PPP Loans

 The new stimulus bill just signed by the President allows the tax deduction for any related payroll or other expenses that were the basis for the PPP loan even if you have a reasonable expectation of forgiveness . The IRS had ruled that the expenses were not tax deductible since the loan forgiveness was tax exempt income. So the taxpayers won one over the IRS. 

2020 Mileage rates

 The IRS standard mileage rates for 2020 are: 57.5 cents per mile for business, 17 cents for medical, and 14 cents for charitable. The 2021 rates are not yet available. 

Roth Conversions

 A really smart strategy for some taxpayers is to convert part of their regular IRA into a Roth IRA. Who should do this? If your income has dropped significantly in 2020, this might be the right move for you. You would have to recognize taxable income for the amount of the conversion but the advantage will come later when you retire and will have a pool of funds you can draw down when you want with no tax implications. There are  no required minimum distributions for your Roth. Your money grows tax free. All of your withdrawals after a five year holding period and age 59 and 1/2 are tax free. You will leave a tax free inheritance to your family. You will also want to consider other issues such as using nonretirement assets to pay the taxes, taxable Social Security benefits, Medicare premiums, and the level of income for the 0% rate on capital gains ($80,000 on a joint return and $40,000 for a single return).  

PPP Loans

 On 11/18/2020 the IRS issued Revenue Ruling 2020-27 which indicates that companies that received a PPP loan cannot deduct the related covered expenses like wages if the loan is expected to be forgiven because of the tax benefit rule. This is true even if the loan has not been forgiven by 12/31/2020. Actually no PPP loans have been forgiven yet as far as I know. There only has to be a reasonable expectation of forgiveness at 12/31/2020 which I believe relates to most  PPP loans. 

Reduce Your Taxes for 2020 Right Now

 You have a month to take action. What should you do? See below for some ideas:

1. Make cash contributions to charities. You can offset 100% of your adjusted gross income this year with cash contributions instead of just 60% as in prior years.

2. Sell stocks that have losses to offset your capital gains. 

3. Do not take a distribution from your retirement plan this year. Required minimum distributions are not required for 2020.

4. Consider an opportunity zone fund investment to defer capital gains for 6 years.

5. Consider setting up a donor advised fund to concentrate your donations this year so you can itemize. 

6. Contribute to a Georgia Path2College 529 plan for your children's education. The state deduction is $4,000 per beneficiary for single returns and $8,000 per beneficiary for joint returns. 

7. Increase your employee 401k contribution to the maximum of $19,500.

8. Consider oil and gas investments and section 181 film investments.

9. If you have earned income, maximize your retirement plan contributions. You can contribute a maximum of $6,000 to an IRA and $7,000 if you are age 50 and above. If your income is above certain thresholds, your deduction may be limited.

10. Delay mailing bills to your customers until late December so you won't get payments until January if you have a cash basis business.

11. Make donations of household goods and clothing to Goodwill.

12. Buy office supplies, equipment, stamps, and software for your business.

13. Consider getting a mileage app like Mile IQ or a mileage log to document your business mileage. Undocumented business mileage will be rejected upon an IRS audit. 

14. Check to make sure all of your 2020 quarterly estimated tax payments have been made. The final one is due January 15, 2021.

15. Organize your tax documents in one file folder for 2020. Complete the tax organizer which will be sent to you soon. Summarize business expenses, cash donations under $250, medical expenses, and rental expenses and put amounts on the organizer. Keep the receipts at home. 

Qualified Dividends

 Qualified dividends are taxed at the favorable long term capital gains rates instead of the ordinary income tax rates. The reduced tax rates apply to dividends from domestic corporations and certain qualified foreign corporations. Also there is a 61 day holding period requirement for the stock to be held  in the 121 day period beginning 61 days before the ex-dividend date. 

Tax Organizer for 2020

I am working on my tax organizer for this year which I hope you will use. I plan to email these to all my clients by January 15, 2021. If you would prefer to get the organizer by regular mail, please let me know. 

Social Security

When should you sign up to receive your social security benefit? You can sign up to receive social security benefits as early as age 62. Your payment increases every month you wait up until age 70, and then then there is no benefit to any further delay. Those born between 1943 and 1954 can get 8% more each year they wait from age 66 to age 70 for a maximum social security benefit of 132% of their full retirement benefit. How many people delay until age 70? According to the Center for Retirement Research at Boston College, only 4 percent of women and 2 percent of men wait until age 70. I believe you should wait and collect the maximum benefit if you are in reasonably good health and don't need the extra money for living expenses. 

