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JOE BIDEN IS NOW THE DEMOCRATIC PRESIDENTIAL CANDIDATE LETS LOOK AT HIS TAX PROPOSALS OR LACK THEREOF

“Biden has not released a single formal tax plan, but he has proposed many tax changes and increases connected to spending proposals related to issues like climate change, infrastructure, health care, education, and research & development. Most of these proposals center around raising income taxes on high earners as well as on businesses. Selected highlights of Biden’s tax increases include:

  • Repealing the Tax Cuts and Jobs Act (TCJA) individual income tax reductions for those earning over $400,000 and restoring the top marginal income tax rate to 39.6 percent from today’s 37 percent. The Section 199A deduction would also be phased out for those earning over $400,000.
  • Taxing capital gains at ordinary income tax rates—up from a top rate of 23.8 percent today—for those earning over $1 million. Biden would also eliminate step-up in basis for inherited assets with capital gains, instead taxing those gains at death.
  • Capping the value of itemized deductions to 28 percent for those in higher marginal tax brackets and restoring the Pease limitation on itemized deductions for those with taxable income above $400,000.
  • Raising the corporate income tax from 21 percent to 28 percent.
  • Imposing a 15 percent minimum book tax on corporations with $100 million or greater in income.
  • Doubling the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of U.S. firms, from 10.5 percent to 21 percent.
  • Imposing the 12.4 percent Social Security payroll tax on wage and self-employment income earned above $400,000.

Using the Tax Foundation General Equilibrium Model, we estimate that Biden’s tax proposals would raise about $3.8 trillion over 10 years. The plan would also reduce long-run economic growth by 1.51 percent and eliminate about 585,000 full-time equivalent jobs.

While Biden’s tax plan would make the tax code more progressive, it would reduce after-tax income for filers across the income spectrum by reducing the incentive to work and invest in the United States. On average, taxpayers would see a 1.7 percent reduction in after-tax income on a conventional basis by 2030, ranging from a 0.7 percent decline for those in the bottom quintile of the income distribution to a 7.8 percent decline for earners in the top 1 percent.

A prospective Biden administration will have to consider how fast and how far to enact the variety of tax increases that the candidate has proposed so far, as the American economy is still struggling with the coronavirus pandemic and economic hardship. If enacted too fast, tax hikes may undercut a nascent economic recovery next year. Tentatively, it seems Biden may be open to delaying some of his tax proposals until economic conditions improve. However, additional details about what a Biden administration would want to see before entertaining tax hikes would increase policy certainty moving forward if he won the election.

In addition to tax increases, Biden proposes a variety of tax incentives that are meant to encourage specific kinds of activity, ranging from carbon capture and storage to an $8,000 tax credit for childcare. In addition to those tax credits, he proposes:

  • A restoration of the electric vehicle tax credit
  • Tax credits for residential energy efficiency
  • Making permanent the New Markets Tax Credit
  • Establishing a Manufacturing Communities Tax Credit
  • A renter’s credit to reduce rent and utilities to 30 percent of income
  • An expanded Earned Income Tax Credit (EITC) for those older than 65
  • A $5,000 tax credit for informal caregivers
  • Expanding the Low-Income Housing Tax Credit (LIHTC)
  • A reinstated Solar Investment Tax Credit (ITC)
  • A tax credit for childcare facilities built by businesses
  • Providing a 26 percent tax credit to match traditional retirement contributions as a replacement to deductibility of those contributions (Roth treatment remains unchanged)
  • Establishing a First Down Payment Tax Credit of up to $15,000

Despite these tax credit proposals, Biden has not gone as far as his running mate, Sen. Kamala Harris (CA), when it comes to expanding the generosity and eligibility of major tax credits such as the Child Tax Credit (CTC) and the EITC. Harris has endorsed a plan that would cost over $2.7 trillion over 10 years, nearly matching the revenue raised from all of Biden’s tax increases. House Democrats have also endorsed more generous tax credits to help vulnerable households, which may be an alternative starting point for Biden.

Biden’s tax vision is twofold: higher taxes on high-income earners and businesses paired with more generous provisions for specific activities and households. Given the current economic landscape, as households and businesses are still reckoning with the economic fallout of the coronavirus pandemic, the former part of the Democratic nominee’s tax vision may have to be put on hold if he wins the election.”

The above was quoted from the “The Tax Foundation”  a non profit tax foundation research center.

OTHER BIDEN CONSIDERATIONS:

Biden calls for lowering the estate tax exemption to 5 Million or so down from $11,580,000 now. Currently the tax rate is 40% and there is no mention weather that will remain the same.

He is calling for a minimum tax of 15% on large corporations meaning even if they would ordinarily have no tax due they still would pay the minimum tax.

He wants to phase out the 20% qualified business income deduction which was to allow businesses other than C Corporations (Filing 1120 IRS Forms) a business deduction because they are taxed at the higher personal income tax rates.

He would also like to see lower and middle income individuals pay less tax Among Biden’s proposals for doing this:  Allowing workers age 65 and older to claim the earned income tax credit.  Giving new breaks to first-time home buyers and renters.  Upping the credit for child and dependent care expenses to $8,000 per child ($16,000 for two or more children). Creating a new credit of up to $5,000 for family members who provide long-term care to elderly or disabled relatives. Increasing the health premium tax credit for individuals who buy health insurance through an exchange by passing the credit on the cost of a gold-level health plan.  Forgiving student loan debt and excluding the forgiven amount from tax.

