You may be using IRS mileage rates to deduct the cost of your business vehicle.

We have a new tool that can tell us whether the mileage rates are a good deal for your taxes. With this tool, we look at the entire life of your vehicle, including any gain or loss on sale or disposition, to get to the bottom-line dollar benefit or detriment that the IRS-mileage-rate method gives you.

This is a cradle-to-grave examination of the mileage rates versus the actual-expense method.

If the tool tells us that the mileage rates are to your benefit, great.

On the other hand, if it turns out that the mileage rates are not optimal for you, we have at our disposal an IRS procedure that allows us to switch you to the actual-expense method so you pocket more after-tax dollars.

You may have noticed that the IRS is in a bad way.

It has a backlog of millions of unprocessed paper tax returns, and taxpayers can’t get through to the agency on the phone. Congress noticed and took action by passing a massive funding of the IRS in the recently enacted Inflation Reduction Act.

The IRS will get an additional $80 billion over the next decade. This includes $35 billion for taxpayer services, operations support, and business systems. Among other things, the IRS plans to use these funds to update its antiquated IT systems (some of which date back to the 1960s), improve phone service, and speed up the processing of paper tax returns.

Despite what you may have heard in the media, the IRS will not expand by 87,000 new employees. It will still be smaller than it was 30 years ago. It may grow by 20,000 to 30,000 workers over the next decade, and the number of revenue agents could increase to 17,000 by 2031—over twice as many as today.

The IRS will have an additional $45 billion to spend on enforcement. Treasury Secretary Janet Yellen has promised that IRS audit rates will remain at “historical levels” for taxpayers earning less than $400,000 annually.

Audit rates will rise for taxpayers earning $400,000 or more per year. If you’re in this group, it’s wise to plan ahead to avoid trouble with a beefed-up IRS.

You should keep complete and accurate records and file a timely tax return. Of course, this is something you should be doing anyway.

Here are a few special areas of concern:

• Cryptocurrency. You can expect increased IRS audits dealing with cryptocurrency transactions. If you’re one of the millions of Americans who engage in such transactions, make sure you keep good records and report any income you earn.

• S Corporations. If you’re an S corporation shareholder-employee, you should have your S corporation pay you an arguably reasonable salary and benefits, and document how you arrived at the amount.

• Syndicated Conservation Easements. Be aware that the IRS is auditing all of these deals, and its scrutiny of them will likely grow.

• Offshore Accounts. You’re supposed to report these to the U.S. Treasury. Failure to do so subjects you to substantial penalties. In recent years, the IRS has gone after banks and bank account holders who hide assets in offshore accounts. In future years, we can expect the IRS to place even greater emphasis on identifying and tracking such offshore assets.

• Partnerships. Partnerships and multi-member LLCs taxed as partnerships (this describes most of them) are already the subject of the Large Partnership Compliance program, which uses data analytics to select large partnership returns for audit. The IRS will likely devote more resources to this program in the future.

Small-business owners with one to 49 employees should consider a medical plan for their business.

Sure, it’s true that with 49 or fewer employees, the tax law does not require you to have a plan, but you should consider one.

When you have 49 or fewer employees, most medical plan tax rules are straightforward.

Here are six opportunities for you to consider:

1. Make sure to claim the federal tax credit equal to 100 percent of the required (2020) and the voluntary (2021) emergency sick leave and emergency family leave payments. You likely made payments that qualify for the credits.

2. If you have a Section 105 plan in place and have not been reimbursing expenses monthly, do a reimbursement now to get your 2022 deductions, and then put yourself on a monthly reimbursement schedule in 2023.

3. If you want to implement a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) but you have not yet done so, make sure to get that done correctly now. You are late, so you could suffer that $50-per-employee penalty should your lateness be found out.

4. But if you are thinking of the QSEHRA and want to help your employees with more money and flexibility, consider the Individual Coverage Health Reimbursement Arrangement (ICHRA). It’s got more advantages.

5. If you operate your business as an S corporation and want an above-the-line tax deduction for the cost of your health insurance, you need the S corporation to (a) pay for or reimburse you for the health insurance and (b) put that insurance cost on your W-2. Make sure the reimbursement happens before December 31 and you have the reimbursement set up to show on the W-2.

6. Claim the tax credit for the group health insurance you give your employees. If you provide your employees with group health insurance, see whether your pay structure and number of employees put you in a position to claim a 50 percent tax credit for some or all of the monies you paid for health insurance in 2022 and possibly in prior years.

The clock continues to tick. Your retirement is one year closer.

You have time before December 31 to take steps that will help you fund the retirement you desire. Here are four things to consider.

1. Establish Your 2022 Retirement Plan

First, a question: do you have your (or your corporation’s) retirement plan in place?

If not, and if you have some cash you can put into a retirement plan, get busy and put that retirement plan in place so you can obtain a tax deduction for 2022.

For most defined contribution plans, such as 401(k) plans, you (the owner-employee) are both an employee and the employer, whether you operate as a corporation or as a proprietorship. And that’s good because you can make both the employer and the employee contributions, allowing you to put a good chunk of money away.

2. Claim the New, Improved Retirement Plan Start-Up Tax Credit of Up to $15,000

By establishing a new qualified retirement plan (such as a profit-sharing plan, 401(k) plan, or defined benefit pension plan), a SIMPLE IRA plan, or a SEP, you can qualify for a non-refundable tax credit that’s the greater of

• $500 or
• the lesser of (a) $250 multiplied by the number of your non-highly compensated employees who are eligible to participate in the plan, or (b) $5,000.

The law bases your credit on your “qualified start-up costs.” For the retirement start-up credit, your qualified start-up costs are the ordinary and necessary expenses you pay or incur in connection with

• the establishment or administration of the plan, or
• the retirement-related education of employees for such plan.

3. Claim the New Automatic Enrollment $500 Tax Credit for Each of Three Years ($1,500 Total)

The SECURE Act added a non-refundable credit of $500 per year for up to three years, beginning with the first taxable year (2020 or later) in which you, as an eligible small employer, include an automatic contribution arrangement in a 401(k) or SIMPLE IRA plan.

The new $500 auto-contribution tax credit is in addition to the start-up credit and can apply to both newly created and existing retirement plans. Further, you don’t have to spend any money to trigger the credit. You just need to add the auto-enrollment feature (which does contain a provision that allows employees to opt out).

4. Convert to a Roth IRA

Consider converting your 401(k) or traditional IRA to a Roth IRA.

You first need to answer this question: How much tax will you have to pay to convert your existing plan to a Roth IRA? With this answer, you now know how much cash you need on hand to pay the extra taxes caused by the conversion to a Roth IRA.

Here are four reasons you should consider converting your retirement plan to a Roth IRA:

1. You can withdraw the monies you put into your Roth IRA (the contributions) at any time, both tax-free and penalty-free, because you invested previously taxed money into the Roth account.

2. You can withdraw the money you converted from the traditional plan to the Roth IRA at any time, tax-free. (But if you make that conversion withdrawal within five years of the conversion, you pay a 10 percent penalty. Each conversion has its own five-year period.)

3. When you have your money in a Roth IRA, you pay no tax on qualified withdrawals (earnings), which are distributions taken after age 59 1/2, provided you’ve had your Roth IRA open for at least five years.

4. Unlike with the traditional IRA, you don’t have to receive required minimum distributions from a Roth IRA when you reach age 72—or to put this another way, you can keep your Roth IRA intact and earning money until you die. (After your death, the Roth IRA can continue to earn money, but someone else will be making the investment decisions and enjoying your cash.)

Here are six powerful business tax deduction strategies you can easily understand and implement before the end of 2022.

1. Prepay Expenses Using the IRS Safe Harbor

You just have to thank the IRS for its tax-deduction safe harbors.

IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.

Under this safe harbor, your 2022 prepayments cannot go into 2023. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.

For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Friday, December 30, 2022, you mail a rent check for $36,000 to cover all of your 2023 rent. Your landlord does not receive the payment in the mail until Tuesday, January 3, 2023. Here are the results:

• You deduct $36,000 in 2022 (the year you paid the money).
• The landlord reports taxable income of $36,000 in 2023 (the year he received the money).

You get what you want—the deduction this year.

The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.

2. Stop Billing Customers, Clients, and Patients

Here is one rock-solid, straightforward strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2022. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)

Customers, clients, and insurance companies generally don’t pay until billed. Not billing customers and clients is a time-tested tax-planning strategy that business owners have used successfully for years.

Example. Jake, a dentist, usually bills his patients and the insurance companies at the end of each week. This year, however, he sends no bills in December. Instead, he gathers up those bills and mails them the first week of January. Presto! He postponed paying taxes on his December 2022 income by moving that income to 2023.

3. Buy Office Equipment

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2022.

Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).

4. Use Your Credit Cards

If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.

But suppose you operate your business as a corporation and are the personal owner of the credit card. In that case, the corporation must reimburse you if you want the corporation to realize the tax deduction, which happens on the reimbursement date. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.

5. Don’t Assume You Are Taking Too Many Deductions

If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.

If you are starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.

You used to be able to carry back your NOL two years and get immediate tax refunds from prior years, but the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.

What does this all mean? Never stop documenting your deductions, and always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.

6. Deal with Your Qualified Improvement Property (QIP)

In the CARES Act, Congress finally fixed the qualified improvement property (QIP) error that it made when enacting the TCJA.

QIP is any improvement made by you to the interior portion of a building you own that is non-residential real property (think office buildings, retail stores, and shopping centers)—if you place the improvement in service after the date you place the building in service.

The big deal: QIP is not real property that you depreciate over 39 years. QIP is 15-year property, eligible for immediate deduction using either 100 percent bonus depreciation or Section 179 expensing. To get the QIP deduction in 2022, you must place the QIP in service on or before December 31, 2022.

Planning note. If you have QIP property on an already filed 2019 return that you did not amend, it’s on that return as 39-year property. You need to fix that—and likely add some cash to your bank account because of the fix.

Do you know all the ways to collect tax-free income?  Surprisingly enough, there are still more than a few ways to do it.  Here’s a summary of what we think are the best federal-income-tax-free opportunities for individual taxpayers. 

1. Roth IRAs
2. Social Security benefits up to the taxable limits
3. Tax-free IRA withdrawals (on top of tax-free Social Security)
4. Home sale gains of up to $250,000 ($500,000 if married, filing jointly)
5. Tax-free capital gains and dividends when you hit the sweet spot
6. Capital gains sheltered with capital losses
7. Stepped-up inherited assets
8. Section 1031 real estate exchanges when held until death
9. Qualified small business tax gains
10. Section 529 college savings plans
11. Coverdell Education Savings Accounts

When it comes to tax planning, tax-free tops the list.

The president signed the Inflation Reduction Act into law on August 16, 2022. It contains some valuable tax credits for homeowners.

When it comes to taxes, nothing is better than a tax credit since it is a dollar-for-dollar reduction in the taxes you must pay (unlike a tax deduction that only reduces your taxable income). In other words, a $1,000 credit saves you $1,000 in taxes.

The new law extends and expands three tax credits intended to encourage homeowners to make their homes more energy efficient and to facilitate the use of electric vehicles.

Energy Efficient Home Improvement Credit

The new law creates the 2023 Energy Efficient Home Improvement Credit that helps homeowners pay for various types of energy efficiency improvements, including

• exterior windows, skylights, and doors;
• home insulation;
• heat pumps, water heaters, central air conditioners, furnaces, and hot water boilers;
• biomass stoves and boilers; and
• electric panel upgrades.

The old credit contained a tiny $500 lifetime cap. Lifetime caps are gone beginning in 2023.

Instead, the new law gives you a $1,200 annual cap along with specific caps on some improvements. But overall, you can perform many energy efficiency projects over several years and collect a credit each year.

Residential Clean Energy Credit

Most taxpayers earn the Residential Clean Energy Credit by installing solar. Two good things here. First, the new law extends the credit through 2034. Second, the new law increases the credit from 26 percent to 30 percent for eligible property placed in service in 2022 through 2032.

There is no annual or lifetime cap on this credit. The average solar project cost on a home is over $20,000, so this credit can save you more than $6,000.

You can also apply this credit to the cost of storage batteries, solar water heaters, geothermal heat pumps, small residential wind turbines, and residential fuel cells.

Home Electric Vehicle Charger Credit

The new law extends through 2032 the tax credit for installing a home electric charger. The amount of credit remains the same: a non-refundable credit equal to 30 percent of the cost of a home charger, capped at $1,000. But starting in 2023, the credit will be available only for homeowners who live in low-income or rural areas.

Through October 2022, you can buy Series I bonds that pay 9.62 percent interest. And you receive that rate for six months from the time of purchase.

What happens after that? On November 1, 2022, the U.S. Treasury Department sets a new six-month rate equal to the fixed rate (currently zero) plus the Consumer Price Index inflation rate.

The interest you earn for the first six months gets added to the principal, and you earn interest on that interest during the next six months (think compound interest).

Sounds too good to be true. There’s a trick, right? Not really, but the government keeps your money, both your principal and your interest, for at least one year.

Mechanics

It works like this: You are buying a 30-year bond. The interest rate changes every six months. You can cash out anytime after one year, but if you cash out before five years, you have to forfeit three months of interest (no big deal).

You don’t pay taxes on the interest until you cash out. You get the compounding effect tax-free. It’s like a Roth IRA without age limits and penalties.

Key point. You can’t lose the money you invest or the interest you earn, other than the three months’ interest, if you cash out before five years.

When you do cash out, you pay federal income taxes on the interest, but you don’t pay state, county, or city income taxes.

It is possible (albeit unlikely for many of you) to avoid taxes on the interest altogether if you use the monies for qualified higher education expenses.

Okay, So What’s the Downside?

You can’t buy more than $10,000 per year, although if you buy from TreasuryDirect and also utilize your tax refund, you can acquire $15,000 of bonds per year. The I bond purchase limit on a tax return is $5,000—regardless of joint or single filing.

If you’re married, your spouse can buy $10,000, so now you’re up to $25,000 per year.

Now, let’s add in your corporation or corporations. Such entities can purchase up to $10,000 of such bonds per calendar year.

Example. Jack, his spouse, and his two corporations are hot for the 9.62 percent of tax-deferred interest. He has not yet filed his 2022 tax return, which shows a tax refund. With Jack, his spouse, and his two corporations, Jack can buy $45,000 of I bonds in calendar year 2022.

He can do the same during calendar year 2023. The major downside to the bonds is that you cannot buy more than the annual limits above. There’s no overall limit, just the annual limits.

Inflation and Deflation

The Series I bond is based on inflation. So if inflation drops to zero, cash out that bond. Meanwhile, ride this inflation wave. And remember, your Series I bond cannot go down in value. If your $10,000 I bond earned $985 in interest, the new principal balance is $10,985 and that principal balance never goes down. Deflation can’t hurt it.

Here’s a question clients have: “I will hire my 15-year-old daughter to work in my single-member LLC business, and I expect to pay her about $12,000 this year. Do I pay her through payroll checks and file a W-2?”

My Answer

Yes. And W-2 payment is essential. If you pay her on a 1099, she will pay self-employment taxes.

When you pay her on a W-2, neither you nor your daughter pays any Social Security or Medicare taxes, and in most states, you also don’t pay any unemployment taxes.

Key point 1. Your single-member LLC is a “disregarded entity” for federal tax purposes. It’s taxed as a sole proprietorship (unless you elect corporate treatment). In this instance, you are the child’s parent, enabling “no Social Security or Medicare taxes” for both your child and your proprietorship.

Key point 2. Your daughter has a $12,950 standard deduction. This means she also pays zero tax on earned income up to that amount.

The IRS noticed that average gas prices across the United States exceeded $5.00 a gallon and took action.

Small businesses that qualify to use and do use the standard mileage rate can deduct 62.5 cents per business mile from July 1 through December 31, 2022. That’s up 4 cents a mile.

This brings up a practical question: what do you do if you track business mileage using the three-month sample method?

Three-Month Sample Basics

As a reminder, here are the basics of how the IRS describes the three-month test:

• The taxpayer uses her vehicle for business use.
• She and other members of her family use the vehicle for personal use.
• The taxpayer keeps a mileage log for the first three months of the taxable year, showing that she uses the vehicle 75 percent of the time for business.
• Invoices and paid bills show that her vehicle use is about the same throughout the year.

According to this IRS regulation, her three-month sample is adequate for this taxpayer to prove her 75 percent business use.

Sample-Method Solution to New July 1 Mileage Rate

To use the sample rate, you need to prove that your vehicle use is about the same throughout the year. Your invoices and paid bills prove the mileage part, and your appointment book can add creditability to consistent business and personal use.

Keep in mind that the sample is just that—a sample—it’s pretty exact for the three months but not that exact for the year, although it must adequately reflect the business mileage for the year.

If you have a good three-month sample, you take your business mileage for the year and apply the 58.5 cents to half the mileage and the 62.5 cents to the remaining half to find your deductions.

For example, say you drove 20,000 business miles for the year. Your deduction would be $12,100 (10,000 x 58.5 cents + 10,000 x 62.5 cents).

Mileage Record for the Full Year

If you have a mileage record for the entire year, no problem. Your record gives you the mileage for the first six months and the last six months.

Do you own a corporation, limited liability company (LLC), limited partnership, limited liability partnership, limited liability limited partnership, or business trust?

Or are you planning to form one of these entities?

If so, be alert. There’s a new federal filing requirement coming.

Back in 2021, Congress passed a new law called the Corporate Transparency Act (CTA) that requires corporations, LLCs, and other business entities to provide information about their owners to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), which is a unit separate from the IRS.

The CTA is part of a government crackdown on corruption, money laundering, terrorist financing, tax fraud, and other illicit activity. It targets the use of anonymous shell companies that facilitate the flow and sheltering of illicit money in the United States.

Businesses subject to the law will have to file a “beneficial owner report” with FinCEN, including each beneficial owner’s full legal name, date of birth, and residential street address, as well as an identifying number from a legal document such as a driver’s license or passport. FinCEN will include the information in a database for use by law enforcement, national security and intelligence agencies, and federal regulators that enforce anti-money-laundering laws. The database will not be publicly accessible.

Violations of the CTA can result in a $500-a-day penalty (up to $10,000) and up to two years’ imprisonment.

The CTA did not take effect immediately. Rather, Congress gave the FinCEN time to write regulations governing how the CTA should be applied and to give businesses a heads-up about the new law. FinCEN has now issued its proposed regulations, and they take a fairly hard line on how the law will be applied.

Here are four things the new regulations make clear.

1. The filing requirement may begin soon. The CTA goes into effect when the proposed regulations become final, which is expected to occur sometime in mid-to-late 2022. As soon as it goes into effect,

• new corporations, LLCs, and other entities will have to comply with the filing requirement within 14 days of being formed, and
• existing entities will have one year to comply.

2. Millions of small businesses are affected. The reporting requirements will apply to almost every small business that is not a sole proprietorship or general partnership, including corporations, LLCs, limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships—over 30 million in all.

Larger companies with more than 20 full-time employees and $5 million in gross receipts are exempt.

3. There will be many beneficial owners. The proposed regulations make it clear that a company can have multiple beneficial owners, and it may not always be easy to identify them all. There are two broad categories of beneficial owners:

• any individual who owns 25 percent or more of the company, and
• any individual who, directly or indirectly, exercises substantial control over the company.

4. Law and accounting firms are not exempt. Neither the CTA nor the proposed regulations contain any exemption for legal or accounting firms, except for the relatively few public accounting firms registered under Section 102 of the Sarbanes-Oxley Act of 2002. Thus, any law or accounting firm that is a professional corporation or an LLC will have to file a beneficial owner report unless it has more than 20 employees and $5 million in annual income.

Do you give money to 501(c)(3) charities?

Do you get a tax benefit from those donations?

Recent changes in the tax code have done much to destroy your benefits from church and other tax-deductible 501(c)(3) donations. But there’s a way to donate the way you want, get revenge on the tax code, and realize the tax benefits you deserve.

This get-even tool is the donor-advised fund, an increasingly popular way to donate to your church and other 501(c)(3) organizations. Indeed, donor-advised funds have exploded over the past few years, with over one million donor-advised fund accounts in existence as of 2020.

Example. You donate $100,000 to the fund today. You get the $100,000 deduction now. From the fund, you donate $10,000 a year to a charitable organization (probably more as your money in the fund grows tax-free).

National investment firms such as Fidelity, Schwab, and Vanguard have all created donor-advised funds. These “commercial” donor-advised funds hire an affiliated for-profit investment firm to manage the assets in the accounts for a fee that varies based on the account balance.

You can also establish a donor-advised fund account with a community foundation that has a local orientation; a single-issue non-profit, such as a university or an environmental charity like the Sierra Club; or an independent, non-commercial organization such as the American Endowment Foundation, National Philanthropic Trust, or United Charitable.

You can always donate cash, including money in IRAs and 401(k)s, to your donor-advised fund account. But many donor-advised funds also accept non-cash donations, including

• stocks, bonds, and mutual fund shares,
• real estate,
• privately owned company stock,
• LLC and limited partnership interests,
• Bitcoin and other cryptocurrency, and
• life insurance.

Donating stock or mutual fund shares that have appreciated is a great tax strategy. Here’s why:

• If you owned the stock for more than one year, you get a deduction equal to its fair market value at the time of the donation.
• And you don’t pay any capital gains tax on the appreciated value of the stock.

Example. Dennis owns 1,000 shares of Evergreen stock that’s publicly traded on NASDAQ. He paid $10,000 for the stock back in 2010, and the shares are worth $100,000 today.

He establishes a donor-advised fund in 2022 and donates the stock.

• He gets a $100,000 charitable deduction for 2022.
• He pays no federal tax on his $90,000 gain.

As you can see, there are many benefits to donor-advised funds for the charitably inclined, and few drawbacks. 

You have heard the horror stories about mail sent to the IRS that remains unanswered for months. Reportedly, the IRS has mountains of unanswered mail pieces in storage trailers, waiting for IRS employees to process them.

Because the understaffed IRS is having so much trouble processing all the documents it receives, you need to protect yourself when you send an important tax filing due by a specific deadline.

If you can file a document electronically, do so. The IRS deems such filings as filed on the date of the electronic postmark.

If you must file a physical document with the IRS, don’t use regular U.S. mail, Priority Mail, or Express Mail.

Why not?

When you mail a document with these methods, the IRS considers it filed on the postmark date, but only if the IRS receives it. What if the U.S. Postal Service doesn’t deliver it or the IRS loses it? You’ll have no way to prove the IRS got it—and the IRS and most courts won’t accept your testimony that it was timely mailed.

Don’t take this chance. Instead, file physical documents by certified or registered U.S. mail, or use an IRS-approved private delivery service (generally, two-day or better service from FedEx, UPS, or DHL Express). When you do this, the IRS considers the document filed on the postmark date whether or not the IRS receives it.

Make sure to keep your receipt.

It isn’t easy to make predictions, especially about the future. But there is one prediction we’re confident in making: you will have substantial out-of-pocket expenses for health care after you retire. Personal finance experts estimate that an average retired couple age 65 will need at least $300,000 to cover health care expenses in retirement.

You may need more.

The time to save for these expenses is before you reach age 65. And the best way to do it may be a Health Savings Account (HSA). After several years, you could have a fat HSA balance that will help pave your way to a comfortable retirement.

Not everyone can have an HSA. But you can if you’re self-employed or your employer doesn’t provide health benefits. Some employers offer, as an employee fringe benefit, either HSAs alone or HSAs combined with high-deductible health plans.

An HSA is much like an IRA for health care. It must be paired with a high-deductible health plan with a minimum annual deductible of $1,400 for self-only coverage ($2,800 for family coverage). The maximum annual deductible must be no more than $7,050 for self-only coverage ($14,100 for family coverage).

An HSA can provide you with three tax benefits:

1. You or your employer can deduct the contributions, up to the annual limits.
2. The money in the account grows tax-free (and you can invest it in many ways).
3. Distributions are tax-free if used for medical expenses.

No other tax-advantaged account gives you all three of these benefits.

You also have complete flexibility in how to use the account. You may take distributions from your HSA at any time. But unlike with a traditional IRA or 401(k), you do not have to take annual required minimum distributions from the account after you turn age 72.

Indeed, you need never take any distributions at all from your HSA. If you name your spouse the designated beneficiary of your HSA, the tax code treats it as your spouse’s HSA when you die (no taxes are due).