Recovery Rebate Credit

 Many of you received a stimulus check earlier this year. What you received was an advance based on your 2018 or 2019 adjusted gross income. The recovery rebate credit will be based on your 2020 adjusted gross income. The CARES Act provided for a stimulus check of $1,200 for individuals, or $2,400 for joint returns and $500 per child under age 17. The credit is phased out at the rate of 5% of adjusted gross income over $150,000 for joint returns and over $75,000 for individual returns. If you received too much advance stimulus, you will not have to pay it back on the 2020 tax return. If you didn't receive enough, you will get a credit against your 2020 taxes. Tutto bene.

Charitable Contributions in 2020

The Cares Act which was signed into law this year has created a new incentive for charitable giving. Taxpayers can deduct up to $300 in cash contributions even if they don't itemize. This is the limit for both single and joint returns. If you do itemize, the limit on cash contributions to public charities (501c3) has been increased from 60% of adjusted gross income to 100% of adjusted gross income. So this is the year to make that large cash donation. Donor advised fund contributions do not qualify for this. 

October 15

 October 15 marks the deadline for individual tax returns for 2019. One of the larger taxpayer penalties is the failure to file penalty if you don't get your tax return filed by the deadline. The penalty is 5% of the unpaid taxes each month or part of a month that the return is late up to a maximum of 25% of the unpaid amount. There is no penalty if no tax is due. 

Business Mileage

Business Use of a Car:

You have to document your business miles for the IRS in order to take a tax deduction. Documentation can be provided by a mileage log, an account book, diary, trip sheets, expense reports, or other similar evidence. I use the mileage record in Quickbooks for my business. You can buy a mileage log at an office supply store, and there are also many aps now that you can get. The Cohan rule that allows taxpayers to estimate some business expenses is not allowable for business mileage. Commuting between your home and your regular work location is not business mileage. 

Upon audit, the IRS will just throw out an estimate of business mileage without supporting documentation. A contemporaneous written record is the best defense showing the specifics of date, mileage and business purpose. 

Visiting the Social Security office

 At some point you may need to make an in person visit to the social security office to handle some problem that has come up with your benefits. It does not have to be a frustrating experience. You do not have to go to your nearest social security office. You can go to any such office in the country, and they can handle your problem. For example, my closest office is in Marietta but that office sometimes has a three hour wait to meet with someone. I would go to the Gainesville office in the future where there might not be any wait at all. 

Georgia Tax Rules and the IRS Rules

 The Governor just signed the 2020 conformity bill making the Georgia tax rules follow  the recent changes in the IRS rules enacted on or before March 27, 2020 with some significant exceptions. Georgia did not adopt any of the recent federal changes in the net operating loss rules. Also Georgia did not not adopt the 100 percent bonus depreciation rules or the twenty percent qualified business income deduction. 

What Insurance Premiums can be covered by an HSA(Health Savings Account)?

 The following 4 types of health insurance can be paid for from your HSA: 1. long-term care insurance 2. health care continuation coverage under COBRA 3. health care coverage while receiving unemployment and 4. Medicare parts B and D if you are 65 or older. You cannot use your HSA to pay for any medicare supplemental plans like Medigap. 

Give your employees a raise!

 A Presidential Memorandum has authorized the deferral of the employee share of the social security tax of 6.2% for the period Sept 1, 2020 to December 31, 2020. This is a voluntary program for the employer, and is only a deferral not a forgiveness of the tax. Employers are responsible for paying the deferred tax between Jan 1, 2021 and April 30, 2021 even if the employees no longer work for the company. Employees that make more than $104,000 are not eligible for the program. This is a great way to increase take home pay now for your employees while they are dealing with this crisis. In 2021, the employees will have their take home pay reduced by the pay back. 

Age Limit for Traditional IRA Contributions

 The age limit of 70 and 1/2 for traditional IRA contributions is now gone effective for 2020 and beyond. Now it doesn't matter how old you are, you can still make a regular IRA contribution as long as you have earned income. 

Set up a Sole Proprietorship Instead

 When you start a new business, think about the simplest form first like the sole proprietorship. This method does not require another tax entity because you just file a schedule C with form 1040 reporting your business income and expenses. You don't really miss out on most tax benefits with this form of business. Putting on the corporate shell does give you more liability protection, but you can also buy liability insurance to cover that risk. You don't have to pay legal fees to set up a sole proprietorship. You also don't have to pay annual fees of $50 to the state. Some taxpayers like to set up a separate business entity (LLC, Sub S or C corp) and put it on the shelf for use someday. I feel this is a bad idea as the IRS looks for the business tax forms to be sent in every year even if there is no activity, and you also still have to pay the state's annual registration fees. 

