Monthly Archives: April 2021

Tax-Free Grants for Restaurants

Posted on by

Article Highlights:

Restaurant Revitalization Fund
Eligible Entities
Application Good-Faith Certification
Tax Issues
Covered Period
Available Funding
Priority in Awarding Grants
Determination of Grant Amount
Use of Funds
Applying for a Grant

The American Rescue Plan Act established the Restaurant Revitalization Fund (RRF) to provide funding to help restaurants and other eligible businesses keep their doors open. This program will provide restaurants with funding equal to their pandemic-related revenue loss, up to $10 million per business and no more than $5 million per physical location. Recipients are not required to repay the funding as long as funds are used for eligible uses no later than March 11, 2023. Eligible Entities – Eligible entities are businesses that are not permanently closed and include businesses where the public or patrons assemble for the primary purpose of being served food or drink, including:

Restaurants
Food stands, food trucks and food carts
Caterers
Bars, saloons, lounges and taverns
Licensed facilities or premises of an alcoholic beverage producer where the public may taste, sample, or purchase products
Other similar places of business in which the public or patrons assemble for the primary purpose of being served food or drink
Snack and nonalcoholic beverage bars

The following types of businesses are also eligible if they can document that their on-site sales to the public comprised at least 33% of gross receipts in 2019. For businesses that opened in 2020 or that have not yet opened, the applicant’s original business model should have contemplated at least 33% of gross receipts in on-site sales to the public.

Bakeries
Brewpubs, tasting rooms and taprooms
Breweries and microbreweries
Wineries and distilleries
Inns – Based on on-site sales of food and beverage rather than gross receipts.

Note: All businesses must satisfy the statutory requirement for ‘place of business in which the public or patrons assemble for the primary purpose of being served food or drink,’ and an eligible entity must have had at least 33% in 2019 of on-site sales to the public. The original business model of eligible entities that opened in 2020 or that have not yet opened should have contemplated at least 33% of gross receipts in on-site sales to the public. Those entities without additional documentation requirements, such as restaurants and bars, are presumed to have on-site sales to the public comprising at least 33% of gross receipts in 2019. All applicants must attest to the following in the application: ‘The Applicant is eligible to receive funding under the rules in effect at the time this application is submitted.’

Eligible entities do not include:
o State- or local government-operated businesses. o Any entity that owned or operated more than 20 locations on March 13, 2020, regardless of whether those locations do business under the same or multiple names. o Any entity with a pending application for or that has received a grant under Sec 324 of the Economic Aid to Hard-Hit Small Businesses Act (PL 116-260). o Publicly traded companies.

Application Good-Faith Certification – An eligible entity applying for a grant under this subsection must make a good-faith certification that:

The uncertainty of current economic conditions makes the grant request necessary to support the ongoing operations of the eligible entity.
The eligible entity has not applied for or received a grant under Sec 324 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Title III of Division N of the Consolidated Appropriations Act, 2021).

Tax Issues

These grants are tax free.
No deduction or basis increase is denied, and no tax attribute is reduced by reason of the gross income exclusion.
Since the restaurant revitalization grants are treated as tax-exempt income, they will be allocated to partners or shareholders and increase their bases in their partnership or S corporation interests.

Covered Period – The period beginning on February 15, 2020 and ending on March 11, 2023. If the business permanently closes, the covered period will end when the business permanently closes or on March 11, 2023, whichever occurs sooner. Recipients that are unable to use all of the funds received on eligible expenses by the end of the covered period must return any unused funds to the Treasury. Available Funding

$5 billion will be available for grants to businesses with gross receipts of no more than $500,000 in 2019.
$20 billion will be available to the SBA administrator to award grants equitably to eligible entities of various sizes based on annual gross receipts.

Priority in Awarding Grants – During the initial 21-day award period, the SBA will prioritize awarding grants to eligible entities most relevant to small business concerns:

Owned and controlled by women,
Owned and controlled by veterans, or
Socially and economically disadvantaged small business concerns. To obtain priority, an applicant must submit self-certification for eligibility.

