Monthly Archives: August 2020

Are You Paying Too Much Interest on Your Home Mortgage?

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Article Highlights:

Lower Mortgage Interest Rates
Refinancing
Limits on Loan Terms
Limit on Home Mortgage Debt
Refinance Calculator

Interest rates are currently at an all-time low, and it may be time for you to consider refinancing your existing home mortgage to take advantage of these lower rates. Doing so may substantially reduce your monthly mortgage payments. As you know if you have been watching the ads, some lenders are offering rates as low as 2.75%. If you are thinking about refinancing your current home loan, consider the tax ramifications before making your decision, as the 2018 tax reform made some changes that may impact it. Home mortgage debt can consist of acquisition debt and equity debt. Acquisition debt is the debt you incur to purchase your home or make substantial improvements to the home. Equity debt is debt secured by the home that you use for other purposes not related to acquiring your home. Prior to 2018, homeowners could deduct the interest paid (up to $100,000 of equity debt) as an itemized deduction. However, with the passage of tax reform, the interest on home equity debt is no longer deductible. So, if you are considering refinancing for more than the current balance of your acquisition debt and won’t be spending the extra amount to make substantial improvements to your home, keep in mind that the interest you’ll pay on the refinanced debt may only be deductible on the portion of the loan that represents acquisition debt. There are other tax pitfalls as well. Prior to tax reform, acquisition debt could be refinanced for a longer term and the interest would continue to be tax deductible for the term of the refinanced loan. Under tax reform, that is no longer the case.
Example: Your original acquisition debt loan was for 30 years. After 20 years, you refinance the original loan into a 15-year loan. Because the refinanced debt extends the overall combined term of the acquisition debt by 5 years, the interest on the debt is only deductible for the subsequent 10 years. In addition, if any of the refinanced debt was equity debt, the refinanced debt must be allocated between acquisition debt and equity debt, with only the interest on the acquisition portion being tax deductible.
Of course, to the extent the additional refinanced debt was used to make a substantial home improvement, such as adding solar power, remodeling the kitchen, or adding a room, that portion of the refinanced debt will be acquisition debt and the interest will be deductible, except as noted next. One more potential tax trap related to refinancing is that tax reform reduced the maximum amount of acquisition debt from which the interest was deductible from $1 million on a taxpayer’s first and second homes to $750,000. The $1 million debt cap was grandfathered for acquisition debt loans in effect prior to tax reform, and those can still be refinanced for their current balance without being subject to the $750,000 limit. However, if a grandfathered loan is refinanced for more than the current balance of the loan, the new $750,000 acquisition debt limit could come into play.
Example: You purchased a home before tax reform, and the initial acquisition loan balance was $850,000. The current balance on the loan is $800,000. You refinance it for the same amount to get a lower interest rate. Under these circumstances, the interest on the entire $800,000 refinanced loan continues to be tax deductible as home acquisition debt interest because it was a grandfathered debt. Example: Similar to the situation above, except the original acquisition loan balance has been paid down to a current balance of $700,000. You refinance the loan for $800,000, using the additional $100,000 to add a room to the home. Because the additional $100,000 is not grandfathered debt, the $750,000 acquisition debt limit comes into play, and only interest you pay on up to $750,000 of the refinanced debt is deductible.
In these examples, we talk about the interest being deductible, but you can only claim the mortgage interest as a tax deduction if you itemize your deductions. Another aspect of tax reform was the approximate doubling of the standard deduction amount. As a result, many taxpayers who itemized prior to tax reform now find that the standard deduction gives them a greater deduction. Some who refinance for a lower interest rate (and, correspondingly, lower interest payments) may find that their total itemized deductions will then be less than the standard deduction, meaning that they won’t have any tax benefit from their home. Putting these tax limitations aside, it still may be financially beneficial to refinance to reduce interest and monthly payments without increasing the amount of the loan. Owning your home debt-free by the time you reach retirement is an important goal, so you should do everything in your power to avoid using the equity in your home and prolonging the payments. However, there may be times when it becomes necessary, such as paying off high-interest credit card debt or paying for junior’s college education. You can use our “Should I Refinace My Mortgage?” calculator to compare your current mortgage payment with a refinanced mortgage payment based upon interest rates and loan term. Combining tax considerations and refinancing options can become quite complicated. If you need assistance in making a refinancing decision, please give this office a call.

