Author Archives: Carl Hartung

Contribute IRA Funds to Charity for a Tax Break

Certain older taxpayers may be able to benefit from a unique tax break.

Transfer funds directly from an IRA to an IRS-approved charity. Although the charitable contribution isn’t deductible, the distribution from the IRA isn’t taxable. And the payout qualifies as a required minimum distribution (RMD).

This strategy is only available to taxpayers over age 70 ½ . Congress threatened to remove this tax break as part of the Tax Cuts and Jobs Act (TCJA). But, ultimately, the new law didn’t touch it.

If you have both a traditional IRA and a Roth IRA, it generally makes sense to use the traditional IRA first for qualified charitable distributions.

Small Business Tax Strategies
July 2021

Consider These Tax-Deductible Commuting Expenses

If you’re self-employed and have resumed work related driving, you may be entitled to deduct some vehicle expenses.

Squeeze every last deductible dime out of your business travel. Keep detailed records to back up your claims. For example:

  • Short stops. It may be convenient for you to visit a client on the way tinto work or on the way home. As a result, you can deduct the cost attributable to the travel between your regular place of business and the client’s business location.
  • Separate offices. If your business has several different offices, you might drive between two or more business locations during the day. As with other business travel, you can deduct the costs between the different business locations.
  • Long-distance commuting. Suppose you spend a couple of weeks visiting a client’s office outside your local geographic area. You never go to your regular workplace. In this case, you can deduct the cost of your daily commute, even though it’s long-distance travel.
  • Temporary assignments. It may be necessary to work at a distant business site for a few months. Instead of commuting daily, you stay near the work site and come home on the weekends. Assuming that the job lasts no more than a year, it qualifies as a temporary assignment. Therefore, you can deduct lodging and meal expenses (within certain limits) plus the cost of the weekend trips.
  • Night school. If you’re taking courses at a local college to improve your job skills, you may go straight to school after work. The cost of travel between work and the school is deductible.

Small Business Tax Strategies
July 2021

4 Ways to Save on Cybersecurity Costs

What’s the biggest threat to your small business? You can choose from several possibilities, but the specter of cyberattacks should be high on your list.

Install cybersecurity measures to protect your business. Generally, these costs can be deducted under applicable federal income tax rules.

Here are four common examples of write-offs that may be available to your small business.

  1. Software packages. Your deduction for anti-virus software, malware or ransomware depends on the type of software you purchase. For starters, you can claim a 100% first-year bonus depreciation for off-the-shelf software. In other words, you can write off the full cost in the year the software is placed in service. Alternatively, you can choose to deduct the cost ratably over the years. In addition, you can deduct monthly costs for cloud-based solutions. If you go the extra yard and have software specifically developed or customized for your business, it is also eligible for first -year bonus depreciation.
  2. Firewalls. Firewall software is designed to deter hackers from invading your company’s computer system. Essentially, you’re entitled to the same tax breaks as you are with other software.
  3. Ransoms. Suppose you’re forced to pay a ransom to cybercriminals so you can unlock your computer system. The jury is still out on whether this expense can be deducted as an “ordinary and necessary” expense or as a theft loss, or if you’re entitled to any deduction at all. The reason?: The IRS may argue that the ransom isn’t deductible because it’s an illegal payment similar to bribes and kickbacks.
  4. IT compensation. Do you have an IT department or a handful of employees responsible for cybersecurity measures? The compensation you pay them is deductible like wages paid to other employees. If you use outside services or independent contractors, those costs are also deductible as ordinary and necessary business expenses.

Small Business Tax Strategies
July 2021

Business Start Up Expenses

Expenses incurred before a business commences aren’t deductible, an appeals court confirms in this case in which an inventor deducted costs for a venture formed to manufacture and market a device to enhance television viewing.

Although time and money were spent developing the device, business hadn’t yet begun. The venture was still in the premanufacturing phase (Provitola, 11th Cir.).

