The Ponzi scheme is an investment fraud where the schemer uses invested money to create fake investment returns.
According to an article at CNBC.com, authorities uncovered 60 alleged Ponzi schemes last year involving a total of $3.25 billion in investor funds—the highest amount since around the time of the Great Recession.
The Great Recession (2007–2009) revealed the famous Bernie Madoff Ponzi scheme and led both lawmakers and the IRS to create helpful actions for taxpayers, such as the safe harbor described in this article. Thank goodness.
And here’s more good news: the Tax Cuts and Jobs Act (TCJA), which crushed most theft losses for tax years 2018–2025, allowed the IRS tax-favored Ponzi scheme loss deduction rules to remain in place.
What the Safe Harbor Does for the Taxpayer
The IRS will not challenge a Ponzi scheme victim who uses the IRS tax relief safe harbor as to the following treatments of the loss:
The tax relief safe harbor truly simplifies the Ponzi scheme theft-loss deduction for the victim.
The IRS frequently disagrees with theft-loss deductions. The rules for deduction and the different interpretations of the facts generate a good number of conflicts and enough litigation to make this safe harbor appealing.
How Individuals and Businesses Claim the Ponzi Scheme Loss Deduction
Say a thief breaks into your home and steals $100,000 worth of your belongings. Your personal theft-loss deduction is zero if the loss is not attributable to a federally declared disaster. That’s the way it is under the TCJA rules for 2018–2025.
But the individual who mistakenly invested in a Ponzi scheme did so for the purpose of making a profit. Tax law treats this theft differently from the theft that occurs when someone breaks into your home and steals your jewelry.
Because of the profit motive, the Ponzi scheme theft is fully deductible as an itemized deduction. Note the “fully” deductible part. The loss is not a capital loss that’s limited to the $3,000 ceiling. It’s a fully deductible theft loss—and as you see below, it can produce an NOL.
The business treatment of the Ponzi scheme loss produces a full deduction as well, albeit as a business casualty loss.
Once you make the safe-harbor calculation and deduct the 95 percent or 75 percent, you may collect a different amount in a subsequent year. That’s no problem. If you receive additional income, you report that additional income in the year of recovery under the tax benefit rule (to the extent that you received a benefit from the earlier deduction).
Should the amount of your loss increase because you collect less than the amount of the claim that you established as a reasonable prospect of recovery, you deduct the additional loss in the year that you can identify that additional loss with reasonable certainty.
Ponzi Scheme Loss Carryback as an NOL
The individual taxpayer who becomes a theft-loss victim may treat his or her theft loss as a loss from a sole proprietorship for purposes of computing the NOL deduction.
Planning note. If you qualify for a 2020 Ponzi scheme loss deduction and that deduction produces an NOL, you carry that loss to your 2015 tax year—or you can elect to forgo the carryback and instead carry the loss forward.
If you have had the misfortune of investing in a Ponzi scheme, please contact us so that we can get on top of this early on.
College is expensive. Data for the 2019–2020 academic year indicates that the average cost of tuition, fees, room, and board was $30,500. Tax law has provisions to help you cover the costs, including Coverdell, Section 529 savings, and Section 529 tuition plans.
Contribute to a Coverdell Education Savings Account
You can contribute up to $2,000 per year to the child’s CESA. If you have several children, you can set up a CESA for each of them.
Contributions are non-deductible, but earnings are allowed to accumulate free of any federal income tax. You can then take tax-free withdrawals to pay for the account beneficiary’s post-secondary tuition, fees, books, supplies, and room and board.
Maybe not for you. Your right to contribute is phased out between modified adjusted gross income (MAGI) of $95,000 and $110,000 if you are unmarried, or between $190,000 and $220,000 if you are a married joint-filer.
Contribute to a Section 529 College Savings Plan
Section 529 college savings plans are state-sponsored arrangements named after the section of our beloved Internal Revenue Code that authorizes very favorable treatment under the federal income and gift tax rules.
You as the parent of a college-bound child begin by making contributions into a trust fund set up by the state plan that you choose. The money goes into an account designated for the beneficiary whom you specify (your college-bound child).
You can then make contributions via a lump-sum pay-in or via installment pay-ins stretching over several years. The plan then invests the money using the investment direction option that you select.
When your child reaches college age, you can take federal-income-tax-free withdrawals to pay eligible college expenses, including room and board under most plans. Plans will generally cover expenses at any accredited college or university in the country (not just schools within the state sponsoring the plan). Community colleges qualify as well.
In essence, a Section 529 college savings plan account is a tax-advantaged way to build up a college fund for your child.