Donating Business Property

 When you donate business property to a charity, you can only deduct your cost or basis. Most business equipment has a basis of 0 because of depreciation so donating old business equipment to charities doesn't give you much of a tax break. You can deduct the cost not the retail value of donated inventory. This stands in marked contrast to donating clothing and household items where you can  deduct the fair market value which is usually much less than the cost. 

Statute of Limitations

The IRS has 3 years from the later of the time you filed the return or the due date of the return to examine it and assess additional tax. For example, if you filed your 2016 tax return on March 15, 2017, then the IRS had until April 15, 2020 to examine the return. If you extended the 2016 tax return to October 15, 2017 and filed by that date, then the IRS has until October 15, 2020 to pick it for examination. Pretty soon most taxpayers can throw away the 2016 supporting documents.

Emailing Tax Returns over the Internet

Whenever I send you an electronic copy of your tax return, I use ahead pdf encrypt software to send it encrypted. I can easily set up a password so you can open the file on your end. This can work both ways. You might consider sending me confidential files using software that will encrypt it so that it remains private if you don't want to mail to me or drop it off at my office. I paid $25 several years ago for this software and that is the only cost. There are no annual fees or update charges.

Temporary Tax Breaks Revived for 2020 and Retroactive to 2018

Congress has given us back some tax breaks that had expired. They include the following:
1. Tuition and fees deduction
2. Medical expenses threshold at 7.5% instead of 10%
3. $2 million exclusion for the cancellation of residence mortgage debt
4. Mortgage insurance premium deduction
If any of these apply to you for 2018 and 2019, you would have to file an amended return to take advantage of them if you have already filed.

Kiddie Tax up to age 23

For 2020, investment income such as dividends, interest, and capital gains over $2,200 will be taxed at the parent's marginal tax rate again. Children's income was taxed at trust rates for 2018 and 2019, but the change in the law which happened on 12/20/2019 is retroactive to 2018. You may have to file an amended return to take advantage of this change if it is beneficial to your situation.

Charity Donations

We have new rules for donations for 2020 that are very favorable for taxpayers. For taxpayers that itemize, the 60% adjusted gross income limitation has been increased to 100%. For those that take the standard deduction, there is a new above the line deduction up to $300 in donations. 

Sale of your Home

One of the best tax breaks we have is the exclusion of $500,000 of gain on the sale of your principal residence for joint sellers and $250,000 for single sellers. To qualify the house had to be your principal residence for at least 2 out of the 5 years prior to the sale. If you provide a written certification to the closing attorney that the property sold was your principal residence and that the full amount of the gain is excludable from gross income, then no reporting is required on your tax return. If you do not provide the certification, then you will get a form 1099S which reports the gross amount of the sale of the property to the IRS. The sale will then need to be reported on the tax return. It used to be that you had to track all of your improvement costs since you bought the property, but for most people that is no longer necessary due to the gain exclusion.

Tax Payments

The IRS and most states have changed their due dates for 2019 taxes and 2020 estimated taxes  to July 15. The 2020 estimated taxes for the first two quarters normally due on April 15 and June 15 is now due on July 15.

Transfer on Death (TOD)

If you do not have a spouse, holding financial assets with a TOD designation is a great way to make it easier on your executor to handle the distribution of your estate. Holding assets jointly with adult children can be a problem as they have access to the funds which you may not want, and the IRS will consider that you have gifted 1/2 of the account to your child which may necessitate a gift tax return. A power of attorney goes away upon the death of the signer so it is of no help in moving assets after death. With a TOD all you need is the death certificate to move assets.

S Corporation Basis

In order to deduct S corporation losses, you need basis in your stock. How do you get basis? Stock basis is increased by cash or property contributions, ordinary business income, and any other items of separately stated income. Stock basis is decreased by distributions, nondeductible expenses, ordinary income business losses, and other deductible expenses. You can also increase basis by loaning funds directly to the S corporation with a formal bona fide debt instrument. Whether or not it is a bona fide debt is subject to IRS scrutiny.  Loan basis is very difficult to establish. A better way would be to contribute cash to the S corporation before year end if you feel you need more basis to deduct losses or avoid capital gains. If distributions exceed basis, then you have to report a capital gain because basis cannot be reduced below 0. If losses exceed basis, then the losses are suspended until future years when the basis is restored.

Roth Conversions

A good tax strategy for 2020 for some taxpayers who are expecting much less income or even losses would be to convert a portion of their retirement plan to a Roth. This would generate taxable income in the year of conversion but might not create a tax liability if you plan it right. This would set up a source of tax free retirement funds for the future which would not be taxable as long as you didn't pull any money out within 5 years. This also is a good strategy to maximize your 20% qualified business income deduction if your taxable income is lower than your qualified business income.

