2021 Tax Tips and Some Motherly Advice https://bit.ly/3eXF3Ch
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2021 Tax Tips and Some Motherly Advice https://bit.ly/3eXF3Ch
Tax Rate Hikes and the Economy
President Biden entered office with an ambitious agenda. From expanded healthcare subsidies and increased social security benefits, to student loan forgiveness. This would be costly. As a candidate, Biden proposed a series of tax rate increases on high-income families to pay for some of his new programs. Under his plan, corporate income tax rates and top personal income rates would rise. Top earners would face new Social Security taxes, and millionaires would face much higher tax rates on capital gains and dividends. What would these tax rate hikes look like, and what would they do to the economy?
Part 1: What are the Corporate Income Tax Increases?
Until 2018, the US had the highest statutory corporate tax rate in the developed world. Even before accounting for new state taxes, the top rate was 35%. This was well above rates in Ireland (12.5%), Canada (15%), and the UK (19%). The Tax Cuts and Jobs Act of 2017 (TCJA) permanently lowered the top rate to 21%. The current administration wants to increase the rate to 28%, which is higher than most developed countries, but still 20% lower than the 2017 rate. There are some reasons for why there isn’t support for the old rate:
- At higher rates, corporations have more incentive to avoid the tax. They hire expensive tax lawyers to find clever ways to reduce their tax bills. They move their headquarters/profits to low-tax jurisdictions. A higher tax rate shifts a corporation’s focus from producing better products at lower costs to finding ways to reduce its tax liability. It affects what they produce, where they build it, and how they finance it. The end result is that consumers pay more but get less and the government takes in less tax revenue.
- The person who pays a tax is often not the same person who bears the cost of the tax. In the case of corporate taxes, economist John Cochrane explains that “as an accounting matter, every cent corporations pay comes from higher prices, lower wages, or lower payments to the shareholders. The question is which one.” Economist Michael Boskin argues that corporate tax is born increasingly by workers: “Corporate taxes, like others, are ultimately paid by people. In a static economy with no international trade, shareholders are likely to bear the costs. The US economy is neither static nor closed to trade, and so taxes tend to be borne by the least mobile factor of production. Capital is much more mobile globally than labor, and the part of the corporate tax that is well above that of our lowest tax competitors will eventually be borne by workers. In a growing economy, the diminished investment slows productivity growth and future wages.
Slower economic growth and lower wages are a high price to pay for a tax that yields surprisingly little revenue. It’s no wonder then that there isn’t much support for pushing the rate back up to its former level.
Part 2: What About Personal Income Taxes?
About half of all federal tax revenue comes from personal income taxes. These taxes are progressive, meaning that as your taxable income rises, the share of your taxed income rises too. Every dollar of taxable income is taxed at a particular rate, called a marginal tax rate. Currently, marginal tax rates on earned income range from 10% to 37%. President Biden wants to raise the top rate to 39.6%, the rate that existed prior to the TCJA.
The personal income tax code doesn’t just tax wage income. People also pay income tax on realized capital gains and dividend payments. Capital gains are the profits made form selling an asset for more than it was bought. The tax rates for investment depend on the gross income of the tax filer and how long the filer held the investment. If you sell an asset within a year after buying it, your tax rate is generally the same tax rate you pay on your taxes. If you held it for more than a year, you pay a lower tax rate. Biden’s plan calls for eliminating this lower tax rate for filers with incomes above $1 million. How big of a tax increase would this be? Currently, the top rate on long-term capital gains and qualified dividends is 23.8% Biden’s plan calls for this to rise to 43.4%.
These higher marginal tax rates would have significant effects on the economy. Watch this video for an explanation:
The marginal tax rate affects a person’s decision on whether to work more hours, hire more workers, or invest in new innovations or businesses. As the video explains, the “investments not made, schooling not pursued, or businesses not started all cumulatively add up to a lower quality of life for everyone.”
While high marginal tax rates discourage the behaviors that produce economic growth, many policy makers are willing to accept that outcome in order to make the tax system more progressive. They argue that high-income taxpayers can afford to pay more. But just because they can, doesn’t mean they will. As we saw with corporate income taxes, the higher the rate, the more incentives people have to avoid the tax. This will be done either through clever accounting or through changing their economic decisions.
