Author Archives: support52

Unused Flexible Spending Accounts Balances

Unused funds in a dependent care FSA at year-end can’t be carried over, IRS confirms privately. Nor can the FSA refund you the extra money, even if you know that you cannot use the funds by December because your child’s day care after-school program is shuttered as a result of the Coronavirus pandemic.

Earlier this year, the IRS allowed, but did not require, employers to amend their plans to allow participants in dependent care flexible spending accounts to elect midyear to cease making 2020 contributions or to reduce the amount of their 2020 payins.

Small Business Tax Strategies
December 2020

Tax Breaks for Business Cars

Buying a new or used passenger auto for your business can lead to tax breaks. If bonus depreciation is claimed, the first-year depreciation cap is $18,100 for vehicles bought after September 27, 2017, and put in use this year.

The second-and third-year caps are $16,100 and $9,700. After that…$5,760. If no bonus depreciation is taken, the first-year regular depreciation ceiling ends up falling sharply to $10,100.

Buyers of heavy SUVs used solely for business can write off the full cost, thanks to bonus depreciation. SUVs used solely must have a gross weight rating over 6,000 pounds. Up to 100% of the cost of a big pickup truck can be expensed.

As noted above, total amounts expensed can’t exceed the business’s taxable income.

Small Business Tax Strategies
December 2020

Paycheck Protection Loan Forgiveness

More bad news from the IRS for firms that took out paycheck protection loans. In May, the agency issued public guidance saying that small businesses that have their Paycheck Protection Program (PPP) loans forgiven cannot deduct expenses that result in forgiveness of the loan.

The IRS now confirms companies can’t deduct such expenses paid or incurred in 2020 if they reasonably expect at year-end to receive forgiveness of the debt in 2021. This is so even if the taxpayer hasn’t yet submitted an application for forgiveness of the PPP loan before the end of 2020 (Revenue Ruling 2020-27).

Lobbying groups continue to press Congress for a legislative fix.

Small Business Tax Strategies
December 2020

Avoid Tax Trap on 529 Withdrawals

If you’re like many parents of children in college, your kid is currently learning remotely from home, even though you signed up for room and board at the school.

Watch out for a hidden tax trap. If you’ve withdrawn funds from a child’s Section 529 plan and don’t return them, you could be hit with an unexpected tax bill.

To add insult to injury, the IRS can tack a 10% penalty tax onto the amount that you owe.

A Section 529 plan is an education savings plan operated by one of the states. As long as certain requirements are met, there’s no income tax on the accumulation of earnings within the plan, plus qualified distributions are exempt from tax. Furthermore, contributions to the plan may be sheltered from gift tax by the annual gift tax exclusion.

The list of qualified expenses includes:

  • Tuition: This qualifies for both full-and part-time students at accredited institutions.
  • Room and Board: As long as the student is attending college at least half-time and room and board are paid directly to the school, it’s a qualified expense.
  • Technology Items: A 529 plan can be used to cover items like computers, printers, laptops and even Internet service.
  • Books and Supplies: These are qualified expenses if the school requires them.

Caution: You may have withdrawn funds to pay for anticipated room and board or other anticipated qualified expenses, but now the expenses won’t be incurred due to COVID-19 related fee refunds or room and board costs because your child is living at home instead of in the dorm.

Refunds of qualified expenses must be re-contributed to the 529 account within 60 days to avoid being taxed on the amount of the 529 withdrawal that is no longer needed due to the refund(s). There will also be a 10% tax penalty on the amount that consists of earnings.

Tip: If you’re returning money to a 529 account, be sure it’s characterized as a recontribution due to a refund of qualified expenses.

Small Business Tax Strategies
December 2020

Closing a Struggling Business?

Hopefully not !!

Are you thinking of shuttering your struggling business? Don’t forget taxes. The IRS is aware of the many small-business closures during the coronavirus pandemic and has redesigned its “Closing a Business” page on its website to help.

The agency has information and procedures for sole proprietorships, partnerships and corporations. Among the to-dos:
– File a final return
– Pay taxes
– Check the rules for terminating a retirement plan
– Cancel your employer identification number and your IRS business account
– Keep your business, tax and payroll records

The Kiplinger Tax Letter
October 2020

Short Term Rental Property

The passive loss rules are strict for short-term rentals of real estate, meaning average rentals of seven days or less. A couple owned beachfront property that they rented out over the years for an average rental period of seven days or less. They paid a management company to get tenants, collect rents, clean and the like. The couple visited the property occasionally to buy supplies and to make repairs.

