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Monthly Archives: December 2020

Top Year-End Tax Tips

As we’re all aware, 2020 has been an extraordinarily complex year — that complexity is reflected in taxpayers’ tax situations, whether they’re businesses or individuals. While there is plenty of time before this year’s tax returns need to be filed, the constantly changing economic situation, the presidential election, and the host of COVID-19 legislative provisions mean that some tax moves will only be effective if they’re made before the end of the year.

We’ve brought together some of our best year-end tax-planning coverage, ranging from reminders of classic strategies to deep dives into rules specific to COVID-19 tax relief. For each article, we’ve highlighted a strategy or two, but they all offer a host of potential tax savings — for those who act fast.

For businesses and individuals:

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In early October, Top 10 Firm Grant Thornton put together a list, a mix of strategies for both companies and individual taxpayers, including:

  • Making sure to use the above-the-line charitable deduction
  • Accelerating AMT refunds
  • Taking advantage of new bonus depreciation rules from the CARES Act

New for the end of the year:

A printout of Congress's tax reform bill, "The Tax Cuts and Jobs Act," alongside a stack of income tax regulations

In an interview, Wolters Kluwer’s Mark Luscombe dives into some of the most important new year-end planning issues, including:

  • Employee tax credits and deferrals related to payroll taxes that expire at the end of 2020
  • Tax provisions that offer retroactive relief
  • The implementing expiration of the expanded ability to make penalty-free withdrawals from retirement plans

Expiring Relief: 

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With a number of COVID-19 related tax relief provisions, Laura Davison of Bloomberg News talks about how year-end planning has been turbocharged. Here are the provisions set to expire:

  • The removal of the cap on individuals’ business loss deductions
  • The one-time deduction for charitable gifts for taxpayers taking the standard deduction

Planning around the election: 

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Tax planners knew that the November election could have a major impact on year-end planning. Particularly, if a Biden win brought in a whole new approach to tax legislation. Accounting Today columnist Mark Luscombe, of Wolters Kluwer, offered strategies for both possible outcomes in Georgia, including:

  • With a Republic win, focusing more on tax-loss harvesting and less on Roth IRA conversions
  • With a Democratic win, preparing for the possibility of higher capital gains and income tax rates

Three-quarters of the way there: 

Coronavirus mask billboard in Times Square

In a column just before the election, Wolters Kluwer’s Mark Luscombe summarized the year-end planning developments thus far in the year including:

  • The restoration of NOL carrybacks for up to five years
  • A number of COVID related corrections and extensions to the Tax Cuts and Job Acts of 2017
  • COVID-19 sick leave and family leave, and employee retention provisions

Acceleration and declaration:

Office expenses

After a “year like no other” this early December list from AG FinTax’s Anil Grandhi included tips on lowering taxes by:

  • Accelerating business purchases
  • Adding children or spouses to the payroll
  • Deferring or accelerating income

From one year to another:2020 to 2021 with cubes

Not everything can be wrapped up by the end of the year. Accounting Today’s senior tax editor, Roger Russell, covers the issues from 2020 that will have an impact on 2021:

  • The tax impacts of remote work
  • How to handle emergency retirement plan withdrawals under the CARES Act
  • The taxability of unemployment benefits

In under the wire:U.S. Capitol

While many of them don’t need to be taken up by December 31st, the last-minute COVID relief legislation signed by President Trump included a number of tax provisions including:

  • Passage of a number of tax extenders
  • An extension of the Work Opportunity Tax Credit
  • Improvements to the Employee Retention Credit

California Proposition 19

  1. Scope – What is the purpose/ subject of this memo

The purpose of this memo is to discuss California Proposition 19, which is also referred to as The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act. This measure was approved by California voters in November 2020. This memo will provide an explanation of the new Proposition and compare it to the existing law. Additionally, the memo contains a list of topics to consider as a result of the passage of this new law.