Further, the US already has one of the most progressive income tax systems in the developed world. The progressive rates don’t necessarily yield substantially higher tax revenue. The tax code is filled with countless deductions that reduce a filer’s taxable income and tax credits that directly reduce a filer’s tax liability. Filers may cut their taxable income by deducting charitable contributions, the interest they pay on their mortgage, and taxes they pay to state and local governments. Families with children may reduce their tax bill by claiming the child tax credit. Businesses can claim credits for research and development or building low-income housing. The US tax code has long been filled with these types of tax breaks. Milton Friedman explains how these tax breaks interact with high tax rates:
Part 3: What About Payroll Taxes?
Social Security and parts of Medicare are financed through payroll taxes on wage and salary income. The 2.9% Medicare tax, split evenly between employee and employer, is assessed on all wage and salary income. The Social Security tax is more complicated. It assesses a 12.4% tax, split like Medicare, on earnings up to the so-called taxable maximum. This maximum is set at $142,800 in 2021. Earnings above the taxable maximum face no Social Security taxes. President Biden wants to assess the full Social Security tax on all earnings above $400K.
It might seem odd that top earners pay a lower share of their income in Social Security taxes than those with earnings below the taxable maximum. There is an interesting historical reason for this unique tax. Workers’ taxable Social Security earnings are used to determine how much they receive in benefits when they retire. In discussing Senator Warren’s Social Security plan, John Cogan explains how applying these taxes to earnings above the taxable maximum would alter the nature of the program:
“The cornerstone of FDR’s Social Security program is its “earned right” principle, under which benefits are earned through payroll-tax contributions. Although Congress has eroded this principle over the years, it remains part of the program’s core. Warren’s plan calls for additional taxes on wage earnings, capital gains, and dividends paid to those with high annual incomes. These incomes are $250K or more for individuals, and $400K or more for families. But in a major break from one of FDR’s main Social Security principles, the plan provides no additional benefits in return for the new taxes. Warren’s new tax plan would account for about a quarter of future revenues flowing into the Social Security system. Such a large revenue stream to fund unearned benefits, called “gratuities” in FDR’s era, would put Social Security on a road to becoming a welfare program.
Even beyond its effect on the Social Security program, adding the Social Security tax on earnings above $400K would represent a dramatic marginal tax rate increase. Currently, workers with incomes in the top personal income tax bracket face a marginal tax rate of roughly 40.8%. 37% of that is for personal income taxes and 3.8% for Medicare. Adding the 12.4% tax would raise the top marginal tax rate above 50%, and that is before accounting for state income taxes. Like other marginal tax rates, these high rates will affect decisions to work, ultimately hurting future economic growth.
High marginal tax rates damage the economy and will result in fewer economic opportunities for everyone. yet we need revenue to pay for essential government services, and much more to fund the reforms envisioned by the new administration. Is there a better way?
Fortunately, yes. A consumption tax such as a sales tax or value-added tax offers a far more efficient way to raise revenue. In Blueprint for America, Michael Boskin explains:
“There is considerable research showing that moving toward a broad-based, integrated progressive consumption tax would significantly increase real GDP and future wages. Replacing both the corporate and personal income taxes with a broad, revenue-neutral consumption or consumed income tax would produce even larger gains.”
A consumption tax would give workers, entrepreneurs, and innovators better incentives to work, invest, and create. The result would be an economy that delivers more economic opportunity while providing adequate revenue for the government.
2021 Tax Calendar
To help you make sure that you do not miss any important 2021 deadlines, we have provided this summary of when various tax-related forms, payments and other actions are due. Please review the calendar and let us know if you have any questions about the deadlines or if you would like assistance in meeting them.
|February 1||Businesses: Providing Form 1098, Form 1099-MISC (except for those that have a February 16 deadline), Form 1099-NEC and Form W-2G to recipients.
Employers: Providing 2020 Form W-2 to employees. Reporting income tax withholding and FICA taxes for fourth quarter 2020 (Form 941). Filing an annual return of federal unemployment taxes (Form 940) and paying any tax due.