According to the Tax Court, the couple did not materially participate in the property and can’t deduct the losses. The couples claim that they devoted at least 100 hours a year to the activity and that their participation was more than anyone else’s, even the management firm’s, didn’t fly with the Court. (Lucero, TC Memo. 2020-136).

Renting through a management company doesn’t negate short-term stays. A real estate pro and his wife owned units at a resort in Colo., Mexico and Hawaii. They contracted with management firms to handle rentals of the units to guests. The average period of per-guest use was less than seven days. The IRS claimed the rentals were not a qualified rental activity because of the guests short-term stays. The couple argued that the management firms, and not the end users, were rental customers. After the couple lost in district court, they appealed, but to no avail. An appeals court said they are not involved in rental activities. They also didn’t materially participate, so the losses are disallowed (Eger, 9th Cir.).

The Kiplinger Tax Letter
October 2020

Social Security Changes

Social Security recipients get a 1.3% increase in their benefits in 2021. The earnings test limits are heading up. Individuals who turn 66 next year will not lose any benefits if they earn $50.520 or less before they reach that age.

Individuals who are 62 through 65 by the end of 2021 can make up to $18,960 before they lose any benefits. There is no earnings cap once a beneficiary turns 66.

The Social Security wage base rises next year to $142,800, a $5,100 hike. The Social Security tax rate on employers and employees stays pat at 6.2%. Both will continue to pay the 1.45% Medicare tax on all compensation, with no cap.

Individuals also pay the 0.9% Medicare surtax on wages and self-employment income over $200,000 for singles and $250,000 for couples. The surtax doesn’t hit employers.

The Kiplinger Tax Letter
October 2020

Virtual Currency Tax Update

Covid-19 has stifled the IRS’s enforcement arm. Many of the agency’s audit activities were curbed from mid-March to July 15 because of the pandemic, and the IRS is slowly stepping back into doing exams. But the IRS hasn’t lost focus of its key priorities. On that list are virtual currency transactions. According to the IRS Commissioner Charles Rettig, the IRS remains very active in increasing tax compliance in emerging areas such as virtual currency.

Virtual currency is treated as property for tax purposes. This includes bitcoin and other forms of similar digital representations of value that act as a substitute for real currency. Taxpayers who sell or exchange virtual currency will recognize gain or loss on the transaction. The profit or loss will be capital gain or loss if the bitcoins were held for investment, similar to stocks or bonds. If you held the virtual currency for more than one year before selling or exchanging it, then the capital gain or loss is long-term and subject to preferred tax rules. Otherwise, it is short-term.

Taxpayers who accept bitcoin as pay for service have ordinary income equal to the value in the U.S. dollars on the date of receipt. Your tax basis in bitcoin is that same value. Employers that pay wages with bitcoin or other cryptocurrency report the U.S. dollar value on W-2s. Ditto for businesses that send out 1099 forms.

The IRS issued further guidance on the taxation of virtual currency last year. Among the topics addressed was donating or gifting cryptocurrency, determining tax basis and holding period in virtual currency received for services or the sale of property, and tax consequences when the currency is split into two as a result of certain software changes, commonly referred to as hard fork. Plus tax return reporting. The IRS has a set of FAQ’s on its website with more details.

The Kiplinger Tax Letter
October 2020

Seek Tax Aid for Medical Dependent

Suppose you help support an elderly parent or another qualifying relative. Under the Tax Cuts and Jobs Act (TCJA), you cannot claim a dependency exemption deduction for a dependent relative for 2018-2025. But keep reading.

Pay your dependent qualifying relative’s medical expenses. You can add those expenses to your own medical expenses for the year. For 2020, you can write off as an itemized deduction medical expense to the extent they exceed 7.5% of your adjusted gross income (AGI).

Expenses paid for a dependent qualifying relative could put you over the 7.5%-of-AGI deduction threshold. You must pay over half of your qualifying relative’s support for the year for the relative to be classified for the year as your dependent for itemized medical expense deduction purposes.