Determination of Grant Amount – The amount of a grant made to an eligible entity under this provision will be equal to the eligible entity’s pandemic-related revenue loss less any PPP loan amount; any amount not used for qualified expenses must be returned to the Treasury.
Example: Heidi’s Café had 2019 gross receipts of $2,000,000, and in 2020, the gross receipts were only $800,000 because the business was closed most of the year due to the pandemic. Heidi’s gross revenue loss is $1,200,000. Heidi’s Café had received a PPP loan of $500,000, so the business would be eligible for a grant of $700,000.
The aggregate amount of grants made to an eligible entity and any affiliated businesses (an affiliated business is one that has an equity or right to profit distributions of not less than 50 percent) will:

Not exceed $10 million and
Will be limited to $5 million per physical location of the eligible entity.

Use of Funds – During the covered period, an entity that receives a grant may use the grant funds for the following expenses incurred as a direct result of, or during, the COVID–19 pandemic:

Payroll costs, including sick leave and costs related to the continuation of group health care, life, disability, vision, or dental benefits during periods of paid sick, medical, or family leave; and group health care, life, disability, vision, or dental insurance premiums.
Payments on any business mortgage obligation (both principal and interest. Note: this does not include any prepayment of principal on a mortgage obligation).
Business rent payments, including rent under a lease agreement (Note: this does not include any prepayment of rent).
Business debt service (both principal and interest. Note: this does not include any prepayment of principal or interest).
Business utility payments for the distribution of electricity, gas, water, telephone, or internet access, or any other utility that is used in the ordinary course of business for which service began before March 11, 2021.
Business maintenance expenses including maintenance on walls, floors, deck surfaces, furniture, fixtures, and equipment.
Construction of outdoor seating.
Business supplies, including protective equipment and cleaning materials.
Business food and beverage expenses, including raw materials for beer, wine, or spirits.
Covered supplier costs, which is an expenditure made by the eligible entity to a supplier of goods for goods that:
o Are essential to the operations of the entity at the time at which the expenditure is made; and o Is made pursuant to a contract, order, or purchase order in effect at any time before the receipt of Restaurant Revitalization funds; or o With respect to perishable goods, a contract, order, or purchase order in effect before or at any time during the covered period.

Business operating expenses, which are defined as business expenses incurred through normal business operations that are necessary and mandatory for the business (e.g., rent, equipment, supplies, inventory, accounting, training, legal, marketing, insurance, licenses, fees). Business operating expenses do not include expenses that occur outside of a company’s day-to-day activities. Note: Past-due expenses are eligible if they were incurred beginning on February 15, 2020 and ending on March 11, 2023.

Applying for a Grant The SBA has added an application portal to its website. They will take about 14 days to process applications once the portal begins accepting them. Remember, as mentioned previously, during the first 21 days of the program, funds will only be distributed to businesses that are majority-owned by women, veterans, or socially and economically disadvantaged individuals. If you qualify, you should be prepared to submit your application within the first 21 days. A sample application can be downloaded and prepared in advance. Additional information is available from the SBA website or the Program Guide PDF. If you have questions or need assistance regarding this program, please give this office a call.

