2020 Tax Planning

Now, as year-end approaches, is a good time to think about planning moves that may help lower your tax bill for this year and possibly next. Year-end planning for 2020 takes place during the COVID-19 pandemic, which in addition to its devastating health and mortality impact has widely affected personal and business finances. New tax rules have been enacted to help mitigate the financial impact of the disease, some of which should be considered as part of this years' planning, most notably elimination of required retirement plan distributions, and liberalized charitable deduction rules.

Major tax changes from recent years generally remain in place, including lower income tax rates, larger standard deductions, limited itemized deductions, elimination of personal exemptions, an increased child tax credit, and a lessened alternative minimum tax (AMT) for individuals; and a major corporate tax rate reduction and elimination of the corporate AMT, limits on interest deductions, and generous expensing and depreciation rules for businesses. And non-corporate taxpayers with certain income from pass-through entities may still be entitled to a valuable deduction.

Despite the lack of major year-over-year tax changes, the time-tested approach of deferring income and accelerating deductions to minimize taxes still works for many taxpayers, as does the bunching of expenses into this year or next to avoid restrictions and maximize deductions..

We have compiled a list of actions based on current tax rules that may help you save tax dollars, or access tax deferred benefits or growth, if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. Want to discuss specific planning considerations in your case? You can contact us to setup a planning discussion for your specific situation.

Year-End Tax Planning Moves for Individuals

  • Higher-income earners must be wary of the 8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI. An important exception is that NII does not include distributions from IRAs and most other retirement plans.
  • The 9% additional Medicare tax also may require higher-income earners to take year-end action. It applies to individuals whose employment wages and self-employment income total more than a threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he or she would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000.
  • Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $80,000 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year for example, you are a joint filer who made a profit of $5,000 on the sale of stock held for more than one year and your other taxable income for 2020 is $75,000 then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses won't yield a benefit this year. (It will offset $5,000 of capital gain that is already tax-free.)
  • Postpone income until 2021 and accelerate deductions into 2020 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2020 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2020. For example, that may be the case for a person who will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or who expects to be in a higher tax bracket next year.
  • If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA in 2020 if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2020, and possibly reduce tax breaks geared to AGI (or modified AGI).
  • It may be advantageous to try to arrange with your employer to defer, until early 2021, a bonus that may be coming your way. This could cut as well as defer your tax.
  • Many taxpayers won't be able to itemize because of the high basic standard deduction amounts that apply for 2020 ($24,800 for joint filers, $12,400 for singles and for marrieds filing separately, $18,650 for heads of household), and because many itemized deductions have been reduced or abolished. Like last year, no more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible; and personal casualty and theft losses are deductible only if they're attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses but only to the extent they exceed 7.5% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt, but payments of those items won't save taxes if they don't cumulatively exceed the standard deduction for your filing status. Two COVID-related changes for 2020 may be relevant here: (1) Individuals may claim a $300 above-the-line deduction for cash charitable contributions on top of their standard deduction; and the percentage limit on charitable contributions has been raised from 60% of modified adjusted gross income (MAGI) to 100%.
  • Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, a taxpayer who will be able to itemize deductions this year but not next will benefit by making two years' worth of charitable contributions this year, instead of spreading out donations over 2020 and 2021. The COVID-related increase for 2020 in the income-based charitable deduction limit for cash contributions from 60% to 100% of MAGI assists in this bunching strategy, especially for higher income individuals with the means and disposition to make large charitable contributions.
  • Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2020 deductions even if you don't pay your credit card bill until after the end of the year.
  • If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2020, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2020. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not good to the extent it causes your 2020 state and local tax payments to exceed $10,000.
  • Required minimum distributions (RMDs) that usually must be taken from an IRA or 401(k) plan (or other employer-sponsored retirement plan) have been waived for 2020. This includes RMDs that would have been required by April 1 if you hit age 70½ during 2019 (and for non-5% company owners over age 70½ who retired during 2019 after having deferred taking RMDs until April 1 following their year of retirement). So if you don't have a financial need to take a distribution in 2020, you don't have to. Note that because of a recent law change, plan participants who turn 70½ in 2020 or later needn't take required distributions for any year before the year in which they reach age 72.
  • If you are age 70½ or older by the end of 2020, have traditional IRAs, and especially if you are unable to itemize your deductions, consider making 2020 charitable donations via qualified charitable distributions from your IRAs. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. However, you are still entitled to claim the entire standard deduction. (Previously, those who reached reach age 70½ during a year weren't permitted to make contributions to a traditional IRA for that year or any later year. While that restriction no longer applies, the qualified charitable distribution amount must be reduced by contributions to an IRA that were deducted for any year in which the contributor was age 70½ or older, unless a previous qualified charitable distribution exclusion was reduced by that post-age 70½ contribution.)
  • If you are younger than age 70½ at the end of 2020, you anticipate that you will not itemize your deductions in later years when you are 70½ or older, and you don't now have any traditional IRAs, establish and contribute as much as you can to one or more traditional IRAs in 2020. If these circumstances apply to you, except that you already have one or more traditional IRAs, make maximum contributions to one or more traditional IRAs in 2020. Then, in the year you reach age 70½, make your charitable donations by way of qualified charitable distributions from your IRA. Doing this will allow you, in effect, to convert nondeductible charitable contributions that you make in the year you turn 70½ and later years, into deductible-in-2020 IRA contributions and reductions of gross income from later year distributions from the IRAs.
  • Take an eligible rollover distribution from a qualified retirement plan before the end of 2020 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2020. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2020, but the withheld tax will be applied pro rata over the full 2020 tax year to reduce previous underpayments of estimated tax.
  • Consider increasing the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year and anticipate similar medical costs next year.
  • If you become eligible in December of 2020 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2020.
  • Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2020 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
  • If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2020 return normally filed next year), or on the return for the prior year (2019), generating a quicker refund.
  • If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in 2020 in order to maximize your casualty loss deduction this year.