 

  1. Analysis – Existing Law (ARTICLE XIII A of the California Constitution)

The existing law is under Proposition 13 which was passed in 1978. Under this law, the following was true:

  1. Property tax is limited to 1% of a home’s taxable value, based on when the home was purchased, and thereafter, the appraised value of the property when purchased, newly constructed, or a change in ownership occurs, subject to an annual inflation adjustment not to exceed 2%.
  2. For taxpayers 55 years or older or any severely and permanently disabled person residing in the property eligible for the homeowner’s exemption, they can transfer the base year value of that property to a replacement dwelling of equal or lesser value located in the same county, or another county that has adopted an ordinance allowing base years value transfers from other counties, as provided. Eligible taxpayers were able to utilize this one time.
  3. The purchase or transfer of the principal residence, and the first $1,000,000 of other real property, of a transferor in the case of a transfer between parents and their children, or between grandparents and their grandchildren if all the parents of those grandchildren are deceased, is not a “purchase” or “change in ownership” for purposes of determining the “full cash value” of the property for taxation. Additionally, there is a restriction on how much that taxable value can go up each year, even if a home’s market value increases much more.

 

  • Analysis – New Tax Law (Assembly Constitutional Amendment No. 11)

Proposition 19 changes the existing law in the following ways:

  1. Homeowners who are 55 or older or who have lost a home in a natural disaster can now transfer their tax assessment from their previous home to a new more expensive home. This can be done up to three times, instead of the previous one-time allowance.
  2. The measure eliminates the exclusion for reassessment when a house transfers to a child or a grandchild. The child or grandchild must actually use the residence as their primary residence to avoid reassessment. Previously, there was no requirement for the inheritor to utilize the house as their primary residence.
  1. Topics to Consider
    1. Who does this help and how?

 

CA proposition 19 benefits homeowners who are 55 years old or older. When they move to a new and more expensive residence, they can blend the taxable value of their old house with the purchase price of a new, more expensive home, reducing the property tax payment they would otherwise face. This benefit would also extend to disabled taxpayers and taxpayers who have lost their homes in wildfires or other natural disasters.

 

“For example, a qualifying homeowner who owns a home with a taxable value of $200,000 that is worth $600,000 on the market would pay roughly $2,200 in property taxes now. If the homeowner moves to a $700,000 house, the homeowner will pay $3,300 a year in property taxes under Proposition 19. Without the initiative, the same homeowner would pay $7,700 annually at the new home.” (LA Times)

 

Based on the example provided by the LA Times, a qualifying homeowner who owns a home with a taxable value of $200,000 that is worth $600,000 on the market would pay roughly $2,200 in property taxes now. If they move to a $400,000 house, it would be expected that if the new home is less than the $600,000 market value of the old home, then the property taxes would be unchanged.

 

  1. Who does this hurt?

 

The group of people who would be hurt by proposition 19 are the children who will inherit the properties from their families and intend to rent it out or keep it as a second home. If the child or grandchild that inherited the property does not utilize the property as their primary residence, the property tax will be reassessed based on the market value and thus the children or grandchildren would lose the ability to retain the tax basis that was based on the original purchase price.

 

 

  1. Are there any exceptions?

 

As we discussed above, for the children who will inherit the properties from their families and intend to rent it out or keep it as a second home, the properties will be reassessed, and the tax base would go up based on the market value consequently. However, Prop 19 does not change any of the ownership rules for properties owned by legal entities, which generally provide that legal entity interests can be transferred from current owners to new owners without triggering a reassessment, subject only to the change in control rule and cumulative ownership rules. This legal entity rule is sometimes referred to as “The Dell Maneuver” because Michael Dell purchased the Fairmont Miramar Hotel in Santa Monica without triggering a reassessment. It should be noted that there are regular attempts to close off the Dell Maneuver legislatively, but none have succeeded to date. Accordingly, individual owners would therefore have an incentive to transfer their property to a legal entity to avoid future reassessment.

 

  1. Important Date

The deadline to transfer real properties without triggering the new reassessment rules under Prop 19 is February 15, 2021.

 

Generally, your estate attorney or attorney will be able to advise you in these matters.  We recommend you speak with your legal counsel if you desire to implement any changes related to Prop 19.

 

Helpful Links:

https://www.boe.ca.gov/prop19/

 

https://www.boe.ca.gov/proptaxes/pdf/lta20061.pdf

Is a new COVID-19 bill coming? The house and the senate have been apparently working on another bill.

Here are the highlights from our perspective.

On December 15, 2020, two bipartisan COVID-19 relief bills, the Bipartisan COVID-19 Emergency Relief Act of 2020 and the Bipartisan State and Local Support and Small Business Protection Act of 2020, were introduced that contain payroll-related provisions.

