This is likely it--your last chance to obtain first- and second-draw Paycheck Protection Program (PPP) monies.
A new law, the PPP Extension Act of 2021, extends the expiration date to the later of May 31 or when the money runs out. Note the phrase “when the money runs out,” and be forewarned that this can happen within weeks. So don’t procrastinate--not even for one day.
If you qualify for the first-draw PPP money, complete your application now. The money is going to run out fast--and once it’s gone, so is the PPP. Legislatively, the new round for the PPP ends on May 31. The clock ticks.
You qualify for the PPP if any of the following are true:
If you qualify, you want the PPP. It’s a much-needed, tax-free cash infusion. It’s called a loan, but it’s not. You have to repay loans. The PPP does not have to be repaid--it’s forgiven.
Plus, expenses paid with this forgiven PPP loan are tax-deductible.
If you need my help with either the first-draw or second-draw PPP, please contact us.
For 2018-2025, you (and estates and trusts) can use your qualified business income (QBI) to create the 20 percent deduction under Section 199A.
While federal income tax losses from business activities are usually beneficial, losses from pass-through business entities can have the adverse side effect of reducing allowable QBI deductions for pass-through business entity owners--such as you.
In this context, pass-through entities are defined as sole proprietorships, single-member (one owner) LLCs treated as sole proprietorships for federal income tax purposes, partnerships, multimember LLCs treated as partnerships for federal income tax purposes, and S corporations.
These entities can pass through business losses that you can deduct in the current year. But a pass-through of a loss could harm your QBI for the current year.
Or you may have to suspend the losses and carry them forward to future years. The suspended losses can also result in negative QBI in the year you deduct them.
Negative QBI from one source offsets positive QBI from other sources.
If you have overall negative QBI for the year, you must carry forward the negative amount to future years to offset positive QBI in those years. That can result in lower QBI deductions in carry-forward years.
The negative QBI issue is especially relevant now, since COVID-19 economic fallout will cause many pass-through business entities to pass through negative QBI amounts to their owners for 2020 and possibly for 2021 as well.
You also may have suspended pass-through business entity losses from prior years that are now deductible, such as suspended passive losses from rental real estate properties that have been sold. Suspended passive losses can also be “freed up” when you have passive income. Previously suspended losses can cause negative QBI in the year they become deductible.
If you own multiple businesses and/or rental properties, the Section 199A deduction can get complicated. If you would like my help sorting this out for you, please don’t hesitate to contact us.
With all that’s been going on, it’s easy to forget that it’s Section 199A season again. Yes, we’re talking about that lovely 20 percent deduction.
Are you compensating yourself and your fellow partners or LLC members with so-called guaranteed payments? If so, you may benefit from the following information about those payments and the preferred return option.
What Is a Guaranteed Payment?
A guaranteed payment is a payment by a partnership to a partner that’s determined without regard to the partnership’s net income.
Guaranteed payments can be for services rendered by a partner to the partnership or for the partnership’s use of the partner’s capital. Guaranteed payments made in exchange for services to a partnership are often called “partner salaries,” which is a misnomer because partners are not considered employees for most federal tax purposes.
Guaranteed payments are treated as ordinary income. Guaranteed payments to an individual partner from a partnership that’s considered to be engaged in a trade or business count as self-employment income.
At the partnership level, guaranteed payments generally count as deductible expenditures in calculating the amount of the partnership’s ordinary net business income or loss. The net income or loss is then allocated under the partnership agreement to the partners, reported on their respective Schedules K-1, and ultimately reported on their individual personal returns.
What Is a Preferred Return?
Good question. There is no specific tax-law definition of what constitutes a preferred return paid by a partnership to a partner.
But for purposes of this analysis, we will define a preferred return as a preferential allocation of partnership net income to a service-providing partner before the remaining partnership net income is allocated to all partners via the standard allocation arrangement specified by the partnership agreement--which is usually based on the partners’ percentage ownership interests. Preferred returns that meet this definition may also be called “priority profit allocations.”
Whether it is called a “preferred return” or a “priority profit allocation,” the key point is that we are talking about a payment to a partner that
is based on a specific allocation of partnership net profit, and
is not based on the partner’s ownership percentage, and
comes before any allocation of partnership net profits based on ownership percentages.