IRS Extends the Opportunity to Defer Capital Gains

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Article Highlights:

Tax Benefits 
Investment Period 
Qualified Opportunity Zone Funds 
Qualified Opportunity Zones 
Deferral Period 
10 Year Election 

As part of tax reform put into place a couple of years ago, individuals are able to defer both short- and long-term capital gains into what are referred to as Qualified Opportunity Zone Funds (QOFs). What is nice about this is that only the actual amount of gain needs to be invested into a QOF to avoid taxes on the gain for the sale year. The gains invested in a QOF are deferred until you cash out of the QOF investment or December 31, 2026, whichever occurs first. This includes the gain from the sale of all capital assets, such as stocks or bonds, property, rentals, land, and even partnership interests.
Example: You sell 1,000 shares of stock that cost you $20 a share (a total cost of $20,000). You were very fortunate, and the stock had appreciated to $100 a share when you sold them, for a total sales price of $100,000 and a capital gain of $80,000. If you invest the $80,000 gain in a QOF within the required 180 days, the gain on the sale and the tax on the gain are postponed. Example: Another example would be if you had inherited vacant land several years ago, and the fair market value of the land at the time you inherited it was $50,000. This year, a grocery chain wants to build a grocery store on the land and purchases it from you for $300,000. As a result of the sale, you have a gain of $250,000 ($300,000 – $50,000). If you invest that $250,000 gain in a QOF within the required 180-day period, you can defer the gain and the tax on the sale.
Investment Period Extended – Normally, to defer the taxable gain into a QOF, the profit must be reinvested into a QOF within 180 days of the sale date. Because of the business disruption caused by the COVID-19 pandemic, the IRS has provided relief for the 180-day investment period requirement. That relief gives those whose 180-day reinvestment period would have ended on or after April 1, 2020 and before December 31, 2020 until December 31, 2020 to invest that gain into a QOF. Qualified Opportunity Funds – A QOF is an investment vehicle organized as a corporation or partnership for the purpose of investing in qualified opportunity zone property acquired after December 31, 2017. The fund must hold at least 90% of its assets in a qualified opportunity zone property. Visit the IRS’s Opportunity Zones Frequently Asked Questions for more details related to QOFs. Qualified Opportunity Zones (QOZs) are population census tracts that are low-income communities specifically designated as QOZs after being nominated by the governor of the state or territory in which the community is located. For more details on QOZs, visit the Treasury Department’s Opportunity Zones Resource Page. Deferral Period – The gain income is deferred until the earlier of the date the investment in the QOF is sold or December 31, 2026. If a taxpayer continues to hold their QOF investment after December 31, 2026, the taxpayer still has to include the deferred gain in their 2026 tax return. If that is the case, the gain reported in 2026 adds to the basis of the QOF. To the extent the QOF is purchased with the deferred gain, the basis of the QOF is zero (because it is untaxed gain). Then, when the QOF is sold, the deferred gain subject to tax is the excess of the lesser of (a) or (b) over the QOF’s basis (or enhanced basis [explained next], if applicable): (a) The deferred gain, or (b) The fair market value of the QOF as determined at the end of the deferral period. Enhanced Basis – Initially, as noted above, when the QOF is purchased with deferred capital gain income, the basis of the QOF is zero. Depending on how long the taxpayer holds their investment in the QOF, the basis may be increased by up to 15% of the gain income originally deferred. 10-Year Election – If the QOF is held for 10 years or longer before it is sold, the taxpayer can elect to increase the basis to the fair market value amount. The effect of this adjustment is that none of the appreciation since the QOF was purchased is taxable when it is sold. This provision applies only to the investment in the QOF made with deferred capital gains. QOFs provide a unique opportunity, but there are investment risks, and it is important to investigate a QOF’s investment strategies carefully to see if the investment is suitable for your needs. Please call this office for information about how a QOF might work for your particular set of tax-related circumstances.