 

Background. Earlier in 2020, the federal government enacted legislation with COVID-19 relief provisions aimed at helping employers and workers. This included the Families First Coronavirus Relief Act (FFCRA) and the Coronavirus Aid, Relief and Economic Security (CARES) Act. Certain provisions in each bill provided aid for employers and workers such as the Paycheck Protection Program (PPP) and Pandemic Unemployment Assistance (PUA).

 

Negotiations for further COVID-19 relief legislation between the White House, Senate and Congress have stalled several times.

 

A new hope? However, the two bipartisan bills introduced in the Senate on December 15 may make it to the finish line before the end of the year based on the statements made by Senators who introduced the bills. According to Senator Joe Manchin (D-WV), who introduced “The Bipartisan COVID-19 Emergency Relief Act of 2020,” with other Senators: “We’re not going home for Christmas until this gets done.”

 

Senator Mitt Romney (R-UT) who, with other Senators, introduced “The Bipartisan State and Local Support and Small Business Protection Act of 2020,” noted: “This compromise represents the best path forward for Congress and the Administration to provide much-needed relief for the American people before the end of the year.” Senator Rob Portman (R-OH) added: “The Senate should not adjourn until we have passed a new COVID-19 package to provide the relief Americans need.” The Bipartisan COVID-19 Emergency Relief Act of 2020. A summary of The Bipartisan COVID-19 Emergency Relief Act of 2020 says it contains the following payroll-related provisions:

 

PPP and small business support.  This bill would provide $300 million to the Small Business Administration (SBA) to allow the hardest hit small businesses to receive a second forgivable PPP loan. Eligibility for these loans would be limited to businesses with 300 or fewer employees that have sustained a 30% revenue loss in any quarter in 2020.

 

Forgivable expenses would be expanded to include supplier costs and investments in facility modifications and personal protective equipment needed to operate safely. Also, business expenses paid for with the proceeds of PPP loans are specifically tax deductible, “consistent with Congressional intent in the CARES Act,” according to the summary.

 

In addition, the loan forgiveness process would be simplified for borrowers with PPP loans of $150,000 or less.

 

Unemployment assistance. The bill would also provide for a 16 week extension of all pandemic unemployment insurance programs, including PUA and pandemic emergency unemployment compensation (PEUC). The 16 weeks would run from the end of December 2020. It would also ensure beneficiaries of Railroad Retirement Board received the same benefits as other workers.

 

In addition, federal supplemental unemployment insurance benefits would be expanded by $300 per week for 16 weeks, from the end of December into April 2021.

 

Payroll support program extension. The bill would extend the Payroll Support Program (PSP) through March 31, 2021. As in the CARES Act, funds will go directly to frontline aviation workers’ wages, salaries, and benefits. The Bipartisan State and Local Support and Small Business Protection Act of 2020. A summary of The Bipartisan State and Local Support and Small Business Protection Act of 2020 says it contains the following payroll-related provisions:

State, local and tribal government relief. This bill would provide for $160 billion for state, local and tribal assistance. And, would extend the deadline for spending CARES Act Coronavirus Relief Fund (CRF) aid on COVID-related expenses through December 31, 2021.

 

Liability protection. This bill would also provide “liability protection” for employers. Employers would not be subject to liability under federal employment law in COVID-19 exposure cases or for changes in working conditions related to COVID-19 if the employer was trying to conform to public health standards and guidance.

 

The bill would also ensure that an employer’s personal protective equipment (PPE) requirements, COVID-19 policies, procedures, or training, workplace testing, or financial assistance to an independent contractor does not create evidence of an employer-employee relationship.

Tax Cuts and Jobs Act – State and Local Taxes Update

7 Companies Making Use of a Stock Option Tax Loophole

Summary

The Tax Cuts and Jobs Acts (TCJA) limited the individual tax deduction of state and local taxes (SALT) to $10,000 for married filing joint and $5,000 for married fling separate, or single. We feel this limitation was done to offset tax reductions done to spur the US economy. This limitation hurt and increased income taxes for taxpayers that are residents in states with high taxes. Taxpayers and states have been looking for a method of getting around this tax deduction limitation. Various ideas have failed, but the IRS recently issued IRS Notice 2020-75 which provides some hope. In the notice the IRS is explaining that if a state makes a flow through entity (an S Corporation or Partnership) liable for the income tax, rather than the shareholders or partners, and the entity pays it, then that state tax is not limited. Many states have been looking for a way to help their residence, and the IRS has explained a way, but why hasn’t more states implemented this change if they really want to help their residence? Currently only seven (7) states have made this change.