Don’t Confuse Savings Plans with Prepaid Plans
Don’t mix up Section 529 college savings plans with Section 529 prepaid college tuition plans—which we will give only a brief mention here. Both types of plans are properly called “Section 529 plans” because both are authorized by that section of the Internal Revenue Code. Both receive the same favorable federal tax treatment. But that’s where the resemblance ends.
The big distinction is that prepaid tuition plans lock in the cost to attend certain colleges. In other words, the rate of return on a prepaid tuition plan account is promised to match the inflation rate for costs to attend the designated school or schools—nothing more, nothing less. That’s okay if that’s what you really want.
No Kiddie Tax on Section 529 Plan
You don’t have to worry about the kiddie tax if you set up a custodial 529 plan in the child’s name. The 529 plan is an investment plan where the monies remain in the plan. You make contributions with after-tax dollars.
When the child takes the money out of the plan for college, he or she does so tax-free when the funds are used to pay for qualified higher education expenses.
If you want to discuss your college-planning strategies, please contact us!
If a loved one passes away and you serve as the executor or inherit assets, you need to consider your duties and so some tax planning.
Filing the Final Form 1040 for Unmarried Decedent
If the decedent was unmarried, an initial step is to file his or her final Form 1040.
That return covers the period from January 1 through the date of death. The return is due on the standard date: for example, April 15, 2021, for someone who dies in 2020, or October 15, 2021, if you extend the return to that date.
Surviving Spouse May Be Able to Use Joint Return Rates for Two Years Following Deceased Spouse’s Year of Death
The benefits of the married-filing-joint status are extended to a qualified widow or widower for the two tax years following the year of the deceased spouse’s death.
In general, to be a qualified widow/widower for the year, the surviving spouse must be unmarried as of the end of the year.
If Decedent Had a Revocable Trust
To avoid probate, many individuals and married couples of means set up revocable trusts to hold valuable assets, including real property and bank and investment accounts.
These revocable trusts are often called “living trusts” or “family trusts.” For federal income tax purposes, they are properly described as “grantor trusts.”
As long as the trust remains in revocable status, it is a grantor trust, and its existence is disregarded for federal income tax purposes. Therefore, the grantor or grantors are treated as still personally owning the trust’s assets for federal income tax purposes, and tax returns of the grantor(s) are prepared accordingly.
Basis Step-Ups for Inherited Assets
If the decedent left appreciated capital gain assets—such as real property and securities held in taxable accounts, the heir(s) can increase the federal income tax basis of those assets to reflect fair market value as of
When the inherited asset is sold, the federal capital gains tax applies only to the appreciation (if any) that occurs after the applicable magic date described above. The step-up to fair market value can dramatically lower the tax bill. Good!
Co-ownership. If the decedent was married and co-owned one or more homes and/or other capital gain assets with the surviving spouse, the tax basis of the ownership interest(s) that belonged to the decedent (usually half) is stepped up.
Community property. If the decedent was married and co-owned one or more homes and/or other capital gain assets with the surviving spouse as community property in one of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), the tax basis of the entire asset—not just the half that belonged to the decedent—is stepped up to fair market value.
This strange-but-true rule means the surviving spouse can sell capital gain assets that were co-owned as community property and only owe federal capital gains tax on the appreciation (if any) that occurs after the applicable magic date. That means little or no tax may be owed. Good!
If you have questions about any of the above, please don’t hesitate to contact us.
As you likely know by now, the Paycheck Protection Program (PPP) loan and its forgiveness process have been an ever-changing (and often confusing) ride so far.
With the new rules for PPP loans of $50,000 or less, you escape from the most difficult part of the loan forgiveness if you had to consider employees.
And you may even obtain more loan forgiveness than you would have otherwise.
Before the $50,000-or-less rule, you had to either suffer a reduction in loan forgiveness or meet one of the many exceptions that allowed you to
Now, with a PPP loan of $50,000 or less, you don’t have to consider the myriad rules about employees. Regardless of what you did with your employees, you qualify for full forgiveness if
Example. Henry obtained a PPP loan of $34,000 based on his 2019 Schedule C income and pay to his part-time employee. When COVID-19 hit, Henry laid off his part-time worker and has not rehired him. Using SBA Form 3508S and the 24-week covered period, Henry qualifies for 100 percent forgiveness of his $34,000 loan because he spent $20,833 (61 percent) on the deemed payroll to himself and the remainder on five months’ rent and utilities.
Planning note. Henry is not an employee of his Schedule C business. He receives no W-2 income. But the PPP rules deem Henry’s 2019 Schedule C profits as his payroll for PPP loan purposes. The rules cap the Schedule C taxpayer’s loan amount and forgiveness at a maximum of $20,833 when Schedule C income is $100,000 or more.
If you would like my help with your PPP loan forgiveness application, please contact us!
