Traveling for business again? What can you deduct?

As we continue to come out of the COVID-19 pandemic, you may be traveling again for business. Under tax law, there are several rules for deducting the cost of your out-of-town business travel within the United States. These rules apply if the business conducted out of town reasonably requires an overnight stay.

Note that under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses through 2025 on their own tax returns. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025.

However, self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.

Here are some of the rules that come into play.

Transportation and meals

The actual costs of travel (for example, plane fare and cabs to the airport) are deductible for out-of-town business trips. You’re also allowed to deduct the cost of meals and lodging. Your meals are deductible even if they’re not connected to a business conversation or other business function. The Consolidated Appropriations Act includes a provision that removes the 50% limit on deducting eligible business meals for 2021 and 2022. In addition, the law allows a 100% deduction for food and beverages provided by a restaurant. Takeout and delivery meals provided by a restaurant are also fully deductible.

Keep in mind that no deduction is allowed for meal or lodging expenses that are “lavish or extravagant,” a term that’s been interpreted to mean “unreasonable.”

Personal entertainment costs on the trip aren’t deductible, but business-related costs such as dry cleaning, phone calls, and computer rentals can be written off.

Combining business and pleasure

Some allocations may be required if the trip is a combined business/pleasure trip, for example, if you fly to a location for five days of business meetings and stay on for an additional vacation period. However, only the cost of meals, lodging, etc., incurred for the business days are deductible — not those incurred for the personal vacation days.

On the other hand, with respect to the cost of the travel itself (plane fare, etc.), if the trip is “primarily” business, the travel cost can be deducted in its entirety, and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. An important factor in determining if the trip is primarily business or personal is the amount of time spent on each (although this isn't the sole factor).

If the trip doesn’t involve the actual conduct of business but is to attend a convention, seminar, etc., the IRS may carefully check the meetings' nature to make sure they aren’t vacations in disguise. Retain all material helpful in establishing the business or professional nature of this travel.

Other expenses

The rules for deducting a spouse's costs who accompany you on a business trip are very restrictive. No deduction is allowed unless the spouse is an employee of you or your company, and the spouse’s travel is also for a business purpose.

Finally, note that personal expenses you incur at home resulting from making the trip aren’t deductible. For example, the cost of boarding a pet while you’re away isn’t deductible. Contact us if you have questions about your small business deductions.

© 2021


Don’t assume your profitable company has strong cash flow

Most of us are taught from a young age never to assume anything. Why? Well, when you assume you make an … you probably know how the rest of the expression goes.

Many business owners make a dangerous assumption that if their companies are profitable, their cash flow must also be strong. But this isn’t always the case. Taking a closer look at the accounting involved can explain.

Investing in the business

What are profits, really? In accounting terms, they’re closely related to taxable income. Reported at the bottom of your company’s income statement, profits are essentially the result of revenue less the cost of goods sold and other operating expenses incurred in the accounting period.

Generally Accepted Accounting Principles (GAAP) require companies to “match” costs and expenses to the period in which revenue is recognized. Under accrual-basis accounting, it doesn’t necessarily matter when you receive payments from customers or pay expenses.

For example, inventory sitting in a warehouse or retail store can’t be deducted — even though it may have been long paid for (or financed). The expense hits your income statement only when an item is sold or used. Your inventory account contains many cash outflows that are waiting to be expensed.

Other working capital accounts — such as accounts receivable, accrued expenses, and trade payables — also represent a difference between the timing of cash flows. As your business grows and strives to increase future sales, you invest more in working capital, which temporarily depletes cash.

However, the reverse also may be true. That is, a mature business may be a “cash cow” that generates ample dollars, despite reporting lackluster profits.

Accounting for expenses

The difference between profits and cash flow doesn’t begin and end with working capital. Your income statement also includes depreciation and amortization, which are non-cash expenses. And it excludes changes in fixed assets, bank financing, and owners’ capital accounts, which affect cash on hand.

Suppose your company uses tax depreciation schedules for book purposes. Let say, in 2020; you bought new equipment to take advantage of the expanded Section 179 and bonus depreciation allowances. Then you deducted the purchase price of these items from profits in 2020. However, because these purchases were financed with debt, the actual cash outflows from the investments in 2020 were minimal.

In 2021, your business will make loan payments to reduce the amount of cash in your checking account. But your profits will be hit with only the interest expense (not the amount of principal that’s being repaid). Plus, there will be no “basis” left in the 2020 purchases to depreciate in 2021. These circumstances will artificially boost profits in 2021 without a proportionate increase in cash.

Keeping your eye on the ball

It’s dangerous to assume that your cash position is strong—cash flow warrants careful monitoring just because you're turning a profit. Our firm can help you generate accurate financial statements and glean the most important insights from them.

