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The Latest on Payroll Tax Deferral

The Latest on Payroll Tax Deferral

The Latest on Payroll Tax Deferral

If you have employees, you must withhold their 6.2 percent share of the Social Security tax from their wages up to an annual wage ceiling ($137,700 for 2020). You must pay the money to the IRS along with your matching 6.2 percent employer share of the tax.

But under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as you likely know, employers are allowed to defer paying their 6.2 percent share of the Social Security tax on wages paid to employees through the end of 2020. Fifty percent of these deferred taxes will have to be paid during 2021 and the remainder in 2022.

Both the Trump administration and the IRS have issued orders permitting employers to defer withholding and paying the employee portion of the Social Security tax for a limited time. But the executive order on employee deferral is much more limited in scope than the CARES Act employer deferral, and it’s beset with practical problems for employers.

Which Taxes Can Be Deferred?

The deferral applies only to the employee portion of the Social Security tax due on wages paid from September 1, 2020, through December 31, 2020. No other payroll taxes can be deferred.

Which Employees Qualify for the Deferral?

Only employees who earn less than $4,000 biweekly qualify for the deferral. Employees who are not paid on a biweekly basis qualify if their pay is equivalent to less than $4,000 biweekly. This would include employees who are paid less than

  • $2,000 weekly,
  • $4,333 semimonthly, or
  • $8,666.67 monthly.

Each pay period is tested separately. An employee who earns too much during one pay period can still qualify for the deferral if he or she earns less than the ceiling amount in a later pay period.

Is the Deferral Mandatory?

IRS officials have stated that the deferral is not mandatory. Employers are not obligated to offer the deferral to their employees. This is so even if an employee requests it.

What Happens When the Deferral Period Ends?

The employee Social Security tax deferral ends on December 31, 2020. IRS guidance provides that the deferred taxes must then be paid “ratably” from wages paid from January 1, 2021, through April 30, 2021. Employers must withhold and pay the deferred taxes from employee wages paid during this period.

Thus, from January 1, 2021, through April 30, 2021, most employees will have to pay a 12.4 percent Social Security tax instead of the normal 6.2 percent. This amounts to a 6.2 percent pay cut for affected employees for four months.

What If Employees Quit or Get Fired?

If an employee quits or is fired during the four-month repayment period, there may not be enough wages paid to cover the deferred Social Security taxes. The IRS says that in this event employers can “make arrangements to otherwise collect” the deferred taxes. What form such “arrangements” could take is unclear.

Interest, penalties, and additions to taxes will begin to accrue on any unpaid deferred Social Security taxes starting May 1, 2021. Thus, if you (the employer) fail to remit the deferred monies because employees were not employed during the collection period, you are on the hook.

Due to the uncertainty involved, many employers have reportedly elected not to participate in the employee Social Security tax deferral.

Using Whole or Partial Rooms for Your Home Office

Home Office With the COVID-19 pandemic still going on, you may be spending more time working from your home office.

You may have taken some extra rooms for your business use. Is that okay?

Section 280A(c) states that you may claim a home office based on the portion of the dwelling that you use exclusively and regularly for business. Thus, the law dictates no specific number of rooms or particulars regarding the size of the office.

The courts make this rule clear, as you can see in the Mills (less than one room) and Hefti (lots of rooms) cases described below.

The Mills Case

Albert Victor Mills maintained an office in his apartment from which he conducted his rental property management business. The apartment was small, totaling only 422 square feet. In the office area of the apartment where Mr. Mills had his desk, he also kept tools, equipment, paint supplies, and a filing cabinet.

The court agreed with Mr. Mills’s allocations and awarded the home-office deduction based on his claimed 23 percent business use of the 422-square-foot apartment.

Planning note. Mr. Mills did not have a single room dedicated to a home office. He had only an area of the apartment where he grouped his office furnishings, equipment, and supplies. If you have a similar situation, make sure your business assets are located in a group.

The Hefti Case

Charles R. Hefti lived in a big house, totaling 9,142 square feet. He claimed that more than 90 percent of his home was used regularly and exclusively for business.

Based on its review of the rooms, the court concluded that 13 rooms, totaling 19 percent of the home, were used exclusively and regularly for business.

Insights

The deductible portion of your home for an office includes the area used exclusively and regularly for business.

Let’s say you have an office in one room and your files in a second room, and you never use these rooms for personal purposes. Further, let’s say you use the office area on a daily basis and the files area in connection with that daily work.

Both rooms would meet the exclusive and regular use requirements, just as Mr. Mills’s and Mr. Hefti’s offices met these rules.

But Not This

“Exclusive use” means that you must use a specific portion of the home only for business purposes. You must make no other use of the space.

Exception. One exception to the exclusive use rule is storage of inventory or product samples if the home is the sole fixed location of a trade or business selling products at retail or wholesale.

Example 1. Your home is the only fixed location of your business, which involves selling mechanics’ tools at retail. You regularly use half of your basement for storage of inventory and product samples. You sometimes use the area for personal purposes. The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business.

Example 2. In Pearson, Dr. Pearson practiced orthodontics in a downtown medical building but retained the dental records of more than 3,000 patients in 36 file drawers (each measuring 26 inches by 14 inches by 12 inches) and had 1,461 boxes containing orthodontic models (each box measuring 10 inches by 6 inches by 2 1/2 inches).

He stored the records in the attic and basement of his home. The areas used for such storage were not separate rooms, and the remaining portions of the attic and basement were used by Dr. Pearson and his family for personal purposes.

The court ruled that Dr. Pearson may not treat the storage areas as home-office expenses because the records were not inventory or samples and Dr. Pearson did not operate a wholesale or retail trade or business from his home.