Caution: To deduct a dependent qualifying relative’s medical expenses, you must make direct payments to medical service providers. Simply reimbursing your relative for expenses that he or she already paid will not get you any deduction.

Example: For 2020, Mom’s total support is $30,000. You give her $1,500 a month for rent, utilities, and groceries, for a total of $18,000 which exceeds 50% of her $30,000 of support. Mom has $2,000 in medical bills that she intends to pay out of her retirement savings.

Better idea: Pay the $2,000 for Mom. Make payment directly to the medical service providers. If necessary, you can reduce the amount you pay for Mom’s rent, utilities, and groceries for the rest of the year by $2,000. Or not, if you can spare the extra $2,000. Either way, you can add the $2,000 of medical bills paid for Mom to your own medical expenses for the purpose of clearing the 7.5%-of-AGI itemized medical expense deduction threshold on your 2020 Form 1040.

Tip: Mom cannot deduct medical expenses that you pay, but she probably claims the standard deduction instead of itemizing. If so, she would not be able to claim any medical expense write off anyway.

Small Business Tax Strategies
August 2020

Reap Tax Windfall From Your Home

As Dorothy said in the classic film The Wizard of Oz, “there’s no place like home.”

Don’t sleep on the tax breaks associated with home ownership. Not only can you benefit while you are living there, you can reap a tax windfall when you finally sell the place.

Here are six ways to go over the rainbow.

  • Cash in on a home sale. Start with one of the biggest tax breaks on the books. If you meet certain requirements you can pocket hundreds of thousands of dollars from a home sale without paying a penny of federal income tax on your gain. Notably, you must have owned and used the home as your principal residence for at least two years during the five-year period ending on the sale date. The maximum exclusion is $250,000 for single filers and $500,000 for joint filers.

Tip: If you are forced to sell the home due to health reasons, an employment change, or other unforeseen circumstances, you may be in line for a partial exclusion.

  • Max out on property taxes. Prior to the Tax Cuts and Job Acts (TCJA), taxpayers could generally write off the full amount of property taxes paid on a principal residence if they itemized. But the TCJA limits the annual deduction for state and local tax (SALT) payments, including property taxes, to $10,000 for 2018 through 2025. Nevertheless, you still derive some tax benefits, especially if your other SALT payments are relatively low or nonexistent. There is no tax reward if you do not itemize.
  • Key in on mortgage interest. The TCJA also modified the deduction for qualified residence interest for 2018 through 2025. Previously, you could deduct interest on home acquisition debts up to $1 million, but the TCJA lowered the threshold to $750,000 (although debts for pre-December 16, 2017 loans are grandfathered). In addition, the deduction for interest paid on the first $100,000 of home equity debt is generally suspended for 2018-2025. However, if you take out a home equity loan and use the proceeds for a home improvement, it can potentially qualify as home acquisition debt, subject to the $750,000 limit when combined with other home acquisition debt. Voila! You may be able to deduct interest on the home equity loan, subject to the $750,000 limit on home acquisition debt.

Note: As with property taxes, you must itemize to benefit from this technique.

  • Prescribe a medical deduction. Itemizers may be in line for another tax break from home improvements. If you arrange an improvement for a medical reason (e.g., you install a pool to help alleviate a child’s asthma), the cost is added to your other deductible medical expenses (minus the increase in the value to our home). You should have a medical doctor’s note to support the expenditure as necessary. To qualify for an itemized medical expense deduction, your unreimbursed medical expenses must exceed 7.5% of your adjusted gross income (AGI). You can only deduct the excess.
  • Be a landlord. When you own a home used as a rental property, you are entitled to deduct depreciation, plus other expenses related to the rental like insurance, repairs, property taxes, mortgage interest, etc. These deductions can help offset tax on the rental income. Note, however, that special rules apply to a “vacation home” you rent to others and use personally. If your personal use exceeds the greater of 14 days or 10% of the days the home is rented out, you cannot claim a rental tax loss for the year.
  • Do your homework. If you are self-employed and use part of your home for business purposes, you may be eligible for home office deductions. To qualify, you must use the office regularly and exclusively as your principal place of business or a place where you meet or deal with clients, patients, or customers in the normal course of business. Assuming you meet this test, you can write off the allocable portion of expenses like utilities, insurance, and repairs, as well as the expenses directly attributable to the home office.

Small Business Tax Strategies
August 2020