Because he has yet to release any formal Tax Plan, how to pay for these recommendation is still a question.

MY THOUGHTS:

The Tax Cuts and Jobs Act that went into effect September 2017 was one of the largest tax reform acts in our nation’s history.  The purpose was to stimulate the economy and put men and women back to work.  It was extremely effective in accomplishing this primary purpose.  Prior to COVID-19 arriving on the scene we had more than doubled the economic expansion (GDP) of the Obama/Biden eight years.  Our nation experienced the lowest unemployment rates in history among every demographic measurement.  Multinational corporation started repatriating dollars back into business expansion in the United States creating hundreds of thousands of new jobs. 

What is good for the economy?

  1. Less government regulation  President Obama had a great idea when he said, “Lets put men and women to work on shovel ready jobs”  He was talking about the detrition of our roads and bridges throughout the nation. There is a need so let’s put people to work fixing this need. Congress even supported him with over a trillion in appropriations to get the job done, however, the president soon learned that “Shovel ready jobs were not so shovel ready after all”.  Why, because of intrusive government regulations it took as much as 18 years to get the permitting completed, just to repair our infrastructure items of roads and bridges.  So during President Obama’s administration not one dollar was spent on shovel ready jobs.

President Trump coming from the development and construction industry immediately identified this problem and started repealing many intrusive government regulations. The first infrastructure bridge was rehabbed  in just three years and he said that was too long and he is working to get the time line to just one year.

  1. Less corporate tax Many corporations are multinational or global not United States only. Take Apple for example, more than 60% of its revenue comes from outside the United States.  Apple can choose to headquarter in a country like Ireland and be taxed at 15% or bring those dollars back to the US and be taxed at 35% (the rate prior to the Tax Cuts and Jobs Act). Where should they deploy those profits, well not in the United Sates and pay more than double the tax rate. So our tax laws can influence where companies deploy their profits, hire employees, build infrastructure and expand their business activities.
  2. Less individual income tax  When the individual tax rates are less, individuals will spend more on the things they find important in their lives.  Dollars spent on goods and services stimulate the economy and expansion of the economy  puts more people to work cycling more dollars through more hands and taxing more individuals.  Those that have excess can save and invest for the future, again stimulating the economy making more dollars available to more companies for more expansion putting more people to work cycling more dollars and taxes more entities and individuals.
  3. Business investment incentives   Lets look at depreciation for example, depreciation is the writing off or expensing of an item  purchased by the business.  It used to be called writing off an item over its” economic useful life” and of course the congress and the IRS were to determine this economic useful life time line. Bonus depreciation was part of the Tax Cuts and Jobs Act and bonus depreciation allows a business to write off 100% of the cost of new or used equipment placed in service by the company if they wished to.

Why would bonus depreciation be a good incentive? Lets look at an example: Lets assume there are two partners in the 35% tax bracket, (Bracket prior to Tax Cuts and Jobs Act was 39.6%).  They make $2  million in net profit and split evenly $1 million each less tax at 35% leaving $650,000 each. They need a new piece of equipment that will allow them to hire 2 operators and 3 salesmen thereby increasing their net profit to $3 million next year. The cost of this equipment is $1million and after talking it over they are ready to commit which would reduce the amount of net profit to just $1 million to split $500,000 each or after tax $ $375,000 each. Now they run this by their tax advisor and he says, “guys you can’t do that”.  They say why not, and he says because I have to depreciate this equipment over 10 years $100,000 per year. That means after the purchase of $1 million you only have $1 million of your profit left in the bank, however, you are going to be taxed on $1,900,000 of profit and at 35% the tax bill is $665,000.  $1 million after purchase less $665,000 is $335,000/2 is $167,500 each. Now they say we were ready to take the chance with this new equipment and reduce our take home from $650,000 to $375,000, however, it is not worth the risk to reduce our take home to $167,500.  They could have borrowed the money to pay for the equipment, thereby, creating debt they may not want and paying interest they did not need. So what happened, they do not by the equipment, they do not hire two operators and 3 salesmen, they did not expand the economy increasing the profits of the company that manufactures the equipment (lost revenue tax) the manufacturer may not have to hire more employees, certainly a bad accounting rule created a lack of economy expansion. Why  make the tax and bookkeeping process hard, why have three sets of books; accounting, cash flow and tax flow books. Why not instead let cash flow and tax flow be the same. If I spend $1million on equipment then allow me to deduct the $1million.

Above is just one example of many BAD accounting rules that can affect the economy.

I wish every politician had an educational background in economics and taxation, every few if any do and so it is easy to promise many things they will not be able to deliver or worse deliver things that are harmful to the economy for their lack of knowledge. You can not throw a rock in a pond without creating the ripple effect, likewise when you create new laws, they too create a ripple effect.

Respectfully,
Al Whalen, EA, ATA, CFP®
www.whalengroup.com
al@whalengroup.com
702-878-3900

Tax Saving Tips August 2020

Bonus Depreciation Some Are Learning From Our Example

In recent months, several countries have introduced accelerated depreciation as a measure to incentivize private investment, including Australia, Austria, Germany and New Zealand.  Countries around the world are experiencing sharp economic down turns as a result of the COVID-19 health crisis. They need to gain more support from the private sector to help stimulate their economies. There are various way of how this policy has been implemented in the respective countries largely based upon current depreciation rules.