September 2020 Individual Due Dates

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September 1 – 2020 Fall and 2021Tax Planning Contact this office to schedule a consultation appointment. September 10 – Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during August, you are required to report them to your employer on IRS Form 4070 no later than September 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.September 15 – Estimated Tax Payment Due
The third installment of 2020 individual estimated taxes is due. Our tax system is a “pay-as-you-earn” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-earn” requirement. These include:

Payroll withholding for employees;
Pension withholding for retirees; and
Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.
Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the de minimis amount), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:

The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.
However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.
This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.
CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.

Posted in Tax

September 2020 Business Due Dates

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September 15 – S Corporations
File a 2019 calendar year income tax return (Form 1120-S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension. Provide each shareholder with a copy of K-1 (Form 1120-S) or a substitute Schedule K-1.
September 15 – Corporations
Deposit the third installment of estimated income tax for 2020 for calendar year
September 15 –  Social Security, Medicare and Withheld Income Tax
If the monthly deposit rule applies, deposit the tax for payments in August.
September 15 – Nonpayroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in August.
September 15 – Partnerships
File a 2019 calendar year return (Form 1065). This due date applies only if you were given an additional 5-month extension. Provide each partner with a copy of K-1 (Form 1065) or a substitute Schedule K-1.
September 30 – Fiduciaries of Estates and Trusts File a 2019 calendar year return (Form 1041). This due date applies only if you were given an extension of 5 1/2 months. If applicable, provide each beneficiary with a copy of K-1 (Form 1041) or a substitute Schedule K-1.

Posted in Tax

How to Create Product Records in QuickBooks Online, Part 2

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Last month, we covered the setup you have to do before you start building your product and service records in QuickBooks Online. We told you to click the gear icon in the upper right, then click Account and settings, then the Sales tab, then Products and Services. Once you’ve specified your preferences, you click the gear icon again, then Products and services, then New to complete the fields required for each record.
Before you start creating product and service records, you should establish your preferences.
You can always view the Products and Services screen by clicking on Sales in the toolbar, then Products and Services. (You can also access it by clicking on the gear icon, then Products and services under Lists.) This comprehensive table, a kind of dashboard for your products and services, displays real-time information about each item’s pricing and inventory levels, as well as its type and tax status. Click the down arrow in the Action column, and you can work with that product in a variety of ways. For example, you can run a report, adjust its starting value and quantity, and reorder. You can also edit the record from here. Large, colorful buttons at the top of the screen give you an instant view of the number of items that are low on stock or out of stock. Click on one, and a list of those items will appear. Warning: Be sure you understand your reason for modifying inventory level numbers (either their starting value or quantity) and the impact this could have on your reporting. We recommend that you consult with us before taking either action. The same goes for reordering if you haven’t worked with purchase orders in QuickBooks Online before. Using Your Records Once you start creating transactions like invoices and sales receipts, you’ll see why we recommended that you complete all of the relevant fields in your product and service records. QuickBooks Online is good about allowing you to supply data “on the fly” (as you go along), but your daily work will go much faster if you do your setup work first. Here’s how you add a product or service to an invoice or a sales receipt, for example. Click on the +New button at the top of the screen and select your transaction type. Choose the appropriate Customer by clicking on the down arrow in the first field in the upper left. Check the rest of the fields in the top half of the form and make any necessary changes. Click in the field under Service Date, then click on the small graphical calendar to select the date of the sale. Click on the down arrow in the field below Product/Service.
You can select from product or service records you’ve created or add a new one on the fly.
As you can see in the above image, +New is the first option in the list. Click on it if you haven’t yet created a record for what you’re selling. The Product/Service Information pane will slide out from the right side of the screen. Otherwise, click on the correct product or service in the list. If you filled out all of the relevant fields in its record, QuickBooks Online will complete the rest of the line with the needed information. You only have to enter a quantity in the Qty field. Enter any information requested at the bottom of the screen and Save the transaction. QuickBooks Online will reduce the quantity available for any products you just sold. You can see your sale and how it affects inventory by looking at reports. Sales By Product/Service Detail, for example, shows you the sale you just made and any others within the date range you selected. Product/Service List provides a number for the quantity on hand. Run Inventory Valuation Detail to see a combination of the data in both of those reports. And if your company counts inventory periodically, you can use the Physical Inventory Worksheet, which even displays a number for any items currently on purchase orders. We hope you’ve been able to continue supplying your customers with the products and services they need during these challenging times. If you maintain thorough product records in QuickBooks Online, you’ll find that your daily sales work can be both fast and accurate. The site can also help you maintain enough inventory that you don’t run short, as well as don’t have too much money tied up in excess products. Please let us know if we can help you with this critical tracking task – or if you have questions about any other element of QuickBooks Online.