Such payments will usually constitute ordinary income and will be subject to self-employment tax when received by an individual partner.
And such payments will effectively reduce the amount of partnership net income that remains to be allocated to the partners based on the standard allocation arrangement specified by the partnership agreement.
The QBI Deduction Factor
Here’s where it gets interesting. For 2018-2025, you as an individual partner can potentially deduct up to 20 percent of your share of a partnership’s qualified business income (QBI), subject to limitations based on your income level and the type of business.
Guaranteed payments don’t count as QBI. To add insult to injury, a partnership’s deductions for guaranteed payments reduce the partnership’s QBI, which in turn can reduce allowable QBI deductions for you and the other partners. Ugh!
In contrast, a preferred return of partnership net income that constitutes a share of the partnership’s QBI counts as QBI, as long as the preferred return is a not a disguised payment for services rendered to the partnership.
Tax-saving strategy. To maximize QBI deductions for you and the other partners, consider replacing guaranteed payments that don’t count as QBI with preferred return payments that do count as QBI.
If you would like to examine the possibility of using the preferred return strategy in your partnership, please contact us.
We seem to be living in an age of natural disasters. Floods, fires, hurricanes, tornados, and other disasters often dominate the news.
If a disaster strikes you, the tax law may help.
You may qualify to deduct a tax code-defined disaster loss from your taxable income. The rules for personal losses are complex and far more restrictive than for business losses.
Only Casualty Losses Are Deductible
Damage to personal property caused by a disaster is deductible only if it qualifies as a casualty loss. A casualty is damage to, destruction of, or loss of property from events such as fires and floods that are sudden, unexpected, or unusual.
The disaster must result in physical damage to property, so economic losses due to the COVID-19 pandemic do not qualify as a casualty loss.
Many, but not all, casualty losses are covered by insurance. You can’t deduct such losses to the extent they are insured. Moreover, suppose you have insured yourself against the loss. In that case, you must file a timely insurance claim, even if that insurance claim will result in the cancellation of your policy or an increase in premiums.
Your casualty loss (not your deduction) is equal to the lesser of
the decrease in the property’s fair market value after the disaster, or
the property’s adjusted basis before the disaster (usually its cost).
Subtract any insurance or other reimbursement from the lesser of (1) or (2).
To find the decline in the property’s fair market value, you can use appraisal or repair costs.
Limits on Casualty Losses
Unfortunately, you can’t deduct all your casualty losses. From 2018 through 2025, you can only deduct personal casualty losses due to a federally declared disaster or to the extent you have casualty gains.
For example, a homeowner can claim a casualty loss if a wildfire (declared a federal disaster) destroys his home. But he gets no deduction if a faulty fireplace caused the fire and destroys his home (no federal disaster).
The law imposes major limits on your casualty-loss deduction. The general rule says that you may not deduct the first $100 and then deduct your loss only to the extent that it exceeds 10 percent of your adjusted gross income. Your final hurdle is that you then deduct the loss as an
itemized deduction. These rules significantly reduce or even eliminate many casualty loss deductions.
Fortunately, some casualty losses are not subject to these limits, including disaster losses sustained due to a federally declared major disaster from January 1, 2020, to February 25, 2021. Instead, losses from such disasters are subject to a $500 floor with no 10 percent adjusted gross income reduction. Under this rule, you deduct the loss whether or not you itemize. If you don’t itemize, you add the deductible loss to your standard deduction.
You have a choice for losses from a federal disaster: claim the loss in the year of the disaster or on the prior year’s return if it’s before October 15. This can result in a quick refund of all or part of the tax you paid that year.
If all this is not complicated enough, there’s one further wrinkle. A casualty such as a fire can result in a casualty gain instead of a casualty loss when the insurance proceeds you receive exceed the property’s adjusted basis (cost).
A casualty gain is taxable. But you may deduct casualty losses from the gains. Here, you don’t need a federal disaster.
Also, you can postpone tax on a casualty gain by buying replacement property.
If you have any questions or need my assistance, please contact us.
When you operate a business, you have a variety of tax breaks available.