If you maximize your contributions and take few distributions over many years, the HSA will grow to a tidy sum. 

Do you have a beach or mountain home that you rent out?

If the average period of rental is less than 30 days, you likely have a choice—either

• claim the income and expenses on Schedule C, or
• claim the income and expenses on Schedule E.

When Is Schedule C a Good Choice?

If you show a tax loss on your rental property, Schedule C is a great choice because it allows you to deduct your rental losses against all other income (assuming you materially participate in the rental property).

If you show taxable income on the rental property, Schedule C is not good because it causes you to pay self-employment taxes.

When Is Schedule E a Good Choice?

If you show taxable income on the transient rental, Schedule E is best because you don’t pay any self-employment taxes on Schedule E income.

If you show a loss on your transient rental and you materially participate, you can deduct your losses against all other income, but those Schedule E losses do not reduce self-employment income.

Okay, now you know how to play the game.

IRS in Summary Mode

In recent advice, the IRS stated that rentals of living quarters are not subject to self-employment tax when no services are rendered for the occupants.

But if services are rendered for the occupants, and the services rendered

1. are not clearly required to maintain the space in a condition for occupancy, and
2. are of such a substantial nature that the compensation for these services can be said to constitute a material portion of the rent,

then the net rental income received is subject to the self-employment tax.

Working at a tender age is an American tradition. What isn’t so traditional is the notion of kids contributing to their own IRA, especially a Roth IRA. But it should be a tradition, because it’s a really good idea.

Here’s what you need to know about IRAs for kids. Let’s start with the Roth IRA option.

Roth IRA Contribution Basics

The only federal-income-tax-law requirement for a child to make an annual Roth IRA contribution is to have enough earned income during the year to cover the contribution. Age is completely irrelevant.

So if a child earns some cash from a summer job or part-time work after school, he or she is entitled to make a Roth contribution for that year.

For both the 2021 and 2022 tax years, your working child can contribute the lesser of

• his or her earned income for the year, or
• $6,000.

While the same $6,000 contribution limit applies equally to Roth IRAs and traditional IRAs, the Roth option is usually better for kids.

Key point. A contribution for your child’s 2021 tax year can be made as late as April 15, 2022. So, there’s still time for that.

Modest Contributions to Child’s Roth IRA Can Amount to Big Bucks by Retirement Age

By making Roth contributions for a few years during the teenage years, your kid can potentially accumulate quite a bit of money by retirement age.

But realistically, most kids won’t be willing to contribute the $6,000 annual maximum even when they have enough earnings to do so.

Say the child contributes $2,500 at the end of each year for four years. Assuming a 5 percent annual rate of return, the Roth account would be worth about $82,000 in 45 years. Assuming a more optimistic 8 percent return, the account value jumps to a whopping $259,000. Wow!

You get the idea. With relatively modest annual contributions for just a few years, Roth IRAs can be worth eye-popping amounts by the time your “kid” approaches retirement age.

The strategy behind creating an S corporation and then selling your home to that S corporation comes into play when

• you want to convert your home to a rental property and take advantage of the exclusions, or
• you need more time to sell the home to realize the benefits of the $250,000 exclusion ($500,000 if filing a joint return).

With this strategy, one question often comes up: If a married couple sells their home to their S corporation to be a rental property, can the owners be the renters?

Answer: No. In this situation, the tax code treats your S corporation as you, the individual taxpayer, and thus you would be renting from yourself, and that would produce no tax benefits.

In effect, the S corporation renting the residence to the owner of the S corporation is the same as homeowners renting their residence to themselves. It produces no tax benefits.   

On the other hand, your S corporation could rent the home for use as a principal residence to your son or daughter or other related party, and the tax code would treat that rental the same as any rental to a third party.

When you own rental property, depreciation is your best friend.

One reason depreciation is so valuable is that, unlike deductible rental property expenses such as interest and maintenance, you get to claim depreciation year after year without having to pay anything beyond your original investment in the property.

Moreover, rental real property owners are entitled to depreciation even if their property goes up in value over time (as it usually does).

The basic idea behind depreciation is simple, but applying it in practice can be complex. Indeed, the annual depreciation deductions for two properties that cost the same can be very different.

For example, if you own a motel with a depreciable basis of $1 million, you get to deduct $25,640 each year for depreciation (except the first and last years). If you own an apartment building with a $1 million basis, your depreciation deduction is $36,360.

Why the difference? A motel and apartment building are both rental real estate. Shouldn’t they be depreciated the same way? Not according to the tax law. An apartment building is a residential rental property, while a motel is a commercial rental property. There are different depreciation periods for commercial and residential property: it takes far longer to depreciate commercial property fully.

For this reason, you should always make sure you correctly classify your property as commercial or residential. Such classification can be more challenging than you might think, especially for mixed-use property. If you rent to residential and commercial tenants, the tax code classifies the building as residential only if 80 percent or more of the gross annual rent is from renting dwelling units.

Even properties rented only for residential use may have to be classified as commercial if a majority of the tenants or guests are transients who stay only a short time. This rule can adversely impact the depreciation deductions for property owners who rent their property to short-term guests through Airbnb and other short-term rental platforms.

If you’ve been using the wrong depreciation period for your residential or commercial rental property, you should correct the error by filing an amended return or IRS Form 3115 to fix depreciation errors that are more than two years old.

Do you have a sideline activity that you think of as a business?

From this sideline activity, are you claiming tax losses on your Form 1040? Will the IRS consider your sideline a business and allow your loss deductions?

The IRS likes to claim that money-losing sideline activities are hobbies rather than businesses. The federal income tax rules for hobbies have been anti-taxpayer for years, and now an unfavorable change enacted in the Tax Cuts and Jobs Act (TCJA) made things even worse for 2018-2025.

If you have such an activity, we should have your attention.

Here’s the deal: if you can show a profit motive for your now-money-losing sideline activity, you can classify that activity as a business for tax purposes and deduct the losses.

Factors that can prove (or disprove) such intent include:

• Conducting the activity in a business-like manner by keeping good records and searching for profit-making strategies.
• Having expertise in the activity or hiring advisors who do.
• Spending enough time to justify the notion that the activity is a business and not just a hobby.
• Expectation of asset appreciation: this is why the IRS will almost never claim that owning rental real estate is a hobby, even when tax losses are incurred year after year.
• Success in other ventures, which indicates that you have business acumen.
• The history and magnitude of income and losses from the activity: occasional large profits hold more weight than more frequent small profits, and losses caused by unusual events or just plain bad luck are more justifiable than ongoing losses that only a hobbyist would be willing to accept.
• Your financial status: “rich” folks can afford to absorb ongoing losses (which may indicate a hobby), while ordinary folks are usually trying to make a buck (which indicates a business).
• Elements of personal pleasure: breeding race horses is lots more fun than draining septic tanks, so the IRS is far more likely to claim the former is a hobby if losses start showing up on your tax returns.

• The firm has 41 years of combined experience.  Joe has a master’s degree in accounting from BYU.  Joey has a Master of Business Administration degree from Utah Valley University.  The firm and its predecessors have been around since 1946.

• Joe & Joey have taken many hours of tax continuing education classes.

• We read newsletters, magazines, and e-mails to keep up on the latest tax law changes so we can advise you.

• We go through two checklists when preparing your return to do our part so you get the tax deductions you are entitled to.

• The firm also can help you with accounting, financial statements, payroll, estate & trust tax planning, and business planning.

• We are open year-round so we are here when you need us.

• We can represent you before the IRS if you get audited.

• We have helped clients save thousands of dollars in IRS penalties.

• Joe & Joey have started their own businesses and they have helped many clients start theirs so they can help you too.

• We can send you a monthly e-mail tax planning newsletter and we mail you semi-annual tax planning newsletters. 

When the individual production activity of a partner is outside his or her capacity as a member of the partnership, the partnership has two choices:

1. Allocate the production income to the partner, and have the partner treat the expenses as unreimbursed partner expenses (UPE).
2. Treat the partner as a 1099 independent contractor for the individual production.

Unreimbursed Partner Expenses

As a partner in a partnership, you generally can’t deduct any of the partnership expenses on your individual tax return—the partnership should pay for and deduct its own business expenses.

But if your partnership agreement or business policy forces you as an individual partner to pay for expenses out of pocket, with no reimbursement available, then you can deduct the business expenses in full on your individual tax return as UPE.

Because the UPE is a trade or business expense, it also reduces your self-employment tax.

Treatment as a 1099 Independent Contractor

The tax code is clear on how this works. IRC Section 707(a)(1) states:

If a partner engages in a transaction with a partnership other than in his capacity as a member of such partnership, the transaction shall, except as otherwise provided in this section, be considered as occurring between the partnership and one who is not a partner.

Thus, under this treatment, you would treat that activity as independent contractor activity and report the income to the partner on IRS Form 1099-NEC, Nonemployee Compensation.

The partnership agreement should clearly define how it will treat a partner’s individual production. 

Say goodbye to the employee retention credit (ERC) for the fourth quarter. Lawmakers giveth, and lawmakers taketh away.

In this case, what lawmakers did is pitiful. It’s like magic: now you see it, now you don’t.

On March 11, 2021, the American Rescue Plan Act of 2021 became Public Law 117-2. This new law extended the ERC to the third and fourth quarters of 2021.

On November 15, 2021, the Infrastructure Investment and Jobs Act became Public Law 117-58 and ended the ERC three months early, retroactive to September 30, 2021.

Lawmakers did not kill the fourth-quarter 2021 ERC for start-up businesses. That tax benefit survived. Thank goodness!

Still, you cannot consider any retroactive repeal of a tax law to be good tax policy. And this retroactive repeal was done only nine months after passage. It is disgraceful.

But don’t let this bad news deter you from claiming the credit for 2020 and for the first three quarters of 2021. You may remember that the remaining credits can add up to $26,000 per employee.

And keep in mind that there’s no mad rush—you have time. You can claim the ERC anytime during the three-year statute of limitations.

After reaching age 50, you can make additional “catch-up” contributions to certain types of tax-advantaged retirement accounts. For the 2021 tax year, this opportunity is available if you’ll be age 50 or older on Friday, December 31, 2021.

Specifically, with an employer-sponsored 401(k), 403(b), 457, or SIMPLE plan, you can make extra salary-reduction catch-up contributions to your account—assuming the plan allows catch-up contributions.

If you are self-employed and have set up a 401(k) plan or SIMPLE IRA for yourself, you can also make extra catch-up contributions to your account. 

Finally, you can make extra catch-up contributions to a traditional or Roth IRA.

These catch-up contributions can carry a hefty punch because they are above and beyond the “regular” annual contribution limits that otherwise apply.

The following table shows maximum allowable catch-up contributions for the 2021 tax year:

If you’re married and both you and your spouse are age 50 or older, the amounts shown above can potentially be doubled, assuming both spouses have accounts set up in their respective names.

But with an employer-sponsored plan, maximum salary-reduction catch-up contributions to your account might be less than the indicated amounts—depending on employee participation levels and the terms of the plan.

The Question: How Much Are Catch-Up Contributions Worth?

This is where it gets interesting. While some folks eagerly embrace any chance to contribute more money to tax-advantaged retirement accounts, others might need some encouragement. Those in the latter category may dismiss catch-up contributions as inconsequential unless proven otherwise. Fair enough. So let’s prove otherwise.

Proof: Make 401(k), 403(b), or 457 Plan Catch-Up Contributions

Assume you turn 50 during 2021 and contribute an extra $6,500 to your account for this year, and then you do the same for the subsequent 15 years (for a total of 16 years), up to age 65. Here’s how much extra you could accumulate by that age in your 401(k), 403(b), or 457 account (rounded to the nearest $1,000), assuming the annual rates of return indicated below:

These are substantial amounts. Of course, we are talking before-tax numbers here. 

Proof: Make SIMPLE Plan Catch-Up Contributions

Say you turn 50 during 2021 and contribute an extra $3,000 for this year, and then you do the same for the subsequent 15 years (for a total of 16 years), up to age 65. Here’s how much extra you could accumulate by that age in your SIMPLE plan account (rounded to the nearest $1,000), assuming the annual rates of return indicated below:

Not bad! Once again, remember that these are before-tax numbers. 

Proof: Make IRA Catch-Up Contributions

Say you turn 50 during 2021 and contribute an extra $1,000 for this year, and then you do the same for the subsequent 15 years (for a total of 16 years), up to age 65. Here’s how much extra you could accumulate by that age in your IRA (rounded off to the nearest $1,000), assuming the annual rates of return indicated below:

These are before-tax numbers for traditional IRAs but after-tax numbers for Roth IRAs.

If you are thinking of getting married, you need to consider December 31, 2021, in your tax planning.

Also, do you give money to family or friends (other than your children, who are subject to the kiddie tax)? If so, you need to consider the zero-taxes planning strategy.

And now, consider your children who are under age 18. Have you paid them for work they’ve done for your business? Have you paid them the right way?

Here are three strategies to consider as we come to the end of 2021.

1. Put Your Children on Your Payroll

If you have a child under the age of 18 and you operate your business as a Schedule C sole proprietor or as a spousal partnership, you absolutely need to consider having that child on your payroll. Why?

First, neither you nor your child would pay payroll taxes on the child’s income.

Second, with a traditional IRA, the child can avoid all federal income taxes on up to $18,550 in income.

If you operate your business as a corporation, you can still benefit by employing the child even though both your corporation and your child suffer payroll taxes.

2. Get Married on or before December 31

Remember, if you are married on December 31, you are married for the entire year.

If you are thinking of getting married in 2022, you might want to rethink that plan.  The IRS could make big savings available to you for the 2021 tax year if you get married on or before December 31, 2021.

You have to run the numbers in your tax return both ways to know the tax benefits and detriments for your particular case. But if the numbers work out, a quick trip to the courthouse could save you thousands.

3. Make Use of the 0 Percent Tax Bracket

In the old days, you used this strategy with your college student. Today, this strategy does not work with the college student, because the kiddie tax now applies to students up to age 24.

But this strategy is a good one, so ask yourself this question: Do I give money to my parents or other loved ones to make their lives more comfortable?

If the answer is yes, is your loved one in the 0 percent capital gains tax bracket? The 0 percent capital gains tax bracket applies to a single person with less than $40,400 in taxable income and to a married couple with less than $80,800 in taxable income.

If the parent or other loved one is in the 0 percent capital gains tax bracket, you can get extra bang for your buck by giving this person appreciated stock rather than cash.

Example. You give Aunt Millie shares of stock with a fair market value of $20,000, for which you paid $2,000. Aunt Millie sells the stock and pays zero capital gains taxes. She now has $20,000 in after-tax cash to spend, which should take care of things for a while.

Had you sold the stock, you would have paid taxes of $4,284 in your tax bracket (23.8 percent x $18,000 gain).

Of course, $5,000 of the $20,000 you gifted goes against your $11.7 million estate tax exemption if you are single. But if you’re married and you made the gift together, you each have a $15,000 gift-tax exclusion, for a total of $30,000, and you have no gift-tax concerns other than the requirement to file a gift-tax return that shows you split the gift.

All small-business owners with one to 49 employees should have a medical plan for their business. Sure, the tax law does not require you to have a plan, but you should.

Most of the tax rules that apply to medical plans are straightforward when you have 49 or fewer employees.

Here are six opportunities for you to consider:

1.  Make sure to claim the federal tax credit equal to 100 percent of required (2020) and voluntary (2021) emergency sick leave and emergency family leave payments. It’s likely that you made payments that qualify for the credits.

2.If you have a Section 105 plan in place and you have not been reimbursing expenses monthly, do a reimbursement now to get your 2021 deductions, and then put yourself on a monthly reimbursement schedule in 2022.

3.If you want to implement a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), make sure to get that done properly now. You are late, so you could suffer that $50-per-employee penalty should you be found out.

4.But if you are thinking of the QSEHRA and want to help your employees with more money and flexibility, be sure to consider the Individual Coverage Health Reimbursement Arrangement (ICHRA). The ICHRA has more advantages.

5.If you operate your business as an S corporation and you want an above-the-line tax deduction for the cost of your health insurance, you need the S corporation to (a) pay for or reimburse you for the health insurance, and (b) put it on your W-2. Make sure that the reimbursement happens before December 31 and that you have the reimbursement set up to show on the W-2.

6.Claim the tax credit for the group health insurance you give your employees. If you provide your employees with group health insurance, see whether your pay structure and number of employees put you in a position to claim a 50 percent tax credit for some or all of the monies you paid for health insurance in 2021 and possibly in prior years.

When you take advantage of the tax code’s offset game, your stock market portfolio can represent a little gold mine of opportunities to reduce your 2021 income taxes.

The tax code contains the basic rules for this game, and once you know the rules, you can apply the correct strategies.

Here’s the basic strategy:

• Avoid the high taxes (up to 40.8 percent) on short-term capital gains and ordinary income.
• Lower the taxes to zero—or if you can’t do that, then lower them to 23.8 percent or less by making the profits subject to long-term capital gains.

Think of this: you are paying taxes at a 71.4 percent higher rate when you pay at 40.8 percent rather than the tax-favored 23.8 percent.

To avoid the higher rates, here are seven possible tax-planning strategies.

Strategy 1

Examine your portfolio for stocks that you want to unload, and make sales where you offset short-term gains subject to a high tax rate such as 40.8 percent with long-term losses (up to 23.8 percent).

In other words, make the high taxes disappear by offsetting them with low-taxed losses, and pocket the difference.

Strategy 2

Use long-term losses to create the $3,000 deduction allowed against ordinary income.

Again, you are trying to use the 23.8 percent loss to kill a 40.8 percent rate of tax (or a 0 percent loss to kill a 12 percent tax, if you are in the 12 percent or lower tax bracket).

Strategy 3

As an individual investor, avoid the wash-sale loss rule.

Under the wash-sale loss rule, if you sell a stock or other security and purchase substantially identical stock or securities within 30 days before or after the date of sale, you don’t recognize your loss on that sale. Instead, the code makes you add the loss amount to the basis of your new stock.

If you want to use the loss in 2021, then you’ll have to sell the stock and sit on your hands for more than 30 days before repurchasing that stock.

Strategy 4

If you have lots of capital losses or capital loss carryovers and the $3,000 allowance is looking extra tiny, sell additional stocks, rental properties, and other assets to create offsetting capital gains.

If you sell stocks to purge the capital losses, you can immediately repurchase the stock after you sell it—there’s no wash-sale “gain” rule.

Strategy 5

Do you give money to your parents to assist them with their retirement or living expenses? How about children (specifically, children not subject to the kiddie tax)?

If so, consider giving appreciated stock to your parents and your non-kiddie-tax children. Why? If the parents or children are in lower tax brackets than you are, you get a bigger bang for your buck by

• gifting them stock,
• having them sell the stock, and then
• having them pay taxes on the stock sale at their lower tax rates.

Strategy 6

If you are going to make a donation to a charity, consider appreciated stock you have owned for more than one year rather than cash, because a donation of appreciated stock gives you more tax benefit.

It works like this:

• Benefit 1. You deduct the fair market value of the stock as a charitable donation.
• Benefit 2. You don’t pay any of the taxes you would have had to pay if you sold the stock.

Example. You bought a publicly traded stock for $1,000, and it’s now worth $11,000. If you give it to a 501(c)(3) charity, the following happens:

• You get a tax deduction for $11,000.
• You pay no taxes on the $10,000 profit.

Two rules to know:

1.Your deductions for donating appreciated stocks to 501(c)(3) organizations may not exceed 30 percent of your adjusted gross income.

2.If your publicly traded stock donation exceeds the 30 percent, no problem. Tax law allows you to carry forward the excess until used, for up to five years.

Strategy 7

If you could sell a publicly traded stock at a loss, do not give that loss-deduction stock to a 501(c)(3) charity. Why? If you sell the stock, you have a tax loss that you can deduct. If you give the stock to a charity, you get no deduction for the loss—in other words, you miss out on that tax-reducing loss.

Remember to consider your Section 199A deduction in your year-end tax planning.

If you don’t, you could end up with an unsatisfactory $0 for your deduction amount. We’ll review three year-end moves that (a) reduce your income taxes and (b) boost your Section 199A deduction at the same time.

First Things First

If your taxable income is above $164,900 (or $329,800 on a joint return), then your type of business, wages paid, and property can reduce and/or eliminate your Section 199A tax deduction.

If your deduction amount is less than 20 percent of your qualified business income (QBI), then consider using one or more of the strategies described below to increase your Section 199A deduction.

Strategy 1: Harvest Capital Losses

Capital gains add to your taxable income, which is the income that

• determines your eligibility for the Section 199A tax deduction,
• sets the upper limit (ceiling) on the amount of your Section 199A tax deduction, and
• establishes when you need wages and/or property to obtain your maximum deductions.

If the capital gains are hurting your Section 199A deduction, you have time before the end of the year to harvest capital losses to offset those harmful gains.

Strategy 2: Make Charitable Contributions

Since the Section 199A deduction uses taxable income for its thresholds, you can use itemized deductions to reduce and/or eliminate threshold problems and increase your Section 199A deduction.

Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year (assuming you already itemize).

Strategy 3: Buy Business Assets

Thanks to 100 percent bonus depreciation and Section 179 expensing, you can write off the entire cost of most assets you buy and place in service before December 31, 2021.

This can help your Section 199A deduction in two ways:

1. The big asset purchase and write-off can reduce your taxable income and increase your Section 199A deduction when it gets your taxable income under the threshold.
2. The big asset purchase and write-off can contribute to an increased Section 199A deduction if your Section 199A deduction currently uses the calculation that includes the 2.5 percent of unadjusted basis in your business’s qualified property. In this scenario, your asset purchases increase your qualified property, which in turn increases your 199A deduction.

Here are six powerful business tax deduction strategies that you can easily understand and implement before the end of 2021.

1. Prepay Expenses Using the IRS Safe Harbor

You just have to thank the IRS for its tax-deduction safe harbors.

IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.

Under this safe harbor, your 2021 prepayments cannot go into 2023. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.

For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Friday, December 31, 2021, you mail a rent check for $36,000 to cover all of your 2022 rent. Your landlord does not receive the payment in the mail until Tuesday, January 4, 2022. Here are the results:

• You deduct $36,000 in 2021 (the year you paid the money).
• The landlord reports taxable income of $36,000 in 2022 (the year he received the money).

You get what you want—the deduction this year.

The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.

2. Stop Billing Customers, Clients, and Patients

Here is one rock-solid, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2021. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)

Customers, clients, patients, and insurance companies generally don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.

Example. Jim, a dentist, usually bills his patients and the insurance companies at the end of each week. This year, however, he sends no bills in December. Instead, he gathers up those bills and mails them the first week of January. Presto! He just postponed paying taxes on his December 2021 income by moving that income to 2022.

3. Buy Office Equipment

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2021.

Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).

4. Use Your Credit Cards

If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.

But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.

5. Don’t Assume You Are Taking Too Many Deductions

If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.

If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.

You used to be able to carry back your NOL two years and get immediate tax refunds from prior years, but the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.

What does this all mean? You should never stop documenting your deductions, and you should always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.

6. Deal with Your Qualified Improvement Property (QIP)

In the CARES Act, Congress finally fixed the qualified improvement property (QIP) error that it made when enacting the TCJA.

QIP is any improvement made by you to the interior portion of a building you own that is non-residential real property (think office buildings, retail stores, and shopping centers) if you place the improvement in service after the date you place the building in service.

The big deal with QIP is that it’s not considered real property that you depreciate over 39 years. QIP is 15-year property, eligible for immediate deduction using either 100 percent bonus depreciation or Section 179 expensing. To get the QIP deduction in 2021, you need to place the QIP in service on or before December 31, 2021.

Planning note. If you have QIP property on an already filed 2018 or 2019 return, it’s on that return as 39-year property. You need to fix that—and likely add some cash to your bank account because of the fix.

Millions of American businesses hire independent contractors to perform all types of services. And millions of American workers prefer to work as contractors rather than employees.

Indeed, due to the COVID-19 pandemic, it’s likely that more people than ever want the freedom that comes with being an independent contractor.

But for decades, many state and federal agencies have had it in for businesses that hire independent contractors rather than employees. They prefer that you classify your workers as employees because then you must

• pay unemployment insurance premiums,
• provide workers’ comp, and
• withhold taxes from employee pay.

Employees are also protected by state and federal labor laws that regulate worker rights such as a minimum wage, overtime, and the right to unionize.