Year-End Tax-Planning Moves for Businesses & Business Owners

  • Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2020, if taxable income exceeds $326,600 for a married couple filing jointly, $163,300 for singles, marrieds filing separately, and heads of household, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income between $326,600 and $426,600, and to all other filers with taxable income between $163,300 and $213,300.
  • Taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2020. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting your tax adviser.
  • More small businesses are able to use the cash (as opposed to accrual) method of accounting in than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test. For 2020, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don't exceed $26 million (the dollar amount was $25 million for 2018, and for earlier years it was $1 million for most businesses). Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.
  • Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2020, the expensing limit is $1,040,000, and the investment ceiling limit is $2,590,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for qualified improvement property (generally, any interior improvement to a building's interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is in service during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2020, rather than at the beginning of 2021, can result in a full expensing deduction for 2020.
  • Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service this year, and for qualified improvement property, described above as related to the expensing deduction. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2020.
  • Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2020.
  • A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for 2020 (and substantial net income in 2021) may find it worthwhile to accelerate just enough of its 2021 income (or to defer just enough of its 2020 deductions) to create a small amount of net income for 2020. This will permit the corporation to base its 2021 estimated tax installments on the relatively small amount of income shown on its 2020 return, rather than having to pay estimated taxes based on 100% of its much larger 2021 taxable income.
  • To reduce 2020 taxable income, consider deferring a debt-cancellation event until 2021.
  • To reduce 2020 taxable income, consider disposing of a passive activity in 2020 if doing so will allow you to deduct suspended passive activity losses.

Have questions about implementing these strategies for your specific situation? Contact Us for more info

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Putting the finishing touches on next year’s budget

By now, some businesses have completed their 2021 budgets while
others are still crunching numbers and scrutinizing line items. As you put the
finishing touches on your company’s spending plan for next year, be sure to
cover the finer points of the process.

This means not just creating a budget for the sake of doing so
but ensuring that it’s a useful and well-understood plan for everyone.


Management teams are often frustrated by the budgeting process.
There are so many details and so much uncertainty. All too often, the stated
objective is to create a budget with or without everyone’s buy-in for how to
get there.

To put a budget in the best position for success, every member
of the leadership team needs to agree on common forecasting goals. Ideally,
before sitting down to review a budget in process, much less view a
presentation on a completed budget, you and your managers should’ve established
some basic ground rules and reasonable expectations.