The recently enacted Consolidated Appropriations Act extends and expands some of the breaks. We bring the following selection of them to your attention as a tax-strategy buffet.
You can deduct 100 percent of your dine-in and take-out business meals that are provided by restaurants in 2021 and 2022.
For hiring members of 10 targeted groups, you can obtain the work opportunity tax credit for first-year wages through 2025.
You can now qualify for the 39 percent new markets tax credit for investments through 2025.
The empowerment zone tax breaks that were scheduled to expire on December 31, 2020, are extended through 2025, but the new law terminates, for 2021 and later, both (a) the enhanced first-year depreciation rules and (b) the capital gains tax deferral break.
Employers may continue through 2025 making Section 127 education plan payments that cover student loan principal and interest up to the plan maximum of $5,250.
For residential rental property that you placed in service before 2018 and were depreciating over 40 years under the straight-line method, you can now use 30 years if you elect out of the Tax Cuts and Jobs Act business interest expense limitations.
Farmers may elect a two-year net operating loss carryback rather than the five-year carryback retroactively, as if this change were in the original CARES Act.
The $1.80 per-square-foot or $0.60 per-square-foot deductions for energy-efficient improvements to commercial buildings are now permanent.
Small Business Administration Economic Injury Disaster Loan advances and loan repayment assistance are not taxable, and you suffer no tax attribute reductions as a result of the tax-free monies.
Manufacturers of residential homes can claim a credit of $1,000 or $2,000 for homes that meet applicable energy-efficiency standards through 2021.
Your business can claim a business federal income tax credit for up to 30 percent of the cost of installing non-hydrogen alternative-fuel vehicle refueling equipment (say, for your employees’ electric vehicles) through 2021.
Your business can claim a federal income tax credit for buying vehicles propelled by chemically combining oxygen with hydrogen to create electricity, through 2021 (credits range from $4,000 to $40,000).
The new law extends the seven-year recovery period to cover motorsports entertainment complex property placed in service through 2025.
You can elect to claim the first-year write-off for the cost of qualified film, television, and theatrical productions commencing before 2025, subject to a $15 million per-production
limit or a $20 million limit for productions in certain disadvantaged areas.
For racehorses that are no more than two years old that you place in service during 2021, you may use three-year depreciation.
You do have to admire the opportunities that the tax law contains to help businesses. If you would like my help with any of the above, please don’t hesitate to contact us.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) made many temporary changes in the tax law. The new Consolidated Appropriations Act (CAA) adjusted some of these and left others to die on December 31, 2020.
With all the changes that took place in 2020, I thought you would like to be informed of the following insights.
Borrow $100,000 from Your IRA and Pay It Back within Three Years with No Tax Consequences
Thanks to the CARES Act, IRA owners who were adversely affected by the COVID-19 pandemic were eligible to take tax-favored coronavirus-related distributions (CRDs) from their IRAs during 2020—but only during 2020.
You could take as much as $100,000. You can then recontribute a CRD back into your IRA within three years of the withdrawal date and treat the withdrawal and later recontribution as a federal-income-tax-free rollover.
In effect, the CRD drill allowed you to borrow up to $100,000 from your IRA(s) and then recontribute (repay) the amount(s) at any time up to three years later, with no federal income tax consequences when all is said and done. There are no limitations on what you can use CRD funds for during the three years.
Status report. The CAA does not extend the CRD deal beyond 2020, but it clarifies that similar tax rules can apply to IRA distributions taken by folks who are affected by specified future disasters.
Suspension of Retirement Account Required Minimum Distributions
In normal times, you must begin taking annual required minimum distributions (RMDs) from traditional IRAs and tax-deferred retirement plan accounts after you reach age 72 (or age 70 1/2 if you turned 70 1/2 before 2020). The CARES Act suspended RMDs for calendar year 2020 as a COVID-19 tax relief measure, but only for that one year.
Status report. So far, lawmakers have not extended this deal.
Small-Employer Tax Credits to Cover Required COVID-19-Related Employee Paid Leave
The Families First Coronavirus Response Act (FFCRA) granted a federal tax credit to small employers to cover mandatory payments to employees who take time off under the FFCRA’s COVID-19-related emergency sick-leave and family-leave provisions.