Don’t Let the IRS Set Your S Corporation Salary

You likely formed an S corporation to save on self-employment taxes.

If so, is your S corporation salary

  • nonexistent?
  • too low?
  • too high?
  • just right?

Getting the S corporation salary right is important. First, if it’s too low and you get caught by the IRS, you will pay not only income taxes and self-employment taxes on the too-low amount, but also both payroll and income tax penalties that can cost plenty.

Second, in most cases, the IRS is going to expand the audit to cover three years and then add the income and penalties for those three years.

Third, after being found out, you likely are now stuck with this higher salary, defeating your original purpose of saving on self-employment taxes.

Getting to the Number

The IRS did you a big favor when it released its “Reasonable Compensation Job Aid for IRS Valuation Professionals.”

The IRS states that the job aid is not an official IRS position and that it does not represent official authority. That said, the document is a huge help because it gives you some clearly defined valuation rules of the road to follow and takes away some of the gray areas.

Market Approach

The market approach to reasonable compensation compares the S corporation’s business with others and then looks at the compensation being paid by those businesses to employees who look like you, the shareholder-employee who is likely the CEO.

The question to be answered is, how much compensation would be paid for this same position, held by a nonowner in an arm’s-length employment relationship, at a similar company?

In its job aid, the IRS states that the courts favor the market approach, but because of challenges in matching employees at comparable companies, the IRS developed other approaches.

Cost Approach

The cost approach breaks your employee activities into their components, such as management, accounting, finance, marketing, advertising, engineering, purchasing, janitorial, bookkeeping, clerking, etc.

Health Insurance

The S corporation’s payment or reimbursement of health insurance for the shareholder-employee and his or her family goes on the shareholder-employee’s W-2 and counts as compensation, but it’s not subject to payroll taxes, so it fits nicely into the payroll tax savings strategy for the S corporation owner.

Pension

The S corporation’s employer contributions on behalf of the owner-employee to a defined benefit plan, simplified employee pension (SEP) plan, or 401(k) count as compensation but don’t trigger payroll taxes. Such contributions further enable the savings on payroll taxes while adding to the dollar amount that’s considered reasonable compensation.

Planning note. Your S corporation compensation determines the amount that your S corporation can contribute to your SEP or 401(k) retirement plan. The defined benefit plan likely allows the corporation to make a larger contribution on your behalf.

Section 199A Deduction

The S corporation’s net income that is passed through to you, the shareholder, can qualify for the 20 percent Section 199A tax deduction on your Form 1040.

Reasonable Compensation Analysis Service

Contact our office to schedule a time to prepare your S-Corp Reasonable Compensation Analysis before the new year begins.

Getting Around the New Law That Impairs the Stretch IRA Strategy

Last December, the Setting Every Community Up for Retirement Enhancement (SECURE) Act became law.

The SECURE Act was intended mainly to expand opportunities for individuals to increase their retirement savings and to simplify the administration of retirement plans. That’s the good part.

But the act also included a big unfavorable change that kneecapped the so-called stretch IRA estate planning strategy that was employed by well-off IRA owners.

The Stretch IRA Strategy

The stretch IRA strategy involves keeping as much money as possible in your traditional IRA or Roth IRA while you’re still alive and then leaving the account to your spouse or a younger beneficiary, who keeps the inherited account rolling for as long as possible and keeps collecting the tax benefits. Thus, the term “stretch IRA.”

The SECURE Act Imposes a New 10-Year Account Liquidation Rule That Seriously Injures the Stretch IRA Strategy

Unfortunately for the estate plans of well-off IRA owners and the tax situations of some of their IRA beneficiaries, the SECURE Act requires most non-spouse beneficiaries to drain inherited IRAs within 10 years after the account owner’s death.

As we just explained, the pre–SECURE Act required minimum distribution (RMD) rules allowed a non-spouse IRA beneficiary to gradually drain the substantial traditional or Roth IRA inherited from good-ole Grandpa Frank over the beneficiary’s IRS-defined life expectancy. That deal is off the table if Grandpa Frank dies in 2020 or later.

Who Is Affected by the SECURE Act Change?

The SECURE Act’s anti-taxpayer 10-year account liquidation rule doesn’t affect RMDs taken by original traditional IRA owners. They still operate under the same RMD rules as before.

As under pre–SECURE Act law, original owners of Roth IRAs need not take any RMDs for as long as they live. Roth IRA owners are unaffected.

Beneficiaries who want to quickly drain their inherited IRAs also are unaffected.

Bottom line. The 10-year account liquidation rule affects only certain non-spouse beneficiaries who would otherwise keep inherited accounts open for as long as possible to reap the tax advantages.

Exception for Eligible Designated Beneficiaries

The SECURE Act’s 10-year account liquidation rule does not immediately affect accounts inherited by a so-called eligible designated beneficiary.

An eligible designated beneficiary is

  • the surviving spouse of the deceased account owner,
  • a minor child of the deceased account owner,
  • a beneficiary who is no more than 10 years younger than the deceased account owner, or
  • a disabled or chronically ill individual.

Under the exception for eligible designated beneficiaries, RMDs generally can be taken from the inherited account over the life expectancy of the eligible designated beneficiary, beginning with the year following the year of the account owner’s death.

Other non-spouse beneficiaries, whom we will call affected beneficiaries, will be slammed by the 10-year account liquidation rule.

Following the death of an eligible designated beneficiary, the account balance must be distributed within 10 years.

The account balance also must be distributed within 10 years after a child of the account owner reaches the age of majority under local law.