© 2021


Tax-favored ways to build up a college fund

If you’re a parent with a college-bound child, you may be concerned about being able to fund future tuition and other higher education costs. You want to take maximum advantage of tax benefits to minimize your expenses. Here are some possible options.

Savings bonds

Series EE U.S. savings bonds offer two tax-saving opportunities for eligible families when used to finance college:

  • You don’t have to report the interest on the bonds for federal tax purposes until the bonds are cashed in, and
  • Interest on “qualified” Series EE (and Series I) bonds may be exempt from federal tax if the bond proceeds are used for qualified education expenses.

To qualify for the tax exemption for college use, you must purchase the bonds in your name (not the child’s) or jointly with your spouse. The proceeds must be used for tuition, fees, and certain other expenses — not room and board. If only part of the proceeds is used for qualified expenses, only that part of the interest is exempt.

The exemption is phased out if your adjusted gross income (AGI) exceeds certain amounts.

529 plans

A qualified tuition program (also known as a 529 plan) allows you to buy tuition credits for a child or make contributions to an account set up to meet a child’s future higher education expenses. State governments or private education institutions establish qualified tuition programs.

Contributions aren’t deductible. The contributions are treated as taxable gifts to the child, but they’re eligible for the annual gift tax exclusion ($15,000 for 2021). A donor who contributes more than the annual exclusion limit for the year can elect to treat the gift as if it were spread out over a five-year period.

The earnings on the contributions accumulate tax-free until college costs are paid from the funds. Distributions from 529 plans are tax-free to the extent the funds are used to pay “qualified higher education expenses.” Distributions of earnings that aren’t used for qualified expenses will be subject to income tax plus a 10% penalty tax.

Coverdell education savings accounts (ESAs)

You can establish a Coverdell ESA and contribute up to $2,000 annually for each child under age 18.

The right to make contributions begins to phase out once your AGI is over a certain amount. If the income limitation is a problem, a child can contribute to his or her own account.

Although the contributions aren’t deductible, income in the account isn’t taxed, and distributions are tax-free if used on qualified education expenses. If the child doesn’t attend college, the money must be withdrawn when he or she turns 30, and any earnings will be subject to tax and penalty. But unused funds can be transferred tax-free to a Coverdell ESA of another member of the child’s family who hasn’t reached age 30. (Some ESA requirements don’t apply to individuals with special needs.)

Plan ahead

These are just some of the tax-favored ways to build up a college fund for your children. Once your child is in college, you may qualify for tax breaks such as the American Opportunity Tax Credit or the Lifetime Learning Credit. Contact us if you’d like to discuss any of the options.

© 2021


2021 Q3 tax calendar: Key deadlines for businesses and other employers

Here are some key tax-related deadlines affecting businesses and other employers during the third quarter of 2021. Keep in mind that this list isn’t all-inclusive, so that additional deadlines may apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Monday, August 2

  • Employers report income tax withholding and FICA taxes for the second quarter of 2021 (Form 941) and pay any tax due.
  • Employers file a 2020 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

Tuesday, August 10

  • Employers report income tax withholding and FICA taxes for the second quarter of 2021 (Form 941) if you deposited all associated taxes that were due in full and on time.

Wednesday, September 15

  • Individuals pay the third installment of 2021 estimated taxes if not paying income tax through withholding (Form 1040-ES).
  • If a calendar-year corporation, pay the third installment of 2021 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic extension:
    • File a 2020 income tax return (Form the 1120S, Form 1065, or Form 1065-B) and pay any tax, interest, and penalties due.
    • Make contributions for 2020 to certain employer-sponsored retirement plans.

© 2021


Still have questions after you file your tax return?

Still have questions after you file your tax return?

Even after your 2020 tax return has been successfully filed with the IRS, you may still have some questions about the return. Here are brief answers to three questions that we’re frequently asked at this time of year.

Are you wondering when you will receive your refund?

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status.” You’ll need your Social Security number, filing status and the exact refund amount.

Which tax records can you throw away now? 

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2017 and earlier years. (If you filed an extension for your 2017 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed legitimate returns. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

If you overlooked claiming a tax break, can you still collect a refund for it?

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

Year-round tax help

Contact us if you have questions about retaining tax records, receiving your refund or filing an amended return. We’re not just here at tax filing time. We’re available all year long.

© 2021


Home sales: How to determine your “basis”

The housing market in many parts of the country is strong this spring. If you’re buying or selling a home, you should know how to determine your “basis.”

How it works

You can claim an itemized deduction on your tax return for real estate taxes and home mortgage interest. Most other home ownership costs can’t be deducted currently. However, these costs may increase your home’s “basis” (your cost for tax purposes). And a higher basis can save taxes when you sell.

