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.
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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.