10-Year Account Liquidation Rule Specifics

When applicable, the 10-year account liquidation rule generally applies regardless of whether you, as the original account owner, die before or after your RMD beginning date. Thanks to another SECURE Act change, the RMD rules do not kick in until age 72 if you attain age 70 1/2 after 2019. If you are in that age category, your required beginning date is April 1 of the year following the year during which you attain age 72.

And then, again thanks to the other SECURE Act change, an affected beneficiary must drain the account inherited from you by the end of the 10th calendar year following the year of your demise. Until that deadline is reached, your beneficiary can leave the account untouched.

Failure to comply with the 10-year account liquidation rule will expose the affected beneficiary to a penalty equal to 50 percent of the account balance that remains after the 10-year deadline has passed.

Reminder. As stated earlier, the SECURE Act’s 10-year account liquidation rule applies only to affected beneficiaries who inherit IRAs from original account owners who die after 2019. An IRA inherited by a non-spousal beneficiary from an original account owner who died in 2019 or earlier is unaffected, so the inherited account can still work as a stretch IRA, the same as before the SECURE Act.

 

Tax-saving Tips

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ppt loan tax-saving tips during COVID19

Government Clarifies PPP Loan Forgiveness for the Self-Employed

We now have both the new clarity and an easy road to Paycheck Protection Program (PPP) loan forgiveness for the self-employed with no employees.

New Easy Road to 100 Percent Forgiveness

Say thanks to the Paycheck Protection Program Flexibility Act of 2020. This new law creates a 24-week period for you to spend your PPP loan proceeds. If you obtained your loan proceeds before June 5, you can elect to use the eight-week period to spend your PPP loan proceeds.

Here’s the big difference:

  • If the 24-week covered period applies, your loan forgiveness for your deemed payroll is capped at 2.5 months of your 2019 Schedule C net profit, not to exceed $20,833.
  • If you elect the eight-week covered period, your loan forgiveness for your deemed payroll is capped at eight weeks, not to exceed $15,385.

Why Is This Important?

When you file as a Schedule C taxpayer and have no employees, your PPP loan is based on 2.5 times your 2019 Schedule C, line 31, net profit, limited to $20,833.

Here’s how the loan amount works:

Tax_table

You may have your loan proceeds either in hand or in play at this point.

(If you have not yet applied for your PPP loan, do so now. Lawmakers recently reopened the program with an eye on using the remaining funds. Under this new law, the extension of the PPP loan program will last until the earlier of August 8, 2020, or the day the funds are exhausted.)

Let’s keep our eyes on the “easy road” to forgiveness. Under the new 24-month rule, you achieve 100 percent forgiveness when you pay yourself the total loan amount within 10.8 weeks of the date you received your loan proceeds. Let’s round the 10.8 to 11 weeks.

Yes, you are reading this correctly. By simply using the loan proceeds on yourself during the first 11 weeks, you achieve total forgiveness.

Note this. By using the 11 weeks, you achieve total PPP loan forgiveness without having to spend any money on rent, utilities, or interest.

When Can I Apply for Forgiveness?

According to SBA guidance issued on June 22, 2020, you may submit your loan forgiveness application anytime on or before the maturity date of the loan—including before the end of the covered period—if you used all the loan proceeds for which you requested forgiveness.

Example. You receive your $20,833 PPP loan on May 15, 2020. You put the money in your business checking account. During the 11 weeks beginning with May 15, 2020, you write checks to yourself that total $20,833. You can apply for $20,833 of loan forgiveness anytime beginning week 11 or later.

Is It Really This Easy?

Yes.

What About Interest, Rent, and Utilities?

With the 11-week program described above, you don’t have to consider interest, rent, or utilities to achieve 100 percent forgiveness. In fact, why bother? By simply using the 11 weeks, you have less paperwork and worry.

Of course, you might want to consider interest, rent, and utilities if this takes you to earlier forgiveness. To obtain full forgiveness, you could spend as little as 60 percent on payroll and the balance on interest, rent, and utilities.

Example. You file a Schedule C and have no employees, and on June 1, 2020, you obtain a PPP loan of $20,000. During the first eight weeks, you spend $12,000 on yourself and $8,000 on qualified Schedule C deductible business interest, rent, and utilities. You can elect the eight-week period and qualify for 100 percent forgiveness.

Here are the basic PPP forgiveness requirements that apply to your 2020 Schedule C business deduction payments for interest, rent, and utilities:

  • Interest payments on any business mortgage obligation on real or personal property where such obligation was in place before February 15, 2020 (but not any prepayment or payment of principal)
  • Payments on business rent obligations on real or personal property under lease agreements in force before February 15, 2020
  • Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020

Meet the Paid Rule

On page 2 of the 3508EZ instructions, you find this:

Enter any amounts paid to a self-employed individual. For a 24-week Covered Period, this amount is capped at $20,833 (the 2.5-month equivalent of $100,000 per year) for each individual or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower.

We may suffer from unfounded paranoia because we find the word “paid” a word to be reckoned with. So, in our opinion, you should have your Schedule C business write you checks from its business account. If there’s no separate business account, make sure the business writes checks that pay your personal expenses in the amount of the deemed compensation.

PPP Loan Forgiveness for Partnerships and S and C Corporations

If you operate your business as a partnership or an S or C corporation, you face entity-specific PPP loan forgiveness rules that apply to you as an owner-worker in the business.

The rules that apply to you do not apply to the rank-and-file employee group. The government puts you, the owner-worker, in a separate “owner-employee” category to limit your business’s PPP benefits.

