Re-evaluate your company’s competitiveness in a changed economy
Just about every business owner’s strategic plans for 2020 look
far different now than they did heading into the year. The COVID-19 pandemic
has changed the economy in profound ways, forcing many companies to recalibrate
suddenly and severely.
As your business moves forward in this uncertain environment,
it’s important to re-evaluate competitiveness. You may have lost an edge that
previously existed, or you may have the opportunity to gain one. Here are some
critical elements to consider.
Objectively assess leadership
More than likely, you and your management team have had to make
some difficult decisions over the last few months. Even if you feel confident
that you’ve done most everything right, objectively examine and discuss your
successes, failures, strengths and weaknesses.
For instance, maybe you’ve had some contentious interactions
with employees while adjusting to remote work environments or increased safety
protocols. Ask your managers whether underlying tensions exist and, if so, how
you might improve morale.
Reassess external relationships
Most businesses rely on relationships to function competitively.
These include connections with customers, suppliers, lenders, advisors and the
local community. In addition, if your company is subject to regulatory
oversight, it must cooperate with local, state and federal officials.
Review and discuss the state of each of these relationships. Are
you getting positive customer feedback on your response to the crisis? Have you
been paying suppliers on time? If not, are you openly communicating about potential
solutions?
Examine supply chain and technology
Competitiveness can hinge on a company’s ability to access the
supplies it needs to operate profitably, and the crisis has had a major impact
on supply chains. Are you in danger of being cut off or limited from any
mission-critical supplies or materials?
Also, look into whether you have access to optimal and scalable
technology that allows you to produce and deliver competitive products or
services. This has become a major issue in many industries as companies pivot
to operate more virtually and do less business in-person.
Look to the future
Finally, identify how COVID-19 and the resulting economic
fallout is affecting your industry. Many sectors have obviously struggled, but
others are booming in response to pandemic-driven needs for certain supplies
and services.
Study how this year’s changes are affecting industry outlook and
projected customer demand. You may need to operate more cautiously to deal with
lower revenue for another year or more. Then again, now could be the time to
claim greater market share if competitors have been struggling more than you.
Rise to the challenges
The pandemic has complicated strategic planning for every
business owner. You must now anticipate not only the usual challenges to your
competitiveness, but also the difficulties of operating safely in a pandemic
and recovering economy. Our firm can help you identify, quantify and analyze
all the factors that contribute to stability and profitability.
© 2020
PPP Flexibility Act eases rules for borrowers coping with COVID-19
As you may recall, the Small Business Administration (SBA)
launched the Paycheck Protection Program (PPP) back in April to help companies
reeling from the economic impact of the COVID-19 pandemic. Created under a
provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act, the
PPP is available to U.S. businesses with fewer than 500 employees.
In its initial incarnation, the PPP offered eligible
participants loans determined by eight weeks of previously established average
payroll. If the recipient maintained its workforce, up to 100% of the loan was
forgivable if the loan proceeds were used to cover payroll expenses, certain
employee health care benefits, mortgage interest, rent, utilities and interest
on any other existing debt during the “covered period” — that is, for eight
weeks after loan origination.
On June 5, the president signed into law the PPP Flexibility
Act. The new law makes a variety of important adjustments that ease the rules
for borrowers. Highlights include:
Extension of covered period. As
mentioned, under the CARES Act and subsequent guidance, the covered period
originally ran for eight weeks after loan origination. The PPP Flexibility Act
extends this period to the earlier of 24 weeks after the origination date or
December 31, 2020.
Adjustment of nonpayroll cost threshold. Previous
regulations issued by the U.S. Treasury Department indicated that eligible
nonpayroll costs couldn’t exceed 25% of the total forgiveness amount for a
borrower to qualify for 100% forgiveness. The PPP Flexibility Act raises this
threshold to 40%. (At least 60% of the loan must still be spent on payroll
costs.)
