IRS for Americans saving for retirement with IRAs, 401(k)s, and other retirement accounts in 2021.

Let’s start with the bad news: Contribution limits won’t go up next year.

And now the good news: The maximum income levels allowed to make deductible contributions to traditional IRAs, contribute to Roth IRAs, and claim the Saver’s Credit all increase for 2021.

Retirement Plan Contribution Limits for 2021

For 2021, employees who are saving for retirement through 401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan can contribute up to $19,500 to those plans during the year. That’s the same contribution limit in place for 2020.

Income Ranges for 2021

Increased income ranges for the traditional IRA deduction, Roth IRA contributions, and the Saver’s Credit means more Americans will qualify for these tax breaks.

If you’re contributing to a traditional IRA, the deduction allowed for your contribution is gradually phased-out if your income is above a certain amount. For 2021, the phase-out ranges are:

For people saving for retirement with a Roth IRA, the actual amount that you can contribute to the account is based on your income. To be eligible to contribute the maximum for 2021, your modified adjusted gross income must be less than $125,000 if single or $198,000 if married and filing jointly (up from $124,000 and $196,000, respectively, for 2020). Contributions begin to be phased out above those amounts, and you won’t be able to put any money into a Roth IRA in 2021 once your income reaches $140,000 if single or $208,000 if married and filing jointly ($139,000 and $206,000 for 2020). The phase-out range for a married person filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000 for 2021.T

Finally, the 2021 income limit for the Saver’s Credit for low- and moderate-income workers is $66,000 for married couples filing jointly ($65,000 in 2020), $49,500 for head-of-household filers ($48,750 in 2020), and $33,000 for singles and married people filing separately ($32,500 in 2020).

Credit given to: Rocky Mengle. Published on November 5, 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.