However, none as generous as what we have in the United States. We allow 100% bonus depreciation on both new and used business equipment placed in service during the year and this effects equipment purchased from September 27, 2017 through the year 2023 and reduction of 20% per year through 2026.  Remember, this policy was put into effect under the Tax Cuts and Jobs Act, this was the first tax act from President Trump’s administration, to stimulate our economy and put more men and women back to work. This was also used under the Obama administration for one year at 100% Bonus and then dropped to 50%. This formula is now being incorporated globally to help stimulate economies.

Spending the PPP Money on You and Your Employees

If you report your business income and expenses on Schedule C of your Form 1040, your Payroll Protection Program (PPP) loan forgiveness is straightforward, as you see in the four answers below.

1. Paying Myself

Question. I know that I can achieve full forgiveness based solely on my 2019 Schedule C income in 10.8 weeks under the 24-week program. Do I have to pay myself every week for 10.8 weeks?

Answer. No. Let’s say your PPP loan is for $20,000. You could, for example, take $20,000 out of your business account in one lump sum and put that in your personal savings anytime during the 10.8-week period and then apply for forgiveness in week 11.

Because both your loan and forgiveness are based on your 2019 Schedule C net profit (yes, last year), you simply need to use the loan money for personal purposes. This is how you pay yourself and obtain loan forgiveness the easy way.

Sure, you need to use only 60 percent of the proceeds for yourself and could use 40 percent for interest, rent, and utilities. But think about it:

  • Pay yourself only: simple paperwork.
  • Pay interest, rent, and utilities: more rules and paperwork.

Keep it simple. Don’t make yourself suffer.

2. Waiting to Spend

Question. Can I wait a number of weeks before I spend my loan proceeds?

Let’s say I receive the PPP proceeds on August 1, 2020. Can I use the 24-week period and start on August 17, for 11 weeks? Would that be okay? And would it be eligible for forgiveness?

Answer. Yes, no problem. But let’s be clear:

  • For PPP loans made on June 5 or later, the 24-week covered period is the rule (there’s no “can” here—no eight-week possibility).
  • There’s no requirement that a Schedule C taxpayer spread out the payments.
  • There’s no payroll or other impediment here.

3. Spending in Chunks

I am a Schedule C taxpayer with no employees. My PPP loan amount was deposited into my business checking account on May 19, 2020. I am not electing the eight-week covered period. Instead, I am choosing the 24-week covered period, which ends on November 2, 2020.

I have two questions.

Question 1. Can I write one check for every four weeks of payroll and deposit it in my personal checking account?

Answer 1. Yes—but this is not a payroll check. As a Schedule C taxpayer with no employees, you have no payroll. Your PPP loan was based on your 2019 net profit. And your forgiveness will be based on the same amount. You don’t need to spread out your payments.

Question 2. Does this check have to be cashed within that four-week period, or if it is written within that period, is that sufficient to apply for forgiveness?

Answer 2. In general, your check is a payment on the date it is written. Because you are dealing with yourself, you should ensure that the check is cashed soon after it is written.

Also, we don’t see any wisdom (in fact, just the opposite) in writing the check within the 24 weeks and then cashing it outside the 24 weeks.

4. Got the PPP Money but Had a Loss in 2019

Question. I am a Schedule C filer, ran at a loss in 2019, but withdrew $120,000 from the business as the business increased its debt position.

I used my draw amount to obtain a $120,000 PPP loan before the guidance was issued on how sole proprietors should calculate their pay. If the business now has two employees, can both of those employees be used for the forgiveness application?

Answer. Yes, you can use the two employees on the forgiveness application, and you can use 24 weeks of pay. In addition to payroll, 40 percent of the forgiveness can come from interest, rent, and utilities.

Example. Say the two-employee payroll for the 24 weeks totals $60,000 and the interest, rent, and utilities total $30,000. You would achieve $90,000 of forgiveness.

Q&A: PPP Forgiveness Answers for S Corporation Owner-Employees

Tax law definitions do not apply to much of the PPP, making it new ground for owners of S corporations. Here are answers to four questions of concern to many S corporation owners.

1. Spouse Owns S Corporation

Question. My wife owns 100 percent of the S corporation. She has a full-time job and does no work for the S corporation. I am the sole worker in the S corporation. Am I treated as:

  • a “non-owner employee” of the S corporation; or
  • an “owner-employee” subject to the limits?

Answer. The PPP guidance does not address the situation you describe. From what we know, you are a non-owner employee, which means you are not stuck with the owner-employee limits.

In tax law, you would have to consider “attribution rules” that would make you own what your wife owns because of your marital relationship. (Yes, in tax law you both would own 100 percent.) But the PPP guidance to date contains no such rules.

According to the latest from the Small Business Administration (SBA), you may rely on the laws, rules, and guidance available at the time of your PPP loan application. As we write, the latest guidance is from over a month ago, on June 25, 2020.

2. S Corporation Owner-Employee with No W-2

Question. I submitted my PPP loan application before the guidance disallowing independent contractor payments was published. And at the time of submission, I had not yet started paying myself a salary.

Now I have the PPP money from the bank but cannot get it forgiven through contractor payments. If I pay myself on a W-2, I lack the look-back period of 2019 payroll. Am I out of luck? Should I go on payroll and hope for the best?