If you’re already down the road in creating a budget, it may not
be too late. Call a meeting and get everyone on the same page before you issue
the final product.

for variances

Many budgets fail because they rely on purely accounting-driven,
historically minded budgeting techniques. To increase the likelihood of
success, you need to actively anticipate “variances.” These are major risks
that could leave your business vulnerable to high-impact financial hits if the
threats materialize.

One type of risk to consider is the competition. The COVID-19 pandemic
and resulting economic impact has reengineered the competitive landscape in
some markets. Unfortunately, many smaller businesses have closed, while larger,
more financially stable companies have asserted their dominance. Be sure the
budget accounts for your place in this hierarchy.

Another risk is compliance. Although regulatory oversight has
diminished in many industries under the current presidential administration,
this may change next year. Be it health care benefits, hiring and independent
contractor policies, or waste disposal, factor compliance risk into your

A third type of variance to consider is internal. If your
business laid off employees this year, will you likely need to rehire some of
them in 2021 as, one hopes, the economy rebounds from the pandemic? Also,
investigate whether fraud affected this year’s budget and how next year’s
edition may need more investment in internal controls to prevent losses.

Eyes on
the prize

Above all, stay focused on the objective of creating a feasible,
flexible budget. Many companies get caught up in trying to tie business
improvement and strategic planning initiatives into the budgeting process.
Doing so can lead to confusion and unexpectedly high demands of time and

You’re looking to set a budget — not fix every minute aspect of
the company. Our firm can help review your process and recommend improvements
that will enable you to avoid common problems and get optimal use out of a
well-constructed budget for next year.

© 2020

Taking distributions from a traditional IRA

Although planning is needed to help build the biggest possible
nest egg in your traditional IRA (including a SEP-IRA and SIMPLE-IRA), it’s
even more critical that you plan for withdrawals from these tax-deferred
retirement vehicles. There are three areas where knowing the fine points of the
IRA distribution rules can make a big difference in how much you and your
family will keep after taxes:

What if you need to take money out of a
traditional IRA before age 59½? For example, you may need money to pay your
child’s education expenses, make a down payment on a new home or meet necessary
living expenses if you retire early. In these cases, any distribution to you
will be fully taxable (unless nondeductible contributions were made, in which
case part of each payout will be tax-free). In addition, distributions before
age 59½ may also be subject to a 10% penalty tax. However, there are several
ways that the penalty tax (but not the regular income tax) can be avoided,
including a method that’s tailor-made for individuals who retire early and need
to draw cash from their traditional IRAs to supplement other income.

The decision concerning who you want to
designate as the beneficiary of your traditional IRA is critically important.
This decision affects the minimum amounts you must generally withdraw from the
IRA when you reach age 72, who will get what remains in the account at your
death, and how that IRA balance can be paid out. What’s more, a periodic review
of the individual(s) you’ve named as IRA beneficiaries is vital. This helps
assure that your overall estate planning objectives will be achieved in light
of changes in the performance of your IRAs, as well as in your personal,
financial and family situation.

minimum distributions (RMDs). 
Once you attain age 72,
distributions from your traditional IRAs must begin. If you don’t withdraw the
minimum amount each year, you may have to pay a 50% penalty tax on what should
have been paid out — but wasn’t. However, for 2020, the CARES Act suspended the
RMD rules — including those for inherited accounts — so you don’t have to take
distributions this year if you don’t want to. Beginning in 2021, the RMD rules
will kick back in unless Congress takes further action. In planning for
required distributions, your income needs must be weighed against the desirable
goal of keeping the tax shelter of the IRA going for as long as possible for
both yourself and your beneficiaries.

versus Roth

It may seem easier to put money into a traditional IRA than to
take it out. This is one area where guidance is essential, and we can assist
you and your family. Contact us to conduct a review of your traditional IRAs
and to analyze other aspects of your retirement planning. We can also discuss
whether you can benefit from a Roth IRA, which operate under a different set of
rules than traditional IRAs.

