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.