Answer. Under the rules, you are out of luck. Your loan forgiveness is based on the lower of your 2019 W-2 (zero) or your 2020 W-2.

3. S Corporation Loan Based on K-1

Question. I operate my business as an S corporation with two W-2 employees other than me (I don’t receive a W-2). I applied for the PPP loan and obtained it based on my K-1.

A few weeks later the lender told me that the money I received was not available to be forgiven. This doesn’t seem fair. My profit is my income. Is there any workaround for this?

Answer. No—no workaround. But in your case, likely no PPP loan forgiveness problem either.

But first, let’s think about taxes. You operate as an S corporation, and you take no salary. (That’s incorrect and likely a tax problem if the IRS audits your tax return.)

Now, let’s get to the PPP. Your lender granted you the PPP loan based on the K-1 and ignored your employees. That shows how confusing the PPP has been. But let’s ignore the right and wrong of that and get to the heart of the issue. Can you obtain forgiveness?

Yes, your S corporation’s forgiveness begins with what you pay your W-2 employees during the 24-week covered period, including what you pay in health insurance and retirement on their behalf. In addition, you may include some or all of your payments for business interest, rent, and utilities during the 24 weeks beginning with receipt of the loan.

Example. Let’s say you received a $100,000 loan. If your payroll during the 24 weeks is $63,000 and the rent and utilities total $37,000, you would qualify for 100 percent forgiveness. If you achieve this in 20 weeks, you could apply for forgiveness then.

Observation. The fact that the lender based your loan on your profits is simply a mistake by the lender. It does not affect forgiveness, which is based on your using the money for the intended PPP purposes such as payroll.

4. S Corporation with Home Office

Question. You recommend that the S corporation owner use an expense report to submit home-office expenses to the business for reimbursement and then classify the reimbursement in the tax return as an office expense.

How would we classify this as mortgage interest and utilities under the PPP loan forgiveness guidelines? We have the same question for partnerships where an item is claimed as an unreimbursed partner expense.

Answer. The reimbursed expense won’t work for the PPP, but here’s the solution: choose the 24-week program, and you will achieve full forgiveness with only the payroll in as little as 10.8 weeks.

Insights into the PPP Loan and Its Forgiveness

We receive many questions about the PPP. Here are two of them with our answers.

1. Good Faith at the Time

Question. What are your thoughts on the repercussions for business owners who acted in good faith based on the information available at the time and are now left to do things that may be more questionable to earn PPP loan forgiveness?

Answer. First, with good faith, there’s no fraud issue as there is no fraud intent. Second, lenders and individuals had to scramble for a good two months or more before guidance was clarified, so many of the PPP loan application forms were murky (and some still are).

Obtaining the loan based on the guidance that existed at the time of your loan application and approval is a non-issue. Further, lenders used their own formulas during the early process (and in some cases, still use them) to determine the loan amounts.

As to taking “questionable” actions to earn forgiveness, if you follow the forgiveness applications, you are doing nothing questionable. And that’s what you should do: follow the instructions in the loan forgiveness applications.

2. EIDL, EIDL Advance, and PPP

Question. I’ve heard of the Economic Injury Disaster Loan (EIDL), EIDL advance, and the PPP. What are the differences?

Answer. We’ll deal with the big picture here. It will prove helpful.

PPP. The PPP is the cash infusion program of choice. The cash infusion part comes from a bank or other SBA lender and is based on your prior payroll (2019 in most cases). It comes into your business as a forgivable loan if you spend the money on defined payroll, interest, rent, and utilities during a period of up to 24 weeks.

Example. You receive a $50,000 PPP loan and spend it within the 24 weeks on defined payroll with no reduction in your employee head count. You qualify for 100 percent forgiveness.

EIDL. Unlike the PPP loan, which comes from a bank or other approved SBA lender, the EIDL is a loan directly from the SBA; it carries a 3.75 percent interest rate, may require collateral, and must be repaid.

EIDL advance. The EIDL advance, when available, comes into play with the EIDL application. It’s an advance on the EIDL of up to $10,000. If you reject or don’t receive an EIDL and don’t have a PPP loan, the EIDL becomes a non-taxable grant and does not have to be repaid.

If you have a forgivable PPP loan, you reduce the amount of forgiveness by the amount of your EIDL advance.

Example. You have a forgivable PPP loan of $30,000 and an EIDL advance of $7,000. The lender will forgive $23,000 of your $30,000. Let’s say you pay off the remaining $7,000. In this case, you have received a net of $30,000 ($7,000 + $30,000 – $7,000).

All About Limited Liability Companies

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

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

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

Here are the most important things to know about LLCs.

LLCs Offer Legal Protection

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

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

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

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

Single-Member LLC Tax Basics

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

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

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

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

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

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

Three key points

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

Multimember LLC Tax Basics

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

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

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

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

Electing to Treat the LLC as a Corporation for Tax Purposes

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

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

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

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

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

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

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

How about 5% interest

Millions of filers are receiving interest payments from IRS this year.  For returns filed by July 15th, the interest runs from April 15th through the refund date. Most filers who received or otherwise requested direct deposit of their refunds will see any interest that IRS owes them directly deposited into their bank accounts.  All others will get a paper check in the mail with a notation stating “INT-Amount.” Remember this interest will be taxable next year, look for a 1099-INT from the IRS.