Specifically, a small employer could collect a tax credit equal to 100 percent of qualified emergency sick-leave and family-leave payments made by the employer pursuant to the FFCRA. But the credit under the FFCRA covers only leave payments made between April 1, 2020, and December 31, 2020. Equivalent tax credit relief was available to self-employed individuals who took qualified leave between those dates.
Status report. The FFCRA expired by its terms on December 31, 2020. But the COVID-Related Tax Relief Act of 2020 (contained within the CAA) extends the small-employer credit to cover leave payments made between January 1, 2021, and March 31, 2021, that fall within the FFCRA framework.
There is no requirement for small employers to provide emergency sick-leave or family-leave payments after December 31, 2020. But between January 1, 2021, and March 31, 2021, employers can choose to make voluntary leave payments that fall within the FFCRA framework and can collect the credit if they do so.
Equivalent tax credit relief is available to self-employed individuals who take qualified leave between January 1, 2021, and March 31, 2021.
Liberalized Business Net Operating Loss Deduction Rules
Business activities that generate tax losses can cause you or your business entity to have a net operating loss (NOL) for the year. The CARES Act significantly loosened the NOL deduction rules and allows a five-year carryback for NOLs that arose in tax years 2018-2020.
So, an NOL that arose in 2020 can be carried back to 2015. NOL carrybacks allow you to claim refunds for taxes paid in the carryback years. Because tax rates were higher in pre-2018 years, NOLs carried back to those years can result in hefty tax refunds.
Status report. The CAA does nothing for NOLs that arise in tax years beginning in 2021—you can carry them forward only.
Suspension of Excess Business Loss Disallowance Rule
Before the CARES Act relief, the Tax Cuts and Jobs Act (TCJA) disallowed so-called excess business losses incurred by individuals in tax years beginning in 2018-2025. The TCJA defined an excess business loss as a loss that exceeds $250,000, or $500,000 for a married joint-filing couple. The $250,000 and $500,000 limits are adjusted annually for inflation.
The CARES Act suspended the excess business loss disallowance rule for losses that arose in tax years beginning in 2018-2020.
Status report. The CAA does nothing for excess business losses that arise in tax years beginning in 2021. As things stand, you effectively treat a 2021 excess business loss as an NOL that you can carry forward to future years.
As always, I’m here to be of service to you. If you need my help on any of the above or other tax issues, please don’t hesitate to contact us.
Disasters such as storms, fires, floods, and hurricanes damage or destroy property.
If property such as an office building, rental property, business vehicle, or business furniture is damaged or destroyed in a disaster, your business may qualify for a casualty loss deduction.
It’s easier to deduct business casualty losses than personal losses, but the rules are complex.
What Casualty Losses Are Deductible
Disasters such as fires and floods can result in a “casualty” because the damage, destruction, or property loss is from a sudden, unexpected, or unusual event.
Car accidents qualify as a casualty so long as they’re not caused by your willful act or willful negligence. Losses due to thefts and vandalism can also qualify.
Insurance covers many casualty losses. You must reduce your casualty loss by the amount of any insurance you receive or expect to receive. But unlike a personal loss, you are not required to file an insurance claim for a business casualty loss. You may wish to not do so if it will result in your policy’s cancellation or an increase in premiums.
How would you increase your total assets?
Well let the Government Help You!
Here’s how: with both the SEP IRA and the solo 401(k) retirement plans, your investment in your tax-favored retirement
Example. You invest $1,000 a month in your retirement. You are in the 40 percent tax bracket (combined federal and state), and you earn 10 percent on your investments. At the end of 30 years, you have $1.58 million in after-tax spendable cash, which comes from (in round numbers):
If you had no government help on the taxes and invested $1,000 a month in an investment that earned 10 percent (6 percent after taxes), you would have a little more than $950,000.
Winner. The retirement plan wins by $630,000—after taxes ($1.58 million vs. $950,000).
Okay, that’s the big picture. It tells you that tax-advantaged investing multiplies profits. So, do it.
If you would like to discuss your retirement options, please contact us.