Here’s What Happened in the World of Small Business in April 2021

Posted on by

Here are five things that happened this past month that affect your small business. 1) President Biden announced tax credits for COVID-19 vaccination paid time off. The President announced on April 21st ‘tax credits for certain businesses that pay employees who take time off to get COVID-19 shots, a new effort to involve corporate America in his vaccination campaign.’ The tax credits will be applicable for businesses with fewer than 500 employees. (Source: Reuters) Why this is important for your business: Providing your employees with paid time off to get their vaccine will now be covered by the government, so you can encourage vaccinations if you choose without taking on the cost of offering additional PTO. 2) Workers at an Amazon warehouse in Alabama voted not to unionize, but the company is being accused of violating laws. The union vote we discussed last month has been completed, and workers at the Amazon fulfillment center in Bessemer, Alabama voted not to unionize. This was seen as a win for Amazon; however, the union that led the drive ‘has filed challenges over the vote, saying the company violated legal restrictions throughout the election.’ (Source: The Wall Street Journal) Why this is important for your business: This union push caught the attention of workers, unions, businesses, and government officials, and the story isn’t over yet. Additionally, other groups across the US have already started announcing their goals to unionize, inspired by the push in Bessemer. No matter your views on organized labor, keep paying attention to this story. 3) Businesses across the world are bracing (and hoping) for an impending post-pandemic ‘spending boom.’ Could we be in the beginning stages of a global spending spree? ‘Consumers around the world have amassed an extra $5.4 trillion in savings since the coronavirus pandemic began, setting the stage for a spending boom that could power a strong uplift in economic growth this year.’ (Source: CNN Business) Why this is important for your business: Revenue, revenue, revenue. 4) Small businesses can get another $500k from the Small Business Administration (SBA). Beginning April 6th, the SBA expanded its Economic Injury and Disaster Loan (EIDL) program. ‘Small businesses who originally took out an EIDL loan for up to $150,000 for six months can extend that loan for up to 24 months and receive additional funds for a total of $500,000 in relief.’ Additionally, the deferment period for both Paycheck Protection Program (PPP) and EIDL loans was extended through 2022. (Source: Yahoo! Finance) Why this is important for your business: If your small business is still struggling financially and you need additional funding, the EIDL expansion could help. 5) The conversation around corporate taxation (and large firms who pay $0 in taxes) is growing louder. A report from the nonpartisan Institute on Taxation and Economic Policy found that ’55 of the largest firms in the country used a complex roadmap of tax breaks and loopholes to bring their tax bill down to zero, despite turning millions, or even billions in profit.’ (Source: Fast Company) Why this is important for your business: This finding has added fuel to the conversation around corporate taxation – or a lack thereof – in the US. Keep an eye on the public discourse and any moves made by politicians to speak on this topic in the coming months.

Qualified Small Business (QSB) Stock Gain Exclusion: Who Can Take Advantage and How to Do It

Posted on by

Originally, selling stocks identified as having Qualified Small Business status was viewed as offering marginal benefit. But the last several years have seen incremental changes to how gains from the sales of these stocks have been treated. As of the most recent shift, which created a 100% exclusion with certain limitations, these stocks now offer significant opportunities for those who invest in startups and other small businesses. The sale of Qualified Small Business (QSB) stock held for more than five years is addressed under Section 1202. It excludes gains from sales, but only under highly specific criteria and limitations. Tracking the exclusion’s history, stockholders were originally limited to excluding 50% of their gains from the sale of QSB stocks. That number was increased to 75% for shares acquired after February 17, 2009 and before September 28, 2010. Even then, the exclusion was viewed with little enthusiasm, as the gains not excluded were taxed at rates that were much higher than capital gains rates. All that changed when the exclusion was increased again to 100% for shares acquired after September 27, 2010. There are important limitations to these exclusions: Most notably, for each taxable year, sellers are only permitted to exclude the greater of 10 times the aggregate adjusted bases of the QSB stock or $10 million dollars. Still, even with these limitations, the 100% exclusion has created a virtual tax-exempt gain that has inspired renewed interest in putting money into small businesses and startups. It has provided opportunities for pass-through entities like partnerships to buy and sell QSB stock at the ultimate investor level offered to noncorporate shareholders like trusts, estates and individuals, and this means that their total gain exclusion goes beyond the standard limitations. This means that each partner in a 10-partner group in which each owns 10% of the partnership’s QSB stock with $0 basis for $100 million can exclude their own share of the gain: the total qualifies because it is broken down to the ultimate investor view. Where this is a relatively simple calculation, for others the requirements of section 1202 are likely to create far greater barriers. Understanding the requirements and considerations involving a QSB Section 1202 contains many rules for being classified as a QSB, and though this article cannot cover all of them, it will point out important elements that businesses or investors thinking about their own qualifications should consider. Its most elemental criterion is that the business be a domestic C corporation whose aggregate gross assets have never exceeded $50 million through the time that the stock for which the gain exclusion is being sought was issued. Other requirements include:

Gross asset test Not only is there a requirement that the domestic C corporation not have had aggregate gross assets exceeding $50 million at any point between August 10, 1993 and the time that the stock seeking the QSB exemption was issued, but that limitation holds true for the time period immediately after the stock is issued as well. This is not based on fair market value – instead, gross assets are calculated based on the tax basis of the company’s assets. Still, fair market value is used to assess circumstances involving assets other than cash or when an existing business incorporated into the small business. It’s also important to understand that if a business is a member of parent-subsidiary controlled group, all corporations are treated as a single unit when calculating total gross assets.
Original issuance requirement In order to qualify for the exemption, the QSB stock shareholder must have first acquired it as an original owner, purchasing it for cash, by providing property, or providing services and obtaining it directly from either the corporation or its underwriter as a qualified shareholder. Buying the stock from another shareholder will not meet the original issuance requirement, and therefore will not qualify the holder of stock for the QSB stock gains exemption, though there are ways to get around this requirement. For example, investors could acquire a target business for the specific purpose of creating a new C corporation, and that would meet Section 1202’s criteria. Similarly, some tax-free incorporations or reorganizations that involve the exchange of QSB stock for stock of another organization may be eligible for exclusion of gains at a later point when the stock is sold. For those who acquire QSB stock as a gift or by having inherited it, the original issuance requirement will not prevent the realization of the exemption benefit and the same is true of distributions to a noncorporate partner by a partnership as long as the noncorporate partner held its partnership interest when the partnership first acquired the QSB stock. This is a complex issue and many situations – including acquiring the stock as the satisfaction of debt for equity, through cashless warrant exercises, or through convertible debt conversions – should be addressed with our office.
Active business requirement The issuing corporation is required to be using at least 80% of its assets to operate one or more qualified trades or businesses (QTOB). This is gauged by value, and if more than half of a subsidiary corporation’s stock is owned by the corporation, then that ratable share must be included in the determination of the assets’ value and the percentage of assets being used for business operations. The rules state that certain fields do not qualify as a QTOB, though whether a business falls into these categories or not may be open to interpretation and can introduce a significant amount of confusion. The fields listed as not qualifying include those involved in law, health, brokerage services, accounting, engineering, financial services, actuarial science, architecture, performing arts, consulting, or athletics.

Additional limitations based on issuer Even once a shareholder meets the specifications that qualify them for the Section 1202 exclusions, there is an additional limitation based on the issuer of the QSB stock. That limitation is whichever of the following two elements is larger:

Ten times the aggregate adjusted bases of the QB stock sold by the taxpayer during the taxable year
$10 million, less the aggregate amount of eligible gain attributed to disposition of stocks issued by the same corporation that the taxpayer realized in a previous taxable year

As previously indicated, the excludible gain that is eligible must have been on sale or exchange of QSB stock owned for more than five years during the taxable year. This is applied at the shareholder level for each investor when the stock is held by a pass-through entity, and this is applied to each investor when calculating the per-issuer limitation. This effectively allows investors in partnerships, whether they are trusts, estates or individuals, to claim a gain exclusion that – when combined – is actually larger than the stated $10 million or 10 times the basis cap limitation. The gain exclusion amount can also be increased by gifting some of the stock in question to family members before the sale. Summing Things Up There are a lot of benefits available for those who can take advantage of the Section 1202 gain exclusion on the sale of QSB stock, but the requirements and eligibility criteria are intimidating and complicated. To protect your own interests and make sure that you understand how it applies to you, we urge you to speak with our office before claiming the exclusion for yourself.