Note that once the business begins, firms can make an election to deduct $10,000 of the pre opening costs and amortize the remaining expenses over 180 months.

Small Business Tax Strategies
July 2021

Lock in Home Sale Gain Exclusion

The home sale gain exclusion might be the “biggest and best” federal income tax break on the books. If you qualify, you can pocket up either a quarter or a half million dollars of profit tax free from the sale of your home – no strings attached.

Potential problem: The seemingly generous home sale exclusion might not be enough to shelter your gain if your home has appreciated significantly since you bought it. You may have to pay a king-sized tax bill after selling your castle for a whopping big profit.

Keep detailed records of home improvements. These expenditures increase your tax basis for home sale gain calculation purposes. So, when you finally do sell your home, the higher basis reduces the taxable amount of the gain. Without detailed records, you’re just taking a shot in the dark at your actual basis. Document qualified expenditures each year.

If you’ve owned and used your home as your principal residence for at least two of the previous five years, you can elect to exclude from federal income tax up to $250,000 of home sale profit if you’re single filer; $500,000 for joint filers. There are no limits on the number of times you can claim the exclusion. The gain for purposes of the exclusion is the difference between the net selling price and your adjusted basis in the home. For example, your basis may have been reduced to reflect rollovers from prior home sales. On the other hand, certain home improvements can increase your basis to cut down your taxable gain or to ensure that your gain is fully sheltered by your allowable exclusion.

Example: You and your spouse bought your first home for $100,000 and sold it for $400,000. Then you bought your current home for $450,000. Under the rules in effect at that time, you avoided any current tax by rolling over the home sale proceeds into your current home. During the past few years, you’ve made significant improvements, including an in-ground pool, deck and finished basement. The total cost of the improvements was $125,000. Now you’re looking to sell the home for $750,000.

At first glance, you might think you would owe no tax on the home sale. Reason: Your $300,000 profit ($750,000 less $450,000) is covered by the $500,000 home sale exclusion for joint filers. But your actual basis after the sale of your first home is $150,000 (purchase price of $450,000 less deferred gain $300,000). Even after you claim the home sale exclusion, you’d have a taxable gain of $100,000 ($750,000 minus $150,000 basis minus $500,000 home sale exclusion).

This is where detailed tax records can come to the rescue. If you can document the $125,000 of home improvements, you can increase your basis to $275,000 ($150,000 plus $125,000). So your taxable gain comes to $475,000 ($750,000 less $275,000) which is less than the $500,000 threshold. Thus, your entire gain is tax free!

Besides tracking current expenses, comb over past credit card statements and checkbooks for proof of home improvements. You may be surprised at some of the costs that can help boost your basis.

Tip: Maintain a logbook, ledger or other record of expenses you’re adding to your basis. Keep the information stored in a safe place. Make backup copies of electronic files.

Tax Checklist of Home Improvements

Such improvements which increase your home’s value or prolong its useful life, can be added to the home tax basis.

  • Finishing a basement or attic
  • New plumbing, heating or air conditioning system
  • Adding a fireplace or new room
  • Outside improvements such as a patio, deck or swimming pool
  • Installing aluminum or vinyl siding or storm windows and doors
  • New landscaping

Note that the cost of repairs – such as expenses for painting, fixing gutters, re-plastering walls and replacing broken windows – are not added to your basis. However, if you lump in repairs with home improvements you can argue that the entire cost is for a general renovation that increases your tax basis.

Tip: Schedule repairs when you’re doing improvements. This gives your basis an extra nudge.

Add these expenses to your basis to reduce your potential taxable gain:

  • Attorney fees
  • Closing costs and settlement fees
  • Title search and insurance
  • Broker commissions
  • Survey and appraisal fees
  • Recording fees for deed and mortgage

Tip: These expenses will be reflected in your HUD closing statement.

Small Business Tax Strategies
July 2021

Timing is Everything

When should you start taking Social Security benefits? It depends.