Working From Home Creates New Deductions For Many

If you are working from home this year and you have an office for your business then you may want to consider an Office in Home Deduction in addition to your regular office expense.  COVID-19 has caused many of us to work from home in addition to working from our main office.  If you are the business owner or partner you can deduct the home office deduction so long as it is a necessary business expense.  For the sole proprietorship you are probably using the home office deduction already, if not then consider it if you have been working from home as a result of COVID-19. If your are a partnership or S-Corporation, make sure you have an Accountable Plan that allows for reimbursement for home office deductions. Remember; take the total property square footage by the square footage of the business use portion to fund the business use percentage example total square footage 2400, business use portion 400, therefore business use 16.67% (400/2400 = .167) Add all your expenses of the home; mortgage interest, property tax, homeowner insurance, home warranty insurance, rent if no mortgage, repairs and maintenance, utilities, other expenses. Do not forget items such as cable, internet, telephone, pest control, pool service, landscaping or gardening service, etc. Lastly you even get to take depreciation on your home if you do not elect the simplified method. All of the above expenses times the business use portion in our example 16.7%

Respectfully,
AL Whalen, EA, ATA, CFP®
www.whalengroup.com
al@whalengroup.com
702-878-3900

Tax-Saving Tips May 2020

Self-Employed with No Employees? Get Your COVID-19 Cash Now

Get ready for this: “I’m from the government, and I’m here to help.”

Here’s the deal: “I’m going to give you $20,833 today. I want you to give me $5,448 no later than two years from now. You can keep the $15,385 difference, tax-free—no strings.”

It’s true. The lucky recipient could be you. To obtain the full $15,385 tax-free cash result in this deal (one of many COVID-19-related assistance programs), you must

  • be self-employed,
  • have no employees, and
  • have self-employment net profits of $100,000 or more.

If you are self-employed, you have no employees, and your net profits are

  • $75,000, you pocket $11,538, tax-free.
  • $50,000, you pocket $7,692, tax-free.
  • $25,000, you pocket $3,846, tax-free.

The results above come from the COVID-19 Payroll Protection Program (PPP). When you are a self-employed taxpayer with no employees, the PPP treats you as the one and only employee, and treats your net profits as your payroll.

Big Picture

Under the PPP, you go to your bank or another Small Business Association (SBA) bank or lender and obtain the PPP loan based on your 2019 net profits. It’s a no-doc loan—super easy. No credit report, no nothing.

Do This Now

Two steps:

  1. Read this letter.
  2. Get your bank (or another bank) to accept your application.

Don’t Procrastinate

The SBA runs out of PPP money in a hurry. The second round of funding started a few days ago.

If you snooze, you lose. And then you’ll have to wait until round 3 of funding, should it take place. (We think it will.)

If you are self-employed, with no employees, you absolutely need to qualify for this loan and its forgiveness. Think free money. Think cash help during this crisis.

Here are three questions and answers that will help you understand this program during these COVID-19 times. Read on.

Q&A 1

Question 1. I have income from self-employment, have no W-2 employees, and file a Form 1040, Schedule C. Am I eligible for a PPP loan?

Answer 1. You are eligible for a PPP loan if

  • you were in operation on February 15, 2020;
  • you are an individual with self-employment income (such as an independent contractor or a sole proprietor);
  • your principal place of residence is in the United States; and
  • you have filed or will file a Form 1040 Schedule C for 2019.

Q&A 2

Question 2. Since I have no employees, how do I calculate the maximum amount I can borrow, and what documentation is required?

Answer 2. Follow the three steps listed below:

  1. Find your 2019 IRS Form 1040 Schedule C line 31 net profit. (If you have not yet filed your 2019 tax return, don’t fret. Fill out the Schedule C now. You need it for the loan.) If the net profit amount is over $100,000, reduce it to $100,000.
  2. Calculate the average monthly net profit amount (divide the net profit by 12).
  3. Multiply the average monthly net profit amount by 2.5.

Q&A 3

Question 3. What amount of the loan qualifies for forgiveness (remember, I don’t have any employees)?

Answer 3. You are going to like this. With no employees, your loan forgiveness is

  • eight weeks’ worth (8/52) of your 2019 net profit (yes, last year, from that Schedule C you used for the loan amount—you don’t have to consider your 2020 profits);
  • mortgage interest paid during the covered period (eight weeks from loan receipt) on real or personal business property (the interest you will deduct on Schedule C);
  • rent payments during the covered period on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments); and
  • utility payments under service agreements dated before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business utility payments).

The SBA will reduce your loan forgiveness by any COVID-19 qualified sick or family leave tax credit you claimed. Your loan is for two years, but you don’t have to wait much longer than the eight weeks to apply for forgiveness. There are no prepayment penalties.

Example

Loan amount. Say your Schedule C shows $120,000 of net profit. Your limit is $100,000. Divide that by 12, and your monthly amount is $8,333. Multiply that by 2.5, and your loan amount is $20,833.

Loan forgiveness. Your loan forgiveness is $15,385 (8/52 of $100,000) plus qualifying interest, rent, and utilities, not to exceed total loan forgiveness of more than $20,513.