Lengthening of period to reestablish
workforce. Under the original PPP, borrowers faced a June 30, 2020
deadline to restore full-time employment and salary levels from reductions made
between February 15, 2020, and April 26, 2020. Failure to do so would mean a
reduction in the forgivable amount. The PPP Flexibility Act extends this
deadline to December 31, 2020.
Reassurance of access to payroll tax
deferment. The new law reassures borrowers that delayed payment of
employer payroll taxes, which is offered under a provision of the CARES Act, is
still available to businesses that receive PPP loans. It won’t be considered
impermissible double dipping.
Important note: The SBA
has announced that, to ensure PPP loans are issued only to eligible borrowers,
all loans exceeding $2 million will be subject to an audit. The government
may still audit smaller PPP loans, if there is suspicion that funds were
misused.
This is just a “quick look” at some of the important aspects of
the PPP Flexibility Act. There are many other details involved that could
affect your company’s ability to qualify for a PPP loan or to achieve 100%
forgiveness. Also, new guidance is being issued regularly and further
legislation is possible. We can help you assess your eligibility and navigate
the loan application and forgiveness processes.
© 2020
If you’re selling your home, don’t forget about taxes
Traditionally, spring and summer are popular times for selling a
home. Unfortunately, the COVID-19 crisis has resulted in a slowdown in sales.
The National Association of Realtors (NAR) reports that existing home sales in
April decreased year-over-year, 17.2% from a year ago. One bit of good news is
that home prices are up. The median existing-home price in April was $286,800,
up 7.4% from April 2019, according to the NAR.
If you’re planning to sell your home this year, it’s a good time
to review the tax considerations.
Some gain is excluded
If you’re selling your principal
residence, and you meet certain requirements, you can exclude up to
$250,000 ($500,000 for joint filers) of gain. Gain that qualifies for the
exclusion is also excluded from the 3.8% net investment income tax.
To be eligible for the exclusion, you must meet these tests:
- The ownership test. You must have owned the property for at least two years
during the five-year period ending on the sale date. - The use test. You
must have used the property as a principal residence for at least two
years during the same five-year period. (Periods of ownership and use
don’t need to overlap.)
In addition, you can’t use the exclusion more than once every
two years.
Larger gains
What if you have more than $250,000/$500,000 of profit when
selling your home? Any gain that doesn’t qualify for the exclusion generally
will be taxed at your long-term capital gains rate, provided you owned the home
for at least a year. If you didn’t, the gain will be considered short term and
subject to your ordinary-income rate, which could be more than double your
long-term rate.
Here are two other tax considerations when selling a home:
- Keep track of your basis. To support an accurate tax basis, be sure to maintain
complete records, including information on your original cost and
subsequent improvements, reduced by any casualty losses and depreciation
claimed based on business use. - Be aware that you can’t deduct a loss. If you sell your principal residence at a loss, it
generally isn’t deductible. But if a portion of your home is rented out or
used exclusively for your business, the loss attributable to that part may
be deductible.
If you’re selling a second
home (for example, a beach house), it won’t be eligible for the gain exclusion.
But if it qualifies as a rental property, it can be considered a business
asset, and you may be able to defer tax on any gains through an installment
sale or a Section 1031 like-kind exchange. In addition, you may be able to
deduct a loss.
For many people, their homes are their most valuable asset. So
before selling yours, make sure you understand the tax implications. We can
help you plan ahead to minimize taxes and answer any questions you have about
your home sale.
© 2020
Good records are the key to tax deductions and trouble-free IRS audits
If you operate a small business, or you’re starting a new one,
you probably know you need to keep records of your income and expenses. In
particular, you should carefully record your expenses in order to claim the
full amount of the tax deductions to which you’re entitled. And you want to
make sure you can defend the amounts reported on your tax returns if you’re
ever audited by the IRS or state tax agencies.
Certain types of expenses, such as automobile, travel, meals and
office-at-home expenses, require special attention because they’re subject to
special recordkeeping requirements or limitations on deductibility.