 

Scope

The purpose of this memo is to discuss Notice 2020-75 issued by Internal Revenue Service (IRS) on November 9, 2020, which allows state and local income taxes imposed on and paid by partnerships or S Corporations in computing its non-separately stated taxable income or loss for the taxable year of payment and are not subject to SALT limitation.

 

Background

Tax Cuts and Job Acts (TCJA) limits the individual deduction of SALT to $10,000 (or $5,000 for married filing separately) for tax years 2018-2025. Due to this limitation, the notice cited that certain jurisdictions have enacted or contemplating to enact tax laws that impose either a mandatory or elective entity-level income tax on partnerships and S Corporations that do business in the jurisdiction or have income derived from or connected with sources within the jurisdiction. The notice pointed out that “certain jurisdictions provide a corresponding offsetting, owner-level tax benefit, such as full or partial credit, deduction, or exclusion” for taxes deducted at the Pass-Through Entity (PTE) level and that Treasury and IRS are “aware of the uncertainty as to whether entity level-payments made under these laws to jurisdictions described in §164(b)(2) other than U.S. territories must be taken into account in applying the SALT deduction limitation at the owner level”.

 

The notice also announced the IRS’s intention to issue a proposed regulation to provide clarity to individual owners of partnerships and S Corporations in calculating their SALT deduction limitations and clarify the Specified Income Tax Payments which are deductible by partnerships and S Corporations in computing their non-separately stated income or loss.

ᐈ Taxes stock photos, Royalty Free taxation photos | download on  Depositphotos®

Discussion/Analysis

  1. Reporting of Deduction in the Partnership or S Corporation Tax Return
    1. Based on the notice, SALT does not need to be separately stated. Thus, it would be expected that the deduction will be reported under “Taxes and Licenses” on Form 1065 or 1120S and will flow-through to partners/shareholders as part of Box 1 “ordinary income or loss” on Schedule K-1.

 

  1. Deductibility of the SALT
    1. As mentioned in the notice, there are “certain jurisdictions” that shifted the individual tax to entity-level tax to “workaround” from the SALT limitation under TCJA and below are the states that imposes entity-level income tax which is referred to as a “Specified Income Tax Payment”:
    2. Connecticut – effective January 1, 2018
    3. Louisiana – election to be made
    4. Maryland – imposed to the distributive shares or pro rata shares of resident members of the PTE
    5. New Jersey – effective January 1, 2020, election to be made
    6. Oklahoma – effective January 1, 2019, needs annual election
    7. Rhode Island – effective January 1, 2019, election to be made
    8. Wisconsin – effective January 1, 2019 for person or persons holding more than 50% of capital and profits of a partnership
  2. According to the notice, if a partnership or an S Corporation makes a Specified Income Tax Payment during the taxable year, the partnership or S Corporation is allowed a deduction for the Specified Income Tax Payment in computing its taxable income for the taxable year in which the payment is made.
  3. The impending proposed regulations defined “Specified Income Tax Payments” as any amount paid by a partnership or an S Corporation to a State, a political subdivision of a State or the District of Columbia (Domestic Jurisdiction) to satisfy its liability for income taxes imposed by the Domestic Jurisdiction on the partnership or S Corporation, meaning, it will solely include the state and local taxes paid under Sec. 164(b)(2) but excluding taxes paid or accrued to foreign countries and U.S. territories under Sec. 703(a)(2)(B) and Sec. 1363(b)(2).

 

  1. Effectivity Date of the Deduction

Based on the notice, the forthcoming Proposed Regulations will apply to payments on or after November 9, 2020, but taxpayers are also permitted to apply the rules to payments made in a partnership or S Corporation tax year ending after December 31, 2017 and before November 9, 2020.

Notes/Comments

  1. This is a taxpayer friendly decision made by IRS. It is expected that other states, particularly those that impose high personal income tax rates on residents that are disproportionately affected by the $10,000 SALT deduction cap may enact similar laws in response to IRS guidance.
  2. Currently, California and many other high tax states have not made this beneficial change. If you live in a state with high income taxes, I suggest you contact them.
  3. Individual states and every individual have unique tax calculations and applications of tax laws, so please contact us if you have questions.