Are you one of the over 11 million Americans who owe the IRS back taxes? The IRS temporarily suspended most collection efforts during the first wave of the coronavirus pandemic through its “People First Initiative.” This initiative expired July 15, 2020.
The IRS is now ready to go after delinquent accounts again. However, the agency recognizes that substantial numbers of taxpayers cannot pay what they owe right now. To help them, it has promulgated a new Taxpayer Relief Initiative.
The new Taxpayer Relief Initiative is relatively modest in scope, but it can be a big help if you owe the IRS.
Among other things, the new initiative gives you an extra 60 days to pay off a tax bill. You now have 180 days instead of 120 days to make a lump sum payment of all you owe.
The initiative also makes it easier to obtain, keep, and modify installment agreements with the IRS. These allow you to make monthly payments over several years.
If you owe $50,000 to $250,000, you may even be able to obtain an installment agreement without the IRS filing a tax lien on your property--something that has never been possible before.
The IRS is also stressing that it will help taxpayers who have already entered into installment agreements or offers in compromise with the agency and who are now having trouble making their payments.
You may also be able to get IRS penalties reduced or eliminated.
Whatever you do, don’t ignore a tax bill from the IRS. And never feel you’re helpless when confronted by the IRS collection juggernaut. You always have options, no matter how much you owe.
If you have any further questions or need my assistance, please contact us.
If you own your own business and operate as a proprietorship or partnership (wherein your spouse is not a partner), one of the smartest tax moves you can make is hiring your spouse to work as your employee.
But the tax savings may be a mirage if you don’t pay your spouse the right way. And the arrangement is subject to attack by the IRS if your spouse is not a bona fide employee.
Here are four things you should know before you hire your spouse that will maximize your savings and minimize the audit risk.
1. Pay benefits, not wages. The way to save on taxes is to pay your spouse with tax-free employee benefits, not taxable wages. Benefits such as health insurance are fully deductible by you as a business expense, but not taxable income for your spouse.
Also, if you pay a spouse only with tax-free fringe benefits, you need not pay payroll taxes, file employment tax returns, or file a W-2 for your spouse.
2. Establish a medical reimbursement arrangement. The most valuable fringe benefit you can provide your spouse-employee is reimbursement for health insurance and uninsured medical expenses. You can accomplish this through a 105-HRA plan if your spouse is your sole employee, or an Individual Coverage Health Reimbursement Account (ICHRA) if you have multiple employees.
3. Provide benefits in addition to health coverage. There are many other tax-free fringe benefits you can provide your spouse in addition to health insurance, including education related to your business, up to $50,000 of life insurance, and de minimis fringes such as gifts.
4. Treat your spouse as a bona fide employee. For your arrangement to withstand IRS scrutiny, you must be able to prove that your spouse is your bona fide employee. You’ll have no problem if:
If you have any further questions or need my assistance, please contact us!
Are you one of the millions of businesses that have an outstanding non-disaster Small Business Administration (SBA) loan? These include:
If so, you have already benefited, or soon will benefit, from a little-known provision included in the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Congress appropriated $17 billion so that the SBA could provide a temporary loan payment subsidy to businesses with these non-disaster SBA loans. Under this provision, the SBA automatically makes six monthly loan payments on behalf of borrowers. There is no need to file an application.
Are the SBA loan subsidies taxable income to you?
Unfortunately, the CARES Act is silent on this subject and the IRS has yet to issue any guidance on this particular loan subsidy program. In the past, the IRS advised that similar loan payments were includible in income by the taxpayer-borrower.
It’s unclear whether the IRS will follow this prior guidance.
The IRS could instead conclude that these loan subsidies are not taxable under the general welfare exclusion. The general welfare exclusion has often been used to exempt from tax SBA disaster payments made to individual taxpayers. The exclusion ordinarily does not apply to payments to business. But the IRS could make an exception due to the extraordinary nature of the COVID-19 pandemic.
It’s also possible that Congress will act to make the SBA loan payments tax-free. This could be done in a future stimulus bill.
Right now, the prudent course is to assume that the SBA loan subsidies are taxable income and plan accordingly.
If you have any further questions or need my assistance, please Donn't hesitate to contact us.
From what we know, when lawmakers originally passed the Paycheck Protection Program (PPP), they thought that under its provisions,
Fly in the Ointment
In late April, the IRS issued Notice 2020-32, which asserts that PPP loan recipients may not deduct business expenses paid using the PPP monies that gave rise to forgiveness (defined payroll, rent, utilities, and interest).
In a May 5, 2020, letter to Secretary of the Treasury Steven Mnuchin, Senator Chuck Grassley (chairman of the Committee on Finance), Senator Ron Wyden (ranking member on the Committee on Finance), and Congressman Richard E. Neal (chairman of the Committee on Ways and Means) jointly stated that the IRS got this wrong and that the intent of the CARES Act was for the PPP to be a tax-free grant.