It’s interesting to note that there’s not one way to keep
business records. In its publication “Starting a Business and Keeping Records,”
the IRS states: “Except in a few cases, the law does not require any specific
kind of records. You can choose any recordkeeping system suited to your
business that clearly shows your income and expenses.”
That being said, many taxpayers don’t make the grade when it comes
to recordkeeping. Here are three court cases to illustrate some of the issues.
Case 1: Without records, the IRS can
reconstruct your income
If a taxpayer is audited and doesn’t have good records, the IRS
can perform a “bank-deposits analysis” to reconstruct income. It assumes that
all money deposited in accounts during a given period is taxable income. That’s
what happened in the case of the business owner of a coin shop and precious
metals business. The owner didn’t agree with the amount of income the IRS
attributed to him after it conducted a bank-deposits analysis.
But the U.S. Tax Court noted that if the taxpayer kept adequate
records, “he could have avoided the bank-deposits analysis altogether.” Because
he didn’t, the court found the bank analysis was appropriate and the owner
underreported his business income for the year. (TC Memo 2020-4)
Case 2: Expenses must be business related
In another case, an independent insurance agent’s claims for a
variety of business deductions were largely denied. The Tax Court found that he
had documentation in the form of cancelled checks and credit card statements
that showed expenses were paid. But there was no proof of a business purpose.
For example, he made utility payments for natural gas,
electricity, water and sewer, but the records didn’t show whether the services
were for his business or his home. (TC Memo 2020-25)
Case number 3: No records could mean no
deductions
In this case, married taxpayers were partners in a travel agency
and owners of a marketing company. The IRS denied their deductions involving
auto expenses, gifts, meals and travel because of insufficient documentation.
The couple produced no evidence about the business purpose of gifts they had
given. In addition, their credit card statements and other information didn’t
detail the time, place, and business relationship for meal expenses or indicate
that travel was conducted for business purposes.
“The disallowed deductions in this case are directly
attributable to (the taxpayer’s) failure to maintain adequate records,“ the
court stated. (TC Memo 2020-7)
We can help
Contact us if you need assistance retaining adequate business
records. Taking a meticulous, proactive approach to how you keep records can
protect your deductions and help make an audit much less painful.
© 2020
Rioting damage at your business? You may be able to claim casualty loss deductions
The recent riots around the country have resulted in many
storefronts, office buildings and business properties being destroyed. In the
case of stores or other businesses with inventory, some of these businesses
lost products after looters ransacked their property. Windows were smashed,
property was vandalized, and some buildings were burned to the ground. This
damage was especially devastating because businesses were reopening after the
COVID-19 pandemic eased.
A commercial insurance property policy should generally cover
some, or all, of the losses. (You may also have a business interruption policy
that covers losses for the time you need to close or limit hours due to rioting
and vandalism.) But a business may also be able to claim casualty property loss
or theft deductions on its tax return. Here’s how a loss is figured for tax
purposes:
Your adjusted basis in the property
MINUS
Any salvage value
MINUS
Any insurance or other reimbursement you receive (or expect to receive).
Losses that qualify
A casualty is the damage, destruction or loss of property
resulting from an identifiable event that is sudden, unexpected or unusual. It
includes natural disasters, such as hurricanes and earthquakes, and man-made
events, such as vandalism and terrorist attacks. It does not include events
that are gradual or progressive, such as a drought.
For insurance and tax purposes, it’s important to have proof of
losses. You’ll need to provide information including a description, the cost or
adjusted basis as well as the fair market value before and after the casualty.
It’s a good time to gather documentation of any losses including receipts,
photos, videos, sales records and police reports.
Finally, be aware that the tax code imposes limits on casualty
loss deductions for personal property that are not imposed on business
property. Contact us for more information about your situation.
© 2020
Seniors: Can you deduct Medicare premiums?