Employers: Filing 2020 Form W-2 (Copy A) and transmittal Form W-3 with the Social Security Administration.
|March 15||Calendar-year S corporations: Filing a 2020 income tax return (Form 1120S) or filing for an automatic six-month extension (Form 7004) and paying any tax due.
Calendar-year partnerships: Filing a 2020 income tax return (Form 1065 or Form 1065-B) or requesting an automatic six-month extension (Form 7004).
|April 15||Individuals: Filing a 2020 income tax return (Form 1040 or Form 1040-SR) or filing for an automatic six-month extension (Form 4868) and paying any tax due. (See June 15 for an exception for certain taxpayers.)
Individuals: Paying the first installment of 2021 estimated taxes, if not paying income tax through withholding (Form 1040-ES).
Individuals: Making 2020 contributions to a traditional IRA or Roth IRA (even if a 2020 income tax return extension is filed).
Individuals: Making 2020 contributions to a SEP or certain other retirement plans (unless a 2020 income tax return extension is filed).
Individuals: Filing a 2020 gift tax return (Form 709) or filing for an automatic six-month extension (Form 8892) and paying any gift tax due. Filing for an automatic six-month extension (Form 4868) to extend both Form 1040 and, if no gift tax is due, Form 709.
Household employers: Filing Schedule H, if wages paid equal $2,200 or more in 2020 and Form 1040 is not required to be filed. For those filing Form 1040, Schedule H is to be submitted with the return and is thus extended to the due date of the return.
Trusts and estates: Filing an income tax return for the 2020 calendar year (Form 1041) or filing for an automatic five-and-a-half month extension to October 1 (Form 7004) and paying any income tax due.
Calendar-year C corporations: Filing a 2020 income tax return (Form 1120) or filing for an automatic six-month extension (Form 7004) and paying any tax due.
Calendar-year corporations: Paying the first installment of 2021 estimated income taxes.
|April 30||Employers: Reporting income tax withholding and FICA taxes for first quarter 2021 (Form 941) and paying any tax due.|
|May 17||Exempt organizations: Filing a 2020 calendar-year information return (Form 990, Form 990-EZ or Form 990-PF) or filing for an automatic six-month extension (Form 8868) and paying any tax due.
Small exempt organizations (with gross receipts normally of $50,000 or less): Filing a 2020 e-Postcard (Form 990-N), if not filing Form 990 or Form 990-EZ.
|June 15||Individuals: Filing a 2020 individual income tax return (Form 1040 or Form 1040-SR) or filing for a four-month extension (Form 4868) and paying any tax and interest due, if you live outside the United States.
Individuals: Paying the second installment of 2021 estimated taxes, if not paying income tax through withholding (Form 1040-ES).
Calendar-year corporations: Paying the second installment of 2021 estimated income taxes.
|August 2||Employers: Reporting income tax withholding and FICA taxes for second quarter 2021 (Form 941) and paying any tax due.
Employers: Filing a 2020 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or requesting an extension.
|September 15||Individuals: Paying the third installment of 2021 estimated taxes, if not paying income tax through withholding (Form 1040-ES).
Calendar-year corporations: Paying the third installment of 2021 estimated income taxes.
Calendar-year S corporations: Filing a 2020 income tax return (Form 1120S) and paying any tax, interest and penalties due, if an automatic six-month extension was filed.
Calendar-year S corporations: Making contributions for 2020 to certain employer-sponsored retirement plans, if an automatic six-month extension was filed.
Calendar-year partnerships: Filing a 2020 income tax return (Form 1065 or Form 1065-B), if an automatic six-month extension was filed.
|October 1||Trusts and estates: Filing an income tax return for the 2020 calendar year (Form 1041) and paying any tax, interest and penalties due, if an automatic five-and-a-half-month extension was filed.
Employers: Establishing a SIMPLE or a Safe-Harbor 401(k) plan for 2020, except in certain circumstances.
|October 15||Individuals: Filing a 2020 income tax return (Form 1040 or Form 1040-SR) and paying any tax, interest and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States).
Individuals: Making contributions for 2020 to certain existing retirement plans or establishing and contributing to a SEP for 2020, if an automatic six-month extension was filed.
Individuals: Filing a 2020 gift tax return (Form 709) and paying any tax, interest and penalties due, if an automatic six-month extension was filed.