The letter makes sense. You can read it here.
The IRS was unmoved by the lawmakers’ letter. The IRS position was clear: no deduction for the expenses paid with the PPP money. The IRS understood that perhaps lawmakers didn’t mean that to happen, but in the eyes of the IRS, the way that the lawmakers enacted the law created the problem. To fix it, lawmakers simply need to pass a new law.
Frankly, we thought that lawmakers would pass a new law and take care of this problem. But no, that has not happened.
New Nails in the Coffin
On November 18, 2020, the IRS drove two new nails into the coffin regarding deductions for PPP monies that were forgiven and spent on payroll, rent, interest, or utilities.
With the rulings described above, the IRS has clarified its position and clearly stated to lawmakers: if you don’t like the non-deductibility of expenses paid with PPP monies, change the law.
Have you established a 105-HRA, Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), or Individual Coverage Health Reimbursement Arrangement (ICHRA) to reimburse your employees for medical expenses?
If so, congratulations! These HRAs are a great way to pay your employees’ medical expenses and obtain a tax deduction.
But all three types of HRAs come with a pesky IRS filing requirement: Each year, you must pay a Patient-Centered Outcomes Research Institute (PCORI) fee that is used to help support the Patient-Centered Outcomes Research Institute.
The fee is small—currently, $2.54 times the “average number of lives covered” by your HRA during the previous plan year. There are various ways to calculate the number of lives covered.
You must pay the fee by filing Form 720 with the IRS by July 31 of the calendar year following the end of your plan year.
Paying the PCORI fee is a bit of a nuisance. But on the plus side, the fee is tax deductible.
If you need my assistance or would simply like to discuss HRAs, please contact us.
Wow, how time flies. Yes, December 31 is just around the corner.
That’s your last day to find tax deductions available from your existing business and personal (yes, personal) vehicles that you can use to cut your 2020 taxes. But don’t wait. Get on this now!
1. Take Your Child’s or Spouse’s Car and Sell It
We know—this sounds horrible. But stay with us.
What did you do with your old business car? Do you still have it? Is your child driving it? Or perhaps your spouse has it as a personal car.
We ask because that old business vehicle could have a big tax loss embedded in it. If so, your strategy is easy: take the vehicle and sell it to a third party before December 31 so you have a tax-deductible loss this year.
Your loss deduction depends on your percentage of business use. That’s one reason to sell this vehicle now: the longer you let your spouse or teenager use it, the smaller your business percentage becomes and the less tax benefit you receive.
2. Cash In on Past Vehicle Trade-Ins
In the past (before 2018), when you traded vehicles, you pushed your old business basis to the replacement vehicle under the old Section 1031 tax-deferred exchange rules. (But remember, this rule doesn’t apply any longer to Section 1031 exchanges of vehicles or other personal property occurring after December 31, 2017.)
Regardless of whether you used IRS mileage rates or the actual-expense method for deducting your business vehicles, you could find a big deduction here.
Check out how Sam finds a $27,000 tax-loss deduction on his existing business car. Sam has been in business for 11 years, during which he
During the 11 years Sam has been in business, he has owned four cars. Further, he deducted each of his cars using IRS standard mileage rates.
If Sam sells his mileage-rate car today, he realizes a tax loss of $27,000. The loss is the accumulation of 11 years of car activity, during which Sam never cashed out because he always traded cars before he knew anything about gain or loss.
Further, Sam thought his use of IRS mileage rates was the end of it—nothing more to think about (wrong thinking here, too).
Because the trades occurred before 2018, they were Section 1031 exchanges and so deferred the tax results to the next vehicle. IRS mileage rates contain a depreciation component. That’s one possible reason Sam unknowingly accumulated his big deduction.
To get a mental picture of how this one sale produces a cash cow, consider this: when Sam sells car four, he is really selling four cars—because the old Section 1031 exchange rules added the old basis of each vehicle to the replacement vehicle’s basis.
Examine your car for this possible loss deduction. Have you been trading business cars? If so, your tax loss deduction could be big!
3. Put Your Personal Vehicle in Business Service
Lawmakers reinstated 100 percent bonus depreciation, and that creates an effective strategy that costs you nothing but can produce solid deductions.
Are you (or your spouse) driving a personal SUV, crossover vehicle, or pickup truck with a gross vehicle weight rating greater than 6,000 pounds? Would you like to increase your tax deductions for this year?
If so, place that personal vehicle in business service this year.
If you see opportunities for deductions that you would like to discuss with me, don’t hesitate to contact us.
Here’s an easy question: Do you need more 2020 tax deductions? If yes, continue on.