If you’re age 65 and older, and you have basic Medicare
insurance, you may need to pay additional premiums to get the level of coverage
you want. The premiums can be costly, especially if you’re married and both you
and your spouse are paying them. But there may be a silver lining: You may
qualify for a tax break for paying the premiums.
Tax deductions for Medicare premiums
You can combine premiums for Medicare health insurance with
other qualifying health care expenses for purposes of claiming an itemized
deduction for medical expenses on your tax return. This includes amounts for
“Medigap” insurance and Medicare Advantage plans. Some people buy Medigap
policies because Medicare Parts A and B don’t cover all their health care
expenses. Coverage gaps include co-payments, co-insurance, deductibles and
other costs. Medigap is private supplemental insurance that’s intended to cover
some or all gaps.
Many people no longer itemize
Qualifying for a medical expense deduction may be difficult for
a couple of reasons. For 2020 (and 2019), you can deduct medical expenses only
if you itemize deductions and only to the extent that total qualifying expenses
exceeded 7.5% of AGI.
The Tax Cuts and Jobs Act nearly doubled the standard deduction
amounts for 2018 through 2025. As a result, fewer individuals are claiming
itemized deductions. For 2020, the standard deduction amounts are $12,400 for
single filers, $24,800 for married couples filing jointly and $18,650 for heads
of household. (For 2019, these amounts were $12,200, $24,400 and $18,350,
respectively.)
However, if you have significant medical expenses, including
Medicare health insurance premiums, you may itemize and collect some tax
savings.
Note: Self-employed people and shareholder-employees of S
corporations can generally claim an above-the-line
deduction for their health insurance premiums, including Medicare premiums. So,
they don’t need to itemize to get the tax savings from their premiums.
Medical expense deduction basics
In addition to Medicare premiums, you can deduct various medical
expenses, including those for dental treatment, ambulance services, dentures,
eyeglasses and contacts, hospital services, lab tests, qualified long-term care
services, prescription medicines and others.
There are also many items that Medicare doesn’t cover that can
be written off for tax purposes, if you qualify. In addition, you can deduct
transportation expenses to get to medical appointments. If you go by car, you
can deduct a flat 17-cents-per-mile rate for 2020 (down from 20 cents for
2019), or you can keep track of your actual out-of-pocket expenses for gas, oil
and repairs.
We can help
Contact us if you have additional questions about Medicare
coverage options or claiming medical expense deductions on your personal tax
return. We can help determine the optimal overall tax-planning strategy based
on your situation.
© 2020
A nonworking spouse can still have an IRA
It’s often difficult for married couples to save as much as they
need for retirement when one spouse doesn’t work outside the home — perhaps so
that spouse can take care of children or elderly parents. In general, an IRA
contribution is allowed only if a taxpayer has compensation. However, an exception
involves a “spousal” IRA. It allows a contribution to be made for a nonworking
spouse.
Under the spousal IRA rules, the amount that a married couple
can contribute to an IRA for a nonworking spouse in 2020 is $6,000, which is
the same limit that applies for the working spouse.
Two main benefits
As you may be aware, IRAs offer two types of benefits for
taxpayers who make contributions to them.
- Contributions of up to $6,000 a year to an IRA may be
tax deductible. - The earnings on funds within the IRA are not taxed
until withdrawn. (Alternatively, you may make contributions to a Roth IRA.
There’s no deduction for Roth IRA contributions, but, if certain requirements
are met, distributions are tax-free.)
As long as the couple together has at least $12,000 of earned
income, $6,000 can be contributed to an IRA for each, for a total of $12,000.
(The contributions for both spouses can be made to either a regular IRA or a
Roth IRA, or split between them, as long as the combined contributions don’t
exceed the $12,000 limit.)
Catching up
In addition, individuals who are age 50 or older can make
“catch-up” contributions to an IRA or Roth IRA in the amount of $1,000. Therefore,
in 2020, for a taxpayer and his or her spouse, both of whom will have reached
age 50 by the end of the year, the combined limit of the deductible
contributions to an IRA for each spouse is $7,000, for a combined deductible
limit of $14,000.
