The Internal Revenue Service announced that the purchase of personal protective equipment, such as masks, hand sanitizer and sanitizing wipes, for the primary purpose of preventing the spread of coronavirus are deductible medical expenses.
The amounts paid for personal protective equipment are also eligible to be paid or reimbursed under health flexible spending arrangements (health FSAs), Archer medical savings accounts (Archer MSAs), health reimbursement arrangements (HRAs), or health savings accounts (HSAs).
When you operate a business, you have a variety of tax breaks available.
The recently enacted Consolidated Appropriations Act extends and expands some of the breaks. We bring the following selection of them to your attention as a tax-strategy buffet.
You do have to admire the opportunities that the tax law contains to help businesses. If you would like our help with any of the above, please don’t hesitate to call us at (919) 290-1011.
Eligible educators can deduct unreimbursed expenses for COVID-19 protective items to stop the spread of COVID-19 in the classroom. COVID-19 protective items include, but are not limited to:
Rev. Proc. 2021-15, issued today, provides guidance related to educators and their expenses under the COVID-related Tax Relief Act of 2020, which was enacted as part of the Consolidated Appropriations Act, 2021. The new law clarifies that unreimbursed expenses paid or incurred after March 12, 2020, by eligible educators for protective items to stop the spread of COVID-19 qualify for the educator expense deduction.
The educator expense deduction rules permit eligible educators to deduct up to $250 of qualifying expenses per year ($500 if married filing jointly and both spouses are eligible educators, but not more than $250 each).
Eligible educators include any individual who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year.
Sixty-one million adults and over 12.6 million children in the United States have some type of disability.
If you have a disabled or blind child or other family member, or are disabled or blind yourself, you should know about ABLE (Achieving a Better Life Experience Act) accounts. These tax-advantaged accounts can be a real game changer for the disabled.
Ordinarily, a disabled person who receives government benefits can have only $2,000 in cash or other countable assets. This can make it impossible for disabled people to save money for emergencies, buy a house or car, or take a vacation.
This is where ABLE accounts come in. Contributions to ABLE accounts up to certain levels are not counted for purposes of means-tested programs for the blind and disabled. Disabled people can have up to $100,000 in an ABLE account without losing Social Security disability benefits.
Contributions to ABLE accounts are not deductible for federal income tax purposes, but the money in the account grows tax-free. Withdrawals are also tax-free if made for a variety of living- and disability-related expenses.
Up to $15,000 in total can be contributed to an ABLE account each year. Contributions can come from the disabled beneficiary, from family, and from friends. Disabled people who work can put in an additional amount limited to the lesser of their compensation or $12,490 in 2021.
A total amount of $300,000 to $500,000 can be deposited into an ABLE account, depending on the state. There is only one real drawback to ABLE accounts: they are available only for people who became blind or disabled before reaching age 26. This eliminates the majority of the disabled.
ABLE accounts are run by the states. Forty-two states and the District of Columbia have them. You don’t have to set up an account in the state where you live, and it can pay to shop around.
By the way, if you have a special needs trust, you can keep it. An ABLE account can be set up in addition to a special needs trust.
As you likely know by now, the Paycheck Protection Program (PPP) loan and its forgiveness process have been an ever-changing (and often confusing) ride so far.
With the new rules for PPP loans of $50,000 or less, you escape the most difficult part of the loan forgiveness if you had to consider employees. And you may even obtain more loan forgiveness than you would have otherwise.
Before the $50,000-or-less rule, you had to either suffer a reduction in loan forgiveness or meet one of the many exceptions that allowed you to
Now, with a PPP loan of $50,000 or less, you don’t have to consider the myriad rules about employees. Regardless of what you did with your employees, you qualify for full forgiveness if
Example. You obtain a PPP loan of $34,000 based on your 2019 Schedule C income and pay to your part-time employee. When COVID-19 hit, you laid off your part-time worker and have not rehired him. Using SBA Form 3508S and the 24-week covered period, you qualify for 100 percent forgiveness of your $34,000 loan because you spent $20,833 (61 percent) on the deemed payroll to yourself and the remainder on five months’ rent and utilities.
Planning note. You are not an employee of your Schedule C business. You receive no W-2 income. But the PPP rules deem your 2019 Schedule C profits as your payroll for PPP loan purposes. The rules cap the Schedule C taxpayer’s loan amount and forgiveness at a maximum of $20,833 when Schedule C income is $100,000 or more.
Are you one of the millions of businesses that have an outstanding non-disaster Small Business Administration (SBA) loan? These include:
If so, you have already benefited, or soon will benefit, from a little-known provision included in the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Congress appropriated $17 billion so that the SBA could provide a temporary loan payment subsidy to businesses with these non-disaster SBA loans. Under this provision, the SBA automatically makes six monthly loan payments on behalf of borrowers. There is no need to file an application.
Are the SBA loan subsidies taxable income to you?
Unfortunately, the CARES Act is silent on this subject and the IRS has yet to issue any guidance on this particular loan subsidy program. In the past, the IRS advised that similar loan payments were includible in income by the taxpayer-borrower.
It’s unclear whether the IRS will follow this prior guidance.
The IRS could instead conclude that these loan subsidies are not taxable under the general welfare exclusion. The general welfare exclusion has often been used to exempt from tax SBA disaster payments made to individual taxpayers. The exclusion ordinarily does not apply to payments to business. But the IRS could make an exception due to the extraordinary nature of the COVID-19 pandemic.
It’s also possible that Congress will act to make the SBA loan payments tax-free. This could be done in a future stimulus bill.
Right now, the prudent course is to assume that the SBA loan subsidies are taxable income and plan accordingly.