Individuals Have a New Opportunity to Receive $500 Economic Impact Payments for Their Children

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Article Highlights:

$500 Per Child Stimulus Payment
Non-Filer Tool
Those Who Have Already Used the Non-Filer Tool
Those Who Haven’t Used Non-Filer Tool
How Payment Will be Made
Get My Payment Tool
Non-Filers

The Internal Revenue Service has announced it will reopen the registration period for federal beneficiaries with children who didn’t receive a $500 per child Economic Impact (stimulus) Payment earlier this year. When to Apply – The IRS urges certain federal benefit recipients to use the IRS.gov Non-Filers tool between August 15 and September 30 to enter information on their qualifying children to receive the supplemental $500 payments. Who Should Register – Those eligible to provide this information include people with qualifying children who receive Social Security retirement, survivor or disability benefits; Supplemental Security Income (SSI); Railroad Retirement benefits; and Veterans Affairs Compensation and Pension (C&P) benefits and did not file a tax return for 2018 or 2019. The IRS anticipates the catch-up payments, equal to $500 per eligible child, will be issued by mid-October. Already Used the Non-Filer Tool? – For those Social Security, SSI, Department of Veterans Affairs and Railroad Retirement Board beneficiaries who have already used the Non-Filers tool to provide information on their children, and who haven’t yet received the $500-per-child payment, no further action is needed. The IRS will automatically make a payment in October. Haven’t Used the Non-Filer Tool? – For those who received Social Security, SSI, RRB or VA benefits and have not used the Non-Filers tool to provide information on their child or children, they should register online by Sept. 30 using the Non-Filers: Enter Payment Info Here tool, available exclusively on IRS.gov. However, anyone who filed or plans to file either a 2018 or 2019 tax return should file the tax return and not use this tool. Any beneficiary who misses the Sept. 30 deadline will need to wait until next year and claim the Economic Impact Payment as a credit on their 2020 federal income tax return. How Will Payment be Made? – Those who received their original Economic Impact Payment by direct deposit will also have any supplemental payment direct deposited to the same account. Others will receive a check. The status of the payments can be checked by using the Get My Payment tool on IRS.gov. In addition, a notice verifying the $500-per-child supplemental payment will be sent to each recipient and should be retained with other tax records. Non-Filers – Those who are not required to file a tax return are still eligible to receive an Economic Impact Payment by using the Non-Filers’ tool – but they need to act by October 15 to receive their payment this year. Otherwise, they will need to wait until next year and claim it as a credit on their 2020 federal income tax return. The Non-Filers tool is designed for people with incomes typically below $24,400 for married couples, and $12,200 for singles. This includes couples and individuals who are experiencing homelessness. People can qualify, even if they don’t work or have no earned income. But low- and moderate-income workers and working families eligible to receive special tax benefits, such as the Earned Income Tax Credit or Child Tax Credit, cannot use this tool. They will need to file a regular return. If you have questions related to this child stimulus payment or stimulus payments in general, please give this office a call.