Are Paycheck Protection Loan (PPP) Expenses Deductible?

What the government gives you it can also take away. The IRS has come out with notice 2020-32 saying that PPP expenses such as payroll costs, qualified mortgage interest, rent and utilities are not tax deductible if the PPP loan is forgiven because the forgiveness is tax free income and they want to prevent a double tax benefit. I believe Congress intended the expenses to be deductible and 5 senators filed a bill on May 5 to make it so. Presently negotiations are going on between the senators and the IRS to withdraw notice 2020-32. We will see what happens.

Paycheck Protection Program (PPP)

This is a loan program designed to support small businesses in this crisis to keep their employees on the payroll. It will cover 8 weeks of payroll costs including benefits along with interest on mortgages, rent and utilities. The loan can be forgiven by the government if you qualify on the spending side. The details are fluid to say the least with constant changes. Check out this website to keep up with PPP: https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses.

Georgia Scholarship Program

Georgia allows taxpayers to get a 100% tax credit for payments made to the Georgia scholarship program. Unfortunately, it is not as good as it used to be as it is no longer deductible on the federal return since August 27, 2018 per treasury decision 9864.

No RMD for 2020

I stated this in an earlier post but I wanted to highlight it again because it is so significant. No  minimum distributions from your retirement plans are required in 2020! This affects those over age 72 and allows you to leave the money in your plan and let it hopefully grow for the rest of the year. You need to contact your broker and stop automatic withdrawals if you haven't already done so. RMD's will start up again in 2021.

2020 Estimated Tax Payments

Both the IRS and Georgia have extended the estimated payments due on April 15 and June 15 to July 15. If you have the federal payments set up to come automatically out of your bank account, you need to call the IRS automated line 888-353-4537 to cancel the June 15 payment. I can send you a paper voucher to use instead with a mailed payment on July 15.

Stimulus Payments and the Cares Act

The stimulus bill(Cares Act) has been signed into law and has many provision to help us deal with the economic impact of the pandemic. Some of the more significant items are listed below:

1. Each qualifying individual will get $1,200 ($2,400 if filing jointly) plus $500 per child under 17. The amount phases out at $75,000 ($150,000 if filing jointly) of adjusted gross income so no payments will be made at an adjusted gross income of $99,000 for individuals and $198,000 for joint returns. Dependents do not qualify for payments. The Treasury department will use your 2018 tax return or 2019 if it has been filed to determine your adjusted gross income. The payments will be direct deposited into your bank account if that was provided on your tax return. Otherwise you will get a check. The IRS and Treasury have a website irs.gov/coronavirus which will soon provide more information about these payments. These payments are not taxable income.
2. A charitable contribution of up to $300 can be deducted beginning in 2020 for those that do not itemize.
3. You do not have to take a required minimum distribution from your retirement plan in 2020 which would have been based on the value of your account at 12/31/19.
4. Waives the 10% early withdrawal penalty from retirement plans for coronavirus related distributions.
5. Qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property now have a depreciation period of 15 years which qualifies them for 100% bonus depreciation. Generally to be qualified, construction had to be done on nonresidential real property already placed in service.

New Filing Deadline for Georgia

On March 25 Georgia extended tax day to July 15 along with the IRS without penalties or interest. This includes the first quarter estimate payment for 2020 estimated tax that was due on April 15.

New Filing Deadline

Your federal tax return is now due on July 15. All federal tax payments due on April 15 such as balance due for 2019, quarter 1 estimate for 2020 taxes, and extension payments are now due on July 15. Federal interest and penalties start on July 16. However, Georgia and most states still have the April 15 deadline.

New Retirement Rules

The Secure Act was signed into law in December of 2019 and is effective for 2020. The new law makes two very good changes: the age limit of 70 1/2 for making regular IRA contributions is gone and the age for required minimum distributions has been increased from 70 1/2 to age 72. The old rules are still in effect for the 2019 tax return however.

Corrected Brokerage Statement 1099's

It is always fun to get a corrected 1099 after your tax return has been sent in. For 2019 the IRS is no longer requiring financial institutions to send amended 1099's if the change is  $100 or less in any box on the form. This should cut down on the number of amended 1099's considerably.

Health Insurance

The rules have changed for 2019 and after tax returns. There no longer is a penalty if you don't have qualified health care insurance. You can now get just catastrophic health care insurance at a fraction of the cost of Obamacare. Many taxpayers also seem to get caught on the Obamacare subsidy if they estimate their  income too low for the next year which results in having to give some or all of the subsidy back. 