There’s one catch, however. If, in 2020, the working spouse is
an active participant in either of several types of retirement plans, a
deductible contribution of up to $6,000 (or $7,000 for a spouse who will be 50
by the end of the year) can be made to the IRA of the non-participant spouse
only if the couple’s AGI doesn’t exceed $104,000. This limit is phased out for
AGI between $196,000 and $206,000.
Contact us if you’d like more information about IRAs or you’d
like to discuss retirement planning.
© 2020
Does your company have an emergency succession plan?
For business owners, succession planning is ideally a long-term
project. You want to begin laying out a smooth ownership transition, and
perhaps grooming a successor, years
in advance. And you shouldn’t officially hand over the reins until many minute
details have been checked and rechecked.
But it doesn’t always work out this way. As the coronavirus
(COVID-19) pandemic has made clear, a business owner may suddenly vanish from
the picture — leaving the company adrift in a time of crisis. In such an
instance, a traditional succession plan may be too cumbersome or indistinct to
execute. That’s why every company should create an emergency succession plan.
Contingency people
When preparing for potential disasters in the past, you’ve
probably been urged to devise contingency plans to stay operational. In the
case of an emergency succession plan, you need to identify contingency people.
Larger organizations may have an advantage here as a CFO or COO
may be able to temporarily or even permanently replace a CEO with relative
ease. For small to midsize companies, the challenge can be greater —
particularly if the owner is heavily involved in retaining key customers or
bringing in new business.
Nevertheless, an emergency succession plan needs to name someone
who can take on a credible leadership role if you become seriously ill or
otherwise incapacitated. He or she should be a trusted individual who you
expect to retain long-term and who has the skills and personality to stabilize
the company during a difficult time.
After you identify this person, consider the “domino effect.”
That is, who will take on your emergency successor’s role when he or she is
busy running the company?
Communication strategies
A traditional succession plan is usually kept close to the vest
until it’s fully formulated and nearing execution. An emergency succession
plan, however, needs to be transparent and well-communicated from the
beginning.
After choosing an “emergency successor,” meet with the person to
discuss the role in depth. Listen to any concerns raised and take steps to
alleviate them. For instance, you may need to train your emergency successor in
various duties or allow him or her to participate in executive-level decisions
to get a feel for running the business.
Beyond that, your company as a whole should know about the
emergency succession plan and how it will affect everyone’s day-to-day duties
if executed. Now may be an optimal time to do this because COVID-19 has put
everyone in a “disaster recovery” frame of mind. It’s also a good idea to
develop a communications strategy for letting customers and suppliers know that
you have an emergency succession plan in place.
Total preparedness
Along with all the hardships wrought by the pandemic, some
powerful lessons are emerging. One of them is the importance of preparedness at
every level. We offer assistance in developing both traditional business
succession plans and emergency ones.
© 2020
Student loan interest: Can you deduct it on your tax return?
The economic impact of the novel coronavirus (COVID-19) is
unprecedented and many taxpayers with student loans have been hard hit.
The Coronavirus Aid, Relief and Economic Security (CARES) Act
contains some assistance to borrowers with federal student loans. Notably,
federal loans were automatically placed in an administrative forbearance, which
allows borrowers to temporarily stop making monthly payments. This payment
suspension is scheduled to last until September 30, 2020.
Tax deduction rules
Despite the suspension, borrowers can still make payments if
they choose. And borrowers in good standing made payments earlier in the year
and will likely make them later in 2020. So can you deduct the student loan
interest on your tax return?
The answer is yes, depending on your income and subject to
certain limits. The maximum amount of student loan interest you can deduct each
year is $2,500. The deduction is phased out if your adjusted gross income (AGI)
exceeds certain levels.
For 2020, the deduction is phased out for taxpayers who are
married filing jointly with AGI between $140,000 and $170,000 ($70,000 and
$85,000 for single filers). The deduction is unavailable for taxpayers with AGI
of $170,000 ($85,000 for single filers) or more. Married taxpayers must file
jointly to claim the deduction.