In 2020, California launched the broadest assault on independent contractors in recent memory when it passed a law popularly known as AB-5 that established an incredibly strict new “ABC test” for determining whether California workers should be classified as employees for purposes of California law. Many feared this would spell the end of independent contractors in California.

It hasn’t worked out that way. The California legislature received a firestorm of complaints from California-based independent contractors and the firms that hire them. As a result, it significantly watered down the new law by providing over 100 exemptions to the ABC test. Meanwhile, California voters responded by passing Proposition 22, which completely exempted most drivers for app-based rideshare and delivery platforms such as Uber, Lyft, and DoorDash.

This outcome appears to have dampened the appetite of many other state legislators to make it harder to hire independent contractors.

But the new Biden administration wants to take up where California left off. It supports adoption of the ABC test across all federal law. This is not likely to happen anytime soon.

Thus, despite everything you may have heard, businesses can still hire independent contractors. But you need to be careful and hire only bona fide independent contractors.

Employers who misclassify employees as independent contractors to reduce labor costs and gain an advantage over competitors can end up paying large back taxes, fines, and judgments.

If you buy a property, fix it up, and then sell it, is that property a dealer or an investor property?

Here are five thoughts on this:

1. Periodically buying property, fixing it up, and selling it makes it look like dealer property. But when you seldom do this, the property can look like investor property.
2. If you hold the property for more than a year from the time of purchase to the close of escrow, investor status gives you tax-favored, long-term capital gains treatment.
3. When you buy and sell without fixing up the property, or when you buy and rent and then sell, you have strong investor attributes.
4. The fix-up, remodel, development, etc., give you dealer attributes.
5. The whole issue of dealer versus investor status is a facts-and-circumstances classification, and it’s a tough call.

As the nation suffers from the ravages of the super-contagious COVID-19 Delta variant, the federal government desperately wants all American workers and their families to get vaccinated.

If you have employees, you probably feel the same way. Indeed, more and more employers are implementing vaccine mandates—a trend that will likely grow after the FDA gives final approval to the COVID-19 vaccines.

COVID-19 vaccine mandates are highly controversial.

One thing that’s not controversial is giving your employees paid time off to get vaccinated and to deal with the possible side effects of vaccination (usually, short-lived flu-like symptoms). The federal government does not require that employers provide such paid time off, but it strongly encourages them to do so. And it’s putting its money where its mouth is, by providing fairly generous tax credits to repay employers for the lost employee work time.

You can also collect these credits if your employees take time off to help family and household members get the vaccination and/or recover from its side effects. There’s only one thing better than having an employee vaccinated: having an employee’s entire family vaccinated.

How big are the credits?

• Employers who give employees paid time off to get vaccinated against COVID-19 and/or recover from the vaccination can collect a sick leave credit of up to $511 per day for 10 days, plus a family leave credit of up to $200 per day for 60 additional days.
• Employers who give employees paid time off to help household members get vaccinated and/or recover from the vaccination can get a sick leave credit for 10 days and family leave credit for 60 days, both capped at $200 per day.

What if you are self-employed and have no employees? You haven’t been left out. Similar tax credits are available to self-employed individuals who take time off from work to get vaccinated or who help family or household members do so.

But you must act soon. These sick leave and family leave credits are available only through September 30, 2021.

One more thing: these are refundable tax credits. This means you collect the full amount even if it exceeds your tax liability. Employers can reduce their third-quarter 2021 payroll tax deposits in the amount of their credits. If the credit exceeds these deposits, employers can get paid the difference in advance by filing IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19.

The documentation requirements for these credits are modest, and you’ll have to file a couple of new forms with your 2021 tax return.

Three bad things happen when you file your tax return late.

What’s Late?

You can extend your tax return and file during the period of extension; that’s not a late-filed return.

The late-filed return is filed after the last extension expired. That’s what causes the three bad things to happen.

Bad Thing 1

The IRS notices that you filed late or not at all.

Of course, the “I didn’t file at all” people receive the IRS’s “come on down and bring your tax records” letter. In general, the meeting with the IRS about non-filed tax returns does not go well.

For the late filers, the big problem is exposure to an IRS audit. Say you’re in the group that the IRS audits about 3 percent of the time, but you file your tax return late. Your chances of an IRS audit increase significantly, perhaps to 50 percent or higher.

Simply stated, bad thing 1 is this: file late and increase your odds of saying “Hello, IRS examiner.”

Bad Thing 2

When you file late, you trigger the big 5 percent a month, not to exceed 25 percent of the tax-due penalty.

Here, the bad news is 5 percent a month. The good news (if you want to call it that) is this penalty maxes out at 25 percent.

Bad Thing 3

Of course, if you owe the “failure to file” penalty, you likely also owe the penalty for “failure to pay.” The failure-to-pay penalty equals 0.5 percent a month, not to exceed 25 percent of the tax due.

The penalty for failure to pay offsets the penalty for failure to file such that the 5 percent is the maximum penalty during the first five months when both penalties apply.

But once those five months are over, the penalty for failure to pay continues to apply. Thus, you can owe 47.5 percent of the tax due by not filing and not paying (25 percent plus 0.5 percent for the additional 45 months it takes to get to the maximum failure-to-pay penalty of 25 percent).

The $250,000 ($500,000, if married) home sale gain exclusion break is one of the great tax-saving opportunities.

Unmarried homeowners can potentially exclude gains up to $250,000, and married homeowners can potentially exclude up to $500,000. You as the seller need not complete any special tax form to take advantage.

To take full advantage of the principal residence gain exclusion break, you must pass two tests: the ownership test and the use test.

• To pass the ownership test, you must have owned the home for at least two years out of the five-year period ending on the sale date.
• To pass the use test, you must have used the home as your principal residence for at least two years out of the five-year period ending on the sale date.

Key point. These two tests are completely independent. In other words, periods of ownership and use need not overlap.

If you’re married and you and your spouse file your tax returns separately, you can potentially qualify for two separate $250,000 exclusions.

If you’re married and file jointly, you qualify for the $500,000 joint-filer exclusion if

• either you pass or your spouse passes the ownership test for the property and
• both you and your spouse pass the use test.

When you file jointly, it’s also possible for both you and your spouse to individually pass the ownership and use tests for two separate residences. In that case, you and your spouse would qualify for two separate $250,000 exclusions.

Each spouse’s eligibility for the $250,000 exclusion is determined separately, as if you were unmarried. For this purpose, a spouse is considered to individually own a property for any period the property is actually owned by either spouse.

The other big qualification rule for the home sale gain exclusion privilege goes like this: the exclusion is generally available only when you have not excluded an earlier gain within the two-year period ending on the date of the later sale. In other words, you generally cannot recycle the gain exclusion privilege until two years have passed since you last used it.

You can claim the larger $500,000 joint-filer exclusion only if neither you nor your spouse took advantage of it for an earlier sale within the two-year period. If one spouse claimed the exclusion within the two-year window but the other spouse did not, the exclusion is limited to $250,000.

Cryptocurrencies have gone mainstream.

For example, you can use bitcoin to buy far more than you would think. To see, try googling “What can I buy with bitcoin?” You will get more than 350,000 hits. But using cryptocurrencies has federal income tax implications that may surprise you.

With the price of bitcoin having gone through the roof (before its recent decline), and with increasing acceptance of bitcoin and other cryptocurrencies as forms of payment, the tax implications of using cryptocurrencies are a hot-button issue for the IRS.

The 2020 version of IRS Form 1040 (the form you recently filed or will file soon) asks whether you received, sold, sent, exchanged, or otherwise acquired—at any time during the year—any financial interest in any virtual currency. If you did, you are supposed to check the “Yes” box.

The fact that this question appears on page 1 of Form 1040, right below the lines for supplying taxpayer information such as your name and address, indicates that the IRS is getting serious about enforcing compliance with the applicable tax rules. Fair warning!

The 2020 Form 1040 instructions clarify that virtual currency transactions for which you should check the “Yes” box include but are not limited to

1. the receipt or transfer of virtual currency for free (i.e., without having to pay),
2. the exchange of virtual currency for goods or services,
3. the sale of virtual currency,
4. the exchange of virtual currency for other property, and
5. the disposition of a financial interest in virtual currency.

To arrive at the federal income tax results of a cryptocurrency transaction, the first step is to calculate the fair market value (FMV), measured in U.S. dollars, of the cryptocurrency on the date you receive it and on the date you use it to pay for something.

When you exchange cryptocurrency for other property, including U.S. dollars, a different cryptocurrency, services, or whatever, you must recognize taxable gain or loss just as you do when you make a stock sale in your taxable brokerage account.

• You’ll have a taxable gain if the FMV of what you receive exceeds your basis in the cryptocurrency that you exchanged.
• You’ll have a taxable loss if the FMV of what you receive is less than your basis in the cryptocurrency.

It is hard to imagine that a cryptocurrency holding will be classified for federal income tax purposes as anything other than a capital asset—even if you use it to conduct business or personal transactions, as opposed to holding it for investment. Therefore, the taxable gain or loss from exchanging a cryptocurrency will be a short-term capital gain or loss or a long-term capital gain or loss, depending on how long you held the cryptocurrency before using it in a transaction.

Example. You use one bitcoin to buy tax-deductible supplies for your booming sole proprietorship business. On the date of the purchase, bitcoins are worth $55,000 each. So, you have a business deduction of $55,000.

But there’s another piece to this transaction: the tax gain or loss from holding the bitcoin and then spending it.

Say you bought the bitcoin in January of this year for only $31,000. You have a $24,000 taxable gain from appreciation in the value of the bitcoin ($55,000 - $31,000). The $24,000 gain is a short-term capital gain because you did not hold the bitcoin for more than one year.

Detailed records are essential for compliance. Your records should include

• the date when you received the cryptocurrency,
• its FMV on the date of receipt,
• the FMV on the date you exchanged it (for U.S. dollars or whatever),
• the cryptocurrency trading exchange that you used to determine FMV, and
• your purpose for holding the currency (business, investment, or personal use).

If you made an error on your tax return, don’t worry—there are two easy ways to fix it:

1. A superseding return
2. A qualified amended return

A superseding return is an amended or corrected return filed on or before the original or extended due date. The IRS considers the changes on a superseding return to be part of your original return.

A qualified amended return is an amended return that you file after the due date of the return (including extensions) and before the earliest of several events, but most likely when the IRS contacts you with respect to an examination of the return. If you file a qualified amended return, you avoid the 20 percent accuracy-related penalty on that mistake.

When it comes to the IRS, an ounce of prevention is worth a pound of cure. If you made a mistake, fix it as soon as you know about it, which will save you penalties, increased interest accruals, and the headache of an IRS review of your return.

The PayPal loophole is going away in a little over six months from now.

You used to be able to avoid giving 1099s to contractors and vendors when you use PayPal or a similar service as your payment platform. This pushed the reporting requirements to PayPal. Current federal law requires that PayPal file Form 1099-K with the IRS and send it to you when

• your gross earnings are more than $20,000, and
• you have more than 200 transactions.

Example. You work as a consultant. Your clients pay you $30,000 via PayPal. PayPal does not give you a 1099-K because this fails the more than 200 transactions in a calendar year test.

According to lawmakers, this created a situation where those people who use PayPal have an easy ability to cheat (i.e., not report the income on their tax returns).

Starting January 1, 2022, the American Rescue Plan Act kills the two-step “more than $20,000 and more than 200 transactions” threshold for third-party settlement organization (TPSO) filing of 1099-K and replaces it with the single “$600 or more” reporting threshold.

The Joint Committee on Taxation estimates that this change in the 1099 rules will gain more than $8 billion in new taxes over the next 10 years.

Several states have already closed this reporting loophole on the state level:

• Maryland, Massachusetts, Mississippi, Vermont, and Virginia require a 1099-K to be filed with the state tax agency if a TPSO pays a state resident $600 or more during the year.
• Illinois and New Jersey have a $1,000 1099-K threshold (plus, for Illinois, a requirement of at least four transactions).
• Arkansas has a $2,500 threshold.
• Missouri has a $1,200 threshold.

Recently, there were changes made to the child tax credit that will benefit many taxpayers. As part of the American Rescue Plan Act that was enacted in March 2021, the child tax credit:

• Amount has increased for certain taxpayers
• Is fully refundable (meaning you can receive it even if you don’t owe the IRS)
• May be partially received in monthly payments

The new law also raised the age of qualifying children to 17 from 16, meaning some families will be able to take advantage of the credit longer.

The IRS will pay half the credit in the form of advance monthly payments beginning July 15. Taxpayers will then claim the other half when they file their 2021 income tax return.

Though these tax changes are temporary and only apply to the 2021 tax year, they may present important cashflow and financial planning opportunities today. It is also important to note that the monthly advance of the child tax credit is a significant change. The credit is normally part of your income tax return and would reduce your tax liability. The choice to have the child tax credit advanced will affect your refund or amount due when you file your return. If your income is too high you may have to pay it back.  To avoid any surprises, please contact our office.

Qualifications and how much to expect

The child tax credit and advance payments are based on several factors, including the age of your children and your income.

• The credit for children ages five and younger is up to $3,600 –– with up to $300 received in monthly payments.
• The credit for children ages six to 17 is up to $3,000 –– with up to $250 received in monthly payments.

To qualify for the child tax credit monthly payments, you (and your spouse if you file a joint tax return) must have:

• Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS your information using the non-filer tool
• A main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year
• A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number
• Income less than certain limits

You can take full advantage of the credit if your income (specifically, your modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. The credit begins to phase out above those thresholds.

Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but may also choose to receive monthly payments.

Taxpayers generally won’t need to do anything to receive any advance payments as the IRS will use the information it has on file to start issuing the payments.

IRS’s child tax credit update portal

Using the IRS’s child credit update portal https://www.irs.gov/credits-deductions/child-tax-credit-update-portal, taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children. Parents may also use the online portal to elect out of the advance payments or check on the status of payments.

The IRS also has a non-filer portal https://www.irs.gov/credits-deductions/child-tax-credit-non-filer-sign-up-tool to use for certain situations.

Let us help you.

With any tax law change, it’s important to revisit your full financial roadmap. We can help you determine how much credit you may be entitled to and whether advance payments are appropriate. How you choose to receive the credit (partially advanced via monthly payments or solely on your next year’s return) could have many impacts to your financial plans.

Please contact our office today at 801-373-5300 to discuss your specific situation. As always, planning ahead can help you maximize your family’s financial situation and position you for greater success.

What happens when lawmakers enact a new tax? It starts small. It looks easy.

In 1935, the self-employment tax topped out at $60. Those 1935 lawmakers must be twirling in their graves with the new rules for 2021, which levy the following taxes:

• A self-employment tax of up to $21,848, which comes from the 15.3 percent rate that applies to self-employment income of up to $142,800.
• A 2.9 percent tax that applies to all self-employment income in excess of the base amount.

Beware

Look at what has happened to self-employment taxes since they first came into being in 1935, assuming you earn at the base amount:

• $60 in 1935
• $60 in 1949
• $3,175 in 1980
• $7,849 in 1990
• $14,413 in 2006
• $21,848 in 2021

To put the rates in perspective, say you are single and earn $150,000. On the last dollar you earned—dollar number 150,000—how much federal tax did you pay? The answer in round numbers—39 cents (14 cents in self-employment and 24 cents in federal income taxes).

Wow! That’s a lot. Then, if you live in a state with an income tax, add the state income tax on top of that.

Tax Planning

Two things to know about tax planning:

1. Your new deductions give you benefits starting at your highest tax rates.
2. In most cases, the return on your planning is not a one-time event. Once your plan is in place, you reap the benefits year after year. Thus, good tax planning is like an annuity.

Checklist

Here is a short checklist of some tax-planning ideas. Review these ideas so you can identify new business deductions for your tax return. You want business deductions because business deductions reduce both your income and your self-employment taxes.

• Eliminate the word “friend” from your vocabulary. From now on, these people are sources of business, so start talking business and asking for referrals over meals and beverages.
• Hire your children. This creates tax deductions for you, and it creates non-taxable or very low taxed income for the children. Also, wages paid by parents to children are exempt from payroll taxes.
• Learn how to combine business and personal trips so that the personal side of your trip becomes part of your business deduction under the travel rules (for example, traveling by cruise ship to a convention on St. Thomas).
• Properly classify business expansion expenses as immediate tax deductions rather than depreciable, amortizable, or (ouch!) non-deductible capital costs.
• Properly identify deductible start-up expenses ($5,000 up front and the balance amortized) rather than letting them fall by the wayside (a common oversight).
• Correctly classify business meals that qualify for the 100 percent deduction rather than the 50 percent deduction.
• Know the entertainment facility rules so your vacation home can become a tax deduction.
• Identify the vehicle deduction method that gives you the best deductions (choosing between the IRS mileage method and the actual expense method).
• Correctly identify your maximum business miles, so you deduct the largest possible percentage of your vehicles.
• Qualify your office in your home as an administrative office.
• Use allocation methods that make your home-office deductions larger.
• If you are married with no employees, hire your spouse and install a Section 105 medical plan to move your medical deductions to Schedule C for maximum benefits.
• Operate as a one-person S corporation to save self-employment taxes.
• If you are single with no employees, operate as a C corporation and install a Section 105 medical plan so you can deduct all your medical expenses.

Usually, in times of economic dislocation such as the COVID-19 pandemic, the self-employed get no special government help. For example, you generally do not receive benefits that employees get, such as unemployment and paid sick leave.

But this time it’s different. Because of the COVID-19 pandemic, you can qualify for the following seven benefits:

1. Economic Injury Disaster Loans (EIDLs). These 3.75 percent interest loans of up to $500,000 are available to the self-employed and are not forgivable. The self-employed can borrow up to $25,000 without any collateral.

2. Prior EIDL Advances. The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, enacted on December 27, 2020, eliminates the rules that required reducing your PPP forgiveness by the amount of your EIDL Advance and requires the Small Business Administration to refund your advance if your loan forgiveness has been previously reduced.

3. New Targeted EIDL Advances. You might qualify for a Targeted EIDL Advance of up to $10,000 if (a) your business is located in a low-income community, and (b) you suffered a 30 percent reduction in revenue during an eight-week period beginning March 2, 2020, or later. Unlike EIDLs, Targeted EIDL Advances need not be paid back. They are tax-free government grants.

4. Sick and family leave tax credits. If you’re unable to work due to COVID-19, or if you need to care for a family member, you can qualify for refundable sick leave and family leave tax credits of up to $15,511 in 2020 and $17,511 in 2021. You can get up to $511 per day for 10 days if you’re sick. You can get up to $200 per day for 70 days if you need to care for others. These credits last through September 30, 2021.

5. Affordable Care Act (ACA) premium tax credits. Congress removed the ACA subsidy cliff (400 percent of the federal poverty level) for 2020 and 2021. During these years, you need pay no more than 8.5 percent of your household income for ACA coverage. You are entitled to premium tax credits to the extent midlevel silver ACA coverage exceeds this amount.

6. Unemployment for the self-employed. For the first time ever, self-employed individuals may receive unemployment benefits. The Pandemic Unemployment Assistance program has been extended to September 6, 2021. You’ll qualify for unemployment only if you’re earning little or no income.

Since 1986, lawmakers have limited business meal deductions: first to 80 percent, and then to 50 percent (unless an exception applies).

But on December 27, 2020, in an effort to help the restaurant industry due to the COVID-19 pandemic, lawmakers enacted a new, temporary 100 percent business meal deduction for calendar years 2021 and 2022.

To qualify for the 100 percent deduction, you need a restaurant to provide you with the food or beverages.

The law requires only that the restaurant provide the food and beverages. You don’t have to pay the money directly to the restaurant. For example, you qualify for the 100 percent deduction if you order a restaurant meal that’s delivered by Uber Eats or Grubhub.

Your deductible business meals must be tax code Section 162 ordinary and necessary business expenses, and they must not be subject to disallowance under tax code Section 274.

You must be present at the business meal, and you must provide the business meal to a person with whom you could reasonably expect to engage or deal with in the active conduct of your business, such as a customer, client, supplier, employee, agent, partner, or professional advisor, whether established or prospective.

Remember, to qualify for the 100 percent deduction, you need a restaurant. The IRS recently provided definitions and examples of what is and is not a restaurant.

A restaurant is “a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” It is not any of the following:

• Grocery stores
• Specialty food stores
• Beer, wine, or liquor stores
• Drug stores
• Convenience stores
• Newsstands
• Vending machines or kiosks

In general, the 50 percent limitation applies to business meals from the sources listed above. The restaurant creates the 100 percent deduction. 

For the 2021 tax year only, the American Rescue Plan Act of 2021 (ARPA) makes big, taxpayer-friendly changes to the federal income tax child tax credit (CTC).

Here’s what you need to know, starting with some necessary background information.

CTC Basics

For 2018-2020 and 2022-2025, the maximum annual CTC is $2,000 per qualifying child.

A qualifying child is an under-age-17 child who could be claimed as your dependent for the year. Basically, that means the child lived with you for over half the year; did not provide more than half of his or her own support; and is a U.S. citizen, U.S. national, or U.S. resident.

The maximum $2,000 CTC is phased out (reduced) if your modified adjusted gross income (MAGI) for the year exceeds $200,000, or $400,000 for a married joint-filing couple. The credit is phased out by $50 per $1,000 (or fraction of $1,000) of MAGI in excess of the applicable phaseout threshold.

For 2018-2020 and 2022-2025, the CTC is partially refundable. You can collect the refundable amount even if you have no federal income tax liability for the year. So, the refundable amount is free money. The refundable amount generally equals 15 percent of your earned income above $2,500.

An alternative formula for determining the refundable amount applies if you have three or more qualifying children. In any case, the maximum refundable amount for 2018-2020 and 2022-2025 is limited to $1,400 per qualifying child. (If you have a 2020 tax liability, the CTC can offset up to $2,000.)

More Generous CTC Rules for 2021

For your 2021 tax year only, ARPA makes the following taxpayer-friendly changes.

Qualifying Children Can Be Up to 17 Years Old

The definition of a qualifying child is broadened to include children who are age 17 or younger as of December 31, 2021.

Bigger Maximum CTC with Separate Phaseout Rule for the Increase

ARPA increased the maximum CTC to $3,000 per qualifying child, or $3,600 for a qualifying child who is age 5 or younger as of December 31, 2021. But the increased 2021 credit amounts are subject to two phaseout rules:

1. The increased CTC amount—$1,000 or $1,600, whichever applies—is phased out for single taxpayers with MAGI above $75,000, for heads of household with MAGI above $112,500, and for married jointly filing couples with MAGI above $150,000. The increased amount is phased out by $50 per $1,000 (or fraction of $1,000) of MAGI in excess of the applicable phaseout threshold.
2. The “regular” $2,000 CTC amount is subject to the “regular” phaseout rule explained earlier.

Key point. If you’re not eligible for the increased CTC amount for 2021 because your income is too high, you can still claim the regular CTC of up to $2,000, subject to the regular phaseout rule.

CTC Is Fully Refundable for Most Folks

For the 2021 tax year, the CTC is fully refundable if you (or, if married, you and your jointly filing spouse) have a principal residence in the U.S. for more than half the year. If you are a member of the U.S. Armed Forces who is stationed outside the U.S. while serving on extended active duty, you’re treated as having a principal residence in the U.S.

For 2021, the CTC is fully refundable even if you have no earned income for the year. The MAGI phaseout rules explained earlier apply in calculating your allowable, fully refundable CTC for 2021.

IRS Will Make Advance CTC Payments (We Hope)

Another ARPA provision directs the IRS to establish a program to make monthly advance payments of CTCs (generally via direct deposits).

Such advance payments will equal 50 percent of the IRS’s estimate of your allowable CTC for 2021. The advance payments will be made in the form of equal monthly installments from July through December 2021. To estimate your advance CTC payments, the IRS will look at the information shown on your 2020 Form 1040 (or on your 2019 return if you have not yet filed your 2020 return).

Deadline Updates

April 15, 2021:

• The first quarter of 2021 federal estimated tax payment is due.

May 17, 2021:

• Federal, Utah, and some other state individual income tax returns are due.
• IRA or HSA contributions are due.

American Rescue Plan Act of 2021

Here is a brief summary of the bill.