© 2020

Health Savings Accounts for your small business

Small business owners are well aware of the increasing cost of
employee health care benefits. As a result, your business may be interested in
providing some of these benefits through an employer-sponsored Health Savings
Account (HSA). Or perhaps you already have an HSA. It’s a good time to review
how these accounts work since the IRS recently announced the relevant
inflation-adjusted amounts for 2021.

basics of HSAs

For eligible individuals, HSAs offer a tax-advantaged way to set
aside funds (or have their employers do so) to meet future medical needs. Here
are the key tax benefits:

  • Contributions that participants make to an HSA are
    deductible, within limits.
  • Contributions that employers make aren’t taxed to
  • Earnings on the funds within an HSA aren’t taxed, so
    the money can accumulate year after year tax free.
  • HSA distributions to cover qualified medical expenses
    aren’t taxed.
  • Employers don’t have to pay payroll taxes on HSA
    contributions made by employees through payroll deductions.

Key 2020
and 2021 amounts

To be eligible for an HSA, an individual must be covered by a
“high deductible health plan.” For 2020, a “high deductible health plan” is one
with an annual deductible of at least $1,400 for self-only coverage, or at
least $2,800 for family coverage. For 2021, these amounts are staying the same.

For self-only coverage, the 2020 limit on deductible
contributions is $3,550. For family coverage, the 2020 limit on deductible
contributions is $7,100. For 2021, these amounts are increasing to $3,600 and
$7,200, respectively. Additionally, for 2020, annual out-of-pocket expenses
required to be paid (other than for premiums) for covered benefits cannot
exceed $6,900 for self-only coverage or $13,800 for family coverage. For 2021,
these amounts are increasing to $7,000 and $14,000.

An individual (and the individual’s covered spouse, as well) who
has reached age 55 before the close of the tax year (and is an eligible HSA
contributor) may make additional “catch-up” contributions for 2020 and 2021 of
up to $1,000.

on an employee’s behalf

If an employer contributes to the HSA of an eligible individual,
the employer’s contribution is treated as employer-provided coverage for
medical expenses under an accident or health plan and is excludable from an
employee’s gross income up to the deduction limitation. There’s no
“use-it-or-lose-it” provision, so funds can be built up for years. An employer
that decides to make contributions on its employees’ behalf must generally make
comparable contributions to the HSAs of all comparable participating employees
for that calendar year. If the employer doesn’t make comparable contributions,
the employer is subject to a 35% tax on the aggregate amount contributed by the
employer to HSAs for that period.

for eligible expenses

HSA distributions can be made to pay for qualified medical
expenses. This generally means those expenses that would qualify for the
medical expense itemized deduction. They include expenses such as doctors’
visits, prescriptions, chiropractic care and premiums for long-term care

If funds are withdrawn from the HSA for any other reason, the
withdrawal is taxable. Additionally, an extra 20% tax will apply to the
withdrawal, unless it’s made after reaching age 65, or in the event of death or

As you can see, HSAs offer a flexible option for providing
health care coverage, but the rules are somewhat complex. Contact us with
questions or if you’d like to discuss offering this benefit to your employees.

© 2020

How Series EE savings bonds are taxed

Many people have Series EE savings bonds that were purchased
many years ago. Perhaps they were given to your children as gifts or maybe you
bought them yourself and put them away in a file cabinet or safe deposit box.
You may wonder: How is the interest you earn on EE bonds taxed? And if they
reach final maturity, what action do you need to take to ensure there’s no loss
of interest or unanticipated tax consequences?

Fixed or
variable interest

Series EE Bonds dated May 2005, and after, earn a fixed rate of
interest. Bonds purchased between May 1997 and April 30, 2005, earn a variable
market-based rate of return.

Paper Series EE bonds were sold at half their face value. For
example, if you own a $50 bond, you paid $25 for it. The bond isn’t worth its
face value until it matures. (The U.S. Treasury Department no longer issues EE
bonds in paper form.) Electronic Series EE Bonds are sold at face value and are
worth their full value when available for redemption.

The minimum term of ownership is one year, but a penalty is
imposed if the bond is redeemed in the first five years. The bonds earn
interest for 30 years.

