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.
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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.