Calendar-year C corporations: Filing a 2020 income tax return (Form 1120) and paying any tax, interest and penalties due, if an automatic six-month extension was filed.
Calendar-year C corporations: Making contributions for 2020 to certain employer-sponsored retirement plans, if an automatic six-month extension was filed.
|November 1||Employers: Reporting income tax withholding and FICA taxes for third quarter 2021 (Form 941) and paying any tax due.|
|November 15||Exempt organizations: Filing a 2020 calendar-year information return (Form 990, Form 990-EZ or Form 990-PF) and paying any tax, interest and penalties due, if a six-month extension was previously filed.|
|December 15||Calendar-year corporations: Paying the fourth installment of 2021 estimated income taxes.|
|December 31||Employers: Establishing a retirement plan for 2021 (generally other than a SIMPLE, a Safe-Harbor 401(k) or a SEP).|
Why Your Business Should Have an Active Social Media Presence
Did you know that the ad spend on Facebook grew by almost 30% in 2020? According to the same report, the trend indicated that business budgets were tightened. However, more budget was allocated to digital channels and social media. This is also the expected trend for 2021. If you’re still not investing in social media marketing, it’s time to get on board with the trends. Here are benefits you can get from it:
Boost Brand Awareness
One of the biggest advantages of having an active social media is the increase in brand awareness. Social media allows businesses a platform to reach out to users who may not have heard of them before. Social media also allows you to enable sending targeting ads. When you send relevant ads based on a user’s preferences, they are more likely to be interested in your content. This feature also allows you to target ads based on different criteria which may include location, gender, age, etc.
Increase Website Traffic and Leads
As more people see what you have to offer, you are likely to see an increase in website traffic. Since you are reaching out to targeted audience, you are also likely to see more traffic coming from qualified leads. This may lead to a boost in lead generation efforts. Not only that, you’re also likely to see a boost in average time spent on a website.
Pro Tip: To keep track of your leads coming from different platforms, use an advanced program specially designed for lead generation.
Improve your Brand Recall
A memorable social media marketing campaign can go a long way in creating a lasting impression in front of your target audience. It’s okay if users don’t purchase your product right away. If users can remember your brand easily, you can move them down the sales funnel with a few more touchpoints. Social media helps you boost your visibility and improve your ad recall. If you run a social media campaign for a long time, you can make sure that you are reaching out to more people and improving their ability to recognize your brand.
Get More Brand Credibility
Social media allows you to work with influencers to promote your products on different channels. Not only can you boost your reach and get more engagement, but you can also boost your brand credibility. Social media influencers work hard to build relationships with their followers. Because of their expertise, they hold credibility in their field and therefore, their followers wait for their recommendations and advice. In addition, other sponsored content can also help you establish your brand as a thought leader in the industry.
Get more Engagement
When you upload content on social media that resonates with your audience, they are likely to respond to it. You’ll get more likes, shares, and comments if the content strikes a chord with them. This can result in a boost in engagement. You can also do things like host contests, create polls, and publish live videos to keep your audience entertained. These things matter because in order to turn a prospect into a customer, you need to keep them engaged. It’s a stepping stone in the right direction.
Get Detailed Customer Insights
One of the biggest advantages of advertising through social media is that you can get access to customer insight. All social media platforms collect user data. From user insights to demographics, these platforms record all kinds of behavioral data. When you run an ad campaign, you can also see how people are engaging with your content. This data can help you figure out which content your audience resonates with the most. Based on that, you can create a more robust content and marketing strategy.
This data can help you learn how to get the most out of your ad spend. In the long run, it can help your business save money and get the most out of your budget through campaign optimization. Once you have data on what works, you can leverage retargeting to follow up multiple times with users who may be interested in your brand. This, in turn, can help you boost your conversion rate.
Regardless of your industry or business size, social media can be a powerful tool to grow your business. It can help you get more visibility, reach out to a broader audience, and generate more qualified leads. Not only can it help you increase your sales and revenue, it can also help you create more cost-effective campaigns. You can leverage social media to gain more credibility and improve your brand recall value. By tracking your campaign results, you can optimize future social media campaigns for better results. Don’t miss out on the multiple benefits social media can offer.