How to Protect Your Data in QuickBooks

Posted on by

After the unprecedented year we’ve just experienced, the last thing you need is to have your accounting data compromised or stolen. It would be impossible to reconstruct your QuickBooks file from scratch, and you can’t afford to have a hacker steal any of your funds. There are numerous steps you can take to protect yourself from threats, both internal and external. QuickBooks itself offers some safeguards. Strong company policies can also help safeguard against data theft or destruction. And some of your security guidelines should just come from using common sense. Here’s a look at what you can do. Keep Your Systems Safe There are countless ways you can protect your data by maintaining the integrity of the computer that’s running QuickBooks. Some involve the same steps you would take to safeguard all of the applications and information you have stored there. You should have reputable antivirus/anti-malware software installed. Use strong passwords. Keep up with system updates.
You can set up automatic updates in QuickBooks to download and install new functionality and bug fixes.
Updates and Backup QuickBooks’ own updates are critical, too. You can start these manually, but we recommend setting up automatic updates. Open the Help menu and click on Update QuickBooks Desktop. Click the Options tab to access this tool. Frequent, safely-stored backups are another essential element of overall data security. If your system is compromised by an intruder, you’ll need to be able to restore your most recent QuickBooks file when it’s safe again. Go to File | Back Up Company to set up either a local or an online backup. Use one of these tools at the end of any day you’ve entered anything on QuickBooks. We can help you with backup if you’re not absolutely sure how to do it. Networks and Smartphones If you have multiple PCs that run on a network, it’s important to maintain that system’s health, too, since an intrusion at one workstation can affect everyone. You can do this by:

Discouraging employees from browsing the web excessively and downloading unnecessary software.
Encouraging responsible handling of emails (no clicking on unknown attachments, no personal email on work computers, etc.)
Installing network monitoring software or hiring a managed IT service that only charges when you need them.

Do your employees have company-issued smartphones? Make sure their security systems are sound. Set policies to protect them. For example, tell employees they should never use them on a public Wi-Fi network or install personal apps on them. Internal Fraud Possible No business owners anticipate that their own employees would steal from them. But it happens, and it can do tremendous financial damage. So minimize your chances of being victimized by limiting the access that employees have to sensitive information.
You can limit the access permissions each user has in multiple areas.
Go to Company | Set Up Users and Passwords, then click Set Up Users. You should be listed there as the Admin. Click Add User and supply a username and password. If you’re not sure how many users are supported on your license or need to add more, contact us. Click Next and then click the button in front of Selected areas of QuickBooks. Click Next again. On the next several screens, you’ll designate that user’s access in areas including Purchases and Accounts Payable and Checking and Credit Cards. When you come to the end of the wizard, click Finish. You might consider running a background check when you hire someone who will have access to QuickBooks. It’s become a more common business practice. QuickBooks provides additional tools that can be helpful in tracking down suspicious activity. You can view the Audit Trail, for one. Go to Reports | Accountant & Taxes | Audit Trail. This report displays a comprehensive list of transactions that have been entered and/or modified. There are other reports that may be helpful, like Missing Checks, Voided/Deleted Transactions, and Purchases By Vendor. A Never-Ending Process It’s so easy to get caught up in the daily work of running your business that you forget to take the steps required to keep your QuickBooks data—and all of your computer hardware and software—safe. We get that. Further, you might think that you’re an unlikely target because you’re a small business. Hackers count on you thinking that, though the reality is that you don’t have to be a big corporation to be the victim of cybercrime. Whether or not criminals get access to your funds, they can do a lot of damage that will end up costing you more time and money than you might think. So stay vigilant. Security should be considered whenever you deal with financial transactions – especially where the internet is involved. If we can be of assistance as you set up safeguards and company policies, let us know. As always, we’re available to answer any questions you might have about QuickBooks operations in general.

Owe Taxes and Can’t Pay by the Due Date?