If you have any further questions or need my assistance, please call us at (919) 290-1011.
Small Business Administration (SBA) Economic Injury Disaster Loans (EIDLs) can be a great source of low-interest funding for businesses struggling with the economic impact of the COVID-19 pandemic.
Unlike Payroll Protection Program (PPP) loans, EIDLs are not forgivable—borrowers have to pay them back. But they have a low 3.75 percent interest rate and a long 30-year repayment period. Borrowers can repay them at any time without penalty.
To obtain an EIDL, borrowers must sign a loan authorization and agreement, a note, and a security agreement filled with fine print. Many of these provisions could have a significant impact on the borrower’s business for the life of the loan—up to 30 years.
It is vital to understand the terms and conditions before taking out any loan, including an EIDL. Here are seven key provisions borrowers should be aware of.
1. No Changes to the Business
Without SBA approval, EIDL borrowers may not sell the business or change its ownership structure. This includes removing or adding a business partner.
2. No Distributions Outside the Usual Course of Business
The owners may not make distributions outside the usual course of business without SBA approval. This includes loans, advances, bonuses, or asset transfers to owners, employees, or other companies.
Distributions within the usual course of business are permitted. SBA officials have said this includes distributions of net income to owners of a pass-through business, such as an S corporation or a limited liability company.
3. Strict Record-Keeping Requirements
The SBA imposes strict record-keeping requirements on EIDL borrowers. They must keep itemized receipts showing how they spend the loan funds. Also required is a full set of financial and operating statements, which must be furnished to the SBA each year. The SBA also has the option of requiring an expensive review of the borrower’s records by an independent CPA.
4. Using Other COVID-19 Payments to Pay the SBA
EIDLs are intended to cover disaster losses not compensated by other sources. If an EIDL borrower obtains grants, loans, insurance proceeds, or lawsuit recoveries to help defray COVID-19-related losses, the borrower is required to notify the SBA. The SBA may require that such money be used to repay the EIDL.
But a business may obtain both a PPP loan and an EIDL so long as it doesn’t use them for the same expenses.
5. Strict Collateral Requirements
Businesses that borrow more than $25,000 are required to pledge all their business’s personal property as collateral. Such collateral includes present and future inventory, equipment, deposit accounts, promissory notes, negotiable instruments, and receivables.
The SBA obtains a security interest in all such collateral the borrower has at the time of the loan, or collateral it acquires or creates in the future. The borrower must
6. Buy American
EIDL borrowers must promise to buy American-made equipment and products with the loan proceeds, to the extent feasible.
7. Penalties for Violations
Penalties for violations of the EIDL terms can be severe. The SBA can demand immediate repayment of the entire loan if the borrower breaches any of its terms. The SBA also reports defaults to credit reporting agencies.
Borrowers who misapply EIDL funds—for example, using them to pay personal expenses—are liable to the SBA for an amount equal to one-and-a-half times the original loan.
If you need my assistance or would simply like to discuss EIDLs, please call us at (919) 290-1011.
Question. My CPA just talked to my bank about loan forgiveness on my small PPP loan. To her surprise, the bank told her to sit on the application for forgiveness until fall because this banker heard that the SBA is going to simply forgive all loans under $500,000. I hope this is true. My wife is ecstatic thinking that she doesn’t have to do anything with all the records needed for our forgiveness. Do you have any insights on this?
Answer. Yes. But temper your hope—there is a twisty road from what we see now and a new law that provides automatic PPP forgiveness.
In a congressional committee hearing, Congressman Chabot asked Secretary Mnuchin about forgiving all PPP loans of $150,000 or less.
Secretary Mnuchin said that was something we should consider but added that we should obviously make sure there’s some fraud protection.
Senators seem warm to the idea.
·S. 4117 would create a one-page attestation form for automatic forgiveness of PPP loans of $150,000 or less. It has 23 cosponsors (three Democrats and 20 Republicans).2
·S. 4321 also creates automatic forgiveness for PPP loans of $150,000 or less and was introduced on Monday, July 27, 2020, by Senators Rubio and Collins.3
At this moment, these are the insights we have. We don’t have a projection on this becoming law, but we can hope.
Are You a Year or More Behind in Filing Your Income Tax Returns?
Sometimes life just gets in the way. You feel too busy or have experienced a divorce, illness, job loss, or death in your family that sidetracked you from filing your tax return on time. Or you could just be overwhelmed with the whole process of filing your taxes. Perhaps you don’t have the money to pay your taxes and thought you should wait to file (this is NOT a good idea).
You may also have a special situation with your spouse if they promised to file and didn’t or they don’t file correctly or they don’t pay. In some cases, you can claim that you were the “innocent spouse” and get your account corrected.
Whatever your situation, we are here for you when you are ready to get caught up, and the sooner, the better. We can help you relieve that huge psychological burden so you feel lighter and free from all that stress.
Failure to File Your Tax Return(s)
The IRS is very aggressive about coming after non-filers and non-payers. So even if you don’t owe that much, you’ll want to file right away to stop the penalties and interest from adding up.
IRS debt can add up fast. There’s a failure to file penalty, interest on the taxes that are late, and the taxes themselves. The failure to file penalty can be as much as 25 percent, so that’s a debt you don’t want to have pile up on you.
The most important thing about filing back taxes is to get them filed as soon as possible whether you can pay them or not. Filing back tax returns will stop the failure to file penalty and is the first step on the road back to compliance for you.
It’s never a good idea to have the IRS estimate and complete your return for you. You are better off hiring a tax professional to get you caught up and to represent your case before the IRS to work out a way to pay your back taxes that won’t leave you bankrupt or suffering financially.