IRS Expected to Audit More Small Businesses in 2021
After years of low examination rates, the IRS announced it will increase audits of small businesses by 50 %. This news comes during a time when complex tax law changes and economic stimulus programs, in response to COVID-19, have made businesses’ books even more complicated than usual.
The Illinois CPA Society cautions this could lead to audits and enforcement actions against many different businesses. These businesses range from long-held family-owned operations to the many online businesses launched as the pandemic drags on.
With the IRS planning to hire more specialized auditors to begin strengthening its enforcement efforts, ICPAS offers the following tips to safeguard your business interests and help avoid an audit:
Keep Clear Records
Accurately and honestly reporting all income, deductions, credits, expenses, and other figures can help keep an audit at bay. Make sure you have adequate documentation to support the figures reported on your business’ information return. This will make your individual tax return less likely to be have errors or be audited.
Mind your deductions
Unusual itemized deductions raise red flags for auditors, especially now that most taxpayers only claim the standard deduction. If your small business is driving you to seek unique deductions or report business losses, enlist the help of a CPA to guide you. Reporting losses for three years or more could increase your risk of an examination into whether you’re actually in business.
Make your estimated tax payments
If you anticipate owing more than $500 in taxes for your business entity throughout the year, you should be making quarterly estimated tax payments. Failing to make these payments raises your risk of an audit and/or penalties.
Today’s bookkeeping software utilizes tools to keep your records accurate and secure. This helps your CPA electronically prepare and file your tax returns—the best method for preventing the filing of erroneous returns that might trigger an audit.
Read up on the rules
Since many small businesses are formed as partnerships, it’s important to determine if yours is subject to the Centralized Partnership Audit Regime, which dramatically changed IRS partnership audit procedures.
Where Did Americans Move in 2020?
Which States Did America Flock to in 2020?
States compete with each other in a variety of ways, including attracting (and retaining) residents. Sustained periods of inbound migration lead to (and reflect) greater economic output and growth. Prolonged periods of net outbound migration, however, can strain state coffers. This can contribute to revenue declines as economic activity and tax revenue follow individuals out of state.
United Van Lines, the largest moving company in the United States, keeps track of its clients’ migration among the 48 contiguous states. It publishes that data each January, comparing the number of inbound moves to outbound moves for each state. Because those who use United Van Lines are individuals and companies, this data is only a subset of all moves. However, the National Movers Study still provides a targeted look at the types of interstate migration patterns we can expect to see in government-issued data once it becomes available.
The 2020 National Movers Study shows Idaho, South Carolina, Oregon, South Dakota, and Arizona as the states with the highest proportion of inbound moves. New Jersey, New York, Illinois, Connecticut, and California saw the highest proportion of outbound migration. Inbound and outbound moves were nearly balanced in Colorado, Wisconsin, and Michigan. (Vermont also saw a high percentage of inbound moves but it was excluded from the survey’s rankings because the sample size was too small.)
Reasons for the Moves
In this study, United Van Lines tracks a few of the most common reasons that people pack up and move to a new state. While “state tax climate” is not a listed reason in this study, we can see glimpses of how taxes can affect decision-making.
Taxes may have limited influence on whether someone takes a job, but they can influence where jobs are available. They can also influence where a person taking a position might locate. The latter is perhaps most visible in smaller states and states with metropolitan centers located near state borders. For example, tens of thousands of individuals work in greater Chicago but live in Indiana. Many interstate commutes are attributable to stark differences in tax landscapes, particularly property taxes. While it is difficult to measure the extent to which tax considerations factor into individuals’ moving decisions, there is no doubt that taxes are important in many individuals’ personal financial deliberations. With the rise of remote work, individuals are likely to be more mobile than ever. They are able to make decisions about where to live that are independent of where their employer is located.
Another reason people moved was retirement.
|Note: Source: United Van Lines, 2020 National Movers Study|
It’s unsurprising that retirees gravitated toward states with good climates, but many of these top states also have tax climates that would be attractive to retirees. Nine out of these 10 states either exempt a large portion of Social Security from income taxes, exempt Social Security completely, or have no income tax at all. Retirees, moreover, are freer to consider factors like taxation than those who are tied to a job.