The IRS can waive penalties it assessed against you or your business if there was “reasonable cause” for your actions.
The IRS permits reasonable cause penalty relief for penalties arising in three broad categories:
Contrary to what you might think, the term “reasonable cause” is a term of art at the IRS. This seemingly simple phrase has a precise and detailed definition as it relates to penalty abatement.
There are three instances where you might qualify for reasonable cause.
There are five instances where you likely do not qualify for reasonable cause penalty relief.
If you would like to discuss IRS penalty relief, please don’t hesitate to contact us!
The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted on December 27, 2020, deals with the annual tax extenders. Congress made some of them permanent, while others got short- or long-term extensions.
These are the big five Form 1040 tax breaks that were scheduled to expire on December 31, 2020:
Here is what Congress did with each of these five provisions:
Embedded in the COVID-19 relief law is $900 billion for financial assistance.
As you would expect in these unusual times, some of the relief is in the form of direct government financial assistance and some is from tax benefits that can impact both tax year 2020 and tax year 2021.
Most of the provisions create extra deductions or credits where Uncle Sam puts cash directly into your wallet. Here are four:
1. Recovery Rebate Payments and Credits
Remember those $1,200 checks many people got earlier in the year? Well, there’s another round of $600 payments coming, with rules very similar to the first round.
2. Paid Sick and Family Leave Credits
As you may remember from the March 2020 law, Congress provided two ways to give workers paid sick and family leave:
The tax credits require that the self-employed person or the employee was unable to work due to a qualifying situation between April 1, 2020, and December 31, 2020. The maximum non-working days eligible for the tax credits are
Under the new law, you now can claim these tax credits for qualifying days through March 31, 2021. But the new law did not increase the maximum creditable days.
3. 100 Percent Business Meal Deduction
The new December 27, 2020, law allows you to deduct 100 percent of your business-related expenses for food and beverages provided by a restaurant for amounts paid or incurred after December 31, 2020, and before January 1, 2023.
4. Charitable Contributions
The CARES Act made three major changes to charitable contribution deductions for tax year 2020:
The new law enacted on December 27, 2020, extends the increased charitable contribution deduction limits for individuals and corporations to tax year 2021. In addition, in tax year 2021, non-itemizers can deduct below-the-line cash charitable contributions up to $600 on a married-filing-joint return ($300 for singles).
If you would like to discuss any of the changes described above, please contact us!
Before the December 27, 2020, enactment of the new COVID-19 relief law, you may have chosen the PPP loan and given no thought to the employee retention credit.
Remember, under the original law, you had to choose between the retention credit and the PPP loan. Millions chose the PPP loan route.
But now the game has changed. You may, as a PPP recipient, qualify to take the employee retention credit retroactively for tax year 2020 and also going forward in tax year 2021.
Here are the key changes you as a PPP player need to know:
Two things to know about the Paycheck Protection Program (PPP) first draw enacted on December 27, 2020:
Who qualifies for first-draw PPP money today? You, most likely—if you file a business tax return and have not yet received any PPP monies.
But don’t wait. The money is going to run out fast, and once it’s gone, so is the PPP. And the new PPP ends March 31, even if the money is not gone by then.
You qualify for the PPP if any of the following are true:
As you know, Congress recently passed a massive new stimulus bill that was enacted into law on December 27, 2020. Most of the public’s attention has been focused on the bill’s authorization of additional stimulus checks, new PPP loans, and other aid targeted to struggling businesses.
But Form 1040 American taxpayers who are not in business are struggling as well. The stimulus bill contains a hodgepodge of eight new or extended tax breaks intended to help Form 1040 filers.
None of these tax breaks are earthshaking by themselves, but together they add up to a nice tax present for COVID-19-weary Americans.
Here are the eight new tax breaks that can help you:
Did you miss out on your prior opportunities to receive tax-free PPP cash?
Many did miss out. Why? One reason: the word “loan.” Who wants a loan? No one. Well, almost no one.
But who wants a tax-free cash gift? If you do, read on for the details. But first, you should know that the big picture works like this:
New Money on the Table
The new COVID-19 stimulus act sets aside $35 billion for first-time PPP applicants, with $15 billion of that made in loans for first-time applicants with 10 or fewer employees or made in amounts less than $250,000 to businesses in low-income areas.