We know there are many national chains out there that would like to help you with your tax problems, but all of the clients we have worked with say they prefer to hire a local tax professional in their own neighborhood.
A tax professional can help you:
Solutions for Your Delinquent Income Tax Return Filings
Contact us at no obligation to you so we can understand your specific tax situation and provide advice on the options available to you. Your tax issue is handled with the utmost confidentiality and privacy.
Due to the COVID-19 pandemic, Congress made changes to the tax law related to retirement account distributions. The changes open new, time-limited ways for you to save tax dollars.
Congress waived all 2020 RMDs. But if you took your RMD before Congress made this change, you have two ways you can undo it:
(1) Use the expanded 60-day indirect rollover if you qualify.
(2) Treat the RMD as a coronavirus-related distribution, and recontribute the funds, if you qualify.
Because of the financial downturn, this may be the year to convert your traditional IRA to a Roth IRA. If you are eligible for a coronavirus-related distribution (highly likely), you can convert up to $100,000 of your traditional IRA to a Roth and take advantage of the three-year spread of the taxable income.
If you have a tax year 2020 loss, you may want to include the conversion income in tax year 2020 so that the loss fully or partially offsets your tax-free Roth IRA conversion.
If you want to discuss any of the above, please call us at (919) 290-1011.
If you are in business for yourself—say, as a corporation or self-employed—payroll taxes and self-employment taxes are likely two of your biggest tax burdens.
Here’s some possible good news: Congress decided to give you significant relief from these taxes due to the COVID-19 pandemic. We’ll tell you what relief options are available and whether or not you qualify.
Payroll Tax Deferral
If you have employees (including yourself), then you can postpone payment of the employer share of payroll taxes incurred from the date of enactment of the CARES Act (March 27, 2020) through December 31, 2020.
You’ll need to pay 50 percent of your 2020 postponed employer taxes no later than December 31, 2021, and the remaining 50 percent no later than December 31, 2022.
Note. This provision doesn’t apply if you use the small business loan forgiveness provision under the CARES Act.
Self-Employment Tax Deferral
If you owe self-employment tax in tax year 2020, you’ll pay it as follows:
Example. On her 2020 Form 1040, Sue has a Schedule C and a self-employment tax liability of $8,000. She’ll pay that $8,000 on the following schedule:
Employee Retention Credit
The CARES Act gives you a refundable tax credit against the employer portion of employment taxes equal to 50 percent of wages paid to your employees after March 12, 2020, and before January 1, 2021.
You are eligible if
If you have more than 100 full-time employees, then you can take a credit for wages paid to your employees when they are not providing services due to COVID-19-related circumstances.
If you have 100 or fewer full-time employees, then all your employee wages qualify for the credit, whether you are open for business or subject to a shutdown order.
The maximum creditable wage amount is $10,000 per employee for all calendar quarters and includes the value of the health benefits you pay on his or her behalf.
Note. You cannot take the employee retention credit if you receive a Small Business Interruption Loan from the Small Business Administration.
FFCRA Tax Credits—Overview
If the Families First Coronavirus Response Act (FFCRA) requires you to provide paid sick leave or paid family leave to your employees, then you receive refundable payroll tax credits against your employer portion of your employment tax liability to offset the wage expense.
You’ll be able to reduce your federal tax deposits by the anticipated credit amount to get immediate cash in your pocket. If the credit amount exceeds your payroll tax deposit, the difference is refundable to you.
You won’t pay employer Social Security taxes on the paid leave, and you’ll get an additional tax credit to offset your share of the Medicare payroll tax.
In addition, if you pay self-employment tax, and if you would have qualified for paid sick or family leave if you had been employed by someone required to offer paid leave, then you get a refundable tax credit against self-employment tax.
These provisions apply starting April 1, 2020, and end on December 31, 2020.
Who Must Provide Paid Leave?
In general, you must provide paid leave if your business or tax-exempt organization has fewer than 500 employees.
The Department of Labor has authority to exempt small businesses with fewer than 50 employees from the paid leave requirements if those requirements would jeopardize the viability of the business.
The fewer-than-50-employees exemption will be available on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer’s business as a going concern.
Paid Sick Leave Payroll Tax Credit
The Emergency Paid Sick Leave Act requires you to provide an employee with paid sick time to the extent that the employee is unable to work or telework due to a need for leave for any of the following reasons:
For paid sick time qualifying under clauses (1), (2), or (3) above,
For paid sick time qualifying under clauses (4), (5), or (6) above,
The maximum number of COVID-19 creditable paid sick leave days is 10 per employee per calendar year.
Your credit also includes your qualified health plan expenses that are allocable to creditable qualified sick leave wages.
Self-Employed Sick Leave Credit
Remember, this credit applies if you were self-employed and would have qualified for paid sick leave if you had been employed by someone required to offer paid leave.
If you were unable to work under clauses (1), (2), or (3) above, your refundable tax credit is equal to the number of days you were unable to work, multiplied by the lesser of
If you were unable to work under clauses (4), (5), or (6) above, your refundable tax credit is equal to the number of days you were unable to work, multiplied by the lesser of
Your maximum number of COVID-19 creditable sick days is 10 days per calendar year.
Your average daily self-employment income under the provision is equal to your net earnings from self-employment for the taxable year, divided by 260.
Example. You have 2020 Schedule C net income from self-employment of $100,000. You were sick and unable to work for five days because you experienced symptoms of COVID-19.
Your average daily self-employment income is $385, which is $100,000 divided by 260.
Your refundable tax credit is $1,925, which is the lesser of
Paid Family Leave Payroll Tax Credit
The Emergency Family and Medical Leave Expansion Act requires you to provide public health emergency leave to employees under the Family and Medical Leave Act of 1993 (FMLA).