Next easy question: Do you need a replacement business vehicle?
If yes, you can simultaneously solve or mitigate both the first problem (needing more deductions) and the second problem (needing a replacement vehicle), but you need to get your vehicle in service on or before December 31, 2020.
To ensure compliance with the “placed in service” rule, drive the vehicle at least one business mile on or before December 31, 2020. In other words, you want to both own and drive the vehicle to ensure that it qualifies for the big deductions.
Now that you have the basics, let’s get to the tax deductions.
1. Buy a New or Used SUV, Crossover Vehicle, or Van
Let’s say that on or before December 31, 2020, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four big benefits:
Example. On or before December 31, 2020, you buy and place in service a qualifying used $50,000 SUV for which you can claim 90 percent business use. Your business cost is $45,000 (90 percent x $50,000). Your maximum write-off for 2020 is $45,000.
2. Buy a New or Used Pickup
If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2020, then this newly purchased vehicle gives you four big benefits:
To qualify for full Section 179 expensing, the pickup truck must have
Short bed. If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, tax law classifies it as an SUV. That’s not bad. The vehicle is still eligible for either expensing of up to the $25,900 SUV expensing limit or 100 percent bonus depreciation.
If you would like to discuss the vehicle strategy, please call me on my direct line at xxx-xxx-xxxx.
If you would like to discuss the vehicle strategy, please don't hesitate to contact us.
1. Put Your Children on Your Payroll
2. Get Divorced after December 31
3. Stay Single to Increase Mortgage Deductions
4. Get Married on or before December 31
5. Make Use of the 0 Percent Tax Bracket
I know that taxes can cause confusion. Remember, that’s why you have us and we are always here to be of service. If you want to discuss any of the strategies above, please contact us.
The clock continues to tick. Your retirement is one year closer.
You have time before December 31 to take steps that will help you fund the retirement you desire. Here are four things to consider:
1. Establish Your 2020 Retirement Plan
First, a question: As you read this, do you have your (or your corporation’s) retirement plan in place?
If not, and if you have some cash you can put into a retirement plan, get busy and put that retirement plan in place so you can obtain a tax deduction for 2020.
For most defined contribution plans, such as 401(k) plans, you (the owner-employee) are both an employee and the employer, whether you operate as a corporation or as a proprietorship. And that’s good because you can make both the employer and the employee contributions, allowing you to put a good chunk of money away.
2. Claim the New, Improved Retirement Plan Start-Up Tax Credit of Up to $15,000
By establishing a new qualified retirement plan (such as a profit-sharing plan, 401(k) plan, or defined benefit pension plan), a SIMPLE IRA plan, or a SEP, you can qualify for a non-refundable tax credit that’s the greater of
The credit is based on your “qualified start-up costs,” which means any ordinary and necessary expenses of an eligible employer that are paid or incurred in connection with
3. Claim the New Automatic Enrollment $500 Tax Credit for Each of Three Years ($1,500 Total)
The SECURE Act added a nonrefundable credit of $500 per year for up to three years beginning with the first taxable year beginning in 2020 or later in which you, as an eligible small employer, include an automatic contribution arrangement in a 401(k) or SIMPLE plan.
The new $500 auto contribution tax credit is in addition to the start-up credit and can apply to both newly created and existing retirement plans. Further, you don’t have to spend any money to trigger the credit. You simply need to add the auto-enrollment feature.
4. Convert to a Roth IRA
Consider converting your 401(k) or traditional IRA to a Roth IRA.
If you make good money on your IRA investments and you won’t need your IRA money during the next five years, the Roth IRA over its lifetime can produce financial results far superior to the traditional retirement plan.
You first need to answer this question: How much tax will I have to pay now to convert my existing plan to a Roth IRA? With the answer to this, you know how much cash you need on hand to pay the extra taxes caused by the conversion to a Roth IRA.
Here are four reasons you should consider converting your retirement plan to a Roth IRA:
If you would like my help with any of the above, please don't hesitate to contact us!
All small-business owners with one to 49 employees should have a medical plan in their business.
Sure, the tax law does not require you to have a plan, but you should.
Most of the tax rules that apply to medical plans are straightforward when you have fewer than 50 employees.
Here are the six opportunities for you to consider:
If you need more insights into the above opportunities, please don't hesitate to contact us.
You likely formed an S corporation to save on self-employment taxes.
If so, is your S corporation salary
Getting the S corporation salary right is important. First, if it’s too low and you get caught by the IRS, you will pay not only income taxes and self-employment taxes on the too-low amount, but also both payroll and income tax penalties that can cost plenty.
Second, in most cases, the IRS is going to expand the audit to cover three years and then add the income and penalties for those three years.
Third, after being found out, you likely are now stuck with this higher salary, defeating your original purpose of saving on self-employment taxes.