The new deadline of March 31, 2021, replaces the expired deadline of August 8, 2020.
The monies available in this new round of PPP funding are on a first-come, first-served basis. Don’t procrastinate. Get your application for your first-time PPP monies in now.
If you would like to discuss the PPP, please contact us!
If you received an initial PPP loan, you can qualify for a second round (called a “second draw”) of tax-free PPP money.
To qualify for the second-draw PPP money, you must
The mechanics of the second-draw PPP loan amount follow the rules that apply to the original (first-draw) PPP loan, with some modifications. The overall limits work as follows:
During a period of your choice, beginning eight weeks from the origination date of the loan and ending 24 weeks after the origination date, you must use 60 percent or more of the monies for defined payroll in order to achieve 100 percent forgiveness.
Expenses that can qualify for forgiveness include the following:
And finally, keep these three thoughts in mind:
If you would like to discuss this second draw opportunity, please don’t hesitate to contact us!
Sixty-one million adults and over 12.6 million children in the United States have some type of disability.
If you have a disabled or blind child or other family member, or are disabled or blind yourself, you should know about ABLE (Achieving a Better Life Experience Act) accounts. These tax-advantaged accounts can be a real game changer for the disabled.
Ordinarily, a disabled person who receives government benefits can have only $2,000 in cash or other countable assets. This can make it impossible for disabled people to save money for emergencies, buy a house or car, or take a vacation.
This is where ABLE accounts come in. Contributions to ABLE accounts up to certain levels are not counted for purposes of means-tested programs for the blind and disabled. Disabled people can have up to $100,000 in an ABLE account without losing Social Security disability benefits.
Contributions to ABLE accounts are not deductible for federal income tax purposes, but the money in the account grows tax-free. Withdrawals are also tax-free if made for a variety of living- and disability-related expenses.
Up to $15,000 in total can be contributed to an ABLE account each year. Contributions can come from the disabled beneficiary, from family, and from friends. Disabled people who work can put in an additional amount limited to the lesser of their compensation or $12,490 in 2021.
A total amount of $300,000 to $500,000 can be deposited into an ABLE account, depending on the state. There is only one real drawback to ABLE accounts: they are available only for people who became blind or disabled before reaching age 26. This eliminates the majority of the disabled.
ABLE accounts are run by the states. Forty-two states and the District of Columbia have them. You don’t have to set up an account in the state where you live, and it can pay to shop around.
By the way, if you have a special needs trust, you can keep it. An ABLE account can be set up in addition to a special needs trust.
If you have any questions or need my assistance, please contact us!
Good news: the new Paycheck Protection Program (PPP) law enacted with the stimulus package adds dollars to your pocket if you have or had PPP money.
Note that the PPP money comes to you in what appears to be a loan. We say “appears” because you typically pay back a loan.
Done right, however, the PPP loan is 100 percent forgiven. The word “loan” makes some businesses leery of this arrangement. Don’t be. The PPP monetary arrangement is a true “have your cake and eat it too” deal.
And this remarkable deal applies to your past PPP loan, the PPP loan you have outstanding, and the PPP loan you are about to get if you have not had one before. Here are the details:
Loan Proceeds Are Not Taxable
The COVID-19-related Tax Relief Act of 2020 reiterates that your PPP loan forgiveness amount is not taxable income to you.
Expenses Paid with Forgiven Loan Money Are Tax-Deductible
As you may remember, the IRS took the position that expenses paid with PPP loan forgiveness monies were not deductible.
Lawmakers disagreed but were unable to get the IRS to change its position. The IRS essentially told lawmakers, “If you want the expenses paid with a PPP loan to be deductible, change the law.”
And that’s precisely what lawmakers did. The COVID-19-related Tax Relief Act of 2020 states that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.”
In plain English, the expenses paid with monies from a forgiven PPP loan are now tax-deductible, and this change goes back to March 27, 2020, the date the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted.
There’s more to this, of course. If you would like my help with your PPP loan or simply would like to talk about it, please contact us!
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.
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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.