You’re entitled to receive 100% of the benefits based on earnings history at full retirement age (FRA). FRA ranges from age 66 for folks who reach that age this year to age 67 for those born after 1959. But you can elect to begin taking benefits as early as age 62, although your monthly benefits will be reduced. The monthly reduction can be up to 25% of the FRA amount. The closer you apply to FRA, however, the lesser the reduction.

Conversely, if you choose to delay benefits, you’ll receive a higher monthly amount than the FRA amount. Essentially, benefits are increased by 8% for each year you delay taking benefits until age 70. But the cost is that you give up years’ worth of benefits. There’s a breakeven point if you live long enough, but there’s obviously no guarantee that you will. One you reach age 70 your benefit maxes out and is increased for inflammation.

Small Business Tax Strategies
July 2021

 

Seek PPP Loan Forgiveness

The massive economic stimulus law – the Coronavirus Aid, Relief and Economic Security (CARES) Act – provides a wide range of relief to small businesses, including Paycheck Protection Program (PPP) loans supervised by the Small Business Administration (SBA).

Now is the time to apply for PPP loan forgiveness. If you qualify, you won’t owe any federal income tax on the forgiven debt.

But be aware that you must meet certain requirements to avoid being taxed on any forgiveness.

PPP loans are forgiven if the loan proceeds are used over a 24-week period to cover payroll costs or other qualified expenses like employee benefits, mortgage interest, rent and utilities. At least 60% of the money must go to payroll.

Normally, loan forgiveness results in taxable income. The CARES Act creates an exception for forgiven PPP loans.

But the SBA has created confusion by issuing murky guidance on when PPP loans can be forgiven. Consider the following points:

  • If your business received a PPP loan and retained or recalled employees and paid at least 60% of the loan proceeds for payroll, the entire debt is forgiven – without any federal income tax consequences.
  • A loan can be partially forgiven based on a complex calculation. For example, if you use 50% of the proceeds for payroll and 50% rent and utilities, you still qualify for forgiveness on a big piece of the pie. Leave the number crunching to your tax pro.
  • For these purposes, payroll costs are limited to $100,000 of annual wages per employee on a pro-rata basis. The IRS has clarified that this amount includes hazard pay, commissions, bonuses, etc. paid to furloughed employees.
  • The beginning date for PPP loan repayments is postponed for six months, but time can fly by for a struggling business. Under the latest guidelines, your bank has 60 days to review forgiveness applications, but the SB can take another 90 days.
  • The IRS has stated that qualifying expenses other than payroll costs must be paid or incurred during a 24-week period or before the next regular billing date to qualify for loan forgiveness.

How can you improve your chances for PPP loan forgiveness? Take the following three-step approach.

  1. Rally the troops. Restore the number of full-time equivalent (FTE) employees to previous levels by the safe-harbor due date of December 31. Bring back furloughed FTEs as soon as possible.
  2. Stack up payroll costs. Run payroll and other remaining qualified expenses – including mortgage interest, rents and utilities – on the last day of the 24-week period. This allows your business to maximize the amount of loan forgiveness.
  3. Pay out bonuses. Reward employees with bonuses to ensure that your business meets the requirement of 60% of payroll costs. The bonuses can even go to family members like your spouse or child. Reminder: You can only count up to $100,000 of an individual’s prorated wages as payroll costs, including any bonus for the calculation.

As of this writing, the government is debating more small business relief.

Small Business Tax Strategies
September 2020

Give IRA Funds Directly to Charity

If you are over age 70 ½ and receive annual required minimum distributions (RMDs) from your IRA (s), you may have more flexibility this year than you think.

Transfer funds directly from an IRA to a charity. There are no federal income tax consequences to this “qualified charitable distribution” (QCD).

A 2020 QCD may still make sense in your situation, even though the RMD rules are suspended for this year.