There are four types of owner-employees:

  1. General partners in partnerships
  2. S corporation shareholder-employees
  3. C corporation shareholder-employees
  4. Form 1040, Schedule C filers (e.g., the self-employed, sole proprietors, 1099 recipients, single-member LLCs, and husband and wife LLCs treated as single-member LLCs)

If you own all or part of your business and work in the business, you fall into one of the four categories.

The maximum loan attributable to and forgiveness available for the “compensation paid” to any owner-employee across all businesses is

  • $15,385 for borrowers who received a PPP loan before June 5, 2020, and elected to use an eight-week covered period, or
  • $20,833 for borrowers under the 24-week covered period.

Owners of Multiple Businesses Beware

If you have ownership interests in more than one business, you need to consider that the owner-employee loan maximums apply to all your businesses.

The new interim final rule puts the $15,385 or $20,833 deemed compensation cap on the loan forgiveness for the defined owner-employee, but contains no guidance on how to allocate or otherwise deal with the caps when you have ownership interests in multiple businesses.

Example. You operate an S corporation and a proprietorship. You receive your PPP loan on June 17. The cap on your combined S corporation and proprietorship loan forgiveness attributable to (a) your employment in the S corporation and (b) your profits from the proprietorship is $20,833.

We know you can obtain loan forgiveness for up to $20,833, but we have no guidance on how you would allocate the forgiveness between the S corporation and proprietorship. Perhaps by the time you apply for PPP loan forgiveness, we will have some directions.

Partnerships

The PPP loan forgiveness begins for general partners at the amount of their 2019 net earnings from self-employment (reduced by claimed Section 179 expense deductions, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.

You then take the lesser of the amount determined above or $100,000, divide by 12, and multiply by 2.5 to find the loan amount. With this calculation, the maximum loan is $20,833.

The maximum forgiveness attributable due to the partner’s self-employment income is

  • $15,385 if the partnership obtained its loan before June 5, 2020, and elected the eight-week regime, or
  • $20,833 if the partnership is under the 24-week program.

Planning note. Under the 24-week program, the partnership with no employees does not need to spend any amounts on interest, rent, or utilities to obtain full forgiveness. It can obtain full forgiveness in 11 weeks using the calculated self-employment income of up to $20,833 for each partner.

S Corporations

As with any owner-employee, the PPP loan and its forgiveness for “compensation” is capped at $15,385 under the eight-week covered period and $20,833 under the 24-week covered period.

Reminder. The $20,833 cap is based on the maximum defined compensation of $100,000 divided by 12 and then multiplied by 2.5.

Under the 24-week program, the S corporation whose only employee is an owner-employee obtains full loan forgiveness after 11 weeks when using the 24-week covered period without spending anything for interest, rent, or utilities.

If the S corporation with no employees other than the owner-employee elects the eight-week covered period, the corporation has to spend money on interest, rent, and utilities to rise above the compensation cap and create full forgiveness.

The Paycheck Protection Program Flexibility Act of 2020 created a new statutory 60 percent payroll rule that can make it easier to qualify for full forgiveness with payments for interest, rent, and utilities when electing the eight-week covered period.

S corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation.

Example. You operate your solo busines as an S corporation. Your 2019 W-2 compensation of $68,000 included $18,000 for medical insurance. Your payroll cost for the PPP loan and its forgiveness includes the full $68,000 plus what the S corporation paid into your retirement plan and to the state for unemployment insurance. The total of these amounts is capped at $100,000, which creates the $20,833 maximum loan amount as explained above.

C Corporations

C corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.

Example. You operate your business as a C corporation where you are the only employee. In 2019, the corporation paid you a salary of $60,000, contributed $12,000 to your retirement plan, paid $20,000 for your family’s medical insurance, and paid $350 to the state for unemployment insurance.

Your corporation has $92,350 in qualifying payroll costs. Your loan and forgiveness are capped at $19,240 ($92,350 ÷ 12 x 2.5).

Form 1040 Schedule C Businesses

Your PPP loan and its forgiveness for “compensation” are capped at $15,385 under the eight-week covered period or at $20,833 under the 24-week covered period. The cap amounts are computed using your net profit from line 31 of your 2019 Schedule C.

Your easy-peasy road to 100 percent loan forgiveness is the 11-week program. With 11 weeks of taking the loan amount out of the business, you obtain full forgiveness without paying any rent, utilities, or interest.

When Can the Owner-Employee’s Business Apply for Forgiveness?

According to SBA guidance issued on June 22, 2020, you may submit your loan forgiveness application anytime on or before the maturity date of the loan—including before the end of the covered period—if you used all the loan proceeds for which you requested forgiveness.

Example. You receive a $20,833 PPP loan on May 19, 2020. During the 11 weeks beginning with May 19, 2020, your corporation pays qualified payroll costs that total $20,833. You can apply for $20,833 of loan forgiveness anytime beginning with week 11.

COVID-19 Strategy: Hire Family Members to Create Tax Benefits

Hire Family Members to Create Tax Benefits

The COVID-19 pandemic may create tax benefit opportunities for you and your family members.

For example, you could hire your under-age-18 children, pay them, say, $10,000 each, and they could pay zero federal income taxes. And you or your corporation, the employer, would deduct the $10,000 you paid to each of the children. The child wins. You win. There’s more.

Schedule C Business

Let’s say you operate your business as a sole proprietorship, a single-member LLC that’s treated as a sole proprietorship for tax purposes, a husband-wife partnership, or an LLC that’s treated as a husband-wife partnership for tax purposes.