How States are Reshaping Nexus Laws for Remote Employees Due to COVID-19

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Ever since the coronavirus pandemic began impacting the United States, businesses around the country have responded by instituting work-from-home policies. While it is unclear how much longer the nation will be in the grips of the crisis, social distancing is likely to remain in place for many organizations. Some of the country’s most recognizable brands, including Facebook and Google, have already announced a work-from-home option that will extend through July 2021 for all of their employees, while others have made the ability to work remotely permanent. As more and more organizations make the decision that their staff members can work from home either permanently or on a long-term basis, they may need to take a closer look at how nexus will be addressed — especially as several state governments are beginning to address work-from-home employees in terms of nexus and on tax revenue. Traditionally, a state tax obligation is established when a business has a physical presence within its borders. That is what creates nexus. If a Floridian goes to New York for a temporary job placement they have an income tax obligation in New York for the money that they earn there, and if a California company places employees in Texas then the company would have an obligation to follow Texas laws and pay Texas sales tax. While New York’s Governor Andrew Cuomo explicitly continued that practice when COVID-19 struck, making temporarily remote employees in New York liable for state income tax, several states (including Massachusetts and Pennsylvania) made clear that the virus-related remote work would not trigger nexus obligations, at least until official work-from-home orders or states of emergency lasted. As mandates are being lifted but companies continue to allow or enforce work from home, those states are beginning to reconsider their position. We are providing the guidance below regarding Congress’ stated position thus far regarding nexus, as well as the position of several states that have published their position. Please contact us if you have any questions. Congress’s Position While not every state has begun to address the tax ramifications of working-from-home due to COVID-19, Congress has begun to address the issue, and on July 27th, 2020 new legislation was introduced with the goal of limiting the amount of state income tax that could be charged on income earned in state to residents of another state. The proposal revises Section 403 of the American Workers, Families and Employers Assistance Act (S. 4318), which says in part:
‘No part of the wages or other remuneration earned by an employee who is a resident of a taxing jurisdiction and performs employment duties in more than one taxing jurisdiction shall be subject to income tax in any taxing jurisdiction other than: (A) The taxing jurisdiction of the employee’s residence (B) Any taxing jurisdiction within which the employee is present and performing employment duties for more than 30 days during the calendar year in which the wages or other remuneration is earned.’
The revision would extend the 30 days in part (B) to 90 days for calendar year 2020 ‘in the case of any employee who performs employment duties in any taxing jurisdiction other than the taxing jurisdiction of the employee’s residence during such year as a result of the COVID-19 public health emergency.’ Indiana Addresses Nexus Rules Following COVID-19 The Indiana Department of Revenue recently posted information regarding the intersection of nexus and COVID-19 on its website. Their post indicated that they would ‘not use someone’s relocation, that is the direct result of temporary remote work requirements arising from and during the COVID-19 pandemic health crisis, as the basis for establishing Indiana nexus or for exceeding the protections provided by P.L. 86-272 for the employer of the temporary relocated employee.’ Despite this assurance, the department went on to explain that nexus could be established for an out-of-state employer if their employee ‘remains in Indiana after the temporary remote work requirement has ended,’ and that the employer could not ‘assert that solely having a temporarily relocated employee in Indiana [due to an official work-from-home order or a physician’s order related to a COVID-19 outbreak or diagnosis] creates nexus for the business or exceeds the protections of P.L. 86-272 for the employer.’ If your clients do business or have employees in Indiana and you need more information, visit the website of the Indiana Department of Revenue for more details. Massachusetts Addresses Nexus Rules Following COVID-19 The Massachusetts Department of Revenue proactively announced new rules regarding nexus well before the full weight of the COVID-19 crisis was felt, and their anticipation of the changing landscape has led to them again issuing a statement to preempt any questions regarding taxation. The department issued rule TIR 20-05 with the intent of minimizing the impact of the COVID-19 state of emergency on employers and employees alike. It read in part:
‘One or more employees working from home solely due to the COVID-19 pandemic will not subject a business to a sales and use tax collection obligation or to the corporate excise by reason of that fact’ from March 10 until the conclusion of the state of emergency. That rule has now been revised with the intent of ensuring ‘that businesses have sufficient time to prepare for the cessation of these temporary rules.’
Revised Guidance on the Massachusetts Tax Implications of an Employee Working Remotely due to the COVID-19 Pandemic makes clear that TIR 20-05 will be in effect ‘until the earlier of December 31, 2020, or 90 days after the state of emergency in Massachusetts is lifted. As of that date, the rules set forth in this TIR will cease to be in effect and the presence of an employee in Massachusetts, even if due solely to a Pandemic-Related Circumstance… will trigger the same tax consequences as under Massachusetts law more generally.’ The new guidelines go on to define a pandemic-related circumstance as including:

A COVID-19-related government order
A COVID-19-related remote work policy adopted by an employer in good faith compliance with federal or state government guidance or public health recommendations
A worker’s COVID-19-related compliance with quarantine, isolation directions relating to a COVID-19 diagnosis or suspected diagnosis, or a physician’s advice.

The new guidance indicates that any business asserting that it qualifies for an exemption based on these definitions will be responsible for substantiating and documenting any evidence supporting their claim, and that without that verification the nexus exemption may be denied. If your clients do business or have employees in Massachusetts and you need more information, visit the website of the Massachusetts Department of Revenue for more details. Oregon Addresses Nexus Rules Following COVID-19 While the state of Oregon’s Department of Revenue has provided an exemption of corporate excise/income tax for COVID-19-related teleworking employees between March 8, 2020 and November 1, 2020, the explicit indication of the exemption ending on November 1st makes plain that traditional imposition of nexus will resume on November 2, 2020. The Oregon Department of Revenue has also clarified how employees temporarily based in the state because of COVID-19 may affect nexus. The department explains:
‘For the purposes of Oregon corporate excise/income tax, the presence of teleworking employees … in Oregon between March 8, 2020 and November 1, 2020 won’t be treated by the department as a relevant factor when making a nexus determination if the employee(s) in question are regularly based outside Oregon.’
If your clients do business or have employees in Oregon and you need more information, visit the website of the Oregon Department of Revenue for more details. South Carolina Addresses Nexus Rules Following COVID-19 Much like the finite period of time that the Oregon Department of Revenue has provided for the suspension of normal nexus rules, the South Carolina Department of Revenue issued its Letter #20-11 which outlines its suspension of establishing nexus, with the southern state’s expiration falling on September 30th, 2020. If your clients do business or have employees in Indiana and you need more information, visit the website of the South Carolina Department of Revenue for more details.

Wealth Transition and Succession Planning: Best Practices for Businesses During COVID-19