Individual Provisions

• Recovery rebates for individuals.  To help individuals stay afloat during this time of economic uncertainty, the government is sending up to $1,400 payments to eligible taxpayers and $2,800 for married couples filing joint returns. An additional $1,400 additional payment is being sent to taxpayers for each dependent.  The payment phases out for higher income taxpayers.  The phaseout begins at modified adjusted gross income of $75,000 for single taxpayers and $150,000 for married joint taxpayers.  The rebates phase out quickly ($80,000 adjusted gross income (AGI) for single & $160,000 for married).
• Child Tax Credit.  For 2021 only the credit is increased to $3,000 ($3,600 per child under six) per qualifying child.  17 year olds also qualify for the credit.  The credit starts to phase out at $75,000 for single and $150,000 for married joint.
• Advance Payment of Child Tax Credit.  For 2021 only, 50% of the credit will be paid in advance monthly starting in July 2021 and ending in December 2021.      
• Unemployment Benefit Exclusion.  For 2020 only the first $10,200 is excluded from taxable income.  Married Joint applies to each spouse.  Exclusion doesn’t apply if modified AGI is $150,000 or more.
• Premium Tax Credit for health insurance is expanded for 2021 and 2022 and 2020 paybacks are suspended.  This means if your 2020 income was too high you don’t have to repay any advance payments.
• Earned Income Credit for Singles Without Children.  The credit is increased and also applies after age 65.  It can apply at age 19 for non-students and others.  So it can apply from age 19 on.
• Child and Dependent Credit (Day Care).  For 2021 the credit is refundable.  For 2021 it is also increased to 50% of expenses ($4,000 for one child and $8,000 for two or more children).

Business Provisions.

• Payroll Credits for Paid Sick and Family Leave.  The credits for sickness and family leave due to Covid-19 are extended through September 30, 2021.  The wages for the credit restart on April 1, 2021.  If an employee already used up their days they can qualify for more days.    
• Employee Retention Credit.  The credit has been extended to December 31, 2021.
• COBRA Continuation Coverage.  The law provides COBRA assistance for those eligible between March 11-September 30, 2021.
• More 1099-K Forms for Credit Card Sales.  Starting in 2022 third party networks like credit card companies, PayPal, Airbnb, etc. will have to send a 1099-K to anyone who was paid over $600 during the year.

When you operate a business, you have a variety of tax breaks available.

The recently enacted CAA 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 business meals that are provided by restaurants in 2021 and 2022.
•  
• 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 TCJA business interest expense limitations.
•  
• Farmers may elect a two-year NOL 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 PPP loans that are forgiven, 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.

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:

1. Filing of returns
2. Payment of tax
3. Accuracy of information

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.

Here are three instances where you might qualify for reasonable cause relief:

1. Your or an immediate family member’s death or serious illness, or your unavoidable absence
2. Inability to obtain necessary records to comply with your tax obligation
3. Destruction or disruption caused by fire, casualty, natural disaster, or other disturbance

Here are five instances where you likely do not qualify for reasonable cause penalty relief:

1. You made a mistake.
2. You forgot.
3. You relied on another party to comply on your behalf.
4. You don’t have the money.
5. You are ignorant of the tax law.

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:

1. Deduct cash contributions to charity if you don’t itemize.
2. Deduct up to 100 percent of your adjusted gross income (AGI) as a charitable deduction.
3. Lengthen to one year the time you have to repay your 2020 employee Social Security taxes if your employer deferred them.
4. Deduct medical expenses in 2021 using the now-extended 7.5 percent of AGI floor for these deductions.
5. Carry over unused flexible savings account (FSA) funds to next year.
6. Use your 2019 income to qualify for the earned income tax credit and/or the child tax credit if you’re a lower-income taxpayer.
7. Deduct out-of-pocket expenses for personal protective equipment (PPE) if you’re a teacher.
8. Take advantage of the lifetime learning credit in 2021 if you’re a higher-income taxpayer.

• The firm has 40 years of combined experience.  Joe has a master’s degree in accounting from BYU.  Joey has a Master of Business Administration degree from Utah Valley University.  The firm and its predecessors have been around since 1946.

• Joe & Joey have taken many hours of tax continuing education classes.

• We read newsletters, magazines, and e-mails to keep up on the latest tax law changes so we can advise you.

• We go through two checklists when preparing your return to do our part so you get the tax deductions you are entitled to.

• The firm also can help you with accounting, financial statements, payroll, estate & trust tax planning, and business planning.

• We are open year-round so we are here when you need us.

• We can represent you before the IRS if you get audited.

• We have helped clients save thousands of dollars in IRS penalties.

• Joe & Joey have started their own businesses and they have helped many clients start theirs so they can help you too.

• We can send you a monthly e-mail tax planning newsletter and we mail you semi-annual tax planning newsletters.

Here is a brief summary of the bill.

Federal Tax break extenders. Many of the “traditional” tax extenders are extended for one year (through 2021) or more, They include: 

• $500 energy-efficient home improvement credit.
• Mortgage insurance deduction.
• Tuition deduction is repealed (starting in 2021) but the Lifetime Learning Credit income limits are increased to help offset this (starting in 2021).   
• 7.5% floor to deduct medical expenses extended permanently.

Individual Provisions

• Recovery rebates for individuals.  To help individuals stay afloat during this time of economic uncertainty, the government is sending up to $600 payments to eligible taxpayers and $1,200 for married couples filing joint returns. An additional $600 additional payment is being sent to taxpayers for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit).  The payment phases out for higher income taxpayers.  The phaseout begins at modified adjusted gross income of $75,000 for single taxpayers and $150,000 for married joint taxpayers.
• 2020 Child Tax Credit and Earned Income Credit can be based on 2019 income (if helpful).
• $300 Charitable Deduction for non-itemizers (taking standard deduction) is extended to 2021.  Starting in 2021 married filing joint taxpayers will be able to deduct $600.

Business Provisions.

• PPP Loans & EIDL Grants are not taxable.  Expenses paid with PPP loans are deductible.  More expenses qualify for PPP forgiveness. 
• New PPP Loans Are Available.  If your revenue went down by 25% or more in any quarter of 2020 you can apply for a new PPP loan.
• Simplified PPP Loan Forgiveness Application.  If your PPP loan is under $150,000 then you can sign a one page form and don’t have to attach many pages of receipts, etc.
• Payroll Credits for Paid Sick and Family Leave.  The credits for sickness and family leave due to Covid-19 are extended through March 31, 2021.
• Employee Retention Credit.  The credit has been extended to June 30, 2021.  The requirements have been lowered—now you only need a reduction in revenue of 20%.  And you can qualify even if you received a PPP loan (but can’t use expenses used for PPP loan forgiveness).
• Business Meals are 100% deductible for 2021 & 2022.  They must be obtained from a restaurant (dine-in, takeout, or delivery).  Need to have receipts, names, purpose, etc.

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:

• you are the sole owner of your business,
• your spouse does real work under your direction and control and keeps a timesheet,
• you regularly pay your spouse’s medical and other reimbursable expenses from your separate business checking account, and
• your spouse’s compensation is reasonable for the work performed.

All small-business owners with one to 49 employees should have a medical plan in their business. Sure, the tax law does not require you to have a plan, but you should.

Most of the tax rules that apply to medical plans are straightforward when you have fewer than 50 employees.

Here are the six opportunities for you to consider:

1. Make sure to claim the federal tax credit equal to 100 percent of required emergency sick leave and emergency family leave payments made pursuant to the Families First Coronavirus Response Act. If you did not obtain a Paycheck Protection Program loan, make sure to obtain the employee retention tax credit too (if you qualify).
2. If you have a Section 105 plan in place and you have not been reimbursing expenses monthly, do a reimbursement now to get your 2020 deductions, and then put yourself on a monthly reimbursement schedule in 2021.
3. If you want to but have not implemented your Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), make sure to get that done properly now. You are late, so you could suffer that $50-per-employee penalty should you be found out.
4. But if you are thinking of the QSEHRA and want to help your employees with more money and flexibility, be sure to consider the Individual Coverage Health Reimbursement Arrangement (ICHRA). The ICHRA has more advantages.
5. If you operate your business as an S corporation and you want an above-the-line tax deduction for the cost of your health insurance, you need the S corporation to (a) pay for or reimburse you for the health insurance, and (b) put it on your W-2. Make sure that the reimbursement happens before December 31 and that you have the reimbursement set up to show on the W-2.
6. Claim the tax credit for the group health insurance you give your employees. If you provide your employees with group health insurance, see whether your pay structure and number of employees put you in a position to claim a 50 percent tax credit for some or all of the monies you paid for health insurance in 2020 and possibly in prior years.

1. Establish Your 2020 Retirement Plan

First, a question: As you read this, do you have your (or your corporation’s) retirement plan in place? 

If not, and if you have some cash you can put into a retirement plan, get busy and put that retirement plan in place so you can obtain a tax deduction for 2020.

For most defined contribution plans, such as 401(k) plans, you (the owner-employee) are both an employee and the employer, whether you operate as a corporation or as a proprietorship. And that’s good because you can make both the employer and the employee contributions, allowing you to put a good chunk of money away.

2. Claim the New, Improved Retirement Plan Start-Up Tax Credit of Up to $15,000

By establishing a new qualified retirement plan (such as a profit-sharing plan, 401(k) plan, or defined benefit pension plan), a SIMPLE IRA plan, or a SEP, you can qualify for a non-refundable tax credit that’s the greater of

• $500 or
• the lesser of (a) $250 multiplied by the number of your non-highly compensated employees who are eligible to participate in the plan, or (b) $5,000.

The credit is based on your “qualified start-up costs,” which means any ordinary and necessary expenses of an eligible employer that are paid or incurred in connection with

• the establishment or administration of an eligible employer plan, or
• the retirement-related education of employees with respect to such plan.

3. Claim the New Automatic Enrollment $500 Tax Credit for Each of Three Years ($1,500 Total)

The SECURE Act added a nonrefundable credit of $500 per year for up to three years beginning with the first taxable year beginning in 2020 or later in which you, as an eligible small employer, include an automatic contribution arrangement in a 401(k) or SIMPLE plan.

The new $500 auto contribution tax credit is in addition to the start-up credit and can apply to both newly created and existing retirement plans. Further, you don’t have to spend any money to trigger the credit. You simply need to add the auto-enrollment feature.

4. Convert to a Roth IRA

Consider converting your 401(k) or traditional IRA to a Roth IRA.

If you make good money on your IRA investments and you won’t need your IRA money during the next five years, the Roth IRA over its lifetime can produce financial results far superior to the traditional retirement plan.

You first need to answer this question: How much tax will I have to pay now to convert my existing plan to a Roth IRA? With the answer to this, you know how much cash you need on hand to pay the extra taxes caused by the conversion to a Roth IRA.

Here are four reasons you should consider converting your retirement plan to a Roth IRA:

1. You can withdraw the monies you put into your Roth IRA (the contributions) at any time, both tax-free and penalty-free, because you invested previously taxed money into the Roth account.
2. You can withdraw the money you converted from the traditional plan to the Roth IRA at any time, tax-free. (If you make that conversion withdrawal within five years, however, you pay a 10 percent penalty. Each conversion has its own five-year period.)
3. When you have your money in a Roth IRA, you pay no tax on qualified withdrawals (earnings), which are distributions taken after age 59 1/2, provided you’ve had your Roth IRA open for at least five years.
4. Unlike with the traditional IRA, you don’t have to receive required minimum distributions from a Roth IRA when you reach age 72—or to put this another way, you can keep your Roth IRA intact and earning money until you die. (After your death, the Roth IRA can continue to earn money, but someone else will be making the investment decisions and enjoying your cash.)

Remember to consider your Section 199A deduction in your year-end tax planning.

If you don’t, you could end up with a big fat $0 for your deduction amount. We’ll review three year-end moves that (a) reduce your income taxes and (b) boost your Section 199A deduction at the same time.

First Things First

If your taxable income is above $163,300 (or $326,600 on a joint return), then your type of business, wages paid, and property can reduce and/or eliminate your Section 199A tax deduction.

If your deduction amount is less than 20 percent of your qualified business income (QBI), then consider using one or more of the strategies described below to increase your Section 199A deduction.

Strategy 1: Harvest Capital Losses

Capital gains add to your taxable income, which is the income that

• determines your eligibility for the Section 199A tax deduction,
• sets the upper limit (ceiling) on the amount of your Section 199A tax deduction, and
• establishes when you need wages and/or property to obtain your maximum deductions.

If the capital gains are hurting your Section 199A deduction, you have time before the end of the year to harvest capital losses to offset those harmful gains.

Strategy 2: Make Charitable Contributions

Since the Section 199A deduction uses taxable income for its thresholds, you can use itemized deductions to reduce and/or eliminate threshold problems and increase your Section 199A deduction.

Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year (assuming you already itemize).

Strategy 3: Buy Business Assets

Thanks to 100 percent bonus depreciation and Section 179 expensing, you can write off the entire cost of most assets you buy and place in service before December 31, 2020.

This can help your Section 199A deduction in two ways:

1. The big asset purchase and write-off can reduce your taxable income and increase your Section 199A deduction when it can get your taxable income under the threshold.
2. The big asset purchase and write-off can contribute to an increased Section 199A deduction if your Section 199A deduction currently uses the calculation that includes the 2.5 percent of unadjusted basis in your business’s qualified property. In this scenario, your asset purchases increase your qualified property, which in turn increases the deduction you already depend on.

The purpose of this article is to get the IRS to owe you money.

Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.

Here are seven powerful business tax deduction strategies that you can easily understand and implement before the end of 2020.

1. Prepay Expenses Using the IRS Safe Harbor

You just have to thank the IRS for its tax-deduction safe harbors.

IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.

Under this safe harbor, your 2020 prepayments cannot go into 2022. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.

For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Thursday, December 31, 2020, you mail a rent check for $36,000 to cover all of your 2021 rent. Your landlord does not receive the payment in the mail until Tuesday, January 5, 2021. Here are the results:

• You deduct $36,000 in 2020 (the year you paid the money).
• The landlord reports taxable income of $36,000 in 2021 (the year he received the money).

You get what you want—the deduction this year.

The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.

Don’t surprise your landlord: if he had received the $36,000 of rent paid in advance in 2020, he would have had to pay taxes on the rent money in tax year 2020.

2. Stop Billing Customers, Clients, and Patients

Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2020. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)

Customers, clients, patients, and insurance companies generally don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.

Example. Jim Schafback, a dentist, usually bills his patients and the insurance companies at the end of each week; however, in December, he sends no bills. Instead, he gathers up those bills and mails them the first week of January. Presto! He just postponed paying taxes on his December 2020 income by moving that income to 2021.

3. Buy Office Equipment

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2020.

Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).

4. Use Your Credit Cards

If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.

But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.

5. Don’t Assume You Are Taking Too Many Deductions

If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.

If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.

You used to be able to carry back your NOL two years and get immediate tax refunds from prior years; however, the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.

What does this all mean? You should never stop documenting your deductions, and you should always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.

6. Thank COVID-19

Let’s be real: there’s little to be grateful for with COVID-19, with one of the several exceptions being the potential opportunities to turn NOLs into cash for your business.

Two NOL opportunities come from the Coronavirus Aid, Relief, and Economic Security (CARES) Act:

1. The CARES Act allows NOLs arising in tax years beginning in 2018, 2019, and 2020 to be carried back five years for refunds against prior taxes.
2. The CARES Act allows application of 100 percent of the NOL to the carryback years.

Before the CARES Act, you could not carry back your 2018, 2019, or 2020 losses, and your NOL could offset only up to 80 percent of taxable income before your Section 199A deduction.

7. Deal with Your Qualified Improvement Property (QIP)

In the CARES Act, Congress finally fixed the qualified improvement property (QIP) error that it made in the TCJA.

QIP is any improvement made by the taxpayer to the interior portion of a building that is non-residential real property (think office buildings, retail stores, and shopping centers) if you place the improvement in service after the date you place the building in service.

If you have such property on an already filed 2018 or 2019 return, it’s on that return as 39-year property. You now have to change it to 15-year property, eligible for both bonus depreciation and Section 179 expensing.

You likely formed an S corporation to save on self-employment taxes.

If so, is your S corporation salary

• nonexistent?
• too low?
• too high?
• just right?

Getting the S corporation salary right is important. First, if it’s too low and you get caught by the IRS, you will pay not only income taxes and self-employment taxes on the too-low amount, but also both payroll and income tax penalties that can cost plenty.

Second, in most cases, the IRS is going to expand the audit to cover three years and then add the income and penalties for those three years.

Third, after being found out, you likely are now stuck with this higher salary, defeating your original purpose of saving on self-employment taxes.

Getting to the Number

The IRS did you a big favor when it released its “Reasonable Compensation Job Aid for IRS Valuation Professionals.”

The IRS states that the job aid is not an official IRS position and that it does not represent official authority. That said, the document is a huge help because it gives you some clearly defined valuation rules of the road to follow and takes away some of the gray areas.

Market Approach

The market approach to reasonable compensation compares the S corporation’s business with others and then looks at the compensation being paid by those businesses to employees who look like you, the shareholder-employee who is likely the CEO.

The question to be answered is, how much compensation would be paid for this same position, held by a nonowner in an arm’s-length employment relationship, at a similar company?

In its job aid, the IRS states that the courts favor the market approach, but because of challenges in matching employees at comparable companies, the IRS developed other approaches.

Cost Approach

The cost approach breaks your employee activities into their components, such as management, accounting, finance, marketing, advertising, engineering, purchasing, janitorial, bookkeeping, clerking, etc.

Here’s an example of how the cost approach works to support a $71,019 salary as reasonable compensation for this S corporation owner whose corporation had $3.5 million in revenue and 19 employees:

Health Insurance

The S corporation’s payment or reimbursement of health insurance for the shareholder-employee and his or her family goes on the shareholder-employee’s W-2 and counts as compensation, but it’s not subject to payroll taxes, so it fits nicely into the payroll tax savings strategy for the S corporation owner.

Pension

The S corporation’s employer contributions on behalf of the owner-employee to a defined benefit plan, simplified employee pension (SEP) plan, or 401(k) count as compensation but don’t trigger payroll taxes. Such contributions further enable the savings on payroll taxes while adding to the dollar amount that’s considered reasonable compensation.

Planning note. Your S corporation compensation determines the amount that your S corporation can contribute to your SEP or 401(k) retirement plan. The defined benefit plan likely allows the corporation to make a larger contribution on your behalf.

Section 199A Deduction

The S corporation’s net income that is passed through to you, the shareholder, can qualify for the 20 percent Section 199A tax deduction on your Form 1040.

Limited liability companies (LLCs) are a popular choice of entity for small businesses and investment activities. LLC owners are called members.

Single-member LLCs have one owner, although spouses who jointly own an LLC in a community property state can elect treatment as a single-member LLC for federal income tax purposes. We will call LLCs with two or more members multimember LLCs.

Key point. LLCs are not corporations. But LLCs can offer similar legal protection to their members (owners).

Here are the most important things to know about LLCs.

LLCs Offer Legal Protection

Using an LLC to conduct a business or investment activity generally protects your personal assets from LLC-related liabilities—similar to the legal protection offered by a corporation.

As you know, liabilities can arise from simple things—like a delivery guy slipping on something you left on your front steps—or in seemingly endless and complicated ways if you have employees.

Key point. As a general rule, no type of entity (including an LLC) will protect your personal assets from exposure to liabilities related to your own professional malpractice or your own tortious acts.

Tortious acts are wrongful deeds other than by breach of contract—such as negligent operation of a motor vehicle resulting in property damage or injuries. The issue of liability protection offered by an LLC is a matter of state law. Seek advice from a competent business attorney for details.

Single-Member LLC Tax Basics

Single-member LLC businesses owned by individuals are treated as sole proprietorships for federal income tax purposes unless the member elects to treat the single-member LLC as a corporation.

In other words, the default federal income tax treatment for a single-member LLC business is sole proprietorship status. Under the default treatment, you simply report all the single-member LLC’s income and expenses on Schedule C of your Form 1040.

If the single-member LLC business activity generates net self-employment income, you will report that on Schedule SE of your Form 1040.

Rental. If the single-member LLC activity is a rental activity, you report the rental income and expenses on Schedule E of your Form 1040.

Farm or ranch. You report the numbers for a farming or ranching activity on Schedule F.

Simple. You don’t need to file a separate federal income tax return for the single-member LLC. And other things being equal, simple is good.

Three key points

1. The big federal income tax advantage of operating as a single-member LLC is simplicity.
2. The big non-tax advantage is liability protection, under applicable state law.
3. As mentioned, you can elect to treat a single-member LLC as a corporation for federal income tax purposes, but we don’t recommend that, for reasons we explain later.

Multimember LLC Tax Basics

Multimember LLCs are treated as partnerships for federal income tax purposes unless you elect to treat the LLC as a corporation.

In other words, the default federal income tax treatment for a multimember LLC is partnership status. Under the default treatment, you must file an annual partnership federal income tax return on Form 1065.

From the Form 1065 partnership return, the LLC issues an annual Schedule K-1 to each member to report that member’s share of the LLC’s income and expenses. The member then takes those taxable and deductible amounts into account on the member’s own return (Form 1040 for a member who is an individual).

The LLC itself does not pay federal income tax. This arrangement is called pass-through taxation, because the income and expenses from the LLC’s operations are passed through to the members, who then take them into account on their own returns. (The same pass-through taxation concept applies to entities set up as “regular” partnerships under applicable state law.)

Electing to Treat the LLC as a Corporation for Tax Purposes

You have the option of electing to treat a single-member LLC or multimember LLC as a corporation for federal income tax purposes. You do that by filing IRS Form 8832, Entity Classification Election, to change the default classification of the single-member LLC or multimember LLC to the new classification as a corporation.

If your desire is to have your LLC treated as an S corporation, it can elect S corporation status directly using IRS Form 2553, or it can elect C corporation treatment on Form 8832 and then S corporation treatment on IRS Form 2553. While there may be valid non-tax reasons for electing to treat an LLC as a corporation, we think tax reasons generally dictate against taking that step.

If you conclude that there are tax advantages to electing corporate status, why not just actually incorporate your operation in the first place? That’s simpler. Keeping your tax matters simple is generally good policy.

Electing corporate status from the LLC could have unintended tax consequences. For example, you can potentially collect federal-income-tax-free gains from selling stock in a qualified small business corporation (QSBC). But you must own shares and hold them for over five years to cash in on this super-favorable deal. Can an LLC membership (ownership) interest count as QSBC stock for this purpose? Apparently not. It’s not stock.

If you are looking for the QSBC stock break, just set up as a corporation in the first place.

Here’s another example: a special federal income tax break allows you to annually deduct up to $50,000 of losses from selling eligible small business stock, or $100,000 if you’re a married joint filer, and treat the loss as a tax-favored ordinary loss instead of a tax-disfavored capital loss.

Can an LLC membership interest count as eligible stock for this purpose? Apparently not. It’s not stock. Avoid the problem—set up as a corporation in the first place.

The Importance of Keeping a Mileage Log

What is the unpardonable sin in an IRS audit?

Suppose you just received a letter from the IRS telling you that you are the subject of an IRS audit. What one record receives special attention? What one record can create a nightmare for you? What one record makes the IRS suspect that you are the keeper of lousy records?

Think of the record you most hate keeping. That’s the one we are talking about. You have probably guessed what that record might be.

Red-Flag Record for the IRS Examiner

Once your audit examination begins, the examiner likes to see this record. If the record is missing or lacking, the IRS examiner knows that your other records probably are lacking, too. This record—the one you probably hate keeping—is the mileage log on your vehicle or vehicles.

The IRS notes that a taxpayer’s failure to keep a mileage log on vehicles indicates that the activity under examination is not being conducted in a businesslike manner.

Do as the Tax Form Says

As a one-owner or husband-and-wife-owned business, regardless of whether it’s a corporation, a partnership, or a proprietorship, you file a tax form that asks you for the following information about your vehicles:

1. Do you have evidence to support the business/investment use claimed? (If “yes,” is the evidence written?)
2. List your total business/investment miles on each vehicle.
3. List your total commuting miles on each vehicle.
4. List your total personal miles on each vehicle.

IRS Form 4562 has columns for answers to the above questions for up to six vehicles used by either a sole proprietor or an owner of more than 5 percent of a corporation, a partnership, or another entity. The mileage log is the record of proof that you need to use for your answers to the tax form questions.