Interest generally
accrues until redemption

Series EE bonds don’t pay interest currently. Instead, the
accrued interest is reflected in the redemption value of the bond. The U.S.
Treasury issues tables showing the redemption values.

The interest on EE bonds isn’t taxed as it accrues unless the
owner elects to have it taxed annually. If an election is made, all previously
accrued but untaxed interest is also reported in the election year. In most
cases, this election isn’t made so bond holders receive the benefits of tax

If the election to report the interest annually is made, it will
apply to all bonds and for all future years. That is, the election cannot be
made on a bond-by-bond or year-by-year basis. However, there’s a procedure
under which the election can be canceled.

If the election isn’t made, all of the accrued interest is
finally taxed when the bond is redeemed or otherwise disposed of (unless it was
exchanged for a Series HH bond). The bond continues to accrue interest even
after reaching its face value, but at “final maturity” (after 30 years)
interest stops accruing and must be reported.

Note: Interest on EE bonds isn’t subject to state income tax.
And using the money for higher education may keep you from paying federal
income tax on your interest.

final maturity

One of the main reasons for buying EE bonds is the fact that
interest can build up without having to currently report or pay tax on it.
Unfortunately, the law doesn’t allow for this tax-free buildup to continue
indefinitely. When the bonds reach final maturity, they stop earning interest.

Series EE bonds issued in January 1990 reached final maturity
after 30 years, in January 2020. That means that not only have they stopped
earning interest, but all of the accrued and as yet untaxed interest is taxable
in 2020.

If you own EE bonds (paper or electronic), check the issue dates
on your bonds. If they’re no longer earning interest, you probably want to
redeem them and put the money into something more profitable. Contact us if you
have any questions about savings bond taxation, including Series HH and Series
I bonds.

© 2020

Do you want to withdraw cash from your closely held corporation at a low tax cost?

Owners of closely held corporations are often interested in
easily withdrawing money from their businesses at the lowest possible tax cost.
The simplest way is to distribute cash as a dividend. However, a dividend
distribution isn’t tax-efficient, since it’s taxable to you to the extent of
your corporation’s “earnings and profits.” And it’s not deductible by the


Fortunately, there are several alternative methods that may
allow you to withdraw cash from a corporation while avoiding dividend
treatment. Here are five strategies to consider:

  • Capital repayments. To the extent that you’ve capitalized the corporation
    with debt, including amounts that you’ve advanced to the business, the
    corporation can repay the debt without the repayment being treated as a
    dividend. Additionally, interest paid on the debt can be deducted by the
    corporation. This assumes that the debt has been properly documented with
    terms that characterize debt and that the corporation doesn’t have an
    excessively high debt-to-equity ratio. If not, the “debt” repayment may be
    taxed as a dividend. If you make future cash contributions to the
    corporation, consider structuring them as debt to facilitate later
    withdrawals on a tax-advantaged basis.
  • Compensation. Reasonable compensation that you, or family members,
    receive for services rendered to the corporation is deductible by the
    business. However, it’s also taxable to the recipient(s). This same rule
    applies to any compensation (in the form of rent) that you receive from
    the corporation for the use of property. In both cases, the compensation
    amount must be reasonable in terms of the services rendered or the value
    of the property provided. If it’s considered excessive, the excess will be
    a nondeductible corporate distribution.
  • Loans. You can withdraw cash tax free from the corporation by borrowing
    money from it. However, to prevent having the loan characterized as a
    corporate distribution, it should be properly documented in a loan
    agreement or note. It should also be made on terms that are comparable to
    those in which an unrelated third party would lend money to you, including
    a provision for interest and principal. Also, consider what the
    corporation’s receipt of interest income will mean.
  • Fringe benefits. You may want to obtain the equivalent of a cash
    withdrawal in fringe benefits, which aren’t taxable to you and are
    deductible by the corporation. Examples include life insurance, certain
    medical benefits, disability insurance and dependent care. Most of these
    benefits are tax-free only if provided on a nondiscriminatory basis to
    other corporation employees. You can also establish a salary reduction
    plan that allows you (and other employees) to take a portion of your
    compensation as nontaxable benefits, rather than as taxable compensation.
  • Property sales. You can withdraw cash from the corporation by selling
    property to it. However, certain sales should be avoided. For example, you
    shouldn’t sell property to a more than 50%-owned corporation at a loss,
    since the loss will be disallowed. And you shouldn’t sell depreciable
    property to a more than 50%-owned corporation at a gain, since the gain
    will be treated as ordinary income, rather than capital gain. A sale
    should be on terms that are comparable to those in which an unrelated
    third party would purchase the property. You may need to obtain an
    independent appraisal to establish the property’s value.