That means you can hire your under-age-18 child, and the child’s wages will be completely exempt from Social Security and Medicare taxes (FICA tax) and FUTA taxes. To be clear, the FICA tax exemption applies to the employee’s share of FICA tax that’s withheld from the employee’s paychecks and to the employer’s share of FICA tax that your business must pay over to the Feds.

For 2020, your under-age-18 employee-child’s standard deduction will shelter from federal income tax the first $12,400 of wages received if the child has no taxable income from other sources. In other words, no federal income taxes for the child with $12,400 or less in wages.

You can hire the under-age-18 child part-time, full-time, or whatever works for you and the child. Right now, children in this age category are probably not attending school, and the school district’s lengthy summer vacation may have already begun.

In the fall, will your under-age-18 child be attending school in person or online? You probably don’t know anything for sure at this point. But in the COVID-19 era, your under-age-18 child’s availability to work in your business may be at an all-time high.

The wages received by your child can be used to help keep the family afloat financially. If the family is not so financially stressed, your child can use some or all of the wages to fund a college savings account or make a Roth IRA contribution.

What if My Business Is Incorporated?

If you operate your business as an S or a C corporation, your child’s wages received from the business are subject to FICA and FUTA taxes, just like any other employee, regardless of the child’s age.

What if I Hire a Family Member over Age 21?

Do it—if this adds after-tax cash to the family unit! The wages received from your business are subject to FICA and FUTA taxes, just like any other employee. This is the case whether you operate your business as an unincorporated sole proprietorship, a partnership, an LLC, or as an S or a C corporation.

Tax Advantages for Your Business

When you hire a child or other family member, your business deducts the wages paid.

  • If you operate the business as a sole proprietorship, a single-member LLC that’s treated as a sole proprietorship for tax purposes, a husband-wife partnership, an LLC that’s treated as a husband-wife partnership for tax purposes, or an S corporation, the wage expense deduction reduces (a) your individual federal taxable income, (b) your individual net self-employment income, and (c) your individual state taxable income (if applicable).
  • If you operate the business as a C corporation, the corporation deducts the wages paid to a child or other family member. The deductions reduce the corporation’s federal taxable income and probably the corporation’s state taxable income (if applicable).
  • If your business will be unprofitable this year due to the COVID-19 fallout, deductions for wages paid to a child or other family member can create or increase a net operating loss (NOL) for 2020. If so, you can carry back the 2020 NOL for up to five tax years—back to 2015. The NOL carryback can trigger a refund of income taxes paid for the carryback year. That can really help. An NOL carried back to a pre-2018 tax year can be especially helpful because tax rates were generally higher in those da

Keep payroll records just like you would for any other employee to document hours worked and duties performed (e.g., timesheets and job descriptions). Issue W-2s just like you would for any other employee.

IRS Enables Millions to Qualify for the $100,000 IRA Grab and Repay

New IRS guidance expands the possibilities for what is an adverse COVID-19 impact on you for purposes of taking up to $100,000 out of your retirement accounts and repaying it without penalties.

First, let’s look at the rules as they existed before this new IRS guidance. The CARES Act created the first set of favorable rules, and those rules are still in play.

What the CARES Act Says

A coronavirus-related distribution from your qualified retirement plan, Section 403(b) plan, or IRA gets two tax benefits:

  1. If you withdraw and keep the money, you pay no 10 percent early withdrawal penalty and you can spread the income equally over tax years 2020, 2021, and 2022. You also can elect to include it all in tax year 2020, if you want.
  2. You can repay the money within three years of the distribution date and pay no tax or penalty on the amount.

Under the CARES Act relief, you qualify for a coronavirus-related distribution if

  • you, your spouse, or your dependent is diagnosed with COVID-19 with a CDC-approved test;
  • you experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
  • you experience adverse financial consequences as a result of being unable to work due to lack of childcare due to COVID-19; or
  • you experience adverse financial consequences as a result of closing or reducing your business hours due to COVID-19.

And then there are two additional CARES Act rules for coronavirus-related distributions:

  1. You can’t treat more than $100,000 per person as a coronavirus-related distribution, and
  2. You must take the distribution on or after January 1, 2020, and before December 31, 2020.

IRS Expands Relief

With the new IRS relief, you now also qualify for coronavirus-related distributions if you experience adverse financial consequences because

  • you, your spouse, or a member of your household has a reduction in pay or self-employment income due to COVID-19;
  • you, your spouse, or a member of your household has a job offer rescinded or a start date for a job delayed due to COVID-19;
  • your spouse or a member of your household is quarantined, is furloughed or laid off, or has work hours reduced due to COVID-19;
  • your spouse or a member of your household is unable to work due to lack of childcare due to COVID-19; or
  • your spouse or a member of your household owns or operates a business that closed or reduced hours due to COVID-19.

Household

For purposes of applying the additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.

Merriam-Webster defines a household as

  • those who dwell under the same roof and compose a family, and
  • a social unit composed of those living together in the same dwelling.

You have to think roommates living together create a household, and if one of them is affected by COVID-19—say, lost his or her job and stopped contributing to the rent—the remaining roommates were adversely affected and should be entitled to the IRA grab-and-repay strategy.

Your Repayment Options

You have many repayment options, as we explain below. To make this easy, let’s say you grab $30,000 from your IRA today and you want to know how you can repay the $30,000 with no taxes or penalties. Here are five scenarios:

Scenario 1. You repay the $30,000 before you timely file your 2020 tax return:

  • You don’t include any of the $30,000 in income on your 2020 tax return. You pay no taxes or penalties.

Scenario 2. You elect to include all $30,000 as income on your timely filed 2020 tax return, but then repay the full $30,000 sometime between filing the 2020 return and July 15, 2023:

  • You amend your 2020 tax return to remove the $30,000 from income and claim a refund of tax paid on that amount.