Under current law, a taxpayer who is age 70 ½ and older can transfer IRA funds directly to a qualified charitable organization, up to an annual limit of $100,00 ($200,000 for a married couple, if both spouses own IRA’s in their own names). Although no federal income tax deduction is allowed for QCD’s donors are not taxed on the transfer either. In other words, it’s a “wash” for tax purposes.

Usually, taxpayers who are older than age 72 (70 ½ prior to 2020) must begin taking RMDs from their IRAs each year. Failure to do so results in a 50% tax penalty on any shortfall, on top of the regular income tax hit. Fortunately, a QDC counts as an RMD.

But the Coronavirus Aid, Relief and Economic (CARES) Act suspended RMDs for the 2020 tax year. So, you don’t have to take any RMDs this year.

Practical Idea: Despite the CARES Act respite, you might complete a QCD anyway. The distribution isn’t taxable and enables you to satisfy charitable intentions.

Furthermore, a QDC isn’t included in your adjusted gross income (AGI) for 2020. As a result, you may avoid the loss of deductions and credits, the alternative minimum tax (AMT) and 3.8% tax on net investment income (NII).

Small Business Tax Strategies
September 2020

Connect with Electric Vehicles Credit

The tax law rewards environmentally conscious car owners.

Buy an electric vehicle that qualifies for a special tax credit. The options continue to expand as technology improves.

But you may have to move fast to get the car you want. The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for domestic use.

The credit for “plugin vehicles” is equal to the sum of (1) $2,500 plus (2) $417 for a vehicle that draws propulsion energy from a battery with not less than five kilowatt (kw) hours of capacity in excess of 5 kw hours, not to exceed $5,000. Thus, the maximum electric vehicle credit is $7,500, regardless of weight.

To qualify for the credit for plug-in vehicles, these requirements must be met:

  • A vehicle with at least four wheels must be manufactured primarily for use on public streets, roads, and highways (not including a vehicle operated exclusively on a rail or rails). For example, golf carts do not qualify.
  • The vehicle is treated as a motor vehicle for purposes of Title II of the Clean Air Act. This effectively bars certain low-speed motor vehicles from the credit.
  • The vehicle has a gross vehicle weight rating (GVWR) of less than $14,000 pounds.
  • The vehicle is propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of being recharged from an external source of electricity.
  • The vehicle is used predominantly in the United States.
  • You are the original use of the vehicle. You must have acquired it for use or lease and not for resale.

Based on current projections, most manufacturers will not clear the 200,000 mark before the end of the year. But Tesla, a notable exception, crossed the threshold in 2019, so the credit disappeared on July 1. Similarly, the credit for GM’s Chevy Bolt has been halved to $3, 750 in 2020. If you are in the market for one of the other top-selling electric vehicles – say, a Ford Focus or a Toyota Prius – do not delay.

Find the list of qualified vehicles at www.irs.gov/business/qualified-vehicles-acquired-after-12-31-2009

Small Business Tax Strategies
September 2020

A Roth For Your Kid? It Works

Suppose your teenage child was fortunate enough to land a job this summer. Typically, your progeny might have an eye on the latest video game craze or a smartphone, but there may be a better way for him or her to spend the hard-earned cash.

Encourage your child to make a Roth IRA contribution. Even though retirement is a long time away, this can be a tax-smart financial move.

But how do you convince a high school student to contribute to a Roth? Explain the tax breaks. If, for example, a 17-year-old can sock away $6,000 a year (the current annual maximum) and receives a hypothetical 7% annual return, the pot will grow to a staggering $2.74 million at age 67! (Note that your child’s Roth contribution for a year cannot exceed the child’s earned income for that year.)

Under current law, future qualified distributions from a Roth account are 100% federal-income-tax-free. Although you generally must wait until age 59 ½ to qualify for tax-free distributions, earlier distributions may be wholly or partially tax free under applicable IRS ordering rules.

Finally, if you want to take some, or even all, of the sting out of the situation, give your teenager a cash gift up to the amount of the Roth contribution. For 2020, you can give the child up to $15,000 with no federal gift or estate tax consequences.