This requirement generally applies when your employee is unable to work or telework due to a need for leave to care for a child under age 18 because the school or place of care is closed, or the childcare provider is unavailable, due to a public health emergency (defined as an emergency with respect to COVID-19 declared by a federal, state, or local authority).
You can provide unpaid leave for the first 10 days of public health emergency leave required, but after that period, you must provide paid leave.
For paid family leave time,
Your credit also includes your qualified health plan expenses that are allocable to creditable qualified sick leave wages.
Self-Employed Family Leave Credit
Remember, this credit applies if you were self-employed and would have qualified for paid family leave if you had been employed by someone required to offer paid leave.
If you were unable to work for reasons listed in the section above, your refundable tax credit is equal to the number of days you were unable to work, multiplied by the lesser of
Your maximum number of creditable family leave days is 50 days per calendar year.
Your average daily self-employment income under the provision is equal to your net earnings from self-employment for the taxable year, divided by 260.
No Double Benefits
For both the paid sick leave credit and the paid family leave credit, you’ll include
Example. You claim a credit of $2,700 for $2,500 of qualified family leave wages and $200 of health plan expenses paid during the quarter. You will have an offsetting income inclusion amount of $2,700, but you may deduct $2,500 of qualified family leave wages and $200 of health plan expenses.
In addition, if you are self-employed but also receive paid sick or family leave from an employer, then the amount you receive from the employer reduces the amount you can use toward the self-employed refundable tax credit.
In the legislation dealing with COVID-19, Congress gave you the possibility of significant tax credit and payroll deferrals for taking care of yourself and your employees. In this article, we explained the
The payroll deferral provisions complicate your accounting, but you keep the cash, so the annoyance is likely worth the trouble.
With the tax credits, the feds are covering or at least subsidizing your paid sick leave payroll during this COVID-19 business interruption.
If you are self-employed and qualify for a refundable tax credit because of your inability to work due to illness or family needs, be sure to thoroughly document that you qualified for the credit.
As you can see, there’s much to know about the COVID-19 pandemic tax legislation. We are here to help you. Please don’t hesitate to call us at (919) 290-1011 if you would like to discuss any of these issues.
Stimulus checks issued to deceased taxpayers needs to be returned to the federal government, according to Treasury Secretary Steven Mnuchin. The Internal Revenue Service has already sent out nearly 90 million checks in a matter of weeks and one of the emerging issues is that some of the recipients are deceased. This is happening because the IRS is sending out checks to people who filed taxes in 2018 or 2019. The problem is some of the people on those tax returns have since died.
It is not clear that you are under any legal obligation to return the money sent to a person who died in 2018 or 2019, the tax years used by the IRS to determine eligibility for a stimulus payment. The CARES Act, which authorized the payments, had no language forbidding distributions to the deceased, nor did it stipulate ways to claw back money given to the dead.
In the absence of official guidance, the safest course of action would be to hold on to the money sent to a deceased taxpayer or return the check to the IRS until the IRS resolves the issue once and for all. For taxpayers located in North Carolina, mail the returned check to:
Memphis Refund Inquiry Unit
5333 Getwell Road
Mail Stop 8422
Memphis, TN 38118
For other states, the IRS mailing addresses can be found here (Q41): https://www.irs.gov/coronavirus/economic-impact-payment-information-center#more.
Should you choose to return the check to the IRS, a note should be included advising the IRS that the taxpayer is deceased and write “void” in the endorsement section on the back of the check. Be sure to mail the check with tracking so you can confirm receipt by the IRS. Do not send with a signature required though since there is no one at the IRS to sign and it will be returned to the sender.
If the stimulus payment was directly deposited into a bank account, the best course of action to take is to either keep the money in the bank account or submit a personal check payable to U.S. Treasury, write 2020EIP and the taxpayer identification number in the memo section of the check and a brief explanation of the reason for returning the EIP to the appropriate IRS location until the IRS or Treasury provides guidance on how to proceed.
If you currently own or manage a small business, you’ve probably experienced an extremely high demand or you’re preparing for the worst – to be shuttered by law for a few weeks or longer.
In either case, your business needs a whopping dose of resilience right now. Here are four steps to safeguard your business and discover where you need to build resiliency.
1 – Protect Your Employees
The most important thing to do is to protect your employees. OSHA demands that we give them a safe working environment, and the definition of this just changed! If possible, make it mandatory for workers to work at home, and if not, get your workers protective gear and make sure your workplace is cleaned constantly.
There are brand new laws regarding sick leave; you will need to learn them and incorporate them into your policies.
If possible, try to continue paying your workers for as long as it’s safe for your business.
If you need to lay off workers, encourage them to pursue opportunities where demand has surged. As of this writing, Walmart is hiring 150,000 workers and Amazon is hiring 100,000 workers. Educate them to go where the demand is.
2 – Execute Your Business Continuity Plan
If you’re saying “What’s a business continuity plan?” right now, you’re not alone. Most small businesses don’t have one. If you have any kind of disaster plan in place, brush off the cobwebs and start from it.
A business continuity plan helps you create a process that you can follow before and after your company experiences a disaster of any kind. Many businesses have plans to recover from weather-related catastrophes, fire, and theft. These plans can be adapted to our new situation.
A business continuity plan can have many parts. For our current situation, cash flow planning can be an important first step. You can use multiple scenarios, for example, revenue levels, to determine how much cash you might need for the next few months.
You may need to evaluate inventory, supply chain, project backlogs, staffing, cash, and other areas of your business to project how things will change from normal operations. You will need to protect your various business functions – HR, IT, accounting, operations, and administration – during this time.
Once you’ve drilled down to the tactics of how you’ll move forward, you’re ready for the next step.