In the SBA loan application, the amounts from this example show as follows:

  • Average monthly payroll: $8,333
  • x 2.5 = $20,833
  • Number of employees: self

Paperwork

The paperwork is easy:

  • Your 2019 1040 Schedule C (if you have not filed yet, complete Schedule C now)
  • Proof that you were self-employed during 2019, such as a 2019 Form 1099-MISC, invoice, bank statement, or other book of record
  • Proof that you were operating as a Schedule C business on or around February 15, 2020 (a 2020 invoice, bank statement, or book of record)
  • Completed application with an SBA lender

Other Facts to Know

How can I request loan forgiveness?

You submit your forgiveness request to the lender that is servicing the loan. The lender must make a decision on the forgiveness within 60 days. 

What is my interest rate?

1.00 percent fixed rate.

When do I need to start paying interest on my loan?

All payments are deferred for six months; however, interest will continue to accrue over this period.

When is my loan due?

In two years.

Can I pay my loan earlier than two years?

Yes. There are no prepayment penalties or fees. 

Do I need to pledge any collateral for these loans?

No. No collateral is required. 

Do I need to personally guarantee this loan?

No. There is no personal guarantee requirement. 

Takeaways

It’s true: the government is here to help your self-employed business during these difficult times, even when the only worker is you. The funds you receive and the minimum amount forgiven are automatic—based solely on your 2019 Schedule C net profit.

You need to move quickly. The government’s newest (round 2) PPP funding will be used up in a matter of weeks.

Get in the game now. Even if you miss out on this round 2 of funding, having your application on file for a possible round 3 of funding would give you a head start.

COVID-19: Tax Benefits for S Corporation Owners

To help your small business, Congress created a lot of new tax-saving provisions due to the COVID-19 pandemic. Many of my clients own and operate S corporations and expect the tax law to treat them differently, as it does with their health insurance deduction.

Perhaps you, too, would like us to help clarify which of the COVID-19 tax benefits the S corporation owner can use to put cash in his or her pocket. Here’s a list as of today.

Payroll Tax Deferral

You can defer payment of your S corporation’s employer share of Social Security tax on federal tax deposits you would otherwise have to make during the period beginning March 27, 2020, and ending December 31, 2020.

Your S corporation’s deferred Social Security taxes are due in two installments. You must pay 50 percent by December 31, 2021, and the other 50 percent by December 31, 2022. If you are an S corporation owner, the S corporation can defer the employer portion of Social Security tax on your salary just as it can on any other employee.

PPP Exception

If your S corporation receives a PPP loan and it obtains loan forgiveness, it does not qualify for the payroll tax deferral provision.

PPP exception loophole. The PPP loan forgiveness prohibition doesn’t apply until your S corporation receives a decision from your lender on PPP loan forgiveness. Before that date, you can defer payroll taxes even if you apply for and receive a PPP loan.

Example 1. You operate as an S corporation and have three employees, including yourself. Your S corporation’s April payroll is $10,000, including your W-2 salary or wages.

The employer Social Security tax on this payroll is $620. Your S corporation doesn’t have to pay it with its federal tax deposit. Instead, it will pay $310 by December 31, 2021, and the other $310 by December 31, 2022.

Employee Retention Credit

Your S corporation gets a refundable payroll tax credit against the employer share of employment taxes equal to 50 percent of its wages paid to employees after March 12, 2020, and before January 1, 2021. But the law also states that “rules similar to the rules of sections 51(i)(1) and 280C(a) . . . shall apply.”

Code Section 280C(a) states you can’t deduct wage expenses equal to the employee retention credit you receive—no double dipping.

Code Section 51(i)(1) affects the S corporation shareholder by denying the employee retention credit for wages paid to the following family members of a 50-percent-or-more shareholder:

  • A child or a descendant of a child
  • A brother, sister, stepbrother, or stepsister
  • The father or mother, or an ancestor of either
  • A stepfather or stepmother
  • A son or daughter of a brother or sister of the taxpayer
  • A brother or sister of the father or mother of the taxpayer
  • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

The provision does not prevent the S corporation owner from taking the employee retention credit on his or her wages, provided that the S corporation otherwise meets one of the following requirements:

  • A government order fully or partially suspended your operations during a calendar quarter due to COVID-19.
  • Your calendar-quarter gross receipts are less than 50 percent of gross receipts from the same quarter in the prior year.

PPP exception. If you receive a PPP loan, then you don’t qualify for the employee retention credit.

Example 2. ABC Corporation is an S corporation with four equal owners who each own 25 percent. It has eight employees: the four owners and four children of the owners. A government order partially suspended the business operations. Because no shareholder has 50 percent or more ownership, the wages of all eight employees qualify for the employee retention credit.

Example 3. DEF Corporation is an S corporation that is 100 percent owned by a married couple. It has four employees: the two owners and two children of the owners. A government order partially suspended the business operations. Only the wages of the two owners qualify for the employee retention credit.

Tax-Free Disaster Payments

Congress allows your S corporation to make tax-deductible disaster-related payments to its employees, and those payments are tax-free to its employees. But as you likely know, S corporation owners usually can’t take advantage of tax-free fringe benefits, and usually have to include their value as taxable income on their W-2.

We have good news about disaster-related payments: none of the guidance issued about these payments denies their favorable tax treatment to the S corporation shareholder. In addition, the IRS doesn’t mention such payments in Publication 15-B, Employer’s Tax Guide to Fringe Benefits.

But we have some bad news, too—there is no guidance explicitly allowing the S corporation owner to take advantage of the tax-free disaster-related payments.