Do What the Audit Would Require

Above, we said to do as the IRS form says. For additional clarification, it is good to know what information the IRS, in a correspondence audit, requires you to provide related to that tax form:

1. Send copies of repair receipts, inspection slips, and other records showing total mileage for the year.
2. Send copies of logbooks and other records to support the business mileage claimed.
3. Provide a copy of your appointment book or calendar of business activities for the year.
4. If you are claiming actual expenses, provide copies of paid bills, invoices, and canceled checks for automobile expenses. These would include gas, oil, tires, repairs, insurance, interest, tags, taxes, parking fees, and tolls.
5. Send a copy of the bill of sale or other verification to establish your basis in the vehicle, including the trade-in of another vehicle.

Note that the IRS is looking for

• a match of the repair bill odometer reading with the mileage in your logbook;
• a match of the inspection slip odometer reading with the mileage in your logbook;
• the mileage between repair stops, to see whether that ties in with your claimed mileage; and
• a business purpose that ties in with your appointment book or other calendar of business activities.

Takeaways

If you want to avoid big trouble during an IRS audit, keep a good mileage log. This takes just minutes a day.

The mileage log is often one of the first records that an IRS examiner will look at. A good mileage log shows that you know the rules and you respect them. Many IRS audits end favorably and quickly upon presentation of a good mileage log.

Waiver of required minimum distribution rules/Rollover. Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans), IRAs, and inherited IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner's having turned age 70 1/2 in 2019.  If you took a minimum distribution between January 1 and August 31, 2020 you have until August 31, 2020 to roll it back into your 401k, IRA, or inherited IRA.

Congress passed a bill and President Trump signed it on June 5, 2020.  Here are some highlights of the bill.

1. The 8 week forgiveness period is now 24 weeks or December 31, 2020 (whichever comes first).
2. You only have to spend 60% on payroll instead of 75%.  If you spend less than 60% some of the loan can still be forgiven.
3. Any amounts not forgiven can be paid over 5 years (instead of 2).
4. You have until December 31, 2020 to rehire or eliminate reductions in employment or wages (was June 30, 2020).
5. The first payment is not due for 10 months (up from 6 months).
6. You can delay your employer portion of social security tax (even if your PPP loan is forgiven).

Congress made an error in the TCJA that limited your ability to fully expense your qualified improvement property (QIP).

The CARES Act fixed the issue retroactively to tax year 2018.

If you have such property in your prior filed 2018 or 2019 tax returns, you likely have no choice but to correct those returns. But the bright side is that the corrected law gives you options that enable you to pick the best tax result.

What Is QIP?

QIP is any improvement made by the taxpayer to the interior portion of a building that is non-residential real property (think office buildings, retail stores, and shopping centers) if you place the improvement in service after the date you place the building in service.

The CARES Act correction added the “made by the taxpayer” requirement to the definition.

QIP does not include any improvement for which the expenditure is attributable to

          the enlargement of the building,

          any elevator or escalator, or

          the internal structural framework of the building.

QIP Problem

Due to a TCJA drafting error in the law, Congress made QIP 39-year property for depreciation purposes and ineligible for bonus depreciation.

Unusual twist. This drafting error did not affect expensing under Section 179. Under the TCJA, you could have elected to expense some or all of your QIP with Section 179.

But now you have to revisit your previously filed 2018 and 2019 tax returns and consider 100 percent bonus depreciation, 15-year depreciation, and Section 179 expensing.

QIP Solution

The CARES Act made QIP 15-year property and made it eligible for bonus depreciation retroactively as if Congress had included it in the TCJA when it originally became law.

This change requires you to take a one-time, lump-sum bonus depreciation deduction for the entire cost of your QIP in the tax year during which you place the QIP in service, unless you elect out.

If the QIP lump-sum deduction creates an NOL, you can carry back that loss to get almost immediate cash.

As you may know, the TCJA increased bonus depreciation to 100 percent. Unlike most tax provisions that involve a tax election, this one requires you to elect out if you don’t want it.

For example, you (or your corporation) buy two $50,000 trucks, each with a gross vehicle weight rating of 6,500 pounds and a bed length of 6.5 feet. You use the trucks 100 percent for business. Because of the weight and bed size, the trucks are exempt from the luxury passenger vehicle depreciation limits.

You have five choices on how to deduct the vehicles on your 2019 tax return (the one you are filing or about to file—we are in tax season):

1. Do nothing. This forces you to use bonus depreciation and deduct the entire $100,000 cost in year one. In addition, you deduct your operating expenses such as gas, oil, and insurance.
2. Elect out, choose Section 179 expensing of any amount of your $100,000 cost of the trucks, and depreciate the balance. For example, you could elect to deduct $30,000 of Section 179 expensing on each truck and then depreciate the remainder using MACRS. In addition, you deduct your operating expenses such as gas, oil, and insurance. (Note. The trucks are not subject to the $25,000 SUV ceiling because of their weight and bed length.)
3. Elect out, don’t use Section 179, and depreciate the trucks using the five-year MACRS depreciation schedule (which takes six years).
4. Elect out, don’t use Section 179, and depreciate the trucks using the five-year straight-line depreciation schedule (which also takes six years).
5. Use the 57.5 cents IRS standard mileage rate for each business mile driven. The 57.5 cents per mile rate includes operating expenses and 27 cents a mile for depreciation.

Okay, you get the big picture. Two trucks, each with a cost of $50,000 and both exempt from the luxury vehicle limits. Five choices as to the deduction.

Luxury Vehicles

Because of their gross vehicle weight, the vehicles mentioned above were exempt from the luxury vehicle depreciation limits that apply to

• cars with curb weight of 6,000 pounds or less, and
• SUVs, pickups, and crossover vehicles with a gross vehicle weight rating of 6,000 pounds or less.

Had the vehicles failed the weight test, their bonus depreciation for 2019 would have been limited to $18,100.

We would like you to be aware that the government has recently passed legislation that may help your business.

The government is offering new ‘Paycheck Protection’ loans that business may qualify for.  They are obtained at SBA-qualified banks.  Loans can be obtained to help pay payroll expenses, rent and utilities and if certain qualifications are met, up to the entire loan can be forgiven.  Banks should start accepting applications for this type of loan after the government funds it again (hopefully this week).

You can apply for an Economic Impact Disaster Loan.  You may be able to receive a $10,000 advance on the loan (which would then reduce forgiveness of the paycheck protection loan above, if also applied for).  The loan should be available again once the government funds it again.  

Unemployment has been ramped up with a temporary $600 a week being added to payments of those who apply

Other payroll credits are available.  Qualifying businesses could get a credit equal to 50% of wages, up to $10,000 of wages per employee.  The maximum credit is $5,000 per employee.

Credits are available for paying employees who must stay home with kids due to school canceling or daycare limitations. 

Credits are available for paying employees who are sick with the coronavirus or helping someone who is.

The employer portion of FICA tax may be deferred.

Please let us know if you have any questions about how these may apply to your situation.  This is a brief summary of the changes.

• The firm has 38 years of combined experience.  Joe has a master’s degree in accounting from BYU.  Joey has a Master of Business Administration degree from Utah Valley University.  The firm and its predecessors have been around since 1946.

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• Joe & Joey have taken many hours of tax continuing education classes.
• We read newsletters, magazines, and e-mails to keep up on the latest tax law changes so we can advise you.
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• We go through two checklists when preparing your return to do our part so you get the tax deductions you are entitled to.

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• The firm also can help you with accounting, financial statements, payroll, estate & trust tax planning, and business planning.

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• We are open year-round so we are here when you need us.

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• We can represent you before the IRS if you get audited.

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• We have helped clients save thousands of dollars in IRS penalties.

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• Joe & Joey have started their own businesses and they have helped many clients start theirs so they can help you too.

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• We can send you a monthly e-mail tax planning newsletter and we mail you semi-annual tax planning newsletters.

If you are self-employed, you have much to think about as you enter your senior years, and that includes retirement savings and Medicare. Here a few thoughts that will help.

Keep Making Retirement Account Contributions, and Make Extra “Catch-up” Contributions Too

Self-employed individuals who are age 50 and older as of the applicable year-end can make additional elective deferral catch-up contributions to certain types of tax-advantaged retirement accounts.

For the 2019 tax year, you can take advantage of this opportunity if you will be 50 or older as of December 31, 2019.

• You can make elective deferral catch-up contributions to your self-employed 401(k) plan or to a SIMPLE IRA.
• You can also make catch-up contributions to a traditional or Roth IRA.

The maximum catch-up contributions for 2019 are as follows:

Catch-up contributions are above and beyond

1. the “regular” 2019 elective deferral contribution limit of $19,000 that otherwise applies to a 401(k) plan.
2. the “regular” 2019 elective deferral contribution limit of $13,000 that otherwise applies to a SIMPLE IRA.
3. the “regular” 2019 contribution limit of $6,000 that otherwise applies to a traditional or Roth IRA.

How Much Can Those Catch-up Contributions Be Worth?

Good question. You might dismiss catch-up contributions as relatively inconsequential unless we can prove otherwise. Fair enough. Here’s your proof:

401(k) catch-up contributions. Say you turned 50 during 2019 and contributed on January 1, 2019, an extra $6,000 for this year to your self-employed 401(k) account and then did the same for the following 15 years, up to age 65. Here’s how much extra you could accumulate in your 401(k) account by the end of the year you reach age 65, assuming the indicated annual rates of return below:

Is There an Upper Age Limit for Regular and Catch-up Contributions?

Another good question.

While you must begin taking annual required minimum distributions (RMDs) from a 401(k), SIMPLE IRA, or traditional IRA account after reaching age 70 1/2, you can continue to contribute to your 401(k), SIMPLE IRA, or Roth IRA account after reaching that age, as long as you have self-employment income (subject to the income limit for annual Roth contribution eligibility).

But you may not contribute to a traditional IRA after reaching age 70 ½ (for 2019).  You can for 2020 and later years. 

Claim a Self-Employed Health Insurance Deduction for Medicare and Long-Term Care Insurance Premiums

If you are self-employed as a sole proprietor, an LLC member treated as a sole proprietor for tax purposes, a partner, an LLC member treated as a partner for tax purposes, or an S corporation shareholder-employee, you can generally claim an above-the-line deduction for health insurance premiums, including Medicare health insurance premiums, paid for you or your spouse.

Key point. You don’t need to itemize deductions to get the tax-saving benefit from this above-the-line self-employed health insurance deduction.

Medicare Part A Premiums

Medicare Part A coverage is commonly called Medicare hospital insurance. It covers inpatient hospital care, skilled nursing facility care, and some home health care services. You don’t have to pay premiums for Part A coverage if you paid Medicare taxes for 40 or more quarters during your working years. That’s because you’re considered to have paid your Part A premiums via Medicare taxes on wages and/or self-employment income.

But some individuals did not pay Medicare taxes for enough months while working and must pay premiums for Part A coverage.

• If you paid Medicare taxes for 30-39 quarters, the 2019 Part A premium is $240 per month ($2,880 if premiums are paid for the full year).
• If you paid Medicare taxes for less than 30 quarters, the 2019 Part A premium is $437 ($5,244 for the full year).
• Your spouse is charged the same Part A premiums if he or she paid Medicare taxes for less than 40 quarters while working.

Medicare Part B Premiums

Medicare Part B coverage is commonly called Medicare medical insurance or Original Medicare. Part B mainly covers doctors and outpatient services, and Medicare-eligible individuals must pay monthly premiums for this benefit.

Your monthly premium for the current year depends on your modified adjusted gross income (MAGI) as reported on Form 1040 for two years earlier. For example, your 2019 premiums depend on your 2017 MAGI.

MAGI is defined as “regular” AGI from your Form 1040 plus any tax-exempt interest income.

Base premiums. For 2019, most folks pay the base premium of $135.60 per month ($1,627 for the full year).

Surcharges for higher-income individuals. Higher-income individuals must pay surcharges in addition to the base premium for Part B coverage.

For 2019, the Part B surcharges depend on the MAGI amount from your 2017 Form 1040. Surcharges apply to unmarried individuals with 2017 MAGI in excess of $85,000 and married individuals who filed joint 2017 returns with MAGI in excess of $170,000.

Including the surcharges (which go up as 2017 MAGI goes up), the 2019 Part B monthly premiums for each covered person can be $189.60 ($2,275 for the full year), $270.90 ($3,251 for the full year), $352.20 ($4,226 for the full year), $433.40 ($5,201 for the full year), or $460.50 ($5,526 for the full year).

The maximum $460.50 monthly premium applies to unmarried individuals with 2017 MAGI in excess of $500,000 and married individuals who filed 2017 joint returns with MAGI in excess of $750,000.

Medicare Part D Premiums

Medicare Part D is private prescription drug coverage. Premiums vary depending on the plan you select. Higher-income individuals must pay a surcharge in addition to the base premium.

Surcharges for higher-income individuals. For 2019, the Part D surcharges depend on your 2017 MAGI, and they go up using the same scale as the Part B surcharges.

The 2019 monthly surcharge amounts for each covered person can be $12.40, $31.90, $51.40, $70.90, or $77.40. The maximum $77.40 surcharge applies to unmarried individuals with 2017 MAGI in excess of $500,000 and married individuals who filed 2017 joint returns with MAGI in excess of $750,000.

Medigap Supplemental Coverage Premiums

Medicare Parts A and B do not pay for all health care services and supplies. Coverage gaps include copayments, coinsurance, and deductibles.

You can buy a so-called Medigap policy, which is private supplemental insurance that’s intended to cover some or all of the gaps. Premiums vary depending on the plan you select.

Medicare Advantage Premiums

You can get your Medicare benefits from the government through Part A and Part B coverage or through a so-called Medicare Advantage plan offered by a private insurance company. Medicare Advantage plans are sometimes called Medicare Part C.

Medicare pays the Medicare Advantage insurance company to cover Medicare Part A and Part B benefits. The insurance company then pays your claims. Your Medicare Advantage plan may also include prescription drug coverage (like Medicare Part D), and it may cover dental and vision care expenses that are not covered by Medicare Part B.

When you enroll in a Medicare Advantage plan, you continue to pay Medicare Part A and B premiums to the government. You may pay a separate additional monthly premium to the insurance company for the Medicare Advantage plan, but some Medicare Advantage plans do not charge any additional premium. The additional premium, if any, depends on the plan that you select.

Key point. Medigap policies do not work with Medicare Advantage plans. So if you join a Medicare Advantage plan, you should drop any Medigap coverage.

Premiums for Qualified Long-Term Care Insurance

These premiums also count as medical expenses for purposes of the above-the-line self-employed health insurance premium deduction, subject to the age-based limits shown below. For each covered person, count the lesser of premiums paid in 2019 or the applicable age-based limit.

Your age as of December 31, 2019, determines your maximum self-employed health insurance tax deduction for your long-term care insurance as follows:

• $790—ages 41-50
• $1,580—ages 51-60   
• $4,220—ages 61-70   
• $5,270—over age 70

1. Put Your Children on Your Payroll

If you have a child under the age of 18 and you operate your business as a Schedule C sole proprietor or as a spousal partnership, you absolutely need to consider having that child on your payroll. Why?

• First, neither you nor your child pay payroll taxes on the child’s income.
• Second, with a traditional IRA, the child can avoid all federal income taxes on up to $18,200 in income.

If you operate your business as a corporation, you can still benefit by employing the child even though you and the child have to pay payroll taxes.

2. Get Married on or before December 31

Remember, if you are married on December 31, you are married for the entire year. If you are thinking of getting married in 2020, you might want to rethink that plan for the same reasons that apply in a divorce (as described above). The IRS could make big savings available to you if you get married on or before December 31, 2019.

You have to run the numbers in your tax return both ways to know the tax benefits and detriments for your particular case. But a quick trip to the courthouse may save you thousands.

3. Make Use of the 0 Percent Tax Bracket

In the old days, you used this strategy with your college student. Today, this strategy does not work with the college student, because the kiddie tax now applies to students up to age 24. But this strategy is a good one, so ask yourself this question: do I give money to my parents or other loved ones to make their lives more comfortable?

If the answer is yes, is your loved one in the 0 percent capital gains tax bracket? The 0 percent capital gains tax bracket applies to a single person with less than $39,376 in taxable income and to a married couple with less than $78,751 in taxable income.

If the parent or other loved one is in the 0 percent capital gains tax bracket, you can get extra bang for your buck by giving this person appreciated stock rather than cash.

Example. You give Aunt Millie shares of stock with a fair market value of $20,000, for which you paid $2,000. Aunt Millie sells the stock and pays zero capital gains taxes. She now has $20,000 in after-tax cash to spend, which should take care of things for a while.

Had you sold the stock, you would have paid taxes of $4,284 in your tax bracket (23.8 percent times the $18,000 gain).

Of course, $5,000 of the $20,000 you gifted goes against your $11.4 million estate tax exemption if you are single. But if you’re married and you made the gift together, you each have a $15,000 gift-tax exclusion, for a total of $30,000, and you have no gift-tax concerns other than the requirement to file a gift-tax return that shows you split the gift.

The goal of this strategy is to get the IRS to owe you money. Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.

Here are five powerful business tax-deduction strategies that you can easily understand and implement before the end of 2019.

1. Prepay Expenses Using the IRS Safe Harbor

You just have to thank the IRS for its tax-deduction safe harbors. IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.

Under this safe harbor, your 2019 prepayments cannot go into 2021. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule. For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Tuesday, December 31, 2019, you mail a rent check for $36,000 to cover all of your 2020 rent. Your landlord does not receive the payment in the mail until Thursday, January 2, 2020. Here are the results:

• You deduct $36,000 in 2019 (the year you paid the money).
• The landlord reports $36,000 in 2020 (the year he received the money).

You get what you want—the deduction this year. The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable. Don’t surprise your landlord: if he had received the $36,000 of rent paid in advance in 2019, he would have had to pay taxes on the rent money in tax year 2019.

2. Stop Billing Customers, Clients, and Patients

Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2019. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.) Customers, clients, patients, and insurance companies generally don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.

Example. Jim Schafback, a dentist, usually bills his patients and the insurance companies at the end of each week; however, in December, he sends no bills. Instead, he gathers up those bills and mails them the first week of January. Presto! He just postponed paying taxes on his December 2019 income by moving that income to 2020.

3. Buy Office Equipment

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2019.

Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).

4. Use Your Credit Cards

If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.

But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.

5. Don’t Assume You Are Taking Too Many Deductions

If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL. If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.

You used to be able to carry back your NOL two years and get immediate tax refunds from prior years; however, the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.

What does all this mean? You should never stop documenting your deductions, and you should always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.

Take Advantage of the 199A Deduction for 2019

If you operate your business as a pass-through entity, such as a proprietorship, partnership, or S corporation, the profits of that business can generate the Section 199A tax deduction.

No-Problem Businesses

You qualify for the Section 199A deduction—period, regardless of pass-through business type—when you have

• pass-through qualified business income (QBI), and
• 2019 Form 1040 taxable income equal to or less than $160,700 single (and head of household) or $321,400 married, filing jointly.

With Form 1040 taxable income equal to or less than the thresholds listed above, doctors, lawyers, accountants, financial planners, stockbrokers, manufacturers, retailers, consultants, and all other businesses with pass-through income qualify for the deduction.

There’s no out-of-favor specified service business problem with income below the thresholds. And the calculation is easy.

With taxable income equal to or less than the thresholds, you qualify for the Section 199A deduction. Your deduction will equal the lesser of

• 20 percent of your Form 1040 taxable income less net capital gains and dividends, or
• 20 percent of your QBI.

Note that qualification for the deduction starts with your Form 1040 taxable income.

Example. You are married with joint taxable income of $320,000 and QBI of $350,000. Your Section 199A deduction is $64,000.

As you can see, no issues. If your taxable income is above the thresholds, you need to consider tax planning—now. Why now? Because some strategies require that you have time on your side.

For example, if you switch from a proprietorship to an S corporation to benefit from the W-2 wage strategy, your switch does not begin until you have the S corporation in place.

If you are looking at a retirement plan strategy, you want time to consider your options and get that tax-savings plan in place.

Act Fast to Claim a 30 Percent Tax Credit for Residential Solar Panels

Here’s a heads-up. The 30 percent residential solar credit

• drops to 26 percent for tax year 2020,
• drops to 22 percent for tax year 2021, and
• terminates in 2022.

Also, unlike the 30 percent commercial solar credit, where you can qualify for the 30 percent tax credit when you commence construction (as defined by the IRS, but easy to do), your 30 percent residential credit is granted when you place the solar property in service.

If you are thinking of the 30 percent tax credit for a solar installation on a residence you own, don’t let the time slip away, because you must have the solar property in use before December 31 to qualify for the 30 percent tax credit (dollar for dollar).

Roth IRA versus Traditional IRA: Which Is Better for You?

Roth IRAs tend to get a lot of hype, and for good reason: because you pay the taxes up front, your eventual withdrawals (assuming you meet the age and holding-period requirements—more on these below) are completely tax-free.

While we like “tax-free” as much as the next person, there are times when a traditional IRA will put more money in your pocket than a Roth would.

Making the Decision on What’s Best

Example. Say that your tax rate is 32 percent and that you will invest $5,000 a year in an IRA and earn 6 percent interest. Should you put the $5,000 a year into a Roth or a traditional IRA?

Say further that neither you nor your spouse is covered by a workplace retirement plan, so you can contribute the $5,000 a year without worry because it’s under the contribution limits. If your income is too high for the Roth IRA, you make the $5,000 contribution via the backdoor.

Traditional IRA

If you invest the $5,000 in a traditional IRA, you create a side fund of $1,600 ($5,000 x 32 percent). On the side fund, you pay taxes each year at 32 percent, making your side fund grow at 4.08 percent (68 percent of 6 percent).

Roth IRA

Roth contributions are not deductible; this means no side fund, so your annual investment remains at $5,000.

Cashing Out

For the Roth, your marginal tax rate at the time of your payout doesn’t matter because you paid your taxes before the money went into the account. The whole amount is now yours, with no additional taxes due.

But for the traditional IRA, your current tax bracket matters a great deal. You have taken care of the taxes on the side fund annually along the way, but the traditional IRA (both growth and contributions) is taxed at your current marginal tax rate at the time you cash out.

The table below shows you how this looks with tax rates of 22 percent, 32 percent, and 37 percent at the time you cash out (winners are in bold):

You can see that the traditional IRA needs a low tax rate at the time of cash-out to win. But even in the 22 percent cash-out tax rate, the Roth wins at the 40-year mark.

Rate of Growth

What about your rate of growth? Do variances here change things any? Let’s take a look.

Here, we’ll look at different rates of growth for a fixed period (30 years) before you withdraw your money. Once again, we’ll consider three different marginal tax rates at the time you cash out—22 percent, 32 percent, and 37 percent.

In the scenarios above, the traditional IRA/side fund combo wins only when your marginal tax rate is lower at the time of withdrawal and only at the lower growth rates.

At higher rates of return—9 percent and 12 percent, in our examples above—the Roth still wins, even if you’re in a higher tax bracket when you withdraw your money.

Proven Tax Reduction Strategies for Sole Proprietors

If you operate your business as a sole proprietorship, there are many strategies to reduce your taxes.

Let’s start with the following 10:

1. Use the Section 105 plan to make your health insurance a tax-favored business deduction on your Schedule C.
2. Employ your under-age-18 child to make taxable income disappear.
3. Employ your spouse without paying him or her a W-2 wage.
4. Rent your office, even your home office, from your spouse to save self-employment taxes.
5. Establish that an office in your home is your principal office to increase (yes, increase!) your vehicle deductions and also turn personal home expenses into business expenses.
6. Give yourself flowers, fruit, and books as tax-deductible fringe benefits.
7. Combine the home office and a heavy SUV, crossover vehicle, or pickup truck to grab big deductions this year.
8. Design a business trip that includes some personal days—days you treat as 100 percent business even though you don’t work on those days.
9. Use the seven-day tax deduction travel rule to create a business trip that is 87 percent personal vacation.
10. Deduct your smartphone and provide smartphones to your employees as tax-free fringe benefits.

If one or more of these look good to you, let’s talk about how to make them work.

If you own more than 2 percent of an S corporation, you have to do three things to claim a deduction for your health insurance:

1. You must get the cost of the insurance on the S corporation’s books.
2. Your S corporation must include the health insurance premiums on your W-2 form.
3. You must (if eligible) claim the health insurance deduction as an above-the-line deduction on Form 1040.