3 -- Communicate to Your Stakeholders
Are you open? Closed? Changed hours of business? Changed the way you greet clients? Changed your services? Added delivery services? Customers and prospects need to know, so post a notice on your website letting them know what your business’s situation is.
If you don’t, you’ll confuse your current customers and miss out on new business. Everyone is wondering what’s open and what’s not right now. And if you’re open, they’re wondering how you’ve changed your cleaning methods and other procedures to keep them safe.
You may also need to reach out to your suppliers to keep them informed of your plans.
4 – Think About Recovery
What will recovery look like when it comes? The good news about our current situation is that we have more time to plan than we would if a fire or weather brought things down suddenly. We also will not have a disruption in electricity, water, or the local supply chain in as severe an impact compared to a weather event.
What we may not have in this case is customers (or we’ll have too many of them). When customers finally start coming back, what will look different in our world? Will we need to operate differently? How will our services change?
In both the continuity plan and the recovery plan, we truly need to be innovative thinkers. We may need to evolve our business model to be something else that people want once we reopen.
Your Business Continuity Plan
If you need help building your resiliency, or even just projecting your cash flow for the next few months, please reach out and let us help.
If you or a well-off relative are facing the gift and estate tax, here’s a planning opportunity often overlooked: pay tuition and medical expenses for loved ones.
Such payments, structured correctly, do not represent gifts.
The monies spent by you on the qualified medical and tuition payments reduce your net worth and taxable estate, but they do no harm to your income, gift, or estate taxes.
Further, the loved one who benefits from your help does not incur any tax issues.
As unusual as this sounds, with the tuition and medical payments, you operate in a tax-free zone.
Gift and Estate Tax Exclusion
If you die in 2020, your heirs won’t pay any estate or gift taxes if your estate and taxable gifts total less than $11.58 million.
If you are married and have done some planning, you and your spouse can avoid estate and gift taxes on up to $23.16 million.
Lawmakers set the current rates with the Tax Cuts and Jobs Act and also set them to drop by 50 percent in 2026. Gifts made now continue as excludable should they exceed the upcoming 50 percent drop.
Beating the Gift Tax with Tuition
The tuition exception to the normal gift tax rules involves direct payment of tuition (money for enrollment) made to an educational organization on behalf of another individual.
You may not two-step this. For example, you can’t write a check to granddaughter Amy for $50,000 that she in turn uses for her tuition. Here, you made a $50,000 gift.
But if you write the $50,000 check directly to the educational organization to pay for Amy’s tuition, you are in the tax-free zone. The $50,000 does not bite into your gift and estate tax exemptions, because it’s for tuition.
The unlimited benefit here applies only to tuition for full-time and part-time students. You can’t use it for items such as dorm fees and books. You can’t pay the money to a trust and then require the trust to pay a grandchild’s future tuition costs (this fails the test for direct to the institution).
Qualifying Educational Organization
The tax code defines “educational organization” as “an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.”
The regs elaborate by explaining that the term “educational institution” includes primary, secondary, preparatory, or high schools, and colleges and universities.
Example. You have four children, ages 7, 8, 9, and 10, at a private school where the tuition is $17,000 per year per student. Grandma Grace pays directly to the school the tuition for each of the children. Grandma Grace has no gift tax or other tax issues. Her payments are in the tax-free zone.
You can also pay the tuition to a foreign university. That tuition payment is in the tax-free zone just as if you had paid it to the University of Chicago.
Irrevocable prepaid tuition meets the rules and offers planning opportunities. Grampa Zeke has four grandchildren all in the first and second grades. He sets up and funds an irrevocable plan with each of the schools to pay the tuition at their respective schools. The plans qualify for tax-free zone treatment.
Planning note. Prepaid tuition can be a great death-bed strategy.
The tax-free zone treatment of medical expenses requires that you pay the money directly to the medical care provider or insurance company (when paying for health insurance).
Under this plan, you avoid gift taxes when you pay directly to the provider any medical expense that would qualify as an itemized deduction on your Form 1040. Here are the basics:
Example. Sam, your buddy, takes a big fall while climbing Mount Everest. You pay $67,000 of his medical bills directly to the medical providers. You are in the tax-free zone and face no gift tax.
Say that the insurance company reimburses Sam for $31,000 of the medical bills that you paid, and Sam keeps the money. Now, you have the following tax situation:
The primary rule to remember when using the tuition and medical gift tax-free strategy is that you must make the payments directly to the institutions and providers. Imbed this rule in your brain as rule one for this strategy. Don’t violate it.
If you have a loved one who needs tuition or medical help from you, use the tax-free zone method. For example, you have an estate tax problem, but Uncle Jimmy needs help with his medical bills. Don’t make a monetary gift to Jimmy to help him.
Even if you don’t have a gift tax problem today, use the tax-free method because, who knows, you could win the lottery tomorrow.
And don’t forget this strategy. Sure, you have an $11.58 million estate and gift tax exemption this year. In 2026, that’s scheduled to drop by 50 percent (adjusted for inflation). But the current deficit issues could trigger a drop to, say, the 2008 exemption amount of $2 million, or lower.
If you have questions about the tuition and medical strategy, please call us at 919-290-1011.
Congress let many tax provisions expire on December 31, 2017, making them dead for your already- filed 2018 tax returns.
In what has become much too common practice, Congress resurrected the dead provisions retroactively to January 1, 2018. That’s good news. The bad news is that we have to amend your tax returns to make this work for you.
And you can relax when filing your 2019 and 2020 tax returns, because lawmakers extended the “extender” tax laws for both years. Thus, no worries until 2021—and even longer for a few extenders that received special treatment.