Getting to the Number
The IRS did you a big favor when it released its “Reasonable Compensation Job Aid for IRS Valuation Professionals.”
The IRS states that the job aid is not an official IRS position and that it does not represent official authority. That said, the document is a huge help because it gives you some clearly defined valuation rules of the road to follow and takes away some of the gray areas.
The two approaches Spencer Accounting Group will likely use based on your business are the:
The S corporation’s payment or reimbursement of health insurance for the shareholder-employee and his or her family goes on the shareholder-employee’s W-2 and counts as compensation, but it’s not subject to payroll taxes, so it fits nicely into the payroll tax savings strategy for the S corporation owner.
The S corporation’s employer contributions on behalf of the owner-employee to a defined benefit plan, simplified employee pension (SEP) plan, or 401(k) count as compensation but don’t trigger payroll taxes. Such contributions further enable the savings on payroll taxes while adding to the dollar amount that’s considered reasonable compensation.
Planning note. Your S corporation compensation determines the amount that your S corporation can contribute to your SEP or 401(k) retirement plan. The defined benefit plan likely allows the corporation to make a larger contribution on your behalf.
Section 199A Deduction
The S corporation’s net income that is passed through to you, the shareholder, can qualify for the 20 percent Section 199A tax deduction on your Form 1040.
Don't hesitate to contact us if you need help determining reasonable compensation.
When you take advantage of the tax code’s offset game, your stock market portfolio can represent a little gold mine of opportunities to reduce your 2020 income taxes.
The tax code contains the basic rules for this game, and once you know the rules, you can apply the correct strategies.
Here’s the basic strategy:
Think of this: you are paying taxes at a 71.4 percent higher rate when you pay at 40.8 percent rather than the tax-favored 23.8 percent.
To avoid the higher rates, here are seven possible tax-planning strategies.
Examine your portfolio for stocks that you want to unload, and make sales where you offset short-term gains subject to a high tax rate such as 40.8 percent with long-term losses (up to 23.8 percent).
In other words, make the high taxes disappear by offsetting them with low-taxed losses, and pocket the difference.
Use long-term losses to create the $3,000 deduction allowed against ordinary income.
Again, you are trying to use the 23.8 percent loss to kill a 40.8 percent rate of tax (or a 0 percent loss to kill a 12 percent tax, if you are in the 12 percent or lower tax bracket).
As an individual investor, avoid the wash-sale loss rule.
Under the wash-sale loss rule, if you sell a stock or other security and purchase substantially identical stock or securities within 30 days before or after the date of sale, you don’t recognize your loss on that sale. Instead, the code makes you add the loss amount to the basis of your new stock.
If you want to use the loss in 2020, then you’ll have to sell the stock and sit on your hands for more than 30 days before repurchasing that stock.
If you have lots of capital losses or capital loss carryovers and the $3,000 allowance is looking extra tiny, sell additional stocks, rental properties, and other assets to create offsetting capital gains.
If you sell stocks to purge the capital losses, you can immediately repurchase the stock after you sell it—there’s no wash-sale “gain” rule.
Do you give money to your parents to assist them with their retirement or living expenses? How about children (specifically, children not subject to the kiddie tax)?
If so, consider giving appreciated stock to your parents and your non-kiddie-tax children. Why? If the parents or children are in lower tax brackets than you are, you get a bigger bang for your buck by
If you are going to make a donation to a charity, consider appreciated stock rather than cash, because a donation of appreciated stock gives you more tax benefit.
It works like this:
Example. You bought a publicly traded stock for $1,000, and it’s now worth $11,000. You give it to a 501(c)(3) charity, and the following happens:
Two rules to know:
If you could sell a publicly traded stock at a loss, do not give that loss-deduction stock to a 501(c)(3) charity. Why? If you sell the stock, you have a tax loss that you can deduct. If you give the stock to a charity, you get no deduction for the loss—in other words, you miss out on that tax-reducing loss.
The stock strategies have a long history in tax planning. If you need our help with any of these strategies, please contact us.
With the COVID-19 pandemic still going on, you may be spending more time working from your home office.
You may have taken some extra rooms for your business use. Is that okay?
Section 280A(c) states that you may claim a home office based on the portion of the dwelling that you use exclusively and regularly for business. Thus, the law dictates no specific number of rooms or particulars regarding the size of the office.
The courts make this rule clear, as you can see in the Mills (less than one room) and Hefti (lots of rooms) cases described below.
The Mills Case
Albert Victor Mills maintained an office in his apartment from which he conducted his rental property management business. The apartment was small, totaling only 422 square feet. In the office area of the apartment where Mr. Mills had his desk, he also kept tools, equipment, paint supplies, and a filing cabinet.