The three-step health-insurance procedure also applies under attribution rules (and this could be a surprise) to your spouse, children, grandchildren, and parents if they work for your S corporation, even if they don’t own a single share of S corporation stock directly.

You need to get this S corporation health-insurance thing right. Without the W-2 treatment, the S corporation does not get a tax deduction.

With the correct W-2 treatment, the more than 2 percent shareholder who finds the health insurance premiums on his or her W-2 can claim the self-employed health insurance deduction on Form 1040, provided he or she is not eligible for employer-subsidized health insurance through another job or a spouse’s job.

Do you claim your business miles at the IRS optional rate? If so, imagine you are now being audited by the IRS for your business mileage. The IRS has requested odometer readings for your vehicle. You might wonder if the IRS can do this.

The answer is yes. The tax code says that you must substantiate your business vehicle deductions by adequate records or by sufficient evidence corroborating your own statement, including the time and place of the travel and the business purpose.

The standard mileage rate does not reduce the need for vehicle mileage records. In other words, the need for the records that prove business mileage does not change when you use the IRS standard mileage rate. They are the same mileage records you need with the actual expense method.

Here’s what the IRS, in its Internal Revenue Manual, tells its examiners to do when looking at business miles:

To verify total miles for the year, the taxpayer should provide repair receipts, inspection slips or any other records showing total mileage at the beginning of the year as well as at the end of the year.

The bottom line here is that the burden of proof is on you to prove your business mileage as required by the law. Thus, make sure that you retain odometer readings at or near the beginning and end of the year from oil changes, vehicle inspections, and repairs.

Backdoor Roth IRA Opportunities Still Available After TCJA

Good news. The Tax Cuts and Jobs Act (TCJA) did not harm the backdoor Roth strategy.

As you likely know, the Roth IRA is a terrific way to grow your wealth with a minimum tax downside because you pay the taxes up front and then, with the proper holding period, pay no taxes after that.

But if you earn too much, you’re completely barred from contributing to a Roth IRA unless you can use the backdoor Roth technique, which involves making a nondeductible contribution to a traditional IRA and then rolling that money into a Roth.

The backdoor Roth strategy has been around for a good nine years, and it has experienced no trouble that we are aware of, so we think it’s a good strategy. We also like the recent notations in the legislative history and the comments from the IRS spokesperson that show approval of the strategy.

Keep in mind that with some planning, you can avoid any taxes on the rollover. For example, if you have an existing traditional IRA, you can move those monies to your qualified plan to avoid having the backdoor strategy trigger some taxes. And if you have no traditional IRA, the nondeductible contribution to the traditional IRA and the subsequent rollover to the Roth IRA triggers no taxes.

How to Deduct Medicare as a Business Expense

Premiums for Medicare health insurance can add up to a substantial sum. That’s especially true if

you have a high income, and

you’re married and both you and your spouse are paying premiums.

Fortunately, the premiums can potentially help your tax situation. The dollar benefit of Medicare tax deductions depends greatly on where you can deduct the premiums:

The business deduction produces the maximum tax benefit.

The self-employed health insurance deduction on line 29 of Schedule 1 of your Form 1040 produces the second-best benefit.

The itemized deduction is either useless or produces the third-best benefit.

Number 1: The Business Deduction

You flat out get the best dollar benefit from your Medicare and supplemental insurance premiums when you can deduct them as business deductions. You can make this happen when:

You are the sole owner and only employee of your C corporation.

You operate as a sole proprietorship or single-member LLC, and your spouse is your only employee.

You operate as a C corporation and have 20 or fewer employees to whom you offer group health insurance.

You operate as a C corporation, either you or your spouse is an employee, and you offer a qualified small employer health reimbursement arrangement (QSEHRA).

Second Best: Self-Employed Health Insurance Deduction

If you are self-employed as a sole proprietor, an LLC member treated as a sole proprietor for tax purposes, a partner, an LLC member treated as a partner for tax purposes, or an S corporation shareholder-employee, you can potentially claim an above-the-line deduction for your health insurance premiums—including Medicare premiums.

You don’t need to itemize deductions to get the tax-saving benefit from this above-the-line self-employed health insurance deduction. According to IRS Publication 535 (Business Expenses), the health insurance coverage must be established or considered to be established for your business as per the following explanations.

If You Are a Sole Proprietor

If you are a sole proprietor or an LLC member treated as a sole proprietor for tax purposes who files Schedule C, a health insurance policy can be in the name of your business or in your own name. Premiums you pay for Medicare health insurance in your name can be used to figure the above-the-line deduction for self-employed health insurance.

If You Are a Partner

If you are a partner or an LLC member treated as a partner for tax purposes, a health insurance policy can be either in the name of the partnership (LLC) or in your own name. You can pay the premiums yourself, or the partnership (LLC) can pay them and report the premium amounts on your Schedule K-1 as guaranteed payments that you must include as income on your Form 1040.

But if the policy is in your name and you pay the premiums yourself, the IRS says the partnership (LLC) must reimburse you and report the premium amounts on your Schedule K-1 as guaranteed payments that you must include as income on your Form 1040. Otherwise, the IRS says the insurance won’t be considered established for your business and you will not qualify for the deduction. The tax code allows the partnership (LLC) to deduct its guaranteed payments.

If You Are an S Corporation Shareholder-Employee

If you are a shareholder-employee who owns more than 2 percent of the S corporation, a health insurance policy can be either in the name of the S corporation or in your own name. You can pay the premiums yourself, or the S corporation can pay them and report the premium amounts on your Form W-2 as additional taxable wages.

But if the policy is in your name and you pay the premiums yourself as you would for your Medicare coverage, the IRS says the S corporation must reimburse you and report the premium amounts on your Form W-2 as additional taxable wages. Otherwise, the IRS says the insurance won’t be considered established for your business.

What about a Spouse’s Medicare?

In guidance, the IRS makes it clear that the S corporation and the partnership can reimburse to the shareholder-employee the spouse’s Medicare payments, and that reimbursement establishes the insurance in the business’s name. The S corporation then adds the reimbursement to the shareholder’s W-2, and the partnership treats the reimbursement to the partner as a guaranteed payment.

The treatment described above creates the tax deduction for the spouse’s cost of Medicare (including supplemental insurance). If you operate as a proprietorship, we recommend having the proprietorship reimburse the nonowner spouse to establish the Medicare insurance in the name of the business.

This tax will create more paperwork for thousands of Utah businesses.

This tax will hurt the Utah economy.

This tax will be a burden on Utah businesses.

Why do we need a new tax when Utah has a 1 billion dollar surplus?

The sales tax base has already been broadened with the sales tax on on-line sales (Wayfair case).

This tax will create new criminals out of any business that doesn’t realize they need to pay it.

IRS Creates a New “Safe Harbor” for Section 199A Rental Properties

The Section 199A 20 percent tax deduction is a gift from lawmakers—literally. You don’t earn this deduction; it’s simply there for you if you qualify.

Under the trade or business rule, your rental property profits can create the deduction. And now, under an alternative rule, you can use the newly created IRS safe harbor to make your rentals qualify for the deduction.

When you meet the new safe-harbor rules, the IRS deems your rental a trade or business with net rental profits that are QBI for the Section 199A tax deduction. But you may not want to use the safe-harbor rules, because they contain some onerous provisions. Also, you may not qualify to use the safe harbor. No problem. You can simply use the second method and win your 199A tax deduction using the existing trade or business tax law rules.

Under the new Section 199A rental real estate safe harbor (and only for this Section 199A safe harbor), each of your rental real estate properties individually or as a group (if you so choose) falls into one of the following categories:

1. Residential real estate enterprise
2. Commercial real estate enterprise
3. Triple net lease real estate

Grouping rule. You (or your pass-through entity) must either

• treat each rental property as a separate enterprise, or
• treat all similar properties as a single enterprise.

Example. You have 10 rentals; eight are residential, and two are commercial. None are triple net lease. With grouping, you have two enterprises: one residential and one commercial.

With grouping of the residential and no grouping of the commercial, you have three enterprises: residential, commercial 1, and commercial 2. (Reminder: You don’t have to use the safe-harbor rules for your rental properties. You can use the historical trade or business rules.)

Safe-Harbor Requirements

Solely for Section 199A purposes, the IRS will treat your rental real estate enterprise as a trade or business if you (or your pass-through entity) can satisfy the following requirements:

1. You maintain separate books and records that reflect the income and expenses of each rental real estate enterprise.
2. You perform 250 or more hours of “rental services” during the tax year.
3. You maintain contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed, (ii) description of all services performed, (iii) dates on which such services were performed, and (iv) who performed the services. (Note: The contemporaneous records rule does not apply to tax years beginning before January 1, 2019—but don’t let this give you false hope; you still need proof.)

Rental Services

Qualifying defined “rental services” can be done by you, your employees, your agents, and/or your independent contractors. Such services include

1. advertising to rent or lease the real estate;
2. negotiating and executing leases;
3. verifying information contained in prospective tenant applications;
4. collecting rent;
5. operating, maintaining, and repairing the property;
6. managing the real estate;
7. purchasing materials; and
8. supervising employees and independent contractors.

Rental services that do not qualify for the safe harbor include

• financial or investment management activities, such as arranging financing, procuring property, or studying and reviewing financial statements or reports on operations;
• planning, managing, or constructing long-term capital improvements; and
• hours spent traveling to and from the real estate.

Reminder. The safe-harbor rules above are solely for Section 199A purposes.

Beware. The passive-activity rules for material participation and status as a real estate professional contain many differences from what you see for the Section 199A tax deduction.

Time log. Your number-one important record for obtaining hassle-free tax deductions on your rental real estate is an accurate and provable time log. If you are using the new Section 199A safe harbor, you now have one additional reason to track time spent.

Nonqualifying Real Estate

Triple net lease property does not qualify for the safe harbor. Remember, the safe harbor is not the only method you can use to qualify your rental real estate for the Section 199A tax deduction.

Also, you may not use the safe harbor on real estate that you use as a residence. If you have a vacation home, Section 280A makes that vacation home either a rental property or a residence.

Safe Harbor—No 1099 Issues

If you use the safe harbor, your rental is a business regardless of whether you send 1099s to service providers. In its preamble to the final Section 199A regulations, the IRS notes that the law requires a trade or business to send 1099s to certain service providers.

Final Thoughts

You may not find it easy getting to the safe harbor. But remember, once you are inside the safe harbor, you have the comfort of knowing that your rental properties are business properties for the possible 20 percent tax deduction under Section 199A. Now, because of the safe harbor, you have a choice:

• use the safe harbor, or
• use the existing tax code trade or business rules to prove that your rental is a trade or business.

And remember, once you are inside the safe harbor, the fact that you did or did not issue 1099s to your service providers is moot for purposes of the Section 199A tax deduction.

Answers to Common Section 199A Questions

For most small businesses and the self-employed, the 20 percent tax deduction from new tax code Section 199A is the most valuable deduction to come out of the Tax Cuts and Jobs Act.

The Section 199A tax deduction is complicated, and many questions remain unanswered even after the IRS issued its proposed regulations on the provision. And to further complicate matters, there’s also a lot of misinformation out there about Section 199A.

Below are answers to six common questions about this new 199A tax deduction.

Question 1. Are real estate agents and brokers in an out-of-favor specified service trade or business for purposes of Section 199A?

Answer 1. No.

Question 2. Do my S corporation shareholder wages count as wages paid by the S corporation for purposes of the 50 percent Section 199A wage limitation?

Answer 2. Yes.

Question 3. Will my allowable SEP/SIMPLE/401(k) contribution as a Schedule C taxpayer be based only on Schedule C net earnings, or do I first subtract the Section 199A deduction?

Answer 3. You’ll continue to use Schedule C net earnings with no adjustment for Section 199A.

Question 4. Is my qualified business income for the Section 199A deduction reduced by either bonus depreciation or Section 179 expensing?

Answer 4. Yes, to both.

Question 5. I took out a loan to buy S corporation stock. The interest is deductible on my Schedule E. Does the interest reduce my Section 199A qualified business income?

Answer 5. Yes, in most circumstances.

Question 6. The out-of-favor specified service trade or business does not qualify for the Section 199A deduction, correct?

Answer 6. Incorrect.

Looking at your taxable income is the first step to see whether you qualify for the Section 199A tax deduction. If your taxable income on IRS Form 1040 is $157,500 or less (single) or $315,000 or less (married, filing jointly) and you have a pass-through business such as a proprietorship, partnership, or S corporation, you qualify for the Section 199A deduction.

With taxable income equal to or below the thresholds above, your type of pass-through business makes no difference. Retail store owners and medical doctors with income equal to or below the thresholds qualify in the same exact manner.

If you prepare your own tax return make sure you have answers to the following questions (if you don’t know the answers preparing your own return could be very costly):

When should you take the sales tax deduction instead of the income tax deduction?

Which one of the education credits is better for you?

Utah retirees—do you know how to avoid the triple whammy when you take a withdrawal from your IRA?

Purchase of business or rental property equipment.  How should you treat equipment when you purchase it?  What are the options (there are several)?  When do you want to maximize the deduction?  When do you want to minimize the deduction?

Should you contribute to a regular IRA?

Should you contribute to a Roth IRA?

When is your state tax refund taxable?

How do you compute basis when you own a partnership, LLC, or S-corporation?

What are the at-risk rules when you own a partnership, LLC, or S-corporation?

When do the passive loss rules apply when you own a partnership, LLC, or S-corporation?

When should you report your Pell Grant as income?

Even if you know the answers to the above questions ask yourself the following:  Do you understand the thousands of pages of tax code; thousands of pages of IRS regulations, rulings, procedures, notices, etc.; thousands of pages of court cases?  Would you do brain surgery on yourself?  Would you try to do dental surgery on yourself?

Take Money Out of Your IRA at Any Age Penalty-Free

You probably think you can’t take money out of your IRAs before age 59 1/2 unless you meet a narrow exception to the unpleasant 10 percent penalty on early distributions. But that’s not true. We have a variety of planning opportunities here.

For example, you don’t pay taxes or the 10 percent penalty on amounts you withdraw that you previously contributed or converted to the Roth IRA. These amounts are your “basis” in the Roth IRA. (Remember, you funded your Roth IRA with after-tax money!)

The law says Roth distributions come out in the following order:

• regular contributions,
• rollover contributions, and finally
• earnings.

Example. Jane opened her Roth IRA in 2002. She contributed $30,000 over the life of the Roth IRA. Today, the account is worth $50,000. Jane can withdraw up to $30,000 tax-free and penalty-free regardless of her age.

If you made nondeductible contributions to a traditional IRA, then you have “basis” in all your traditional IRAs. With basis, you have some planning opportunities with your business’s qualified plans, such as your 401(k).

And then, on a totally different front, there’s a little-known escape from the 10 percent penalty, called the substantially equal periodic payment exception. It allows you to create a stream of penalty-free traditional IRA distributions starting at any age for any reason.

You have to continue the substantially equal periodic payments for at least five years or until you reach age 59 1/2, whichever is later. As you can see from the above, you can touch your IRA accounts before age 59 1/2 without a special reason.

Starting now, this year (2018), you have to consider your Section 199A deduction in your year-end tax planning. If you don’t, you could end up with a big fat $0 for your deduction amount.

If your taxable income is above $157,500 (or $315,000 on a joint return), then your type of business, wages paid, and property can reduce and/or eliminate your Section 199A tax deduction.

Strategy 1: Harvest Capital Losses

Capital gains add to your taxable income, and taxable income is the income that determines your eligibility for the Section 199A tax deduction,

• sets the upper limit (ceiling) on the amount of your Section 199A tax deduction, and establishes the thresholds above which you need wages and/or property to obtain your maximum deductions.

If the capital gains are hurting your Section 199A deduction, you have time before the end of the year to harvest capital losses to offset those harmful gains.

Strategy 2: Make Charitable Contributions

Since the Section 199A deduction uses taxable income for its thresholds, you can use itemized deductions to reduce and/or eliminate threshold problems and increase your Section 199A deduction.

Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year.

Consider doing one or both of the following:

Donate appreciated stock.

Prepay (before December 31) your planned 2019 charitable contributions so you can claim them as deductions this year.

Strategy 3: Make Retirement Contributions

Any retirement contributions you make directly reduce your taxable income—and you still have the money inside the retirement account, growing free of taxes until you take it out of the account.

If you are a sole proprietor, your retirement contributions don’t reduce your qualified business income (QBI). Therefore, as long as your QBI is the basis for your Section 199A deduction, you can put away as much as you want using a traditional IRA, SIMPLE IRA, SEP-IRA, or individual 401(k) without damaging your Section 199A deduction.

If you are an S corporation owner, your retirement strategy can achieve the same result as the proprietor’s by using an employee salary or wage contribution to the retirement plan and no contribution by the S corporation.

Strategy 4: Buy Business Assets

Thanks to 100 percent bonus depreciation and Section 179 expensing, you can write off the entire cost of most assets you buy and place in service before midnight, December 31, 2018.

This can help your Section 199A deduction in two ways:

1. The big asset purchase and write-off can reduce your taxable income and increase your Section 199A deduction when the write-off gets your taxable income under the threshold.
2. The big asset purchase and write-off can contribute to an increased Section 199A deduction if your Section 199A deduction currently uses the calculation that includes the 2.5 percent of unadjusted basis in your business’s qualified property (UBIA). In this scenario, your asset purchases increase your UBIA, which in turn increases the deduction you already depend on.

This is generally not a question that you would associate with taxes.  In the past there had been a tax benefit that you received per child.  For 2017 for children under 17, you got a $1,000 credit and a $4,050 tax exemption.  The credit unfortunately started phasing out after adjusted gross income (AGI) of $110,000 for married filing joint, $75,000 for head of household, and $55,000 for single filers. 

With the new tax law change starting in 2018, the credit has been doubled to $2,000 and the phase out has been raised to $400,000 (AGI) for married filing joint and to $200,000 for head of household and single filers.  The $4,050 deduction was removed, but most tax rates were lowered, and tax brackets extended.

This means more money for many low income filers, and a long unexperienced benefit for higher income filers under $400,000 joint (or $200,000) AGI. 

Does this mean that you should have more kids?  You decide.  I imagine that there are other things to consider….

What do you mean I can't deduct all of my state and local tax? Does that mean property, income and sales tax? What!!! That's right. The new tax changes are making it so that individuals can only deduct up to $10,000 of state and local taxes per year as an itemized deduction. That includes income/sales tax and property tax.

Luckily, this does not include tax paid on a rental or in a business. Does this mean that you should start renting out your basement in order to deduct part of the property tax that you won't be able to deduct? Does this mean starting up a home office to do the same? You tell me. If you don't do something, you can kiss the excess goodbye.

Is the government incentivizing me to get divorced before the end of 2018?  If you expect to pay alimony and want those payments to be tax deductible, then the answer is yes.  Starting in 2019 alimony payments made will not be tax-deductible to the payer, and will not be shown as income on the payee’s tax return.  This is the opposite of how things work right now.  Currently, if you pay alimony to your ex-spouse and meet the tax requirements, it is tax-deductible to you and must then be reported on your ex-spouse’s tax return as income.

It is important to also remember that payments considered to be child support will be taxed to the payor and tax-free to the payee either way. 

I expect that in the future, alimony will become less popular in general, but for this year at least, it’s still works in favor of the payer.

*Let it be known that I am personally in favor of strong marriages and I sorrow at the high incidence of divorce in today’s society. 

New IRS 199A Regulations Benefit Out-of-Favor Service Businesses

If you operate an out-of-favor business (known in the law as a “specified service trade or business”) and your taxable income is more than $207,500 (single) or $415,000 (married, filing jointly), your Section 199A deduction is easy to compute. It’s zero.

This out-of-favor specified service trade or business group includes any trade or business

·         involving the performance of services in the fields of health, law, consulting, athletics, financial services, and brokerage services; or

·         where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners; or

·         that involves the performance of services that consist of investing and investment management trading or dealing in securities, partnership interests, or commodities. For this purpose, a security and a commodity have the meanings provided in the rules for the mark-to-market accounting method for dealers in securities [Internal Revenue Code Sections 475(c)(2) and 475(e)(2), respectively].

If you were not in one of the named groups above, you likely worried about being in a reputation or skill out-of-favor specified service business. If you were worried, you joined a large group of worried businesses, because many businesses depend on reputation and/or skill for success.

For example, the National Association of Realtors believed real estate agents fell into this out-of-favor category.

But don’t worry, be happy. The IRS has come to the rescue by regulating the draconian reputation and/or skill provision down to almost nothing. The reputation and/or skill out-of-favor specified service business includes you if you

·         receive fees, compensation, or other income for endorsing products or services;

·         license or receive fees, compensation, or other income for the use of your image, likeness, name, signature, voice, trademark, or any other symbols associated with your identity; or

·         receive fees, compensation, or other income for appearing at an event or on radio, television, or another media format.

Example. Harry is a well-known chef and the sole owner of multiple restaurants, each of which is a single-member LLC—disregarded tax entities that are taxed as proprietorships. Due to Harry’s skill and reputation as a chef, he receives an endorsement fee of $500,000 for the use of his name on a line of cooking utensils and cookware.

Results. Harry’s restaurant business is not an out-of-favor business, but his endorsement fee is an out-of-favor specified service business.

If you have questions about how the law will treat your business income for the new Section 199A 20 percent tax deduction, please give us a call, and we’ll examine your situation.

How Cost Segregation Can Turn Your Rental into a Cash Cow

Cost segregation breaks your real property into its components, some of which you can depreciate much faster than the typical 27.5 years for a residential rental or 39 years for nonresidential real estate.

When you buy real property, you typically break it into two assets for depreciation purposes:

·         land, which is non-depreciable; and

·         building (residential is 27.5-year property; nonresidential is 39-year property).

With a cost segregation study, you make your property much more than a building on land. Here’s what’s possible with a cost segregation study:

·         Land, which is non-depreciable

·         5-year property

·         7-year property

·         15-year property

·         For the remainder, 27.5-year property or 39-year property, depending on building use

With a cost segregation study, you front-load your depreciation deductions and take them sooner, but you’ll take the same total depreciation amount over the lifetime of the property.

Tax reform under the Tax Cuts and Jobs Act boosted bonus depreciation from 50 percent to 100 percent, and this new law also allows bonus depreciation on qualifying used property. Cost segregation is made to take advantage of these new law changes.

And you can apply cost segregation to rentals and offices you have had for 10 years or that you are buying tomorrow. But if the passive activity loss rules affect your ability to take immediate rental losses, we need to run your numbers to see if you can benefit and also identify what you could do to benefit even more.

Tax reform in one of its “not beneficial to you” new law sections took away your ability to do a like-kind exchange for non-real property. Therefore, if you do a cost segregation and then later use a like-kind exchange on that property, you’ll have taxable gain attributable to everything that’s not land or 27.5-year or 39-year property.

Retirement Plan and IRA Rollover Advice

When moving your retirement money to an IRA, you should follow this one rule of thumb. If you fail to follow the rule we’re about to reveal, you can face two big problems:

·         First, your check will be shorted by 20 percent (federal withholding).

·         Second, you will be on the search for replacement money.

Here is this very important rule of thumb that you need to follow: Move the money using a trustee-to-trustee transfer. Nothing else. There are two types of transfers that can be used to move qualified plan distributions into IRAs in a tax-free manner: (1) direct (trustee-to-trustee) rollovers and (2) what we will call traditional rollovers.

If you want to do a totally tax-free rollover, do nothing other than the direct (trustee-to-trustee) rollover of your qualified retirement plan distribution into the rollover IRA. This is easy to do.

Simply instruct the qualified plan trustee or administrator to (1) make a wire transfer into your rollover IRA or (2) cut a check payable to the trustee of your rollover IRA (this option is less preferable than a wire transfer). Your employee benefits department should have all the forms necessary to arrange for a direct rollover.

Retirement Plan and IRA Rollover Advice

When moving your retirement money to an IRA, you should follow this one rule of thumb. If you fail to follow the rule we’re about to reveal, you can face two big problems:

·         First, your check will be shorted by 20 percent (federal withholding).

·         Second, you will be on the search for replacement money.

Here is this very important rule of thumb that you need to follow: Move the money using a trustee-to-trustee transfer. Nothing else. There are two types of transfers that can be used to move qualified plan distributions into IRAs in a tax-free manner: (1) direct (trustee-to-trustee) rollovers and (2) what we will call traditional rollovers.