Scenario 3. You include $10,000 as income on your timely filed 2020 tax return, but then repay the full $30,000 sometime between filing the 2020 return and July 15, 2023:

  • You claim $10,000 of income on your original 2020 tax return, and
  • You later amend your 2020 tax return to remove the $10,000 from income and claim a refund of tax paid on that amount.

Scenario 4. You include $10,000 as income on your timely filed 2020 tax return, but then decide to repay $10,000 of the total $30,000 distribution, which you do on March 1, 2022:

  • You claim $10,000 of income on your 2020 tax return,
  • You claim no income on your 2021 tax return (because you made the $10,000 repayment prior to filing the return), and
  • You claim $10,000 of income on your 2022 tax return.

Scenario 5. You include $10,000 as income on your timely filed 2020 tax return, but then decide to repay $20,000 of the total $30,000 distribution, which you do on November 1, 2021. This one is tricky because you have two ways to do it:

  • You claim no income from the distribution on either your 2021 or 2022 tax return, or
  • You claim $10,000 of income on your 2022 tax return and amend your 2020 tax return to remove the $10,000 from income and claim a refund of tax paid on that amount.

As you can see, you have many options to repay or not when it comes to taking up to $100,000 from your retirement plan.

If you have more questions, feel free to contact us.

Tax-Saving Tips

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Tax-Saving Tips

Does No 1099 Mean No Deduction for You?

Imagine this: you didn’t issue Form 1099s to your contractors. Now, the IRS is auditing your tax return, and the auditor claims you lose your deductions because you didn’t issue the Form 1099s. Is this correct?

No. IRS auditors often make this claim, but they are incorrect.

There is no provision in the federal tax law that denies you a deduction for labor expenses simply because you didn’t file the required Form 1099s. But the tax court has stated that the non-filing of required Form 1099s can cast doubt on the legitimacy of the deduction claimed.

As with any deduction claimed on the tax return, you have to keep sufficient records to substantiate the deduction amount. If you had filed Form 1099s, then this would have been solid documentation to help prove the expenses to the auditor.

But since you didn’t file Form 1099s, you need to provide ironclad documentation to prove the expenses, including some or all of the following:

  • Bank statement transactions
  • Canceled checks
  • Credit card statement transactions
  • Invoices from the contractor
  • Signed agreements with the contractor
  • A signed statement from the contractor verifying the amounts received

Ultimately, to prove your deduction in a court of law, should you have to go that far, you’ll need to show by a preponderance of the evidence that you made the payments. This means that your evidence has to make it more than 50 percent likely that you did make the payments to the contractors.

Besides the extra trouble of proving the deductions, keep in mind that the cost of not filing Form 1099s surfaces a financial penalty. For the 2019 Form 1099s, the potential penalties are

  • $270 per Form 1099, or
  • $550 per Form 1099 if the IRS determines you intentionally disregarded the requirement.

As you can see, filing the 1099s avoids trouble.

IRS Issues New Bitcoin Tax Guidance

The IRS recently issued new cryptocurrency guidance and is hot on your trail if you bought and sold cryptocurrency and didn’t report it on your tax return.

Tax-saving tips

Here are the tax basics. You’ll treat cryptocurrency as property for tax purposes.

  • If you receive bitcoin in exchange for your services, then your income is the fair market value of the bitcoin received. Your basis in the bitcoin received is its fair market value at the time of receipt plus any transaction fees incurred.
  • If you receive bitcoin in exchange for your property, then your gain or loss is the fair market value of the bitcoin received less the adjusted basis of your property given up. Your basis in the bitcoin is its fair market value at the time of receipt plus any transaction fees incurred.
  • If you give bitcoin in exchange for services, then the value of the expense is the fair market value of the bitcoin given. Also, the value of the services received less the adjusted basis of the bitcoin is a gain or loss to you.
  • If you give bitcoin in exchange for someone’s property, then your gain or loss is the fair market value of the property you received less the adjusted  youbasis ofr bitcoin.

Cryptocurrency is a capital asset (provided you aren’t a trader). Therefore,

  • you pay tax on any gain at reduced rates, and
  • losses are subject to capital loss limitation rules.

Forks

In the cryptocurrency world, a fork occurs when the digital register that logs transactions of a particular cryptocurrency diverges into a new digital register. There are two types of forks:

  • one in which you don’t get cryptocurrency, and
  • one in which you get new cryptocurrency.

The IRS ruled that

  • a fork in which you don’t get cryptocurrency is not a taxable event, and
  • a fork in which you get new cryptocurrency is a taxable event and you’ll recognize ordinary income equal to the fair market value of the new cryptocurrency received.

Example. You own J, a cryptocurrency. A fork occurs and you receive three units of K, a new Cryptocur­rency. At the time of the fork, K has a value of $20 per unit. You’ll recognize $60 of ordinary income due to the fork.

Specific Identification

When selling property, you generally sell it on a first-in, first-out (FIFO) basis, unless you are eligible to use the specific identification method. You want to use the specific identification method if you can because you can select the amount of gain or loss your sale will create. With FIFO, you have no choice.

To use the specific identification method, you’ll have to either

  • document the specific unit’s unique digital identifier, such as a private key, public key, and address, or
  • keep records showing the transaction information for all units of a specific virtual currency, such as bitcoin, held in a single account, wallet, or address.

 

Tax-saving tips

This information must show

  • the date and time you acquired each unit;
  • your basis and the fair market value of each unit at the time you acquired it;
  • the date and time you sold, exchanged, or otherwise disposed of each unit;
  • the fair market value of each unit when you sold, exchanged, or disposed of it; and
  • the amount of money or the value of property received for each unit.