If you’re interested in discussing any of these ideas, contact
us. We can help you get the most out of your corporation at the lowest tax

© 2020

Should you go phishing with your employees?

Every business owner is aware of the threat posed by
cybercriminals. If a hacker were to gain access to the sensitive data about
your business, customers or employees, the damage to your reputation and
profitability could be severe.

You’re also probably aware of the specific danger of “phishing.”
This is when a fraudster sends a phony communication (usually an email, but
sometimes a text or instant message) that appears to be from a reputable
source. The criminal’s objective is either to get recipients to reveal
sensitive personal or company information or to click on a link exposing their
computers to malicious software.

It’s a terrible thing to do, of course. Maybe you should give it
a try.

upfront investment

That’s right, many businesses are intentionally sending fake emails to their
employees to determine how many recipients will fall for the scams and how much
risk the companies face. These “phishing simulations” can be revealing and
helpful, but they’re also fraught with hazards both financial and ethical.

On the financial side, a phishing simulation generally calls for
an investment in software designed to create and distribute “realistic”
phishing emails and then gather risk-assessment data. There are free,
open-source platforms you might try. But their functionality is limited, and
you’ll have to install and use them yourself without external tech support.

Commercially available phishing simulators are rich in features.
Many come with educational tools so you can not only determine whether
employees will fall for phishing scams, but also teach them how to avoid doing
so. Developers typically offer installation assistance and ongoing support as

However, you’ll need to establish a budget and shop carefully.
You must then regularly use the software as part of your company’s wider IT
security measures to get an adequate return on investment.


As mentioned, phishing simulations present ethical risks. Some
might say that the very act of sending a deceptive email to employees is a
betrayal of trust. What’s worse, if the simulated phishing message exploits
particularly sensitive fears, you could incur a backlash from both employees
and the public at large.

A major media company recently learned this the hard way when it
tried to lure employees to respond to a phishing simulation email with promises
of cash bonuses to those who remained on staff following layoffs related to the
COVID-19 pandemic. Users who “clicked through” were met with a shaming message
that they’d just failed a cybersecurity test. Angry employees took to social
media, the story spread and the company’s reputation as an employer took a
major hit.


Adding phishing simulations to your cybersecurity arsenal may be
a good idea. Just bear in mind that these aren’t a “one and done” type of
activity. Simulations must be part of a well-planned, long-term and broadly executed
effort that seeks to empathetically educate users, not alienate them. Contact
us to discuss ways to prudently handle IT costs.

© 2020

Disability income: How is it taxed?

Many Americans receive disability income. You may wonder if —
and how — it’s taxed. As is often the case with tax questions, the answer is …
it depends.

The key factor is who paid for the benefit. If the income is
paid directly to you by your employer, it’s taxable to you as ordinary salary
would be. (Taxable benefits are also subject to federal income tax withholding,
although depending on the employer’s disability plan, in some cases aren’t
subject to the Social Security tax.)

Frequently, the payments aren’t made by the employer but by an
insurance company under a policy providing disability coverage or, under an
arrangement having the effect of accident or health insurance. If this is the
case, the tax treatment depends on who paid for the coverage. If your employer
paid for it, then the income is taxed to you just as if paid directly to you by
the employer. On the other hand, if it’s a policy you paid for, the payments
you receive under it aren’t taxable.

Even if your employer arranges for the coverage, (in other
words, it’s a policy made available to you at work), the benefits aren’t taxed
to you if you pay the premiums. For these purposes, if the premiums are paid by
the employer but the amount paid is included as part of your taxable income
from work, the premiums are treated as paid by you.

