Tag Archives: Money

Small Business Expect Revenue to Grow in 2021

Well over half of small businesses expect their revenue to increase over the next 12 months. This compares to fall of 2020, when just 34% of small business owners were confident of increasing revenue. This positive statistic about the outlook of small businesses after the unprecedented disruption of 2020 and early 2021, was unveiled by the Bank of America.

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Bank of American Small Business Owner Report 2021

Bank of America’s 2021 Small Business Report was based on a survey of nearly 1,000 small business owners. The survey was conducted in March 2021. It reveals that economic confidence and business outlook is witnessing a rebound. 56% of participants say they are confident the local economy will improve, which is a significant rise from 39% last fall. Half of respondents anticipate the national economy will expand, up from 37% in fall 2020.

Small Business Planning on Hiring in Forthcoming Months

Such is the confidence among small business that 21% plan to hire in coming months, a 7% rise from fall 2020. These heartening figures confirm just how much the small business community is progressing as the nation continues to lift lockdown restrictions. The research also shows what small businesses are doing to help aid recovery. 62% say they have been building a digital strategy, and 30% have been accepting forms of cashless payments. The Bank of America’s report provides important insight into strategies small businesses are adapting to pave the way for a rebound.

The Backbone of the US Economy

Talking about the resilience of small business and the moves they are taking to secure recovery, Sharon Miller, head of Small Business at the Bank of America commented:

“Small business owners have showed time and again during the pandemic that they are the resilient backbone of our economy and of local communities throughout the country. From providing essential services to revamping operating models, I am inspired by the dedication and passion of entrepreneurs across the country and encouraged to see their renewed optimism about the future of their businesses.”

“Almost 80% of those surveyed say a widely available vaccine and/or herd immunity in their community will play a pivotal role in bringing business back to pre-pandemic levels,” Miller continued.

Leading Concerns

The research also looked at the leading concerns small businesses are facing. The political environment and health care costs are among the top concerns, with 71% and 64% reporting such concerns, respectively. These figures are consistent with those reported in the fall of 2020. Worries that have witnessed a drop in prevalence since last fall are those about the pandemic. 55% of those surveyed in the last Bank of America report highlighted such concerns, down from 75% last fall. Fears about consumer spending has also dropped 75% last fall to 55%.

Steps to Aid Recovery

The report also explores the steps small business owners are taking to help aid recovery. It found that 62% of business owners have adopted new digital tools and strategies to optimize operations in response to the pandemic. Such digital initiatives include 47% of small businesses interacting with customers virtually, and 36% interacting with employees virtually. 30% have started accepting digital payments, and 26% have enhanced their social media presence. While the report presents a positive picture of small businesses gathering momentum after months of hardship, it confirms the value of taking savvy steps to gain momentum and boost revenue, such as taking operations online.

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:

  1. 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.
  2. 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.

Conclusion

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.

Date Deadline for:
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

Free Vector | Illustration of social media marketing app

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.

Conclusion

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.

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.Growth clipart sale growth, Picture #2783288 growth clipart sale growth

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:

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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:

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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

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.