Posted on by

Article Highlights:

If you can’t pay
Loans
Credit card payments
IRS Installment agreement
Retirement funds

The vast majority of Americans get a tax refund from the IRS each spring, but what if you are one of those who end ends up owing? The IRS encourages you to pay the full amount of your tax liability on time by imposing significant penalties and interest on late payments if you don’t. So if you are unable to pay the tax you owe, it is generally in your best interest to make other arrangements to obtain the funds for paying your taxes rather than be subjected to the government’s penalties and interest. Here are a few options to consider. Although they all have negative connotations, they are all better than the penalties and interest the IRS could impose, not to mention the time and headache of dealing with IRS communications and the possibility of wage, bank account and asset levies.

Family Loan – Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
Credit Card – Another option is to pay by credit card with one of the service providers that works with the IRS. However, since the IRS will not pay the credit card discount fee, you will have to pay it and pay the higher credit card interest rates.
Installment Agreement – If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate, and there is a user fee to set up the payment plan. In making the agreement, you will have to agree to keep all future years’ tax obligations current. If you don’t make your payments on time or have an outstanding past due amount in a future year, you will be in default of the agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed. If you will be seeking an installment agreement exceeding $50,000, you will need to validate your financial condition and the need for an installment agreement by providing the IRS with a Collection Information Statement (financial statements). You may also pay down the balance due to $50,000 or less to take advantage of the streamlined option.
Tap a Retirement Account – This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under age 59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.

If you would like to discuss your options, please give this office a call.

Posted in Tax

May 2021 Business Due Dates

Posted on by

May 10 – Social Security, Medicare and Withheld Income Tax File Form 941 for the first quarter of 2021. This due date applies only if you deposited the tax for the quarter in full and on time. May 17 – Employer’s Monthly Deposit Due If you are an employer and the monthly deposit rules apply, May 17 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for April 2021. This is also the due date for the non-payroll withholding deposit for April 2021 if the monthly deposit rule applies.

Posted in Tax

May 2021 Individual Due Dates

Posted on by

May 10 – Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during April, you are required to report them to your employer on IRS Form 4070 no later than May 1110. 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.May 17 –  Individual Tax Returns Due File a 2020 income tax return (Form 1040 or 1040-SR) and pay any tax due. If you want an automatic extension of time to file the return, please call this office. Note: The normal due date for individual returns is April 15. However, the IRS extended it to May 17. Caution: The extension gives you until October 15, 2021 to file your 2020 1040 or 1040-SR return without being liable for the late filing penalty. However, it does not avoid the late payment penalty; thus, if you owe money, the late payment penalty can be severe, so you are encouraged to file as soon as possible to minimize that penalty. Also, you will owe interest, figured from the original due date until the tax is paid. If you have a refund, there is no penalty; however, you are giving the government a free loan, since they will only pay interest starting 45 days after the return is filed. Please call this office to discuss your individual situation if you are unable to file by the May 17 due date.

Posted in Tax

Running a Trading Business – and What it Means for Your Taxes

Posted on by

The average American taxpayer is not aware that people who officially qualify as running a trading business receive special tax treatment. Their income comes from the profit they make by trading options, equities and other asset classes, and is viewed as ‘investment’ income. Investment income is taxed differently than salary and wages, which are considered ‘earned’ income. There are significant differences between the way that investment income and earned income are taxed and how the two can be combined. Let’s take a closer look at what being considered a trader entails, and what its impact could be. The Requirements for Being Considered a ‘Trader’ The Internal Revenue Service defines a ‘trader’ as a person in the business of buying and selling securities for their own account. The criteria for this classification include:

Seeking profit from the daily movements of the market and from changes in securities prices rather than from interest, dividends or the appreciation of capital
The level of activity of trading must be considered substantial
The activity must be conducted regularly and continually

There are also specific criteria for qualifying as a ‘trading business.’ They are:

Adhering to typical holding periods for buying and selling securities
How often you trade during the year and what the dollar amount of those trades are
How much the business’ trading is done for the purpose of livelihood income
How much time is spent on trading

