425 Business Interview

In November, I had the opportunity to be interviewed by Kelly Stroh with 425 Business Magazine. We discussed business taxes for 2020/2021. It’s completely representative of 2020 craziness that after the interview went to print we had so many changes in December.

Here’s the article which was published on January 6, 2021.

Let’s update of a few items based upon what happened at the end of 2020 with the Tax Certainty and Disaster Tax Relief Act of 2020.

PPP Loans - Yes! This program was a huge relief in 2020. However, on January 7, 2021 the IRS issued Rev Rul 2021-2 which took into account the changes and obsoleted some of the December guidance. Now, business expenses paid with amounts received from loans under the PPP are deductible as trade or business expense even if the PPP loan was or is expected to be forgiven. Also, the forgiveness doesn’t reduce any tax attributes or deny basis increase in assets. It applies to tax years ending after March 27, 2020. This is great news for Federal taxes! As a caution, not all states follow federal. Please check with your tax advisor and verify the state reporting requirements here.

Business Meals Deduction - This one definitely deserves a mention. The Tax Relief Act of 2020 allows for 100% deduction of food and beverage provided by a restaurant if paid or incurred in 2021 and 2022. Other rules, such as the nondeductible nature of entertainment expenses, remain unchanged. Its also assumed that food and beverage NOT provided by a restaurant will still be subject to the 50% disallowance.

Health and Dependent Care Flexible Spending Arrangements - When permitted by the plan there can be a few changes to unused carryovers. FSA may carryover unused 2020 benefits to 2021, and 2021 benefits to 2022. The grace period for a play year ending in 2020 or 2021 may be extended to 12 months after the plan year end. An employee can make changes in election amounts without a status change in 2021. Also, the maximum age of eligible dependents for dependent care may be increased from 12 to 13 for the 2021 year. You can even amend the plan retroactively if adopted by the last day of the first calendar year beginning after the end of the year in which it is effective. This again depends upon what is permitted by the plan. Make sure your communicate with the employees if your plan has been amended and how that amendment has changed their plan for 2020, 2021, and 2022.

Hope this update was helpful. Let me know if you have questions.

Happy 2021!

Four ways a “simple” 1040 can save on taxes

Do you have a “simple” 1040? Do you receive a W-2 and have straightforward investments? It probably seems like there is not a lot of fancy planning you need to do. You might be right, though that doesn’t mean you shouldn’t consider some proactive steps before the end of the year. Let’s check a few areas where you might be able to save on your tax bill.

1. Charitable Giving - Clients who itemize are well aware of the tax benefits related to charitable giving. New for the 2020 tax year, there is an opportunity for individuals who don’t itemize to get a benefit. The IRS has allowed for a charitable deduction up to $300 even if you don’t itemize.

2. Employer Benefits - If your employer offers a complete benefit package, do a quick check to see which benefits you are utilizing effectively.

   • Childcare - Flexible spending arrangement (FSA), if offered by your employer, can almost always save in your daycare costs. Up to $5,000 can be put into the FSA to help reduce income and FICA taxes for the taxpayer.

   • 401(k) - If you are fortunate enough to increase your savings in 2020, consider utilizing your 401(k). You’ll save on tax and may have the additional benefit of employer matching opportunities. If cash flow is an issue, the tax savings from utilizing the 401(k) might not be worth the overall decrease to your cash flow.

   • Health savings accounts (HSA)- Check with your employer if they have an program to help with employee HSA’s. These can be a good way for employees to save for emergency medical bills and keep what they save out of their taxable income. Some employers even help fund a portion of the HSA.

3. RMD’s - The SECURE act raised the required minimum distribution (RMD) age from 70 1/2 to 72. Better yet, in 2020 RMD’s aren’t required at all per the CARES Act. If you took a 2020 RMD, you had until August 31st to put the money back into the individual retirement account.

4. Roth Conversions - If your income is lower in 2020, this may be a good year to consider converting your IRA (pre-tax) to a Roth IRA (after-tax). You’ll pay more tax now, but then you won’t pay tax in the future when you withdraw.

   • There are some things to be aware of here. If the taxpayer withdraws from the Roth within 5 years of conversion, then they may be subject to the 10% early withdrawal penalty. Talk to your financial advisor to see if this is a good fit with your overall retirement planning strategy.

   • Sometimes your income is high enough that you can’t benefit from deductible contributions to traditional IRAs. In that case, speak to your financial advisor about a Backdoor Roth. In this situation, you put non-deductible contributions into a traditional IRA, then you convert the traditional IRA to a Roth. The conversion of the amount you contributed isn’t taxable, because the original contribution was non-deductible. The earnings in the conversion are taxable. There are some nuances to these strategies so be sure to talk to your advisor prior to either of these types of conversion.

   One final tip isn’t actually a way to save on taxes, but it is a way to increase your 2020 cash flow. The CARES act may provide the opportunity to access retirement account funds penalty free for COVID-19 related withdrawals up to $100,000. Remember, this is penalty free not income tax free. If you do make a withdrawal be sure to plan for the increased tax bill when April comes around. There may be options to spread the taxes from the withdrawal over your 2020, 2021, and 2022 tax returns. You can also pay back the withdrawal over 2020, 2021, and 2022 and avoid the tax altogether, if the entire withdrawal is repaid.

   Eligible plans may include IRAs and employer plans, such as 401(k)’s. COVID-19 related withdrawals includes a taxpayer, spouse, or dependent diagnosed with COVID-19. Adverse financial consequences as a result of being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19. If lack of childcare due to COVID-19 means that you are unable to work, then that would also qualify.

   I hope you enjoyed these ideas. Good luck with your 2020 tax planning.

Additional relief for Stock Attribution

The IRS released final rules regarding reporting ownership attribution of foreign corporations under Section 958(b) of TCJA (2017) and finalized proposed regulations published in 2019.

Who cares?

US persons that have an ownership interest, make payments to, or receive payments from certain foreign corporations.

What happened?

In the 2017 change , stock of a foreign corporation, owned by a foreign person could be attributed to a US person under 318(a)(3). This was used to determine if the US person was a US shareholder of the foreign corporation and whether the foreign corporation was considered a controlled foreign corporation (CFC).

In late 2019 the IRS issued proposed rules to repeal that particular change as well as to include relief from certain information reporting requirements and safe harbors related to determining whether a foreign corporation is a CFC and determining taxable income and E&P of a CFC.

There are, of course, more details. If your investments were affected by the 2017 change and you think changes to 958(b) affect your situation, we recommend you talk to your tax advisor.

Weekly tax updates 9/18/2020

What’s exciting this week?

Don’t forget the approaching 10/15 tax deadline! Often this deadline applies to extended individual and corporate tax returns.

• California FTB released guidance on franchise tax implications for corporations with no previous connections to the state who now have employees teleworking from CA. COVID-19 Pandemic-Related Telecommuting Nexus Relief and PL 86-272.

• Netherlands - Significant changes to corporate income tax rate structures in 2021 as well as the allowance of a reserve for losses resulting from COVID-19.

• Oregon - Victims of Oregon Wildfires have until January 15, 2021 to file various individual and business tax returns and make tax payments. The payment relief does NOT apply to payments that were due July 15, 2020 but does apply to the quarterly payment that was due September 15, 2020. See IR-2020-2015 for more details.

• Former S Corps - The IRS added Section 1271(f) on Tuesday, which extends the period to avoid tax on distributions of money to shareholders of an S Corp following its transition to a C Corp. See here.

• Deloitte released an updated comparison of the Biden vs Trump tax plans.