If you want to do a totally tax-free rollover, do nothing other than the direct (trustee-to-trustee) rollover of your qualified retirement plan distribution into the rollover IRA. This is easy to do.

Simply instruct the qualified plan trustee or administrator to (1) make a wire transfer into your rollover IRA or (2) cut a check payable to the trustee of your rollover IRA (this option is less preferable than a wire transfer). Your employee benefits department should have all the forms necessary to arrange for a direct rollover.

Convert Your Personal Vehicle to Business and Deduct up to 100 Percent

You probably like your personal vehicle just as it is. But wouldn’t you like it far better if it were producing tax deductions? Perhaps big deductions, immediately. And the Tax Cuts and Jobs Act gives you the tax reform road map on how to do this.

Of course, to make this happen, you need to strip your personal vehicle of its personal status and re-dress it as a business vehicle. This is not difficult. In its new business dress, your former personal vehicle can qualify for up to 100 percent bonus depreciation.

Example. Sam has a personal vehicle with a tax basis for depreciation of $31,000. With 70 percent business use on this 100 percent bonus depreciation–qualifying vehicle, Sam has a new $21,700 tax deduction for this year ($31,000 x 70 percent).

Let it be known that as of June 4, 2018, Joey Larsen is a Certified Public Accountant in Utah.  That's C.P.A.

Tax Reform Changes Affecting Partnerships and LLCs and Their Owners

The Tax Cuts and Jobs Act (TCJA) includes several changes that affect partnerships and their partners, and LLCs that are treated as partnerships for tax purposes and their members. Most of the changes are good news. Here are some highlights:

Technical Termination Rule Repealed (Good)

Under prior law, a partnership or an LLC treated as a partnership for tax purposes was considered terminated for federal income tax purposes if, within a 12-month period, there was a sale or exchange of 50 percent or more of the partnership’s or LLC’s capital and profits interests. Fortunately, the TCJA repealed the technical termination rule, effective for partnership or LLC tax years beginning in 2018 and beyond. This is a permanent change.

Lower Tax Rates for Individual Partners and LLC Members (Good)

For 2018 through 2025, the TCJA retains seven tax rate brackets for ordinary income and net short-term capital gains recognized by individual taxpayers, including income and gains passed through to individual partners and LLC members. Six of the rates are lower than before. In 2026, the rates and brackets that were in place for 2017 are scheduled to return, but skeptics doubt that will happen.

Unchanged Rates for Long-Term Gains and Qualified Dividends (Not Good)

The TCJA retains the 0, 15, and 20 percent tax rates on long-term capital gains and qualified dividends recognized by individual taxpayers, including gains and dividends passed through to individual partners and LLC members. After 2018, these brackets will be indexed for inflation.

New Pass-Through Business Deduction (Good)

For tax years beginning in 2018-2025, the TCJA establishes a new deduction based on your share of qualified business income (QBI) passed through from a partnership or LLC. The deduction generally equals 20 percent of QBI, subject to restrictions that can apply at higher income levels.

New Limits on Deducting Business Losses (Not Good)

For 2018-2025, the TCJA made two changes to the rules for deducting an individual taxpayer’s business losses. Unfortunately, the changes are not in your favor.

For tax years beginning in 2018-2025, you cannot deduct an excess business loss in the current year. An excess business loss means the amount of a loss in excess of $250,000, or $500,000 if you are a married joint-filer. The excess business loss is carried over to the following tax year, and you can then deduct it under new rules for deducting net operating loss (NOL) carryforwards, explained below.

Key Point: This new loss disallowance rule applies after applying the passive activity loss (PAL) rules. So if the PAL rules disallow your business loss, you don’t get to use the new loss disallowance rule.

For NOLs arising in tax years beginning in 2018 and beyond, the TCJA stipulates that you generally cannot use an NOL carryover to shelter more than 80 percent of taxable income in the carryover year. Under prior law, you could generally use an NOL carryover to shelter up to 100 percent of your taxable income in the carryover year.

Another TCJA change stipulates that NOLs arising in tax years ending after 2017 generally cannot be carried back to an earlier tax year. You can carry such losses forward only. But you can carry them forward indefinitely. Under prior law, you could carry an NOL forward for no more than 20 years.

Will Renting Your Home Destroy Your $250,000 Exclusion?

The days when you could convert your rental property or vacation home to a principal residence and then use the full $250,000/$500,000 home-sale exclusion to avoid taxes are gone.

Here’s how the $250,000/$500,000 exclusion works today. You must divide your period of home ownership into two categories—qualified and nonqualified use:

·         Qualified use means the time you or your spouse uses the home as your principal residence.

·         Nonqualified use means any time on January 1, 2009, or later in which neither you nor your spouse (or your former spouse) uses the property as a primary residence.

You allocate gain on the sale of your home between the periods of qualified and nonqualified use, and the gain allocated to nonqualified use doesn’t qualify for the $250,000/$500,000 home-sale exclusion. You have one important exception to the nonqualified use definition: nonqualified use does not include rental use during the five-year period that’s after the last date you or your spouse used the property as your principal residence.

In other words, if you live in your principal residence for two years or more and then rent it out for three years or less, the rental period is not a “period of nonqualified use,” and you qualify for the $250,000/$500,000 home-sale exclusion.

Tax Reform Update on Business Meals with Clients and Prospects

Here’s the updated strategy: deduct your client and business meals as if tax reform never took place.

Wow. Is this aggressive? Not if

·         the IRS comes out with regulations that follow a model set by the American Institute of CPAs, or

·         the Joint Committee on Taxation in its explanation of the Tax Cuts and Jobs Act states that client and business meals continue as deductions, or

·         lawmakers enact a new tax code section that authorizes client and business meal deductions.

How big is the “if” in the if? We have some insights that say business meals will be deductible for all of 2018. Of course, nothing is certain except the current uncertainty.

Let’s put it this way: If you do what you need to do to deduct the meals, then you are in a position to claim the business meals deduction when one of the above happens. So, make sure you have your 2018 business meals documented as follows:

·         The name of the person you had the meal with.

·         The name of the restaurant where you had the meal.

·         A short description of the business discussed.

·         If the meal costs $75 or more, keep the receipt that shows the name of the restaurant, number of people at the table, and itemized list of food and drink consumed.

Tax Reform: Planning for Your New 20 Percent Deduction

As you likely know by now, the Tax Cuts and Jobs Act created a 20 percent tax deduction under new tax code Section 199A.

The question for you: Will you reap any benefits from this new deduction? And the second question: If your chance of qualifying for the 20 percent tax deduction looks bleak, what can you do now to create some hope that you’ll get the deduction?

If your defined taxable income is $315,000 or less (joint return) or $157,500 or less (single), you can relax. You don’t need any strategies to realize your Section 199A deduction. It is simply the lesser of 20 percent of your taxable income (less net capital gains) or 20 percent of your qualified business income.

Example. John is single, a lawyer, with $125,000 in qualified business income and $150,000 in taxable income (excluding net capital gains). John’s Section 199A tax deduction is $25,000 (20 percent x $125,000).

Once you exceed $315,000 (married) or $157,500 (single), we should spend at least a few minutes reviewing your deduction.

Here’s an example of why this is important. We just reviewed a return that would have had $315,001 in taxable income and $350,000 in qualified business income. With that income, the 199A deduction was zero for this individual, but with $1 less in taxable income, this individual’s deduction is $63,000. We are helping this individual avoid that highly troubling $1 so he can realize his $63,000 deduction.

If you expect to exceed the thresholds, we should talk, because some planning ideas require that you have time on your side. Also, once the year is over, you have very few, if any, Section 199A planning opportunities.

The recent tax reform eliminated personal exemptions for taxable years after December 31, 2017, and before January 1, 2026. This makes your child worthless to you on your Form 1040. But there is a way to get even or, perhaps, much more than even.

Let’s set the stage first. For taxable years after December 31, 2017, and before January 1, 2026, the standard deduction for a single taxpayer begins at $12,000 in 2018 and increases every year for inflation. The new standard deduction means that a single taxpayer such as your child can earn up to $12,000 in W-2 wages and pay not a penny in federal taxes.

As the owner of a business, you have the advantage of being able to hire your child to work in your business, and that creates tax-saving opportunities for both you and your child. The big dollar benefits of hiring your child go to the Form 1040, Schedule C taxpayer and the husband-and-wife partnership because such businesses are exempt from FICA when they employ their children who are under age 18.

S and C corporations and non-spouse partnerships do not qualify for this benefit. They have to pay the payroll taxes on all employees—period. There is no parental benefit.

Tax Reform Attacks Home Mortgage Interest Deductions 

The recent tax reform contains two big changes to how much you can deduct in mortgage interest for tax years 2018 through 2025:

1.      During this seven-year period, you may not deduct any interest on prior or current home equity debt, with certain exceptions.

2.      Also during this seven-year period, the maximum amount you may treat as acquisition debt for homes purchased after December 15, 2017, is $750,000.

Exception alert. Your home equity loan may include acquisition or home-improvement debt, and that debt continues as deductible under the recent tax reform rules.

Example. Billy took out a $90,000 home equity loan in 2015. He used $50,000 to remodel portions of his home and used the remaining $40,000 for his daughter’s college tuition. Billy’s total home mortgages never exceeded $1.1 million. Under the new law, Billy may deduct five-ninths of his home equity loan interest in 2018.

Acquisition debt. When you buy your main home or a second home and take out mortgages secured by those homes, your mortgages are called acquisition debt. You can add acquisition debt when you improve your main or second home, and that new debt is secured by the home you improved.

Refinancing alert. Your acquisition debt does not increase when you refinance unless you use the new monies to improve the home.

Example. Tom bought a home in 2010 and took out a $500,000 mortgage that he secured with the home. In 2018, Tom has paid down his mortgage to $430,000, and his home has increased in value to $800,000. Tom refinances the home and takes out a new mortgage in the amount of $600,000, secured by the home.

If Tom uses none of the new money to improve his home, his mortgage interest deduction in 2018 is based on the $430,000 of mortgage principal that remained as of the date of his refinancing. To put this in perspective, your original acquisition debt never increases on that original home. To increase your debt eligible for the home mortgage interest deduction, you need to use the new debt to improve the home.

Ceilings. Because of tax reform, you now have two possible 2018 ceilings on your home mortgages that are eligible for the mortgage interest deductions.

$1.1 million. For indebtedness incurred before December 15, 2017, you may not deduct interest on more than $1.1 million in mortgages ($1 million in acquisition debt and $100,000 in home equity debt used for acquisition or improvements). The original $1.1 million ceiling is grandfathered for acquisition and improvement loans in existence before December 15, 2017.

Example. Sam took out his mortgages during 2013. Sam faces the $1.1 million ceiling in 2018.

$750,000. For home mortgage indebtedness incurred on or after December 15, 2017, you may deduct interest on no more than $750,000 of home mortgages.

Example. Jim took out his mortgage in 2018. He faces the $750,000 ceiling.

Exception. If you entered into a written, binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and you complete the purchase before April 1, 2018, you fall into the $1.1 million ceiling category.

Tax Reform Allows Bigger Vehicle Deductions 

Finally, lawmakers did the right thing by increasing the luxury auto depreciation limits on business cars. The old luxury limits were unrealistic, punitive, unfair, and discriminatory against any car that cost more than $15,800. The new limits don’t create parity in all respects, but they are a big improvement.

If you bought a car in 2017 and paid more than $15,800, you were driving a luxury car that lawmakers punished you for by putting a lid on your depreciation. For example, say in 2017 you bought a $40,000 car and drove it 100 percent for business. Your maximum depreciation deductions for the first five years would total only $15,060. To fully depreciate this car under the old rules would have taken 19 years.

It was ridiculous to take 19 years to depreciate that $40,000 car. And now, finally, lawmakers have fixed a big part of what the tax code calls “luxury automobile limits.” Under the new law, this $40,000 vehicle is fully depreciated in six years. Think about that: old law, 19 years. New law, six years. Essentially, the new law sets the so-called luxury automobile limit at $50,000. This means any vehicle that costs $50,000 or less is not penalized by the luxury vehicle limits when you’re using MACRS depreciation.

Under the new law, the annual limits are

·         Year 1: $10,000

·         Year 2: $16,000

·         Year 3: $9,600

·         Year 4 and each succeeding year: $5,760

What do the new limits mean? Before 2018, many business taxpayers were buying vehicles with gross vehicle weight ratings (GVWRs) greater than 6,000 pounds to escape the draconian luxury limit of roughly $15,000. Even today, SUVs, crossover vehicles, and pickup trucks can avoid the automobile luxury limits and even qualify for immediate write-offs of the full business cost using bonus depreciation or Section 179 expensing. Cars don’t qualify for unlimited bonus depreciation or any added benefits from Section 179 expensing.

But the big deal is that because of the higher, more realistic luxury auto limits, there’s far less need to buy the bigger, heavier SUV or crossover vehicle. With a car costing $50,000 or less, you realize 71.2 percent of your total vehicle depreciation deductions in the first three years.

Tax Reform Destroys Entertainment Deductions for Businesses

First, lawmakers reduced the directly related and associated entertainment deductions to 80 percent with the 1986 Tax Reform Act. Later, in 1993, they reduced that 80 percent to 50 percent.

And now, with the newest tax reform, lawmakers simply killed business deductions for directly related and associated entertainment effective January 1, 2018.

For example, during 2017, you could take a prospect or client to a business dinner followed by the theater or a ballgame and deduct 50 percent of all the monies spent, providing you passed some tax law tests on business discussion and associated entertainment.

Now, in what you and I thought was a business-friendly tax reform package, you find that lawmakers exterminated a big chunk of business entertainment. You can no longer deduct entertainment that has as its mission the generation of business income or other specific business benefit.

The 2018 tax reform prohibition against deductible entertainment is true regardless of your business discussion, negotiation, business meeting, or other bona fide transaction.

Here’s a short list of what died on January 1, 2018, so you can get a good handle on what’s no longer deductible:

·         Golf

·         Skiing

·         Tickets to sports games—football, baseball, basketball, soccer, etc.

·         Disneyland

Entertainment That Survived Tax Reform

As just discussed above, you may no longer deduct directly related or associated business entertainment effective January 1, 2018.

Common forms of directly related and associated entertainment that are no longer deductible include business meals with clients or prospects, golf, football games, and similar business-building activities.

That’s the bad news. The good news is that tax code Section 274(e) pretty much survived the entertainment bloodletting. Under this section, you continue to deduct

·         entertainment, amusement, and recreation expenses you treat as compensation to employees and that are included as wages for income tax withholding purposes;

·         expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees);

·         expenses that are directly related to business meetings of employees, stockholders, agents, or directors (here, the law limits expenses for food and beverages to 50 percent);

·         expenses directly related and necessary to attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade (here, the law also limits expenses for food and beverages to 50 percent);

·         expenses for goods, services, and facilities you or your business makes available to the general public;

·         expenses for entertainment goods, services, and facilities that you sell to customers; and

·         expenses paid on behalf of nonemployees that are includable in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award.

When you are considering using the above survivors of tax reform’s entertainment cuts, you will find good strategies in the following:

1.      Renting your home to your corporation.

2.      Taking your employees on an employee party trip.

3.      Partying with your employees.

4.      Making your vacation home a deductible entertainment facility.

5.      Creating an employee entertainment facility.

6.      Deducting the entertainment facility, because facility use creates compensation to users.

If you would like our help implementing any of the strategies above, please don’t hesitate to contact us.

Tax Reform Provides New 20% Deduction

The new 2018 Section 199A tax deduction that you can claim on your IRS Form 1040 is a big deal. There are many rules (all new, of course), but your odds as a business owner of benefiting from this new deduction are excellent.

Rejoice if you operate your business as a sole proprietorship, partnership, or S corporation, because your 2018 income from these businesses can qualify for some or all of the new 20 percent deduction.

You also can qualify for the new 20 percent 2018 tax deduction on the income you receive from your real estate investments, publicly traded partnerships, real estate investment trusts (REITs), and qualified cooperatives.

When can you as a business owner qualify for this new 20 percent tax deduction with almost no complications?

To qualify for the 20 percent with almost no complications, you need two things: First, you need qualified business income from one of the sources above to which you can apply the 20 percent. Second, to avoid complications, you need “defined taxable income” of

·         $315,000 or less if married filing a joint return, or

·         $157,500 or less if filing as a single taxpayer.

Example. You are single and operate your business as a proprietorship. It produces $150,000 of qualified business income. Your other income and deductions result in defined taxable income of $153,000. You qualify for a deduction of $30,000 ($150,000 x 20 percent).

If you operate your business as a partnership or S corporation and you have the qualified business income and defined taxable income numbers above, you qualify for the same $30,000 deduction. The same is true if your income comes from a rental property, real estate investment trust, or limited partnership.

Some unfriendly rules apply to what Section 199A calls a specified service trade or business, such as operating as a law or accounting firm. But if the doctor, lawyer, actor, or accountant has defined taxable income less than the thresholds above, he or she qualifies for the full 20 percent deduction on his or her qualified business income.

In other words, if you are a lawyer with the same facts as in the example above, you would qualify for the $30,000 deduction.

Once you are above the thresholds and phaseouts ($50,000 single, $100,000 married filing jointly), you can qualify for the Section 199A deduction only when

·         you are not in the out-of-favor group (accountant, doctor, lawyer, etc.), and

·         your qualified business pays W-2 wages and/or has property.

Phaseout for New 20% Deduction

If your pass-through business is an in-favor business and it qualifies for tax reform’s new 20 percent tax deduction on qualified business income, you benefit at all times, including being above, below, or in the expanded wage and property phase-in range.

On the other hand, if your business is a specified service trade or business (doctors, lawyers, accountants, actors, athletes, traders, etc.), it is in the out-of-favor group and you benefit only when you are in or below the phaseout range.

Once your taxable income exceeds the threshold amounts above, you arrive in one of the four possible categories below:

1.      Phase-in range for a non-specified service trade or business

2.      Phaseout range for a specified service trade or business

3.      Above the phase-in range for an in-favor non-specified service trade or business

4.      Above the phaseout range for an out-of-favor specified service trade or business

If your taxable income is going to be above the threshold amounts that trigger the phase-in or phaseout issues, contact us so we can spend some time on your tax planning.

How the 20% Deduction Works for a Specified Service Provider

As discussed above, the 20 percent tax deduction under new 2018 tax code Section 199A is a very nice tax break for business owners, except for owners with high income who also fall into the out-of-favor group.

In general, the out-of-favor group includes lawyers, doctors, accountants, tax professionals, consultants, athletes, authors, securities traders, actors, singers, musicians, entertainers, and others.

Getting just a little more technical, the out-of-favor “specified service trade or business” group includes any trade or business

·         involving the performance of services in the fields of health, law, consulting, athletics, financial services, and brokerage services; or

·         where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners; or

·         that involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities. For this purpose, a security and a commodity have the meanings provided in the rules for the mark-to-market accounting method for dealers in securities (Sections 475(c)(2) and 475(e)(2), respectively).

Notably, engineers and architects who had previously been in the out-of-favor professionals group somehow escaped the group with passage of this new law.

When you are a member of the out-of-favor group, your Section 199A deduction on your out-of-favor business is zero when you have taxable income of more than

·         $415,000 if married filing a joint return, or

·         $207,500 filing as a single taxpayer.

Preserve the Deduction with an S Corporation 

Will your business operation create the 20 percent tax deduction for you?

If not, and if that is due to too much income and a lack of (a) wages and/or (b) depreciable property, a switch to the S corporation as your choice of business entity may produce the tax savings you are looking for.

As mentioned above, to qualify for the full 20 percent deduction on your qualified business income under new tax code Section 199A, you need defined taxable income of less than $157,500 (single) or $315,000 (married).

If your taxable income is greater than $207,500 (single) or $415,000 (married), you don’t qualify for the Section 199A deduction unless you pay W-2 wages or have property.

Example. Sam is single, not in the out-of-favor specified service trade or business group (doctors, lawyers, consultants, etc.), operates a sole proprietorship that generates $400,000 of proprietorship net income, and has taxable income of $370,000. In this condition, Sam’s 20 percent Section 199A tax deduction is zero.

Here’s how the S corporation helps Sam. The S corporation pays Sam a reasonable salary, let’s say that’s $100,000. With this salary, Sam pockets

1.      $10,871 on his self-employment taxes, and

2.      $17,500 on his newfound 20 percent deduction under new tax code Section 199A.

New Tax Reform Law

These changes are effective for tax years beginning after December 31, 2017 (except where noted).  This is a brief overview.  Please call us if you have any questions.

Individuals

Good news:

·         Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37% — through 2025

·         Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately) — through 2025

• Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit — through 2025
• Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018
• Elimination of the AGI-based reduction of certain itemized deductions — through 2025
• AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers — through 2025
• Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018
• Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing) — through 2025

Bad News:

• Elimination of personal exemptions — through 2025
• New $10,000 limit on the deduction for state and local taxes (on a combined basis for property, income taxes, and sales taxes; $5,000 for separate filers) — through 2025
• Elimination of the deduction for interest on home equity debt — through 2025
• Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses) — through 2025
• Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances) — through 2025

Businesses

Good News:

• New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
• Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
• Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
• Mostly lower C-corporation flat tax rate of 21%. (replaces C-corporation tax rates of 15%-35%) 

Bad News:

• Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers
• New rule limiting like-kind exchanges to real property that is not held primarily for sale
• New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

2018 Real Estate Taxes May Not Be Deductible as a 2017 Schedule A Itemized Deduction

The IRS issued a statement on 12/27/17 that said that 2018 real estate taxes that have not been assessed (you haven’t received a bill for them) are not deductible in 2017 (even if paid in 2017).  If you have received a bill for 2018 taxes then you should be able to deduct them in 2017 if you pay them in 2017.

The new $10,000 limit starting in 2018 on deducting state and local taxes applies to Schedule A itemized deductions only.  You can continue to deduct “business or rental” real estate taxes on Schedule C, E, F, etc.).

2017 is coming to a close with sweeping new tax legislation passed. While the changes don’t take effect until 2018 (with one minor exception), we want to alert you to some steps you might take before year-end to preserve the best possible tax results.

As you explore these ideas, mostly you will find they contain a common and time-tested theme: where possible, defer income and accelerate the payment of deductible expenses. The reason for relying on this oldest of strategies is because ordinary income tax rates should be lower next year and many expenses will either no longer be deductible or will be less valuable in light of higher standard deductions in 2018.

1.      Delay year-end bonuses or other compensation. Many employees cannot control the timing of compensation, but it never hurts to ask. Where shifting income from 2017 to 2018 is possible, lower marginal tax rates should apply in 2018.

2.      Maximize retirement deferrals. Be sure to fully fund your 401(k) and/or IRA to further reduce gross income for 2017. We’ll discuss during tax season fully funding 2017 SEPs and other retirement accounts that can be funded up to April 15.

3.      Business owners and consultants should delay billing. It isn’t proper to simply delay depositing checks received before year-end, but you generally won’t be paid for amounts you haven’t billed. Shift that mid- to late-December billing out until January 1.

4.      Prepay state income tax. The deduction for all taxes will be limited to $10,000 beginning in 2018, so pay the fourth quarter estimate that is dated January 2018 by December 31, 2017. This strategy, however, requires that you know your status regarding alternative minimum tax (AMT). If you will be subject to AMT in 2017, it is likely that prepaying your state taxes will not reduce your 2017 taxes. In that case, with no benefit in either year, it makes better financial sense to make the payment later.

5.      Prepay property taxes. The deduction for all taxes is limited to $10,000 beginning in 2018. To the extent that you already have an assessment that isn’t due until after the first of next year, pay it by December 31. For taxpayers with high property tax bills and other large deductions such as mortgage interest and contributions, accelerating the 2018 property tax payment into 2017 may save a deduction due to disappear next year. Mid-range taxpayers may need a projection to see if this makes sense. And here again, the strategy won’t work for those in AMT in 2017.

Example. Sharon and Vern owe $12,000 in property taxes annually in two installments. They also pay $15,000 mortgage interest and donate $3,000 to charity. If they prepay in 2017 $6,000 property tax due in 2018, their itemized deductions will be $36,000 ($12,000 + $6,000 + $15,000 + $3,000). If they do this for 2018, they will only have $24,000 of deductions, ($6,000 + $15,000 + $3,000) the amount of the new 2018 standard deduction. If they don’t prepay, they will lose the benefit of $2,000 because they can only deduct a maximum of $10,000 property tax in 2018. With prepay, total two-year deductions are $60,000. Without prepay, total two-year deductions are $58,000.