Back from the Dead
The big five tax breaks that most likely impact your Form 1040 are as follows:
Congress extended these five tax breaks retroactively to January 1, 2018. They now expire on December 31, 2020, so you’re good for both 2019 and 2020.
Other Provisions Revived
Congress also extended the following tax breaks retroactively to January 1, 2018, and they now expire on December 31, 2020 (unless otherwise noted):
Temporary Provisions Extended
Congress originally scheduled these provisions to end in 2019 and now extended them through 2020:
If you have questions about the extenders, please call us at 919-290-1011.
The IRS recently issued new cryptocurrency guidance and is hot on your trail if you bought and sold cryptocurrency and didn’t report it on your tax return.
Here are the tax basics. You’ll treat cryptocurrency as property for tax purposes.
Cryptocurrency is a capital asset (provided you aren’t a trader). Therefore,
In the cryptocurrency world, a fork occurs when the digital register that logs transactions of a particular cryptocurrency diverges into a new digital register. There are two types of forks:
The IRS ruled that
Example. You own J, a cryptocurrency. A fork occurs and you receive three units of K, a new cryptocurrency. At the time of the fork, K has a value of $20 per unit. You’ll recognize $60 of ordinary income due to the fork.
When selling property, you generally sell it on a first-in, first-out (FIFO) basis, unless you are eligible to use the specific identification method. You want to use the specific identification method if you can because you can select the amount of gain or loss your sale will create. With FIFO, you have no choice.
To use the specific identification method, you’ll have to either
Imagine this: you didn’t issue Form 1099s to your contractors.
Now, the IRS is auditing your tax return, and the auditor claims you lose your deductions because you didn’t issue the Form 1099s. Is this correct?
No. IRS auditors often make this claim, but they are incorrect.
There is no provision in the tax law that denies you a deduction for labor expenses simply because you didn’t file the required Form 1099s.
But the tax court has stated that the non-filing of required Form 1099s can cast doubt on the legitimacy of the deduction claimed.
As with any deduction claimed on the tax return, you have to keep sufficient records to substantiate the deduction amount. If you had filed Form 1099s, then this would have been solid documentation to help prove the expenses to the auditor.
But since you didn’t file Form 1099s, you need to provide ironclad documentation to prove the expenses, including some or all of the following:
Ultimately, to prove your deduction in a court of law, should you have to go that far, you’ll need to show by a preponderance of the evidence that you made the payments. This means that your evidence has to make it more than 50 percent likely that you did make the payments to the contractors.
Besides the extra trouble of proving the deductions, keep in mind that the cost of not filing Form 1099s surfaces a financial penalty.
For the 2019 Form 1099s, the potential penalties are
As you can see, filing the 1099s avoids trouble. If you need our assistance or would simply like to discuss 1099s, please call us at (919) 290-1011.
The new Individual Coverage HRA (ICHRA) lets you help employees with their health care costs without fear of ACA penalties. Starting January 1, 2020, employers can offer this new ICHRA.
The ICHRA allows you to
The ICHRA is a plan for employees. It’s not for the owners of partnerships, proprietorships, or S corporations.
ICHRAs are available only to employees enrolled in
If you already offer a traditional group health plan, you cannot offer an ICHRA to the employees who are eligible for the group plan. Employers are legally barred from giving employees a choice between a group plan and the ICHRA.
But you can offer a traditional group health plan to some classes of employees and the ICHRA to other classes of employees. Classes may be distinguished on the following factors:
Minimum class size requirements apply if you are offering a traditional group health plan to some employees and the ICHRA to other employees. The minimum class sizes are
Integration with Cafeteria Plans
What happens if the reimbursement amount you provide is insufficient to cover an employee’s premiums? Can you allow the employee to pay the balance pretax through a cafeteria plan?
Yes, but only if the employee has a non-Exchange health plan. The tax code prohibits employees from making salary reduction contributions to a cafeteria plan to purchase coverage offered through the Exchange. But if the employee has a non-Exchange plan, this is permissible, subject to the existing rules that govern cafeteria plans.
The Clock Is Ticking
Employers can start offering ICHRAs on January 1, 2020. You don’t need to provide the 90 days’ required notice in the first year, so you still have time to get your plan in place before January 1.
But keep in mind that your employees will need to obtain individual insurance coverage and many may need to use the open enrollment period that runs from November 1 through December 15. This means you should have your notice to the employees before November 1 if you want your ICHRA effective on January 1, 2020. We have a model notice that you can use, and it includes information on Exchange enrollment.
The new law provides that the individual health plans purchased by your employees are not subject to ERISA, provided the following safe-harbor requirements are met:
If you are interested in the ICHRA, you need to move quickly.
Each year, the IRS sends millions of letters and notices to taxpayers. I frequently receive calls from panicked taxpayers regarding IRS collection notices they received in the mail. Fear is the IRS' best weapon.
These IRS collection notices serve two purposes:
(1) inform taxpayers of their rights and
(2) to demand payment.
These notices are generated now by the IRS computers, and are essentially “form notices”, but each notice conveys important information. The first and subsequent notices come regularly, often 4-5 weeks apart, with each subsequent notice promising more aggressive action by the IRS to collect the tax debt.
The first three IRS collection notices are informative in nature. The IRS wants you, the taxpayer, to know how much you owe and that the IRS expects you to pay. These notices also inform the taxpayer that if payment is not forthcoming that the IRS is going to use more aggressive collection tactics such as IRS bank levies and wage garnishments.
It is the last IRS collection notice labeled “Final Notice of Intent to Levy” that you need to be concerned about. Once you get this notice you can expect the IRS to do a bank levy or wage garnishment. No longer is the IRS seeking to inform the taxpayer, the IRS is now in tax collection mode and you can expect more aggressive action on the part of the IRS to get the taxes paid.