Divorce-Related Tax Issues for Small-Business Owners

As with all financial transactions, divorce comes with tax consequences. And those consequences have changed for tax years 2018 and later thanks to the Tax Cuts and Jobs Act (TCJA).

General Rule

The general tax rule in a divorce is that you can divide up most assets, including cash, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences.

When an asset falls under the tax-free transfer rule, the ex-spouse who receives the asset takes over its existing tax basis (for tax gain/loss purposes) and its existing holding period (for short- or long-term holding period purposes).

Example. Your divorce settlement calls for your soon-to-be-ex to get 40 percent of your highly appreciated  small-business corporation stock. Thanks to the tax-free transfer rule, there’s no tax impact when you transfer the shares.

 

Your ex keeps on rolling under the same tax rules that would have applied had you continued to own the shares (carryover basis and carryover holding period). When your ex ultimately sells the shares, he or she (not you) will owe any resulting capital gains taxes.

QDRO Required

Does your business have a qualified retirement plan, such as a profit-sharing plan, 401(k) plan, or defined benefit pension plan? If so, you probably will be required to give your soon-to-be-ex a percentage of your account balance or benefits as part of the divorce property settlement.

The trick is to do this without putting yourself on the hook for income taxes on amounts that go to your ex. Here’s the drill: include a qualified domestic relations order (QDRO) in the divorce papers. The QDRO makes your ex responsible for the income taxes on retirement account money that he or she receives in the form of account withdrawals, a pension, or an annuity.

In other words, the QDRO causes the tax bill to follow the money, which is only fair.

QDRO Not Required

You don’t need a QDRO to obtain an equitable tax outcome when you are required to turn over some of your IRA money to your ex as part of a divorce property settlement. QDROs are only relevant in the context of qualified retirement plans.

Therefore, you don’t need a QDRO for your Simplified Employee Pension accounts, Savings Incentive Match Plan for Employees (SIMPLE) IRAs, traditional IRAs, and Roth IRAs. Even so, you have to

Tax-saving tips

be careful and use the magic words to avoid getting taxed on money that goes to your ex.

Magic Words

Avoid the tax problem: include magic words in the divorce papers.

You can make a tax-free transfer of all or a portion of an IRA balance to your ex only if the transfer is ordered by a divorce or separation instrument. For this purpose, the tax code narrowly defines a divorce or separation instrument as a “decree of divorce or separate maintenance or a written instrument incident to such a decree.”

TCJA Eliminates Alimony Tax Deduction

How do you counteract loss of alimony deductions?

The federal income tax deduction for alimony payments required by divorce agreements executed after 2018 was permanently eliminated by the TCJA.

If you are a higher-income individual, this TCJA post-2018 development is an expensive game-changer for you. In the pre-TCJA days, you as a higher-income individual could reap big tax savings from deducting alimony payments, but those tax savings are history.

What can you do now that those deductions have been eliminated? One thing is to transfer assets with tax liabilities to your soon-to-be-ex (such as qualified plan and IRA balances, appreciated stock and mutual fund shares, and ownership of your highly appreciated vacation home).

Disassociating yourself from tax liabilities is effectively the same as getting a deduction. In a divorce, make it your mission to try to keep ownership of assets that have no tax liabilities, such as your Roth IRA.

Stock Redemption

 

If your business is incorporated and your soon-to-be-ex is a part owner, another idea is to arrange for a stock redemption deal to buy out your ex’s shares in lieu of making nondeductible alimony payments. With proper planning, you can arrange for your ex to bear the tax consequences of the redemption.

As you can see, there’s much to consider in a divorce.

Tax Tips for the Self-Employed Age 50 and Older

 

If you are self-employed, you have much to think about as you enter your senior years, and that includes retirement savings and Medicare. Here a few thoughts that will help.

 

Keep Making Retirement Account Contributions, and Make Extra “Catch-up” Contributions Too

 

Self-employed individuals who are age 50 and older as of the applicable year-end can make additional elective deferral catch-up contributions to certain types of tax-advantaged retirement accounts.

For the 2019 tax year, you can take advantage of this opportunity if you will be 50 or older as of December 31, 2019.

  • You can make elective deferral catch-up contributions to your self-employed 401(k) plan or to a SIMPLE IRA.
  • You can also make catch-up contributions to a traditional or Roth IRA.

 

Tax-saving tips

Tax-saving tips

Catch-up contributions are above and beyond

  1. the “regular” 2019 elective deferral contribution limit of $19,000 that otherwise applies to a 401(k) plan.
  2. the “regular” 2019 elective deferral contribution limit of $13,000 that otherwise applies to a SIMPLE IRA.
  3. the “regular” 2019 contribution limit of $6,000 that otherwise applies to a traditional or Roth IRA.

How Much Can Those Catch-up Contributions Be Worth?

Good question. You might dismiss catch-up contributions as relatively inconsequential unless we can prove otherwise. Fair enough. Here’s your proof:

401(k) catch-up contributions. Say you turned 50 during 2019 and contributed on January 1, 2019, an extra $6,000 for this year to your self-employed 401(k) account and then did the same for the following 15 years, up to age 65. Here’s how much extra you could accumulate in your 401(k) account by the end of the year you reach age 65, assuming the indicated annual rates of return below:

Tax-saving tips

Is There an Upper Age Limit for Regular and Catch-up Contributions?

Another good question.