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Regardless of the type of business you’re running, it’s safe to say that you’ve likely already been impacted by the ongoing COVID-19 pandemic that is making its way across the globe. With no complete end to the situation in sight, many have begun to try to settle into whatever this “new normal” actually is. They’re resuming their regular activities (at least as much as possible) and are once again attempting to continue to follow the path that they set for themselves and their organizations at the beginning of the year. This, of course, presents its own fair share of challenges. Once you get your doors opened back up again, you may start to think about other important events down the line: valuations and appraisals, risk assessments, and succession planning. Thanks in no small part due to COVID-19, many private enterprises and even family-owned businesses have been forced to dramatically rethink their points of view on these and other important wealth transition and succession planning topics. Not only that, but when you consider that roughly $68 trillion is set to be passed down from Baby Boomers to their beneficiaries over the next ten years – an unprecedented transfer of wealth – it’s clear that these are issues that must be assessed sooner rather than later. Business Valuations in a COVID World One of the more unfortunate impacts that COVID-19 has had in the last few months involves a decrease in small business values across the board. The fact that both actual and expected revenues and earnings have likely decreased for many organizations, coupled with an increase in interest-bearing debt and liquidity issues in the market at large, all have a lot to do with this issue. At the same time, it is entirely possible to mitigate risk to that end by keeping a few key things in mind. First and foremost, focus your attention on cash flows, the cost of capital, and growth as much as possible. One of the most critical considerations for a proper business valuation in these times involves figuring out what, exactly, a recovery from COVID-19 will look like for your organization. Obviously, certain industries have bounced back faster than others. Likewise, there are certain things that we just cannot know right now – like when a vaccine will be available and what effect that will have on the world. But you can focus on a few key areas – like whether you will experience a full recovery or only a partial recovery, and how long that impact will last – to make better determinations about projected cash flow and other growth-related factors. On the plus side, all of this represents a unique opportunity for many people to take advantage of low small business valuations to minimize things like estate and gift taxes. Lower business valuations allow business owners like yourself to transfer a greater portion of your business assets and reduce your taxable estate. So, from that perspective, you’ll be able to gift assets against your lifetime exemption that would have previously been considered a taxable event had COVID-19 not occurred at all. Mitigating Risk and Protecting Your Legacy In general, you need to remember what the major goals of wealth transition and succession planning actually are: you’re attempting to preserve as much of your wealth AND your business as possible. It’s about making a plan that you can follow over time, yes – but it’s also about being flexible enough to evolve that plan as conditions can (and likely will) change. Case in point: COVID-19’s impact on the supply chain. Even if your small business isn’t being directly impacted right now to the same degree as others, the same might not be true of your supply chain partners or even your largest customers. These could absolutely have a considerable impact on your own operations, and if your organization is particularly vulnerable to these types of issues, you need to start thinking about ways to mitigate them as soon as you can. Likewise, you may be one of the lucky few businesses that wasn’t actually negatively impacted by COVID-19 at all. Some industries are absolutely thriving right now – with manufacturers of personal safety gear and even a lot of food and beverage manufacturers being among them. If all of this describes your situation, it’s likely that you’ve seen a short-term increase in sales and, in all likelihood, profitability. How will this impact the future of your organization? Is this what the “new normal” looks like for you, or will you eventually return to pre-COVID levels in terms of sales and profitability? Do you have a way to determine this right now, or is time going to have to tell the story? These are all critical questions that you need to try to answer to make the best possible decisions in terms of succession planning. In the end, understand that wealth transition and succession planning were always complicated processes, and COVID-19 has not done anyone any favors. No matter what, you need to recognize that this is an inherently specific process: so much is impacted by your own unique circumstances and the facts surrounding your organization. Likewise, your end goals will play an important role in the decisions you make, along with how they may have changed in the last few months. However, if you’re able to keep these core best practices in mind and look at things through this new pandemic lens, you’ll be able to create the right plan for your objectives with as few of the potential downsides as possible.

What Are the Tax Plans of the Major Parties’ Presidential Candidates?

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Article Highlights:

Tax Issues
Current Law
Trump Proposals
Biden Proposals

As the November elections approach, you might want to know what the two front-running presidential candidates’ tax plans for the future are. The following is an overview of their positions, at least what is known now. However, the political and economic landscapes can change, and there is no assurance these plans won’t be revised or that they will have eventual Congressional backing. However, the information may be helpful as you look toward future tax planning.

(Click the image to increase size)

These are just proposals of what changes might happen based on the election results. It takes acts of Congress to move plans into law. With various scenarios in play, it might be wise to look at proactive tax planning to minimize future tax liability. Please feel free to contact our office to schedule an appointment.