If you choose to have your S corporation provide tax-free disaster-related payments to you, we recommend you implement a formal, written plan and keep excellent documentation—even though such steps are not required by the law.

Example 4. Your S corporation sets up a plan to give every employee a $500 payment to cover telework supplies and ongoing expenses during the COVID-19 pandemic. Your business is subject to a shutdown order, and all 12 of your employees, including you, must work remotely from home.

The $6,000 in payments your S corporation provides is tax-deductible to the corporation and tax-free to the employees, including the S corporation shareholder.

Takeaways

Many small-business owners, like you, operate out of an S corporation. And as you know, the tax law sometimes isn’t kind to S corporation owners, because the law limits or eliminates tax breaks other business owners can take.

Luckily for you, S corporation owners get to benefit from most of the big COVID-19 tax benefits, including:

  • Payroll tax deferral
  • Employee retention credit
  • Tax-free disaster-related payments

COVID-19 Crisis Creates Silver Lining for Roth IRA Conversions

For years, financial and tax advisors have lectured about the wonderfulness of Roth IRAs and why you should convert traditional IRAs into Roth accounts.

But, of course, you didn’t get around to it. In hindsight, maybe that was a good thing. For many, the financial fallout from the COVID-19 crisis creates a once-in-a-lifetime opportunity to do Roth conversions at an affordable tax cost and also gain insurance against future tax rate increases.

Roth IRAs Have Two Big Tax Advantages

Advantage #1: Tax-Free Withdrawals

Unlike withdrawals from a traditional IRA, qualified Roth IRA withdrawals are federal-income-tax-free and usually state-income-tax-free, too. What is a qualified withdrawal? In general, the tax-free qualified withdrawal is one taken after you meet both of the following requirements:

  1. You had at least one Roth IRA open for over five years.
  2. You reached age 59½, became disabled, or died.

To meet the five-year requirement, start the clock ticking on the first day of the tax year for which you make your initial contribution to any Roth account. That initial contribution can be a regular annual contribution, or it can be a contribution from converting a traditional IRA into a Roth account.

Example: Five-Year Rule.

You opened your first Roth IRA by making a regular annual contribution on April 15, 2017, for your 2016 tax year. The five-year clock started ticking on January 1, 2016 (the first day of your 2016 tax year), even though you did not actually make your initial Roth contribution until April 15, 2017.

You meet the five-year requirement on January 1, 2021. From that date forward, as long as you are age 59½ or older on the withdrawal date, you can take federal-income-tax-free Roth IRA withdrawals—including withdrawals from a new Roth IRA established with a 2020 conversion of a traditional IRA. 

Advantage #2: Exemption from RMD Rules

Unlike with the traditional IRA, you as the original owner of the Roth account don’t have to take annual required minimum distributions (RMDs) from the Roth account after reaching age 72. That’s good, because RMDs taken from a traditional IRA are taxable.

Under those rules, if your surviving spouse is the sole account beneficiary of your Roth IRA, he or she can treat the inherited account as his or her own Roth IRA. That means your surviving spouse can leave the account untouched for as long as he or she lives.

If a non-spouse beneficiary inherits your Roth IRA, he or she can leave it untouched for at least 10 years. As long as an inherited Roth account is kept open, it can keep earning tax-free income and gains.

Silver Lining for Roth Conversions

A Roth conversion is treated as a taxable distribution from your traditional IRA because you’re deemed to receive a payout from the traditional account with the money then going into the new Roth account.

So, doing a conversion will trigger a bigger federal income tax bill for the conversion year, and maybe a bigger state income tax bill, too. That said, right now might be the best time ever to convert a traditional IRA into a Roth IRA. Here are three reasons why. 

1. Current tax rates are low thanks to the TCJA.

Today’s federal income tax rates might be the lowest you’ll see for the rest of your life. Thanks to the Tax Cuts and Jobs Act (TCJA), rates for 2018-2025 were reduced. The top rate was reduced from 39.6 percent in 2017 to 37 percent for 2018-2025.

But the rates that were in effect before the TCJA are scheduled to come back into play for 2026 and beyond. And rates could get jacked up much sooner than 2026, depending on politics and the need to recover some of the trillions of dollars the federal government is dishing out in response to the COVID-19 pandemic.

Believing that rates will only go back to the 2017 levels in the aftermath of the COVID-19 mess might be way too optimistic.

2. Your tax rate this year might be lower due to your COVID-19 fallout.

You won’t be alone if your 2020 income takes a hit from the COVID-19 crisis. If that happens, your marginal federal income tax rate for this year might be lower than what you expected just a short time ago—maybe way lower. A lower marginal rate translates into a lower tax bill if you convert your traditional IRA into a Roth account this year.

But watch out if you convert a traditional IRA with a large balance—say, several hundred thousand dollars or more. Such a conversion would trigger lots of extra taxable income, and you could wind up paying federal income tax at rates of 32, 35, and 37 percent on a big chunk of that extra income.

3. A lower IRA balance due to the stock market decline means a lower conversion tax bill.

Just a short time ago, the U.S. stock market averages were at all-time highs. Then the COVID-19 crisis happened, and the averages dropped big-time.

Depending on how the money in your traditional IRA was invested, your account might have taken a substantial hit. Nobody likes seeing their IRA balance go south, but a lower balance means a lower tax bill when (if) you convert your traditional IRA into a Roth account.