A couple
of examples

Let’s say your salary is $1,000 a week ($52,000 a year).
Additionally, under a disability insurance arrangement made available to you by
your employer, $10 a week ($520 for the year) is paid on your behalf by your
employer to an insurance company. You include $52,520 in income as your wages
for the year: the $52,000 paid to you plus the $520 in disability insurance
premiums. In this case, the insurance is treated as paid for by you. If you
become disabled and receive benefits, they aren’t taxable income to you.

Now, let’s look at an example with the same facts as above.
Except in this case, you include only $52,000 in income as your wages for the
year because the amount paid for the insurance coverage qualifies as excludable
under the rules for employer-provided health and accident plans. In this case,
the insurance is treated as paid for by your employer. If you become disabled
and receive benefits, they are taxable income to you.

Note: There are special rules in the case of a permanent loss
(or loss of the use) of a part or function of the body, or a permanent

Security benefits 

This discussion doesn’t cover the tax treatment of Social
Security disability benefits. These benefits may be taxed to you under
different rules.

How much
coverage is needed? 

In deciding how much disability coverage you need to protect
yourself and your family, take the tax treatment into consideration. If you’re
buying the policy yourself, you only have to replace your after tax,
“take-home” income because your benefits won’t be taxed. On the other hand, if
your employer pays for the benefit, you’ll lose a percentage to taxes. If your
current coverage is insufficient, you may wish to supplement an employer
benefit with a policy you take out.

Contact us if you’d like to discuss this in more detail.

© 2020

Tax responsibilities if your business is closing amid the pandemic

Unfortunately, the COVID-19 pandemic has forced many businesses
to shut down. If this is your situation, we’re here to assist you in any way we
can, including taking care of the various tax obligations that must be met.

Of course, a business must file a final income tax return and
some other related forms for the year it closes. The type of return to be filed
depends on the type of business you have. Here’s a rundown of the basic

Sole Proprietorships. You’ll
need to file the usual Schedule C, “Profit or Loss from Business,” with your
individual return for the year you close the business. You may also need to
report self-employment tax. 

Partnerships. A
partnership must file Form 1065, “U.S. Return of Partnership Income,” for the
year it closes. You also must report capital gains and losses on Schedule D.
Indicate that this is the final return and do the same on Schedules K-1,
“Partner’s Share of Income, Deductions, Credits, Etc.”

All Corporations. Form
966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a
resolution or plan to dissolve a corporation or liquidate any of its stock.

C Corporations. File
Form 1120, “U.S. Corporate Income Tax Return,” for the year you close. Report
capital gains and losses on Schedule D. Indicate this is the final return.

S Corporations. File
Form 1120-S, “U.S. Income Tax Return for an S Corporation” for the year of
closing. Report capital gains and losses on Schedule D. The “final return” box
must be checked on Schedule K-1.

All Businesses. Other
forms may need to be filed to report sales of business property and asset
acquisitions if you sell your business.

and contract workers

If you have employees, you must pay them final wages and
compensation owed, make final federal tax deposits and report employment taxes.
Failure to withhold or deposit employee income, Social Security and Medicare
taxes can result in full personal liability for what’s known as the Trust Fund
Recovery Penalty.

If you’ve paid any contractors at least $600 during the calendar
year in which you close your business, you must report those payments on Form
1099-NEC, “Nonemployee Compensation.”

Other tax

If your business has a retirement plan for employees, you’ll
want to terminate the plan and distribute benefits to participants. There are
detailed notice, funding, timing and filing requirements that must be met by a
terminating plan. There are also complex requirements related to flexible
spending accounts, Health Savings Accounts, and other programs for your

We can assist you with many other complicated tax issues related
to closing your business, including Paycheck Protection Plan (PPP) loans, the
COVID-19 employee retention tax credit, employment tax deferral, debt
cancellation, use of net operating losses, freeing up any remaining passive
activity losses, depreciation recapture, and possible bankruptcy issues.

We can advise you on the length of time you need to keep
business records. You also must cancel your Employer Identification Number
(EIN) and close your IRS business account.

If your business is unable to pay all the taxes it owes, we can
explain the available payment options to you. Contact us to discuss these
issues and get answers to any questions.

© 2020