Posted in Tax

Missing Out on the Earned Income Tax Credit?

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Article Highlights:

Earned Income Tax Credit
Refundable Tax Credit
Qualifications
Special Rule for Military

The EITC is for people who work but have lower incomes. If you qualify, it could be worth up to $6,660 in 2020, up from $6,557 in 2019, so you could pay less federal tax or even get a refund. The credit is a refundable credit, which means you can get the benefits of the credit even if you do not owe any taxes. That’s money you can use to make a difference in your life. Even though this credit can be worth thousands of dollars to a low-income family, the IRS estimates as many as 25 percent of people who qualify for the credit do not claim it simply because they don’t understand the criteria. Plus, many individuals who never qualified for the EITC previously may be eligible in 2020 because their income will be lower as a result of the COVID pandemic. If you qualify for but failed to claim the credit on your return for 2017, 2018 and/or 2019, you can still claim it for those years by filing an amended return or an original return if you have not previously filed. The EITC is based on the amount of your earned income (EI) and whether there are qualifying children in your household. The credit increases as the taxpayer’s earned income or adjusted gross income (AGI) increases until it reaches a plateau, where it remains constant at the maximum credit amount until it reaches the AGI phase-out threshold. Once the threshold amount is exceeded, the credit is reduced by a set percentage, and no credit is allowed once the income exceeds the top of the phase-out range. The following table illustrates the maximum credit and phase-out ranges based on filing status and number of children for 2020.

Filing Status

Number of Children

Credit %

Maximum Credit

EI Phase-out Threshold Starts

EI Phase-out Threshold Ends

Joint Filing

None

7.65

$538

$14,680

$21,710

Others

None

7.65

$538

$8,790

$15,820

Joint Filing

1

34.00

$3,584

$25,220

$47,646

Others

1

34.00

$3,584

$19,330

$41,756

Joint Filing

2

40.00

$5,920

$25,220

$53,330

Others

2

40.00

$5,920

$19,330

$47,440

Joint Filing

3 or more

40.00

$6,660

$25,220

$56,844

Others

3 or more

40.00

$6,660

19,330

$50,954

If you have children, they must meet relationship, age and residency requirements. Additionally, you must file a tax return to claim the credit. The EITC income qualifications are annually inflation-adjusted. To claim the credit, you must meet a few basic rules:

You (and your spouse, if married and filing jointly) must have a valid Social Security number (SSN).
If you have a qualifying child, the child also must have a valid SSN.
You must have earned income from employment or from self-employment.
Your filing status cannot be married, filing separately.
You must have been a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.
You cannot be a qualifying child of another person.
Your investment income for 2020 cannot exceed $3,650 (call for other years).
If you do not have a qualifying child, you must: o Be age 25 but under 65 at the end of the year, o Live in the United States for more than half the year, and o Not be a qualifying child of another person.
You cannot file Form 2555 (excluding foreign earned income)

Active Military – Members of the military can elect to include their nontaxable combat pay in their earned income for the earned income credit. If that election is made, the military member must include all nontaxable combat pay received as earned income. If spouses filing a joint return both received nontaxable combat pay, then each one can make a separate election. Disabled – Disabled individuals frequently overlook the opportunity to claim this credit. Even though they may not be working and earning income, certain disability income is treated as earned income for purposes of the EITC and includes the following amounts:

Disability benefits attributable to the employer’s payment of disability policy premiums. However, nontaxable disability income from policies whose premiums the employee paid, and Social Security benefits, are not ‘earned income’ for purposes of the EITC.
Long-term disability benefits to an individual who is retired on disability are only earned income until the individual reaches the minimum retirement age, which is generally the earliest age at which the individual could receive a pension or annuity if not disabled.

If you have questions about your qualifications for this credit or need help amending or filing a prior year’s return to claim the credit, please give this office a call.

Posted in Tax