The collection notices you can expect to receive are listed here in the order you will receive them.
CP14 - First notice - Balance Due on Tax Return
CP501 – Second notice - You Still Owe a Balance – Reminder
CP503 – Third notice – Second reminder but sometimes the IRS skips this notice and goes directly to the fourth notice
CP504 – Fourth notice - Notice of Intent to Seize (Levy) Your Property or Rights to Property (If you have not paid your tax debt or arranged for a plan of resolution after receiving these notices, the threats get serious. If you get one of the following notices, you have little time to act before losing rights and getting your income or assets seized)
CP90 – Fifth notice - Final Notice of Intent to Levy; Notice of Your Rights to a Hearing
LT11 – Final notice - Intent to Seize Your Property or Rights to Property
If you or someone you know in the Raleigh, North Carolina has received an IRS collection notice, please feel free to contact me directly at (919) 290-1011.
With the current super-generous federal estate tax exemption of $11.4 million, estate planning may be completely off your radar.
After all, with that huge exemption, you may think there’s no way your estate would owe any federal estate tax if you happen to die—expectedly or unexpectedly. Is your thinking right?
You should probably take one very important estate planning action as soon as you finish reading this.
Check the beneficiary designations for your
If you’ve not yet turned in the forms to designate beneficiaries, please do it now. If the forms are out of date, change them to reflect current reality before it’s too late.
If you need motivation, here are two real-life horror stories to light a fire under you.
Real-Life Horror Story 1
Dad failed to change the beneficiary designations for his Boeing Corporation pension benefits and life insurance after his divorce, so Dad’s ex was still the named beneficiary.
Two months later, Dad died in a car crash. The Supreme Court ruled 7-2 that the beneficiary designations trumped a state law that would have automatically disinherited the ex. So the ex got the money, and the kids got the bills for an unsuccessful legal fight that went all the way to the Supreme Court. Oops!
Real-Life Horror Story 2
In another real-life case, the ex-spouse collected $400,000 from Dad’s company savings and investment plan even though the ex had specifically waived any interest in the plan under the divorce agreement.
Believing the divorce agreement was the last word on the subject, Dad failed to turn in the form to officially change the plan beneficiary from his ex to his daughter.
He died seven years after the divorce. The company plan document stipulated that beneficiaries could be changed only by submitting the required form.
The Supreme Court unanimously ruled that the hideously outdated beneficiary designation trumped the divorce agreement. So the ex got the $400,000, and the daughter got stiffed. Oops!
The two Supreme Court decisions were not even close calls. Pay attention to your beneficiary designations.
The Disaster Avoidance Message
Divorce is not the only situation where failing to turn in or update beneficiary designation forms can cause big problems for your intended heirs—it’s just the most obvious situation.
For example, the same basic issue exists if you become disenchanted with an adult child who has decided to become a professional Frisbee golfer on top of marrying someone you can’t stand.
Or you might now decide to leave more of your life insurance benefits to an adult child who just had twins and less to your childless offspring.
You get the idea. When things in your life change, you may need to refresh your beneficiary designations.
Another big reason to designate beneficiaries: it avoids probate.
Also, consider naming contingent beneficiaries. These are individuals who stand in line behind your primary beneficiaries.
Do not rely on a will or living trust document to override outdated beneficiary designations. As a general rule, whoever is named on the most recent beneficiary form (which may not be nearly recent enough) will get the money automatically when you die—regardless of what other documents might say.
Check your designations at least once a year or whenever significant life events occur.
It usually takes only a few minutes to conduct a checkup and make any needed changes. Often you can access the necessary forms online. But if you wait, it could be too late, as illustrated by the real-life horror stories presented earlier. Don’t wait!
If you have questions about beneficiaries, please don’t hesitate to call us at 919-290-1011.
Owing money to the IRS or state can be extremely stressful and you may be tempted to ignore the situation, but this will only make it worse. But where do you start? Let’s begin by explaining the IRS collection process.
After a tax return is filed and processed, the IRS will assess the taxpayer for any taxes due and not paid with the return. A notice or demand for payment is then mailed to the taxpayer. If this notice goes unpaid, a silent lien arises by statute, attaching to all the taxpayer’s assets owned and later acquired. This lien continues until the liability for the amount assessed is satisfied (paid) or becomes unenforceable due to the passing of the collection statute expiration date.
If these notices are ignored, a final notice of the IRS’s intent to levy the taxpayer’s income and assets is sent, beginning the statutory 30-day window for the taxpayer to request a collection due process hearing. If the taxpayer owes more than $10,000, the IRS files a Notice of Federal Tax Lien in the public records.
Assuming an appeal is not filed, and the amount assessed is not paid, the IRS begins seizing the taxpayer’s assets, including garnishing wages and seizing funds in the taxpayer’s bank accounts. This process of enforced collections continues until the taxpayer pays the liability due plus interest and penalties.
While there are several options available to you when you owe taxes to the IRS or to the state, navigating the maze of requirements can be confusing at best. If you need help getting in compliance with your IRS and state tax filings, please contact our firm at (919) 290-1011.
We focus on assisting taxpayers with IRS and North Carolina Department of Revenue issues in the greater Raleigh, North Carolina area.
If you own a condominium, cottage, cabin, lake or beach home, ski lodge, or similar property that you rent for an “average” rental period of seven days or less for the year, you have a property with unique tax attributes.
Seven days example. Say you have a beach home and you rent it 15 times during the year, for a total of 85 days. Your average rental is 5.7 days. That’s an average of seven days or less for the year.