Even if you consider yourself or call yourself a trader, a day trader, or a trading business, the IRS will analyze the levels for each and determine whether they are high enough for you to get the tax benefits that go with the title. Those whose volume does not reach the IRS’ qualifying levels will be considered an investor. What are the advantages of qualifying as a trader? Consider a scenario in which an individual earns a wage of $100,000 and an additional $30,000 by trading stocks. As an investor, the $30,000 will be taxed at either the short-term or long-term capital gains rate depending upon how long you held the position. Likewise, if you lost that same amount from your investments, you would be unable to reduce your earned income by that amount: you would be limited to no more than $3,000 in losses against earned income and still be taxed on $97,000 of taxable income. As a qualified trader, however, you are entitled to approach the taxes on gains and losses differently, using an accounting method called ‘mark-to-market’ that determines values using prevailing market price. The $30,000 in losses on your trades would be subtracted from your $100,000 in wages, reducing your taxable income to $70,000. It seems pretty obvious, therefore, that anybody who can qualify as a trader should do so, but it is not that simple. You can’t look at your successes or failures as a trader and then decide at tax filing time what you want to do: It is a status that you need to elect in the previous year. Determining that you qualify for this status can lead to filing other advantages. For example, filing Form 6781, Gains and Losses from Section 1256 Contracts and Straddles, is specifically for those whose trades include products like foreign exchanges, index options, traded futures and other marked-to-market products. These provide you with a special 60/40 tax treatment under which as long as you’ve been holding your position for a specific period of time — even as short as three days — you’ll be able to have them taxed as though 60% are long-term capital gains and 40% are short-term capital gains. A $1,000 net gain on an index option would only see 40%, or $400, taxed at the higher short-term capital gain rate that is the same or ordinary income, while $600 (or 60%) would be taxed at the lower long-term capital gains rate. Similarly, traders’ contracts qualify for Section 1256 treatment, avoiding wash sales rules that apply to investors. For an investor, securities that are sold at a loss and then bought again within a 61-day window measured as being 30 days before or after the closing transaction cannot be recorded as a loss. Instead, it is measured based on the cost basis of the shares that you repurchase, and the loss can’t be taken until those newer shares are finally liquidated, at some point in the future. Everything gets adjusted, thus disallowing the original loss, and this is true even if you are using two different brokerage accounts. You can’t avoid the wash sales rules by selling for a loss in one account and buying back using another. As a qualified trader, however, wash sale rules don’t apply. Gains are carried over to Schedule D, while losses can be used to offset gains for previous years or for the current year. Those who trade options are able to take advantage of several different protective tax strategies. These include: Offsetting Gains by Purchasing Put Options The short-term tax consequences that come from having substantial gains on large stock positions can be offset by buying stock puts. But you need to remember that if the stock price continues to rise, you run the risk of losing your money when the put expires. By choosing an OTM – or out of the money – Put, you could lose the entire premium as well as the cost of the transaction. The longer the option, the greater the ‘theta’ meter of loss. A better, safer option might be to choose in-the-money options, which retain some of their intrinsic value – though they can still end up expiring with no value. To help with theta risk, consider buying in-the-money options, because they’ll have some intrinsic value and not all ‘time’ value, initially. Of course, they can still expire worthless if they’re OTM at expiration, but the risks are lower. LEAPS® Another possibility is to get a tax advantage by trading option contracts that expire far in the future. Known as LEAPS, or Long-term Equity AnticiPation Securities, these have expiration dates as far in the future as 32 months. The length of time that you hold them will determine their tax treatment, but there are clear advantages compared to what is offered by buying and selling the more traditional short-term alternatives. The fact that LEAPS can be held for more than a year means that profits can be treated and taxed as a long-term gain and offer a great way to diversify your portfolio. IRA Trading You can trade an Individual Retirement Account (IRA) or any self-directed retirement account and realize significant tax benefits in some cases. The key is to do your research into what your brokerage allows, as some allow options in IRAS and others do not. If you can use this strategy, you will find that the wash sale rules essentially don’t apply because you will only be taxed when a distribution is made. If the account is taxable, however, it may trigger a wash sale. Hedging through Index Options You can realize preferential tax treatment through options on the Nasdaq-100 (NDX), the S&P 500 Index (SPX), and other broad indices — as well as futures contracts — if you do so using Section 1256 contracts. Traders and investors alike can realize significant savings by consulting with a tax professional who can help them navigate the complexities of short- and long-term gains. For assistance from an experienced tax advisor, contact us today.