The court agreed with Mr. Mills’s allocations and awarded the home-office deduction based on his claimed 23 percent business use of the 422-square-foot apartment.
Planning note. Mr. Mills did not have a single room dedicated to a home office. He had only an area of the apartment where he grouped his office furnishings, equipment, and supplies. If you have a similar situation, make sure your business assets are located in a group.
The Hefti Case
Charles R. Hefti lived in a big house, totaling 9,142 square feet. He claimed that more than 90 percent of his home was used regularly and exclusively for business.
Based on its review of the rooms, the court concluded that 13 rooms, totaling 19 percent of the home, were used exclusively and regularly for business.
The deductible portion of your home for an office includes the area used exclusively and regularly for business.
Let’s say you have an office in one room and your files in a second room, and you never use these rooms for personal purposes. Further, let’s say you use the office area on a daily basis and the files area in connection with that daily work.
Both rooms would meet the exclusive and regular use requirements, just as Mr. Mills’s and Mr. Hefti’s offices met these rules.
But Not This
“Exclusive use” means that you must use a specific portion of the home only for business purposes. You must make no other use of the space.
Exception. One exception to the exclusive use rule is storage of inventory or product samples if the home is the sole fixed location of a trade or business selling products at retail or wholesale.
Example 1. Your home is the only fixed location of your business, which involves selling mechanics’ tools at retail. You regularly use half of your basement for storage of inventory and product samples. You sometimes use the area for personal purposes. The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business.
Example 2. In Pearson, Dr. Pearson practiced orthodontics in a downtown medical building but retained the dental records of more than 3,000 patients in 36 file drawers (each measuring 26 inches by 14 inches by 12 inches) and had 1,461 boxes containing orthodontic models (each box measuring 10 inches by 6 inches by 2 1/2 inches).
He stored the records in the attic and basement of his home. The areas used for such storage were not separate rooms, and the remaining portions of the attic and basement were used by Dr. Pearson and his family for personal purposes.
The court ruled that Dr. Pearson may not treat the storage areas as home-office expenses because the records were not inventory or samples and Dr. Pearson did not operate a wholesale or retail trade or business from his home.
Remember to consider your Section 199A deduction in your year-end tax planning.
If you don’t, you could end up with a big fat $0 for your deduction amount. We’ll review three year-end moves that (a) reduce your income taxes and (b) boost your Section 199A deduction at the same time
Strategy 1: Harvest Capital Losses
Strategy 2: Make Charitable Contributions
Strategy 3: Buy Business Assets
This can get confusing. If you would like our help, please contact us.
Your goal should be to get the IRS to owe you money. Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.
Here are seven powerful business tax-deduction strategies that you can easily understand and implement before the end of 2020.
1. Prepay Expenses Using the IRS Safe Harbor
2. Stop Billing Customers, Clients, and Patients
3. Buy Office Equipment
4. Use Your Credit Cards
5. Don’t Assume You Are Taking Too Many Deductions
6. Utilize COVID-19 Opportunities
7. Deal with Your Qualified Improvement Property
We trust that you will find these seven ideas worthwhile. If you would like to discuss any of them, please contact us.
If you have employees, you must withhold their 6.2 percent share of the Social Security tax from their wages up to an annual wage ceiling ($137,700 for 2020). You must pay the money to the IRS along with your matching 6.2 percent employer share of the tax.
But under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as you likely know, employers are allowed to defer paying their 6.2 percent share of the Social Security tax on wages paid to employees through the end of 2020. Fifty percent of these deferred taxes will have to be paid during 2021 and the remainder in 2022.
Both the Trump administration and the IRS have issued orders permitting employers to defer withholding and paying the employee portion of the Social Security tax for a limited time. But the executive order on employee deferral is much more limited in scope than the CARES Act employer deferral, and it’s beset with practical problems for employers.
Which Taxes Can Be Deferred?
The deferral applies only to the employee portion of the Social Security tax due on wages paid from September 1, 2020, through December 31, 2020. No other payroll taxes can be deferred.
Which Employees Qualify for the Deferral?
Only employees who earn less than $4,000 biweekly qualify for the deferral. Employees who are not paid on a biweekly basis qualify if their pay is equivalent to less than $4,000 biweekly. This would include employees who are paid less than
Each pay period is tested separately. An employee who earns too much during one pay period can still qualify for the deferral if he or she earns less than the ceiling amount in a later pay period.
Is the Deferral Mandatory?
IRS officials have stated that the deferral is not mandatory. Employers are not obligated to offer the deferral to their employees. This is so even if an employee requests it.
What Happens When the Deferral Period Ends?