When the investments in your Roth account recover, you can eventually withdraw the increased account value in the form of federal-income-tax-free qualified Roth IRA withdrawals. If you leave your Roth IRA to your heirs, they can do the same thing.

In contrast, if you keep your account in traditional IRA status, any account value recovery and increase will be treated as high-taxed ordinary income when it is eventually withdrawn.

As mentioned earlier, the current maximum federal income tax rate is “only” 37 percent. What will it be five years from now? 39.6 percent? 45 percent? 50 percent? 55 percent? Nobody knows, but we would bet it won’t be lower than 37 percent.      

The Bottom Line

If you do a Roth conversion this year, you will be taxed at today’s “low” rates on the extra income triggered by the conversion.

On the (far bigger) upside, you avoid the potential for higher future tax rates (maybe much higher) on all the post-conversion recovery and future income and gains that will accumulate in your new Roth account.

That’s because qualified Roth withdrawals taken after age 59½ are totally federal-income-tax-free, as long as you’ve had at least one Roth account open for more than five years when withdrawals are taken. 

If you leave your Roth IRA to an heir, he or she can take tax-free qualified withdrawals from the inherited account—as long as at least one of your Roth IRAs has been open for more than five years when withdrawals are taken.

Grab Some Quick Cash with the CARES Act’s Five-Year NOL Carryback

For many years, thanks to the net operating loss (NOL) provisions, the tax code gave you quick cash in your pocket if you had an overall net loss in a tax year.

Unfortunately, starting in 2018, the TCJA took away your ability to get almost instant benefit from your NOL. Now, due to the COVID-19 pandemic, Congress temporarily restored your ability to get fast cash from your net operating losses—even losses incurred in prior years (2018 and 2019).

NOL Defined

You have an NOL when certain deductions exceed your gross income. An NOL generally occurs when you have a net business loss for the tax year.

Example. John has a Schedule C loss of $40,000 and $10,000 in wage income from a part-time job. John’s NOL is $30,000.

COVID-19 Temporary NOL Rules

The CARES Act suspends the TCJA limitations on your NOLs for tax years beginning in 2018, 2019, and 2020, which means you can

  • carry back your NOL five years and carry it forward indefinitely, and
  • apply 100 percent of the loss.

You can also elect to waive the carryback and only carry forward the NOL.

Claiming Your Refund

The best way to claim a refund from an NOL carryback is to use the “tentative refund” procedures by filing either

  • Form 1045, Application for Tentative Refund, or
  • Form 1139, Corporation Application for Tentative Refund.

If you qualify to use these forms to claim your refund, you get two benefits:

  1. The IRS makes only a limited examination of the claim for omissions and computational errors.
  2. You receive your cash refund within 90 days of filing your application.

Normally, to qualify to use this procedure, you’d need to file your application no later than 12 months after the end of the tax year in which your NOL arose. Therefore, for NOLs on a 2018 Form 1040, you’d normally be out of luck, as the deadline was December 31, 2019.

But the IRS has given you mercy: you have a six-month extension to file your Form 1045 or Form 1139 if you have an NOL that arose in a tax year starting in 2018 and that ended on or before June 30, 2019. For example, if your NOL was on your 2018 Form 1040, you now have until June 30, 2020, to file Form 1045.

CARES Act Fixes TCJA Glitch on QIP, Requires Action

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

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

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

What Is QIP?

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

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

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

  • the enlargement of the building,
  • any elevator or escalator, or
  • the internal structural framework of the building.

QIP Problem

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

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

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

QIP Solution

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

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

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

SPOUSES Who Own A Business Together May Elect To File Two Schedule Cs

When filing a joint tax return spouses may elect to file two schedule Cs instead of having to prepare a separate partnership return. To be eligible for this special qualified joint venture treatment, each spouse must materially participate in the jointly owned business, and report income and expenses on separate Schedule Cs based on their ownership stake.  This way married co-owners can get their own credit for Social Security and Medicare coverage.  Also, a qualified joint venture generally doesn’t need an employer identification number unless the business is otherwise required to file excise or employment tax returns.

The Social Security Wage Base Is Expected To Be $141,900 for 2021

The increase for next year is up $4,200 from this year’s cap, according to the social security Administration trustees.  This is $300 lower than the president’s budget forecast, released earlier this year.  The final number, based in the national average wage-index growth, comes in mid -October.

IRA PLANNING TIP

The stock market has declined from is all time highs, therefore, you may wish to consider converting a traditional IRA to Roth IRA.  You will still have to pay income tax on the converted funds for the year of the switch, but once the money is in the Roth IRA, future earnings and distributions that you take from the account are tax free.

Filing Deadlines Have Been Extended to July 15th

If you need additional time to file your 2019 tax return you may still file an extension of time to file until October 15th.  Let me help get this job done, If you are not a new client we can mail you are tax organizers that has all your information from last year so that you do not forget anything. If you are a new client for this year, we have a questionnaire and organizer for you as well, however, we will need a copy of your last years tax return to make sure all carryover information is correctly entered for this year.  Remember you can make an appointment to meet in person (we provide mask and rubber gloves if desired), drop off your information or mail your information and we can do a telephone interview. If you have tax questions, just call are office for the answer. 

Respectfully,

Al Whalen, EA, ATA, CFP®

702-878-3900

al@whalengroup.com

www.whalengroup.com