6.      Bunching strategies. With the standard deductions doubling in 2018, lower itemizers will need to begin to incorporate strategies to bunch deductible expenses every other year to “pop up” over the standard deduction and preserve tax benefits. In this case, you might warn your favorite charities as you contribute this year-end that your next contribution might not occur until January 2019. In that way, you can make double contributions at the beginning and end of 2019 to achieve deductions above the standard deduction that year.

7.      Make donations directly from IRA. If you are 70½ or older but your donations do not bring you over the new higher standard deduction, make those donations directly from your IRA as a custodial transfer.

8.      Complete trade-ins of business equipment, machinery, and autos before year-end. Section 1031 like-kind exchanges will only be available on real property beginning in 2018. If you have other business assets with low or no basis that you were considering trading in on the purchase of new, complete the transaction and place the new assets in service before year-end if possible.

9.      Complete large capital gains sales and prepay the state tax. You may want to accelerate this type of income into 2017 as long as it is accompanied by the payment of state tax. With capital gains rates remaining virtually the same under the new law, the net after-tax result can be better this year.

Example. Karen is holding a significant amount of highly appreciated stock with very low cost basis. She can sell for $500,000 long-term capital gains. When she sells, she will owe $50,000 in state income tax. She also has $100,000 other ordinary income and $20,000 itemized deductions. If Karen sells and pays the state tax in 2017 instead of 2018, she will save approximately $2,000 in federal taxes.

Individual situations are unique, and there are no one-size-fits-all tax planning strategies. If you would like to discuss these or other ideas that apply to your particular circumstances, please feel free to contact us.

Sort of.  The tax reform bill passed the House of Representatives.  Then a different tax reform bill passed the Senate.  Now it will go to committee to see if they can combine the two bills into one that both can agree with.  So have we seen sweeping tax reform?  Not yet, but it’s getting closer all the time.

Lock Down Vehicle Deductions with a Home Office

The IRS gives you two possible strategies for turning otherwise personal mileage into business mileage:

1.       Going to a temporary work location

2.       Establishing an office in the home as a principal office

The temporary work location strategy contains some real unknowns, such as what is technically considered a temporary work location and whether the work performed at that location is for one year or less.

These unknowns make it difficult or impossible to use your facts and circumstances to produce your desired business-mileage results. The easy solution is the office in the home as a principal office.

The first reason this type of home office is an easy solution is that the rules are crystal clear, making compliance easy. The second reason is that with this office you know that all trips from home for this trade or business are business trips, including the trip from your home to your regular office outside the home.

Update on Health Savings Accounts (HSAs)

Health savings accounts (HSAs) are now more popular than ever. According to a recent survey, the number of HSAs has surpassed 21 million, and the accounts now hold about $42.7 billion in assets.

Here’s a very tight summary of how the HSA works for you:

• Deduct the health insurance cost. To enable the HSA, your health insurance must be a high-deductible health insurance policy. Sole proprietors, partners, and S corporation owners can qualify to deduct this high-deductible insurance on page 1 of Form 1040. (The page 1 Form 1040 deduction does not suffer the 10 percent haircut that applies to itemized medical deductions.)
• Deduct the HSA contribution. For 2017, you can make a deductible HSA contribution of up to $3,400 if you have qualifying self-only coverage, or up to $6,750 if you have qualifying family coverage (anything other than self-only coverage). The deduction for the contribution is above the line, so it does not suffer from phaseouts and it’s deductible whether you itemize or not.
• Tax-deferred earnings. The monies accumulated in your HSA grow and compound tax deferred (or even tax-free if you withdraw correctly).
• Tax-free withdrawals. Withdrawals from your HSA are tax-free when you use the monies to pay for qualified medical expenses. You can’t pay your high-deductible premiums with HSA funds. But once you reach Medicare age, you can use the withdrawals for Medicare premiums in addition to other qualified medical expenses.
• Retirement withdrawals. You can make your HSA work like a traditional IRA after reaching Medicare age. To make this happen, you just withdraw funds from the HSA and don’t use them for medical expenses. This triggers the federal income tax but no penalties.

As you grow your business and make more money, your chances of an IRS audit increase. For example, on an individual tax return, here are your chances of audit:

·         One in 38 with $200,000 or more in income

·         One in 10 with over $1 million in income

·         One in three with over $10 million in income

So, what do you do if the IRS sends you an audit notice? First, you call us.

What will we do? This depends on whom you will face in the audit: a tax auditor or a revenue agent.

If the IRS wants information by mail then we can respond to them.  If the IRS wants you to come to its office, you likely will meet with a tax auditor.  We can represent you with or without your presence.

On the other hand, if the IRS wants to come to your office, expect a revenue agent. In this type of examination, you generally want us with you. We speak the same technical language as the revenue agent, and this helps ensure that you don’t lose your rightful deductions.

When you have a dispute with the IRS, you’ll need to show that the law supports what you did if you want to win your argument. Support directly from the Internal Revenue Code is the best proof. You can also use Treasury Department or other IRS interpretations of the Internal Revenue Code to support your position, such as Treasury Regulations, Revenue Rulings or Revenue Procedures, and Announcements and Notices.

We strive to find your deductions in one of the sources above. A private letter ruling, while not authority unless you requested it for your situation, can prove useful to us because it shows the IRS reasoning on a specific situation.

What’s interesting is that you can’t rely on IRS form instructions, IRS publications, the IRS website, or the Internal Revenue Manual. These are not authority according to both the IRS and the courts. We use them to help us find that higher authority that we can then apply to your situation.

If you sell property to a related party, you may not deduct your loss on the sale. And this gets worse. The loss you cannot deduct no longer belongs to you. It moves to the related party, and that can really complicate matters. This brings up two questions:

1. Who are your related parties?
2. What happens to the loss that the government took away from you?

Related Parties: The tax code says that your related parties include, among others, you and your spouse, brothers and sisters, parents, children, grandparents, or grandchildren. Additionally, it includes corporations and partnerships in which you own, directly or indirectly, more than 50 percent (e.g., stock, value, profits interest).

The constructive ownership rules expand your network of related parties because you are deemed to own what you and your family members own, and if you are a shareholder or partner, you own a proportionate share of the stock owned by the corporation or partnership.

Where the Loss Goes: Your tax-deductible loss is lost to you when you sell to a related party. But here’s a possible (although often unlikely) silver lining: the loss you lost travels to the buyer, and the buyer can use that loss to reduce any taxable gain on a later sale of the property.

For example, say you incur a loss when you sell your business vehicle to your brother. You can’t deduct the loss. If your brother later sells the vehicle for more than he paid you, then he can use your loss to offset his gain. If he sells it for less than he paid you, then he can’t deduct the loss.

You need to know that the related-party loss-disallowance rule exists, so you don’t mistakenly make your tax-loss deductions disappear. If possible, don’t sell to a related party. Instead, sell to a remotely related person, such as an in-law, aunt, niece, cousin, or employee of the business.

Mileage Log Required for Vehicle Tax Deductions

When it comes to your tax records, there’s one record that you really should keep, and it’s easily overlooked. It’s the mileage log. In an IRS audit, the mileage log often creates the first impression of your tax records. Whether you use the IRS mileage rate method or the actual expense method, you need a written record that proves your business percentage of use.

Various records can be used, but the IRS three-month sampling record is the preferred choice for those who know about it. With this method, you keep a mileage log for three months and then apply that three-month business percentage to either the miles you drove for the year (mileage method), or the expenses you incurred for the year (actual expense method).

The three months must be consecutive and must represent your driving pattern. Otherwise you must keep the mileage log for the entire year.

With respect to keeping your mileage log, technology has made your job a lot easier. You can find very affordable apps that work with your smartphone, such as Mileage Expense Log, Mile IQ, and Trip Log. These apps track where you go and where you stop, and that takes away a big part of the record-keeping hassle. Make sure you also add the business reason for the stops. This takes a few minutes, but it’s critical. Don’t skip this step.

If you would like an example of what a mileage log should look like, feel free to contact us.

Using a 529 Plan to Pay for Your Child’s College

A Section 529 plan is a great way to fund your child’s college education. For income tax purposes, it works like this:

• no tax deduction for the money you put into the plan,
• tax-free growth inside the plan, and
• tax-free distribution when the money or prepaid tuition is used for college.

For gift-tax purposes, the 529 plan works like this: contributions to 529 plans are taxable gifts eligible for the annual gift-tax exclusion of $14,000 per donee (2017 amount), which doubles to $28,000 if your spouse consents to gift splitting.

Have you ever looked at your company’s tax return at the end of the year and wondered if it was correct.  You certainly tried to pay as little tax as possible.  Did you take dangerous positions that will put the assets of your business at risk when the IRS comes a knocking?

This is a big dilemma in today’s world.  At Joseph M Larsen CPA we are studying and reading about the tax law and its implications for you and your business.  We take a conservative view of tax.  We hope that none of our clients find themselves in trouble with the IRS.  At the same time because we immerse ourselves in the rules, we know so many safe ways to save taxes.  Come to us to avoid paying the max tax and getting the ax. 

Is there a difference between a beekeeper and a bookkeeper?  Maybe.  A beekeeper makes sure that his bees thrive.  He keeps a watch out for outside dangers.  He notices failures inside the hive.  He tries to keep you from getting stung.  He makes sure that at the end of the year there is plenty of honey. 

Is that what a bookkeeper does too?  You decide.  Come to Joseph M Larsen CPA PC if you’re looking for some more honey. 

It is very important to know your filing deadlines for taxes.  If you are a partnership or an S Corporation, you need to file by March 15, 2017.  If you’re a C Corporation you need to file by April 18, 2017.  Extensions may be possible, but wouldn’t it be nice to know now what you owe and how much you made?  Yes, it would. 

If you prepare your own tax return make sure you have answers to the following questions (if you don’t know the answers preparing your own return could be very costly):

1. When should you take the sales tax deduction instead of the income tax deduction?
2. Is one of the education credits or the tuition deduction better for me?
3. Utah retirees—do you know how to avoid the triple whammy when you take a withdrawal from your IRA?
4. Purchase of business or rental property equipment.  How should you treat equipment when you purchase it?  What are the options (there are several)?  When do you want to maximize the deduction?  When do you want to minimize the deduction?
5. Should you contribute to a regular IRA?
6. Should you contribute to a Roth IRA?
7. When is your state tax refund taxable?
8. How do you compute basis when you own a partnership, LLC, or S-corporation?
9. What are the at-risk rules when you own a partnership, LLC, or S-corporation?
10. When do the passive loss rules apply when you own a partnership, LLC, or S-corporation?
11. When should you report your Pell Grant as income?

Even if you know the answers to the above questions ask yourself the following:  Do you understand the thousands of pages of tax code; thousands of pages of IRS regulations, rulings, procedures, notices, etc.; thousands of pages of court cases?  Would you do brain surgery on yourself?  Would you try to do dental surgery on yourself?

1. Max Your IRA.  You can put in $5,500 ($6,500 if 50+) per year if you are not covered by a retirement plan and you have enough earned income.  If you are covered by a retirement plan limitations may apply depending on your income.
2.  
3. Consider Selling Stocks That Have Lost Value.  If you have capital gains this year you may want to sell stocks that have lost value to offset the gains.  Losses can offset the gains plus $3,000 with the remainder carried forward.
4.  
5. Take Advantage of the Standard Deduction.  If your deductions are close to the standard deduction then try to move them into one year to get above it and then take the standard deduction the next year.  You can prepay your charitable donations and your state income tax.  Prepaying your state income tax may not help if the alternative minimum tax (AMT) applies.  The goal is to have no deductions in the standard deduction year.
6.  
7. Take Minimum Retirement Distributions.  If you are over 70 1/2 years old make sure you take the required minimum distributions out of your IRA’s and retirement plans each year (if you don’t a 50% penalty applies).  You can take a minimum distribution out of one IRA for all IRA’s but retirement plans usually require that you take a minimum distribution out of each plan.  If you are still working you may not be required to take a minimum distribution out of the company plan that you work for (if you are not an owner or if you own less than 5% of the company).
8.  
9. Consider Buying Equipment for Your Business.  The tax law gives you lots of options about how fast you can depreciate equipment.  You will want to consider your current and future income when deciding what depreciation option to use.

What does a nervous system do?  It sends you pain when something bad is happening.  It certainly comes in handy in certain situations, like when your leg gets cut off for example.  It entices you to do something to remedy the situation.

Businesses unfortunately don’t have built-in nervous systems like our bodies.  Often part of a business can be flailing or failing for a long time without anyone becoming aware of it. 

In order to prevent premature business death or injury, we recommend installing a business nervous system.  An experienced bookkeeper.  A qualified bookkeeper from Joseph M Larsen CPA can keep a finger on the pulse of your business.  With quarterly financial statements being provided and explained you’ll be able to catch that business leg before it falls off. 

The Social Security Administration and the Internal Revenue Service (IRS) have moved up the due date for W-2’s and 1099-Misc to January 31 each year.  In the past the forms were required to be distributed to employees and independent contractors by January 31 but the forms weren’t due to the government until February 28 (if paper) and March 31 (if e-file). 

Now the above forms are due to the government on January 31 (even if e-filed).  This change goes into effect on January 31, 2017.  Congress made the change to reduce ID theft. 

Sometimes when sitting around the dining room table after paying a hefty hospital bill, people will say, “At least it is tax deductible” and then have a good laugh. 

Unfortunately medical bills don’t always come with a tax benefit.  First of all for most people, the only medical bills that can be deducted is the amount that exceeds 10% of their adjusted gross income (AGI) (unless they are 65 or older and then the limit is 7.5% of AGI for 2016).  That would take a large amount of medical bills for most people (but you should add them up to see if they will help).  The second problem is that since they’re taken as itemized deductions, many people don’t benefit because the standard deduction exceeds all of their itemized deductions. 

My advice to you is to not get sick so that you don’t need to pay a doctor, because the tax benefits just might not be there.

What is a 401(k) plan?  What does the k stand for?  Is it kangaroo?  These are common questions.  We have at least some of the answers:

A 401k is a type of retirement plan that employers can offer their employees.  It allows employees to contribute pre-tax up to $18,000 per year ($24,000 if 50 or older).  It allows for employer contributions as well, though they are generally not required.  A 401(k) can allow employees to borrow from their own plans (repayment is usually required within five years).  Employers are required to file an annual report with the U.S. Department of Labor (Form 5500).  Use of an outside administrator is recommended. 

There you have it.  A 401(k) is a great way to help your employees save for retirement, and to our dismay, the ‘k’ doesn’t stand for kangaroo.  (the name ‘401(k)’ is really just a reference to a section of the Internal Revenue Code)

There are so many tax scams going on right now, it's important to keep one important fact straight:  The IRS will not call or email as their first contact with you.  If you do get audited, the IRS’s first contact with you will be by mail.

The IRS is not well known for being a reasonable or easy to work with institution, but neither do they threaten widows by phone with jail-time. 

The real IRS will not ask for credit card information over the phone, threaten you with a lawsuit, threaten to arrest you or demand payment without appeal.  Don't fall for it, you already pay enough legitimate taxes, there is no need to pay a scammer too. 

Employers with 100 or fewer employees can have them (including the self-employed) if they don’t maintain another retirement plan.  It must be offered to all employees who have made $5,000 or more from the employer in any two previous years and are expected to do so again this year.

Employees can contribute up to $12,500 per year ($15,500 if 50 or older).  The employer match can be up to 3% of wages or the employer can contribute 2% of wages for all eligible employees (including nonparticipants). 

There are penalties of 10% (25% within first two years of participation) if funds are withdrawn early.  No loans from the funds are permitted.

There are certainly complexities to the Simple IRA, but it can definitely be termed as simple when compared to the other retirement plan options.  They require no annual 5500 report to the U.S. Department of Labor.  They can be one of the lowest cost retirement plans for an employer.

General Rule:  Your state refund is taxable if you itemized deductions in the prior year and received a tax benefit from deducting your state income tax.

Exceptions:

1. You took the standard deduction in the prior year.  If you took the standard deduction in the prior year your state refund is not taxable.
2. You used the sales tax deduction in the prior year.  If you used the sales tax deduction in the prior year your state refund is not taxable.
3. You were subject to the alternative minimum tax in the prior year.  If you were subject to the alternative minimum tax in the prior year and received no tax benefit from deducting your state tax then your state tax refund is not taxable.  If you received a partial benefit then some of your state refund is taxable.
4. You paid the state tax and received the state tax refund in the same year.  In this case your state tax refund is not taxable but don’t deduct the tax you paid (to the extent of the refund excluded).

If you can claim your home as a home office then it may be possible for you to claim the miles it takes you to get to your non-home office every day.  Come and talk to us today about what it takes to have a home office and how to claim the business miles!

CPA Prepared Tax Return vs. Self-Prepared Tax Return

If you prepare your own tax return make sure you have answers to the following questions (if you don’t know the answers preparing your own return could be very costly):

1. When should you take the sales tax deduction instead of the income tax deduction?
2. Is one of the education credits or the tuition deduction better for me?
3. Utah retirees—do you know how to avoid the triple whammy when you take a withdrawal from your IRA?
4. Purchase of business or rental property equipment.  How should you treat equipment when you purchase it?  What are the options (there are several)?  When do you want to maximize the deduction?  When do you want to minimize the deduction?
5. Should you contribute to a regular IRA?
6. Should you contribute to a Roth IRA?
7. When is your state tax refund taxable?
8. How do you compute basis when you own a partnership, LLC, or S-corporation?
9. What are the at-risk rules when you own a partnership, LLC, or S-corporation?
10. When do the passive loss rules apply when you own a partnership, LLC, or S-corporation?
11. When should you report your Pell Grant as income?

Even if you know the answers to the above questions ask yourself the following:  Do you understand the thousands of pages of tax code; thousands of pages of IRS regulations, rulings, procedures, notices, etc.; thousands of pages of court cases?  Would you do brain surgery on yourself?  Would you try to do dental surgery on yourself?

1. IRA is usually taxable.  An IRA withdrawal is usually taxable (assuming it was deductible when you put money in the IRA)

2. IRA withdrawal can cause Social Security to be taxable.  If none or part of your Social Security is taxable, the IRA withdrawal can cause more of your Social Security to be taxable.

3. Utah Retirement Credit can be reduced.  The additional income from the IRA and taxable Social Security can cause your Utah Retirement Credit to be reduced or eliminated.

There are ways to reduce or eliminate the effect of the triple whammy.  Please call us for more information.

Consider a health savings account.  You need to have an insurance plan that qualifies for a health savings account.  Then you can set up a health savings account.  For 2016 a single taxpayer can contribute up to $3,350 plus $1,000 if you are over 54 years old and a married filing joint taxpayer can contribute up to $6,750 plus $1,000 if you are over 54 years old (each spouse can put in an extra $1,000 if they are both over 54 years old). 

Health savings accounts give you a tax deduction when you put money in and you can withdraw money tax-free if the withdrawal is for qualified medical & dental expenses.

Please be very aware of the hefty penalties that appear when 941 deposits are not made in a timely manner.  The penalties and interest can begin to rival the original tax.  Don't take your chances when it comes to the IRS, be prompt!

1. Notify social security administration (give them the social security number of the deceased and the date of death) and pensions of the death immediately.

2. Meet with the CPA and decide whether to use a calendar year or fiscal year for the estate income tax return (Form 1041).  If you elect to use a fiscal year you will file an estate income tax return.  If you have a trust and elect to use a calendar year you will file a trust income tax return.  A calendar year return is due April 15 of the following year (unless extended).  A fiscal year return is due 3 ½ months after the fiscal year-end (unless extended).  A fiscal year can suspend estimated tax payments for the first two years and defer income.

3. Consider prepaying state tax in year of death if AMT (alternative minimum tax) will apply in the next year.  Make sure estate pays its share of the state income tax.

4. Consider reducing estimated tax payments in following year if some of the income will be taxed by the estate or if income will fall (do a tax estimate for the survivor for the next year).

5. Meet with the attorney and decide if any legal notices need to be filed.  Decide if any estate assets are subject to probate.  For probate assets file informal probate papers with court and secure letters testamentary.

6. Obtain a tax identification number from the IRS for the estate or trust.  Use this number in all future transactions until the estate or trust is distributed to the beneficiaries. Give this number to banks, mutual funds, and others immediately as the tax id# for the trust.

7. Set up new bank and other accounts for the estate or trust using the new tax id# for the trust.  Close all old accounts immediately with the deceased social security number listed on them (even if in the trust name).  Keep a careful record of all deposits, withdrawals, and checks written.

8. Value all assets in the estate.  Get appraisals for all real estate as of the date of death.  Get a detailed listing of highs and lows for each bond, stock, and mutual fund on the date of death.  Notify your broker to change the cost basis in their records.  Obtain an estate tax information organizer from the CPA.

9. Meet with the CPA and decide if an estate tax return (Form 706) needs to be filed.  This return is due nine months after the date of death.  If your spouse was the first to die and you are the surviving spouse you may want to file Form 706 to preserve the unused spousal estate & gift tax exemption.  Please contact me about this.

10. Inform all beneficiaries to not file their income tax returns for the next year until they receive a K-1 from you for their share of the estate’s income and expenses.

11. Keep enough money in the estate bank account to cover expenses and taxes.  File a final income tax return (Form 1040) for the decedent (the person who died).  This return is due by April 15 of the following year (unless extended).

12. I recommend that you not distribute the assets until all liabilities (bills) have been paid.  If you distribute noncash assets (investments, real estate, etc.) give an equal share to each beneficiary or make all noncash distributions at the same time.

13. If there is a surviving spouse consider accelerating income on Form 1040 in the year of death to use up carryovers (capital losses, charitable contributions, net operating losses, etc.).  Most unused carryovers expire in the year of death.

Now that the new year has begun, we will all begin receiving documents that we will need for taxes.  We have sent out a 'Things to Bring' list to all of our clients.  A good tip is to be sure to put each document in the same place.  As it comes in the mail or online, get or print them and put them all in a folder.  It is so easy to lose documentation that could save you tax money.  Don't miss out!

If you are a business owner, you need to be aware of the great impact your choice of entity can have on your taxes and personal liability.  An entity that made sense when a company was started, may be restrictive or costly as time goes on.  Come and meet with Joseph M Larsen CPA to discuss the pros and cons of each option.

Congress has passed the latest tax extenders bill (signed by President on December 18, 2015) with a new wrinkle-some items are now permanent, some items are extended for five years, and some for two years (2015-2016).  We will list some of the changes below:

Individual Permanent Changes:

Sales tax deduction.

American Opportunity Credit (for education).

$250 Teachers Deduction (expanded starting in 2016).

Donation of IRA to charity for those over 70 1/2 years old.

Business Permanent Changes:

$500,000 Section 179 deduction for equipment & certain real property.

Research Tax Credit.

15 year depreciation for qualified leasehold improvements, restaurant property, and retail improvements.

W-2's & 1099-MISC's will be due by January 31 (starting in 2017 for 2016 returns).

Five-Year Extensions for Businesses:

Bonus depreciation of new equipment (50% for 2015-17), 40%-2018, 30% 2019.

Work Opportunity Credit.

Two-Year Extensions for Individuals:

Tuition Deduction.

Residential Energy Tax Credit (up to $500 lifetime).

Mortgage Insurance Premium Deduction.

Mortgage Debt Exclusion (up to $2 million for married joint).

https://www.youtube.com/watch?v=zRc4YjGltQw

Check out this new video.  We'd love to use our expertise to help your business!

Do you do the bookkeeping for your business?  How long does it take you?  Are you sure that you are doing it right?  Are you getting good actionable information out of it?  If you answered 'no' to any of these questions, then it is a good time to talk to us about keeping your books for you.  Our firm has decades of experience in accounting and tax.  We will also provide you with quarterly reports that can give you good information about your business' performance.  Give us a call so that you can do what you do best, and we can do what we do best.

As the end of the year draws to a close it is good time to consider a few tax savings strategies.  Here are just a few possible ways to try to lower you tax burden for 2015:

Maximize 401(k) and IRA contributions

Accelerate medical expenses if your current expenses are over 10% (7.5% if over 65) of your adjusted gross income.

Donate appreciated assets held over one year to charity to avoid capital gains taxes.

These are just a few ideas to consider in order to save on taxes.  Please give us a call and we can talk about more.