Other requirements
The interest must be for a “qualified education loan,” which
means debt incurred to pay tuition, room and board, and related expenses to
attend a post-high school educational institution. Certain vocational schools
and post-graduate programs also may qualify.
The interest must be on funds borrowed to cover qualified
education costs of the taxpayer, his or her spouse or a dependent. The student
must be a degree candidate carrying at least half the normal full-time
workload. Also, the education expenses must be paid or incurred within a
reasonable time before or after the loan is taken out.
It doesn’t matter when the loan was taken out or whether
interest payments made in earlier years on the loan were deductible or not. And
no deduction is allowed to a taxpayer who can be claimed as a dependent on
another taxpayer’s return.
The deduction is taken “above the line.” In other words, it’s
subtracted from gross income to determine AGI. Thus, it’s available even to
taxpayers who don’t itemize deductions.
Document expenses
Taxpayers should keep records to verify eligible expenses.
Documenting tuition isn’t likely to pose a problem. However, take care to
document other qualifying expenditures for items such as books, equipment,
fees, and transportation. Documenting room and board expenses should be simple
if a student lives in a dormitory. Student who live off campus should maintain
records of room and board expenses, especially when there are complicating factors
such as roommates.
Contact us if you have questions about deducting student loan
interest or for information on other tax breaks related to paying for college.
© 2020
IRS releases 2021 amounts for Health Savings Accounts
The IRS recently released the 2021 inflation-adjusted amounts
for Health Savings Accounts (HSAs).
HSA basics
An HSA is a trust created or organized exclusively for the
purpose of paying the “qualified medical expenses” of an “account beneficiary.”
An HSA can only be established for the benefit of an “eligible individual” who
is covered under a “high deductible health plan.” In addition, a participant
can’t be enrolled in Medicare or have other health coverage (exceptions include
dental, vision, long-term care, accident and specific disease insurance).
In general, a high deductible health plan (HDHP) is a plan that
has an annual deductible that isn’t less than $1,000 for self-only coverage and
$2,000 for family coverage. In addition, the sum of the annual deductible and
other annual out-of-pocket expenses required to be paid under the plan for
covered benefits (but not for premiums) cannot exceed $5,000 for self-only
coverage, and $10,000 for family coverage.
Within specified dollar limits, an above-the-line tax deduction
is allowed for an individual's contribution to an HSA. This annual contribution
limitation and the annual deductible and out-of-pocket expenses under the tax
code are adjusted annually for inflation.
Inflation adjustments for 2021 contributions
In Revenue Procedure 2020-32, the IRS released the 2021
inflation-adjusted figures for contributions to HSAs, which are as follows:
Annual contribution limitation. For
calendar year 2021, the annual contribution limitation for an individual with
self-only coverage under a HDHP is $3,600. For an individual with family
coverage, the amount is $7,200. This is up from $3,550 and $7,100,
respectively, for 2020.
High deductible health plan defined. For
calendar year 2021, an HDHP is a health plan with an annual deductible that
isn’t less than $1,400 for self-only coverage or $2,800 for family coverage
(these amounts are unchanged from 2020). In addition, annual out-of-pocket
expenses (deductibles, co-payments, and other amounts, but not premiums) can’t
exceed $7,000 for self-only coverage or $14,000 for family coverage (up from
$6,900 and $13,800, respectively, for 2020).
A variety of benefits
There are many advantages to HSAs. Contributions to the accounts
are made on a pre-tax basis. The money can accumulate year after year tax free
and be withdrawn tax free to pay for a variety of medical expenses such as
doctor visits, prescriptions, chiropractic care and premiums for long-term-care
insurance. In addition, an HSA is "portable." It stays with an
account holder if he or she changes employers or leaves the work force. For
more information about HSAs, contact your employee benefits and tax advisor.
© 2020