The employee Social Security tax deferral ends on December 31, 2020. IRS guidance provides that the deferred taxes must then be paid “ratably” from wages paid from January 1, 2021, through April 30, 2021. Employers must withhold and pay the deferred taxes from employee wages paid during this period.
Thus, from January 1, 2021, through April 30, 2021, most employees will have to pay a 12.4 percent Social Security tax instead of the normal 6.2 percent. This amounts to a 6.2 percent pay cut for affected employees for four months.
What If Employees Quit or Get Fired?
If an employee quits or is fired during the four-month repayment period, there may not be enough wages paid to cover the deferred Social Security taxes. The IRS says that in this event employers can “make arrangements to otherwise collect” the deferred taxes. What form such “arrangements” could take is unclear.
Interest, penalties, and additions to taxes will begin to accrue on any unpaid deferred Social Security taxes starting May 1, 2021. Thus, if you (the employer) fail to remit the deferred monies because employees were not employed during the collection period, you are on the hook.
Due to the uncertainty involved, many employers have reportedly elected not to participate in the employee Social Security tax deferral.
If you’re considering moving to a different state, taxes in the new state may be the deciding factor—especially if you expect them to be lower.
Consider All Applicable State and Local Taxes
If your objective is to move to a lower-tax state, it may seem like a no-brainer to move to one that has no personal income tax. But that’s not a no-brainer!
You must consider all the taxes that can potentially apply to local residents—including property taxes and death taxes.
If you die without clearly establishing domicile in just one state, both the old and new states may claim that state death taxes are owed. Not good!
If you are thinking of moving to another state, please don’t hesitate to ask us for help. Contact us here.
What is the ultimate sin in an IRS audit?
Suppose you just received that lovely letter from the IRS telling you that you are the subject of an IRS audit.
What one record receives special attention? What one record can create a nightmare for you? What one record makes the IRS suspect that you are the keeper of lousy records?
Think of the record people most hate keeping. That’s the one we are talking about. You have probably guessed what that record might be. You might even know because you had a recent audit and didn't have this record..... think about it!
Red-Flag Record for the IRS Examiner
Once your audit examination begins, the examiner likes to see this record. If the record is missing or lacking, the IRS examiner knows that your other records probably are lacking, too.
This record—the one you probably hate keeping—is the mileage log on your vehicle or vehicles.
The IRS notes that a taxpayer’s failure to keep a mileage log on vehicles indicates that the activity under examination is not being conducted in a businesslike manner.
Small Business Administration (SBA) Economic Injury Disaster Loans (EIDLs) can be a great source of low-interest funding for businesses struggling with the economic impact of the COVID-19 pandemic.
Unlike Payroll Protection Program (PPP) loans, EIDLs are not forgivable—borrowers have to pay them back. But they have a low 3.75 percent interest rate and a long 30-year repayment period. Borrowers can repay them at any time without penalty.
To obtain an EIDL, borrowers must sign a loan authorization and agreement, a note, and a security agreement filled with fine print. Many of these provisions could have a significant impact on the borrower’s business for the life of the loan—up to 30 years.
It is vital to understand the terms and conditions before taking out any loan, including an EIDL. Here are seven key provisions borrowers should be aware of.
If you need our assistance determining what these rules are.. please contact us. We will get you started.
Did you take advantage of Section 179 expensing deduction on your vehicle.
Do you know the you could lose it?
Do you know how to keep it?
You might wonder: What do we mean by “keep it”?
In tax law, there’s no free lunch. The Section 179 deduction comes with “recapture strings” attached.
When you claim your Section 179 deduction, you make a deal with the government to keep your business use above 50 percent during the “designated” depreciation periods (five years for vehicles).
One Sad Story
In 2018, If you claimed a $53,000 Section 179 deduction on a qualifying pickup truck. In 2020, Your spouse, drives the truck and your business use drops to zero.
You have just violated the 50 percent business-use agreement with the government. Now you have phantom income to report (called “recapture”), and you will be required to pay the price for breaking his tax promise on the Section 179 deal.
You need to consider recapture when doing your tax planning. If you would like my help with this, please don’t hesitate to contact us..
Boy do we have some goods news for you!
New IRS guidance expands the possibilities for what is an adverse COVID-19 impact on you for purposes of taking up to $100,000 out of your retirement accounts and repaying it without penalties.
First, let’s look at the rules as they existed before this new IRS guidance. The CARES Act created the first set of favorable rules, and those rules are still in play.
What the CARES Act Says
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Spencer Accounting Group, LLC does not provide investment, tax, legal, or retirement advice or recommendations in these blogs. The information presented here is not specific to any individual's personal circumstances.
Keana Spencer is an Accountant, Entrepreneur, and Educator to her clients, with a strong passion. Keana has over 10 years of experience and through her practice, she is a source of knowledge and strategies to her clients.