While you must begin taking annual required minimum distributions (RMDs) from a 401(k), SIMPLE IRA, or traditional IRA account after reaching age 70 1/2, you can continue to contribute to your 401(k), SIMPLE IRA, or Roth IRA account after reaching that age, as long as you have self-employment income (subject to the income limit for annual Roth contribution eligibility).

But you may not contribute to a traditional IRA after reaching age 70 1/2.

Claim a Self-Employed Health Insurance Deduction for Medicare and Long-Term Care Insurance Premiums

If you are self-employed as a sole proprietor, an LLC member treated as a sole proprietor for tax purposes, a partner, an LLC member treated as a partner for tax purposes, or an S corporation shareholder-employee, you can generally claim an above-the-line deduction for health insurance premiums, including Medicare health insurance premiums, paid for you or your spouse.

Key point. You don’t need to itemize deductions to get the tax-saving benefit from this above-the-line self-employed health insurance deduction.

Medicare Part A Premiums

 

Tax-saving tips

Medicare Part A coverage is commonly called Medicare hospital insurance. It covers inpatient hospital care, skilled nursing facility care, and some home health care services.

You don’t have to pay premiums for Part A coverage if you paid Medicare taxes for 40 or more quarters during your working years. That’s because you’re considered to have paid your Part A premiums via Medicare taxes on wages and/or self-employment income.

But some individuals did not pay Medicare taxes for enough months while working and must pay premiums for Part A coverage.

  • If you paid Medicare taxes for 30-39 quarters, the 2019 Part A premium is $240 per month ($2,880 if premiums are paid for the full year).
  • If you paid Medicare taxes for less than 30 quarters, the 2019 Part A premium is $437 ($5,244 for the full year).
  • Your spouse is charged the same Part A premiums if he or she paid Medicare taxes for less than 40 quarters while working.

 

Medicare Part B Premiums

Medicare Part B coverage is commonly called Medicare medical insurance or Original Medicare. Part B mainly covers doctors and outpatient services, and Medicare-eligible individuals must pay monthly premiums for this benefit.

Your monthly premium for the current year depends on your modified adjusted gross income (MAGI) as reported on Form 1040 for two years earlier. For example, your 2019 premiums depend on your 2017 MAGI.

MAGI is defined as “regular” AGI from your Form 1040 plus any tax-exempt interest income.

Base premiums. For 2019, most folks pay the base premium of $135.60 per month ($1,627 for the full year).

Surcharges for Higher-Income Individuals. Higher-income individuals must pay surcharges in addition to the base premium for Part B coverage.

For 2019, the Part B surcharges depend on the MAGI amount from your 2017 Form 1040. Surcharges apply to unmarried individuals with 2017 MAGI in excess of $85,000 and married individuals who filed joint 2017 returns with MAGI in excess of $170,000.

Including the surcharges (which go up as 2017 MAGI goes up), the 2019 Part B monthly premiums for each covered person can be $189.60 ($2,275 for the full year), $270.90 ($3,251 for the full year), $352.20 ($4,226 for the full year), $433.40 ($5,201 for the full year), or $460.50 ($5,526 for the full year).

The maximum $460.50 monthly premium applies to unmarried individuals with 2017 MAGI in excess of $500,000 and married individuals who filed 2017 joint returns with MAGI in excess of $750,000.

Medicare Part D Premiums

Medicare Part D is private prescription drug coverage. Premiums vary depending on the plan you select. Higher-income individuals must pay a surcharge in addition to the base premium.

Surcharges for higher-income individuals. For 2019, the Part D surcharges depend on your 2017 MAGI, and they go up using the same scale as the Part B surcharges.

The 2019 monthly surcharge amounts for each covered person can be $12.40, $31.90, $51.40, $70.90, or $77.40. The maximum $77.40 surcharge applies to unmarried individuals with 2017 MAGI in excess of $500,000 and married individuals who filed 2017 joint returns with MAGI in excess of $750,000.

Tax-saving tips

Medigap Supplemental Coverage Premiums

Medicare Parts A and B do not pay for all health care services and supplies. Coverage gaps include copayments, coinsurance, and deductibles.

You can buy a so-called Medigap policy, which is private supplemental insurance that’s intended to cover some or all of the gaps. Premiums vary depending on the plan you select.

Medicare Advantage Premiums

You can get your Medicare benefits from the government through Part A and Part B coverage or through a so-called Medicare Advantage plan offered by a private insurance company. Medicare Advantage plans are sometimes called Medicare Part C.

Medicare pays the Medicare Advantage insurance company to cover Medicare Part A and Part B benefits. The insurance company then pays your claims. Your Medicare Advantage plan may also include prescription drug coverage (like Medicare Part D), and it may cover dental and vision care expenses that are not covered by Medicare Part B.

When you enroll in a Medicare Advantage plan, you continue to pay Medicare Part A and B premiums to the government. You may pay a separate additional monthly premium to the insurance company for the Medicare Advantage plan, but some Medicare Advantage plans do not charge any additional premium. The additional premium, if any, depends on the plan that you select.

Key point. Medigap policies do not work with Medicare Advantage plans. So if you join a Medicare Advantage plan, you should drop any Medigap coverage.

Premiums for Qualified Long-Term Care Insurance

These premiums also count as medical expenses for purposes of the above-the-line self-employed health insurance premium deduction, subject to the age-based limits shown below. For each covered person, count the lesser of premiums paid in 2019 or the applicable age-based limit.

Your age as of December 31, 2019, determines your maximum self-employed health insurance tax deduction for your long-term care insurance as follows:

  • $790—ages 41-50
  • $1,580—ages 51-60
  • $4,220—ages 61-70
  • $5,270—over age 70