Video tip: Made a Mistake in Your Tax Return?

Posted on by

Did you just find out that you made a mistake in your tax return? Do not panic. Watch this video for essential points you should know and how to fix your mistake.
.embed-container { position: relative; padding-bottom: 56.25%; height: 0; overflow: hidden; max-width: 100%; } .embed-container iframe, .embed-container object, .embed-container embed { position: absolute; top: 0; left: 0; width: 100%; height: 100%; }

Posted in Tax

The US Loses Out On $1 Trillion a Year Due to Tax Cheats, IRS Estimates

Posted on by

As part of its oversight role, Congress is constantly assessing the economic health of the United States, so hearing from Internal Revenue Service Commissioner Chuck Rettig that the country may be losing up to $1 trillion a year in evaded taxes is an obvious cause for concern. This estimate is several times the 3-year-cumulative amount of $441 billion that the agency had previously asserted. In his meeting with the Senate Finance Committee, Rettig said “I think it would not be outlandish to believe that the actual tax gap could approach and possibly exceed $1 trillion per year.” He listed several tax evasion techniques that the agency had not included or even been aware of. Among them were new technologies such as the use of cryptocurrency, as well as more familiar issues such as illegal income, underreporting from pass-through businesses, and offshore tax evasion. Lawmakers hearing of the disparity between what is collected and what should be collected are vowing to take action. According to Senate Finance Chairman Ron Wyden (Oregon – D) the IRS commissioner’s news should serve as a “wake-up call” to the remarkable revenue losses the government is suffering. He anticipates that his colleagues will take action to facilitate more aggressive tax enforcement, indicating that conversations he has already had with Senator Mike Crapo of Idaho, his committee’s top Republican, indicate bipartisan support. Other senators who have voiced concern include Massachusetts Democratic Senator Elizabeth Warren, who is planning a bill to provide mandatory, steady funding for auditors for the IRS budget; and Ohio Republican Senator Rob Portman, whose focus is on tax-dodging cryptocurrency enthusiasts. Presidential Action In addition to congressional action, President Joe Biden has included an extra $900 million in his budget proposal to provide for expanded audits and has included corporate tax enforcement in his $2.25 trillion infrastructure plan. He is also promoting additional individual tax proposals. Responding to questions about what his agency needs to improve enforcement, Commissioner Rettig pointed to 17,000 enforcement-related positions lost over the last ten years and indicated that with $1 billion more in funding, the agency could engage in a multi-year process to update outdated computer systems to flag fraud and tax evasion and hire an additional 4,875 front-line audit personnel. “We want to get there, but we do need your help,” he said. Pointing to the fact that roughly 99% of taxes subject to automatic withholding and reporting are paid while only 45% of those not subject to this oversight are paid, he said that shoring up regulations overseeing tax-return preparers and tax-reporting requirements would close the gap and serve to minimize fraud. High-Income Individuals and Corporations Hide the Most According to a recent study, the richest 1% of the American population fail to report or pay taxes on one out of every five dollars that they earn. This evasion is made possible by the fact that income from partnerships, limited liability corporations and other pass-through entities is not automatically withheld in the same way that is done for wage earners. The study’s authors, which include two IRS officials, concluded that eliminating that method of shielding income, as well as offshore structures, would increase the amount of money collected by the IRS by approximately $175 billion each year.

Posted in Tax