How Technology Can Steer You Through the Fast Lane of the Post-Covid World

How Technology Can Steer You Through the Fast Lane of the Post-Covid World

Now, given the rapid changes in an uncertain economy affected by the virus, knowing how to utilize and navigate technology in the post-COVID world will be even more crucial for entrepreneurs, college graduates, other job seekers, and upwardly mobile professionals, says Tim Mercer, ForbesBooks author of Bootstrapped Millionaire: Defying the Odds of Business.

“Corporate America is undergoing a major transformation,” says Mercer, who also is founder of IBOX Global (IBOXG), which provides technology services to government agencies and Fortune 500 corporations.

“Technology is at the center of this seachange. The virus will have a tremendous long-term impact on the workplace, and the influence of technology will loom larger as a result of the lessons we’ve learned during this unprecedented time.

“Company structures are appearing more tailored to the entrepreneurial mind. The evolving trend is working from home, smaller workplaces, and niche-focused businesses. The work is moving faster, and whether a business owner or freelancer, you must be agile and nimble to compete. All these changes can be good, but only if you are ready.”

The Key To Success In The Post-COVID World

Mercer says the key to success in the post-COVID world is understanding these business-related benefits of technology:

The internet is the great equalizer for knowledge and opportunity

“The internet is the driving force behind the access to today’s opportunities,” Mercer says. “With the global economy, and technology connecting so many of us to it simultaneously, success has more to do with your ability to identify the right opportunities and your desire to go after them.” While the internet enables someone to gain knowledge quickly, Mercer says it’s also important to be vigilant in discerning the quality of online sources.

Leveraging technology correctly helps businesses run efficiently

You don’t need to earn a degree in information technology or become a computer whiz to leverage the benefits of technology, Mercer says. “What’s most important is that you know how to use technology to achieve your business goals,” he says. “For example, through the power of tools like QuickBooks, I was able to manage the financial aspect of several of my businesses without having to hire a full-time finance team. Leverage the strength of technology to carry more of your workload while increasing your profitability.”

Tech certifications can be more powerful than four-year degrees

Many college graduates aren’t working in fields related to their majors, and today’s employers are increasingly shifting toward skills-based hiring for technology jobs. “With the demand in tech, that means certification programs are on the uptick, often providing a quicker and more cost-effective way of getting hired than does a four-year college degree,” Mercer says. “A person’s overall earning powers in tech can more than double. Our general educational system often doesn’t meet the demands of today’s business environment. Typical college grads and most students lack the skills required for today’s tech positions.”

Freelancing and independent consulting are on the rise

Gigging – taking on multiple freelance jobs – is growing in popularity, largely due to the growth in digital platforms and social media. “This has given rise to a freelancer and consulting boom that has opened the door to a more flexible and creative workforce of contractors to accommodate the heavy workflow of today’s companies,” Mercer says. “The power of social media and online platforms is making it easier for entrepreneurs to engage a more diverse and global market. You can use your individual skills to bring more value to your business simply by selling those skills and services to others.”

“Technology has a hugely important role in enabling us to meet the many economic and business challenges presented by the pandemic,” Mercer says, “and to be better prepared for whatever comes next.”

 

5 WAYS TO GIVE BACK ON A BUDGET: GIVING SEASON FOR BUSINESSES

1. Collaborate with a Charity

There are several different ways giving businesses can collaborate with charities. Perhaps the most public way is to donate a portion of sales to a charitable organization. Also, you can prompt buyers to round up to the nearest dollar or make a larger donation at checkout. This puts your partnership with the organization square in front of your customers. This spreads awareness around not only a cause important to the business but sharing the mission of the specific organization.

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2. Reward Referrals with Donations

Incorporating donations into a referral program is a great way to encourage engagement among current customers. This is in addition to giving back and boosting sales. For example, small business owners can set up a referral program to support local schools. Customers can pick a local school to receive a donation or new school supplies with every successful referral.

3. Take a Day off to Volunteer Together

There is evidence to support that volunteering lowers stress and helps us live longer. However, finding time to volunteer is difficult no matter how motivated we are.

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4. Food and Clothing Drive

An alternative to taking time away from work, that also engages employees, is organizing a food and clothing drive. A good way to bring in more goods is to set up a friendly competition, breaking staff up into multiple teams. A prize for the winning team is letting them pick a charitable organization that the business will make a donation to.

giving businesses

5. Pro-Bono Work

Finally, business owners and their employees can give back to communities by offering their services to local organizations. For example, a small event planning firm can organize a silent auction, or a boutique ad agency can create an advertisement for a local charity. There are a multitude of ways to apply business skills to make an impact.