Kiddie Tax

The rules have changed to allow more flexibility for paying taxes on unearned income such as dividends, interest, and capital gains over $2,200 for children under age 24. You now can elect to pay taxes under the old method based on the parent's tax rate instead of the trust rate. The trust rate reaches the max rate of 37% on income over $12,750. You can also amend 2018 to make the election to be taxed on the parent rate for that year.

To Itemize or take the Standard Deduction

The standard deduction is now $24,400 for joint returns and $12,200 for single returns. You also get another $1,300 if you are at least age 65 on joint returns and $1,650 for single returns. Many taxpayers who used to itemize no longer need to track the medical expenses, taxes paid, donations, and mortgage interest since they add up to less than the standard deduction. Medical expenses are also subject to a threshold of 7.5% of adjusted gross income and taxes are maxed out at $10,000. However if you are filing a joint GA return and your itemized deductions exceed $20,000, you should itemize since the combined federal and state taxes will be less than if you take the standard deduction since GA has such a low standard deduction. You have to do the same in GA as you do on the federal return regarding itemization or taking the standard deduction. The GA standard deduction is $4,600 for single and $6,000 for joint plus another $1,300 for age 65 and older. 

Long Term (assets held over 1 year) Capital Gains Tax Rates for 2019

Many times clients ask me what the capital gains rate will be for a transaction they are contemplating. It is not an easy answer. There are 5 different rates and the lower 3: 0%, 15% and 20% depend on the taxpayer's taxable income. For instance taxpayers filing a joint return  with taxable income under $78,750 pay at the 0% rate in 2019. The 25% rate applies when you sell depreciated property like rental property with unrecaptured section 1250 gain. The 28% long term capital gains rate applies to the sale of collectibles which include such assets as works of art, rugs, antiques, stamps, coins, metals like gold bullion, vintage cars, and alcoholic beverages. There is another sneaky add on Obamacare tax of 3.8% on capital gains if your adjusted gross income is above $250,000 (joint) and $200,000(single).

Hobby Income and Expenses

If the IRS classifies your business as a hobby, really bad things happen such as the income is taxable as other income but you can't deduct any of the expenses. There is a presumption that your business is not a hobby if you have a profit in at least 3 out of 5 years. However if you can prove you have a profit motive through facts and circusmstances then you are still ok even if you don't meet the 3 out of 5 year test. How do you prove you have a profit motive? You have to conduct your business in a professional manner by having a business checking account, a business credit card, keeping good records, having a business license, having a business plan, and having business cards. The IRS will look at the time and effort you spend on the activity and whether the activity is a fun one. If you are having too much fun, then the presumption is it is a hobby.

More Last Minute Tax Changes (Tax Extenders)

Last month Congress passed some additional tax changes, the more important of which are included below:

1. The credit for nonbusiness energy property additions such as qualified windows, doors, skylights,  roofs, furnaces, heat pumps, and water heaters to your home has been extended through 2019. It is subject to a lifetime cap of $500. Many taxpayers have already received the maximum credit in past years when it was available.
2. Property that dispenses alternative fuels including natural gas, hydrogen, and electricity can qualify for a $1,000 credit if installed at your home. This provision has been extended through 2019.
3. The exclusion of $2,000,000 of qualified principal residence indebtedness forgiveness from taxable income has been extended through 2019.
4. Mortgage insurance premiums on your home will still be deductible in 2019 if your adjusted gross income is under $100,000.
5. The qualified tuition and related expense deduction of $4,000(adjusted gross income AGI under $130,000 for joint returns) and $2,000(AGI under $160,000 for joint returns) has come back for 2019.
6. The medical expense deduction floor of 10 percent of AGI has been dropped to 7.5 percent for 2019.

New Retirement Changes for 2020

President Trump signed the Secure Act in December 2019 which made several key changes in retirement law. The 3 most significant changes are the following:
1. Non spouse beneficiaries have to withdraw all of the funds from an inherited IRA over a ten year period instead of over their life expectancy. This change will accelerate taxable income for many taxpayers.
2. Required minimum distributions from regular IRA's won't have to start until age 72 instead of age 70 and 1/2. This is a very popular change.
3. The age limit for regular IRA contributions has been waived. It used to be you couldn't make contributions after you reached 70 and 1/2. Your contribution is still limited by the earned income of you and your spouse. Also your contribution may not be deductible if your adjusted gross income is over a certain amount.  In my opinion you should make the maximum contribution every year.