States and Tax Rates
Our State Business Tax Climate Index uses over 100 variables to evaluate states on the competitiveness of their tax rates and structures. Four of the 10 worst-performing states on this year’s Index are also among the 10 states with the most outbound migration in this year’s National Movers Study (New Jersey, New York, Connecticut, and California). Seven of the top 10 ranked inbound migration states also rank in the top half of states on the Index, which measures tax structure. And the three which do not (Alabama, Arkansas, and South Carolina), while having significant room for improvement in the structure of their tax codes, generally feature low tax burdens. Conversely, all but one of the top outbound states rank in the bottom third of the Index, the only exception being North Dakota (17th), where outbound migration has been driven by a decline in energy markets.
While certain factors are outside a state’s control (sunny Florida may always have a certain competitive advantage in attracting retirees, for example), every state can foster an attractive economic landscape through wise tax policy decisions.
4 Ways to Improve Your Company’s Sales
Most salespeople would tell you that there are few better feelings in life than closing a deal. This is because guiding a customer through the sales process and coming out the other side with dollars committed isn’t a matter of blind luck. It’s a craft — based on equal parts data mining, psychology, intuition and other skills. Many sales staffs were under unprecedented pressure last year. The COVID-19 pandemic triggered changes to the economy that made many buyers cut back on spending. Now that the economy is slowly recovering, sales opportunities may be improving.
Here are four steps your salespeople can follow to improve the odds that those chances will come to fruition:
1. Qualify prospects. Time is an asset. Successful salespeople focus most or all their time on prospects who are most likely to buy. Viable prospects typically have certain things in common:
- A clear need for the products or services in question
- Sufficient knowledge of the products or services
- An identifiable decision-maker who can approve the sale
- Adequate financial standing
- A need to buy right away or soon.
If any of these factors is missing, and certainly if several are, the salesperson will likely end up wasting his or her time trying to make a sale.
2. Ask the right questions. A salesperson must deeply understand a prospect’s motivation for needing your company’s products or services. To do so, inquiries are key. Salespeople who make great presentations but don’t ask effective questions tend to come up short. An old rule of thumb says: The most effective salespeople spend 80% of their time listening and 20% talking. Actual percentages may vary, but the point is that a substantial portion of a salesperson’s “talk time” should be spent asking intelligent, insightful questions that arise from pre-call research and specific points mentioned by the buyer.
3. Identify and overcome objections. A nightmare scenario for any salesperson is spending a huge amount of time on an opportunity, only to have an unknown issue come out of left field at closing and kill the entire deal. To guard against this, successful salespeople identify and address objections during their calls with prospects, thereby minimizing or eliminating unpleasant surprises at closing. They view objections as requests for information that, if handled correctly, will educate the prospect and strengthen the relationship.
4. Present a solution. The most eloquent sales presentation may be entertaining, but it will probably be unsuccessful if it doesn’t satisfy a buyer’s needs. Your product or service must fix a problem or help accomplish a goal. Without that, what motivation does a prospect have to spend money? Your salespeople must be not only careful researchers and charming conversationalists, but also problem-solvers. When you alleviate customers’ concerns and allow them to meet strategic objectives, you’ll increase the likelihood of making today’s sales and setting yourself up for tomorrow’s.
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:
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:
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
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:
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:
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:
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:
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:
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
Tax Cuts and Jobs Act – State and Local Taxes Update
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.
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.
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.
- Reporting of Deduction in the Partnership or S Corporation Tax Return
- 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.
- Deductibility of the SALT
- 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”:
- Connecticut – effective January 1, 2018
- Louisiana – election to be made
- Maryland – imposed to the distributive shares or pro rata shares of resident members of the PTE
- New Jersey – effective January 1, 2020, election to be made
- Oklahoma – effective January 1, 2019, needs annual election
- Rhode Island – effective January 1, 2019, election to be made
- Wisconsin – effective January 1, 2019 for person or persons holding more than 50% of capital and profits of a partnership
- 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.
- 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).
- 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.
- 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.
- 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.
- Individual states and every individual have unique tax calculations and applications of tax laws, so please contact us if you have questions.
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.
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.
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.
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.