The law allows an exclusion from income for all or part of the gain realized on the sale of your home. The general exclusion limit is $250,000 ($500,000 for married taxpayers). You may feel the exclusion amount makes keeping track of the basis relatively unimportant. Many homes today sell for less than $500,000. However, that reasoning doesn’t take into account what may happen in the future. If history is any indication, a home that’s owned for 20 or 30 years appreciates greatly. Thus, you want your basis to be as high as possible in order to avoid or reduce the tax that may result when you eventually sell.

Good recordkeeping

To prove the amount of your basis, keep accurate records of your purchase price, closing costs, and other expenses that increase your basis. Save receipts and other records for improvements and additions you make to the home. When you eventually sell, your basis will establish the amount of your gain. Keep the supporting documentation for at least three years after you file your return for the sale year.

Start with the purchase price

The main element in your home’s basis is the purchase price. This includes your down payment and any debt, such as a mortgage. It also includes certain settlement or closing costs. If you had your house built on land you own, your basis is the cost of the land plus certain costs to complete the house.

You add to the cost of your home expenses that you paid in connection with the purchase, including attorney’s fees, abstract fees, owner’s title insurance, recording fees and transfer taxes. The basis of your home is affected by expenses after a casualty to restore damaged property and depreciation if you used your home for business or rental purposes,

Over time, you may make additions and improvements to your home. Add the cost of these improvements to your basis. Improvements that add to your home’s basis include:

  • A room addition,
  • Finishing the basement,
  • A fence,
  • Storm windows or doors,
  • A new heating or central air conditioning system,
  • Flooring,
  • A new roof, and
  • Driveway paving.

Home expenses that don’t add much to the value or the property’s life are considered repairs, not improvements. Therefore, you can’t add them to the property’s basis. Repairs include painting, fixing gutters, repairing leaks and replacing broken windows. However, an entire job is considered an improvement if items that would otherwise be considered repairs are done as part of extensive remodeling.

The cost of appliances purchased for your home generally don’t add to your basis unless they are considered attached to the house. Thus, the cost of a built-in oven or range would increase basis. But an appliance that can be easily removed wouldn’t.

Plan for best results

Other rules and requirements may apply. We can help you plan for the best tax results involving your home’s basis.


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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Why do partners sometimes report more income on tax returns than they receive in cash?

If you’re a partner in a business, you may have come across a
situation that gave you pause. In a given year, you may be taxed on more
partnership income than was distributed to you from the partnership in which
you’re a partner.

Why is this? The answer lies in the way partnerships and
partners are taxed. Unlike regular corporations, partnerships aren’t subject to
income tax. Instead, each partner is taxed on the partnership’s earnings —
whether or not they’re distributed. Similarly, if a partnership has a loss, the
loss is passed through to the partners. (However, various rules may prevent a
partner from currently using his share of a partnership’s loss to offset other
income.)

Separate entity

While a partnership isn’t subject to income tax, it’s treated as
a separate entity for purposes of determining its income, gains, losses,
deductions and credits. This makes it possible to pass through to partners
their share of these items.

A partnership must file an information return, which is IRS Form
1065. On Schedule K of Form 1065, the partnership separately identifies
income, deductions, credits and other items. This is so that each partner can
properly treat items that are subject to limits or other rules that could
affect their correct treatment at the partner’s level. Examples of such items
include capital gains and losses, interest expense on investment debts and
charitable contributions. Each partner gets a Schedule K-1 showing his or her
share of partnership items.

Basis and distribution rules ensure that partners aren’t taxed
twice. A partner’s initial basis in his partnership interest (the determination
of which varies depending on how the interest was acquired) is increased by his
share of partnership taxable income. When that income is paid out to partners
in cash, they aren’t taxed on the cash if they have sufficient basis. Instead,
partners just reduce their basis by the amount of the distribution. If a cash
distribution exceeds a partner’s basis, then the excess is taxed to the partner
as a gain, which often is a capital gain.

Here’s an example

Two individuals each contribute $10,000 to form a partnership.
The partnership has $80,000 of taxable income in the first year, during which
it makes no cash distributions to the two partners. Each of them reports
$40,000 of taxable income from the partnership as shown on their K-1s. Each has
a starting basis of $10,000, which is increased by $40,000 to $50,000. In the
second year, the partnership breaks even (has zero taxable income) and
distributes $40,000 to each of the two partners. The cash distributed to them
is received tax-free. Each of them, however, must reduce the basis in his
partnership interest from $50,000 to $10,000.

Other rules and limitations

The example and details above are an overview and, therefore,
don’t cover all the rules. For example, many other events require basis
adjustments and there are a host of special rules covering noncash
distributions, distributions of securities, liquidating distributions and other
matters.

© 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:

  1. 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.
  2. 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


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