The right type of beach home or vacation cottage can produce great tax results when the average rental period is seven days or less.
But it’s tricky because when the average rental period is seven days or less, the property is not a rental property as defined by the tax code. Instead, the property is
> a commercial hotel type property that you report on Schedule C of your tax return if you provide services in connection with the rentals, or
> a weird in-limbo property that you report on Schedule E when you don’t provide services.
If the property shows a loss, you can deduct that loss on either Schedule C or Schedule E if you can prove that you materially participate. With the seven-days-or-less-average rental, you likely have only two ways to materially participate:
(1) The combined participation by you and your spouse constitutes substantially all the participation in the seven-days-or-less-average rental activity when you consider all the individuals who participated (including contractors).
(2) The combined hours of participation by you and your spouse in the seven-days-or-less-average rental activity are (a) more than 100 hours and (b) more hours than the participation of any other individual.
Example. Your seven-days-or-less beach rental produces a $20,000 tax loss for the year. On this rental, you spend 65 hours during the year. No other person works on the rental. You materially participate in this rental, and the $20,000 is deductible—period (regardless of its location on Schedule C or E).
If you have a profit on the rental, you likely have a Section 199A deduction when you report the rental on Schedule C as a business. Although not deemed a business by Schedule E reporting, the Schedule E rental could rise to the level of a business as defined for the Section 199A deduction.
If you have one of these seven-days-or-less-average rental properties and would like to discuss it, please call us at (919) 290-1011.
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.
Tax reform’s Section 199A deduction often confuses small-business owners and tax professionals alike. It’s quite possible you’ll get a Schedule K-1 from a business that omits the information you need to calculate your deduction.
What do you do?
You have a big problem. Without a properly completed Schedule K-1, your Section 199A deduction is a big fat $0.
Best option: fix the K-1. You should request a corrected Schedule K-1 from the entity giving you the Schedule K-1 so you have the information you need to calculate your Section 199A deduction.
Not-so-great options. If you can’t get a corrected Schedule K-1, you have two options:
(1) Take no Section 199A deduction.
(2) File Form 8082 with your tax return and claim the Section 199A deduction.
You file Form 8082 with your tax return when you take a position on your tax return that is inconsistent with the Schedule K-1 you received.
Since the final regulations presume the Section 199A amounts are $0 when omitted, it is possible Form 8082 can rebut that presumption. The truth is, we do not know for sure.
You can determine qualified business income, but not W-2 wages or unadjusted basis immediately after acquisition of qualified property, from the other information on the Schedule K-1. Therefore, the Form 8082 option is likely available only if you are under the Section 199A taxable income threshold ($315,000 on a joint return or $157,500 for all other filing statuses).
You also might use Form 8082 if your Schedule K-1 has wrong Section 199A information—for example, if the K-1 indicates the business is a specified service trade or business, but it is not.
Amended return. If you did not take a Section 199A deduction and you eventually get a corrected Schedule K-1, you can claim the deduction on an amended return and obtain a refund.
Tax reform made many good changes in the tax law for the small-business owner. But the changes to the net operating loss (NOL) deduction rules are not in the good-changes category. They are designed to hurt you and put money in the IRS’s pocket.
Now, if you have a bad year in your business, the new NOL rules are designed to stop you from using your business loss to find some immediate cash. The new (let’s call them bad-for-you) rules certainly differ from the prior beneficial rules.
Old NOL Rules
You have an NOL when your business deductions exceed your business income in a taxable year. Before tax reform, you could carry back the NOL to prior tax years and get refunds of taxes paid in those prior years.
Alternatively, you could have elected to waive the NOL carryback and instead carry forward the NOL to offset some or all of your taxable income in future tax years.
New NOL Rules
Tax reform made two key changes to the NOL rules:
> You can no longer carry back the NOL (except for certain qualified farming losses).
> Your NOL carryforward can offset only up to 80 percent of your taxable income in a tax year.
The changes put more money in the IRS’s pocket by eliminating your ability to get an immediate tax benefit from your NOL carryback, and delaying your ability to get tax benefits from future NOL carryforwards.
We are bringing the NOL rules to your attention in case you need to do some planning with us. We likely have some strategies that can help you realize some immediate benefits from your business loss.
If you are a small employer (fewer than 50 employees), you should consider the qualified small-employer health reimbursement account (QSEHRA) as a good way to help your employees with their medical expenses.
If the QSEHRA is indeed going to be your plan of choice, then you have three good reasons to get that QSEHRA plan in place on or before October 2, 2018. First, this avoids penalties. Second, your employees will have the time they need to select health insurance. Third, you will have your plan in place on January 1, 2019, when you need it.
One very attractive aspect of the QSEHRA is that it can reimburse individually purchased insurance without your suffering the $100-a-day per-employee penalty. The second and perhaps most attractive aspect of the QSEHRA is that you know your costs per employee. The costs are fixed—by you.
Eligible employer. To be an eligible employer, you must have fewer than 50 eligible employees and not offer group health or a flexible spending arrangement to any employee. For the QSEHRA, group health includes excepted benefit plans such as vision and dental, so don’t offer them either.
Eligible employees. All employees are eligible employees, but the QSEHRA may exclude
> employees who have not completed 90 days of service with you,
> employees who have not attained age 25 before the beginning of the plan year,
> part-time or seasonal employees,
> employees covered by a collective bargaining agreement if health benefits were the subject of good-faith bargaining, and
> employees who are non-resident aliens with no earned income from sources within the United States.
Dollar limits. Tax law indexes the dollar limits for inflation. The 2018 limits are $5,050 for self-only coverage and $10,250 for family coverage. For part-year coverage, you prorate the limit to reflect the number of months the QSEHRA covers the individual.