Harless Tax Blog
Election Day often brings out the wanderlust in people dissatisfied with the results; the 2020 election is no different. After a tough year, Americans are once again looking into living abroad.
There are currently 9 million U.S. expats living all over the world, a number that stands to grow after this election season as online searches on expat life surge 300 percent above the average. With rising coronavirus numbers in the U.S., combined with the new flexibility offered by remote work, Americans are more inclined than ever to give expat life a try.
While living abroad brings a new lifestyle and a rush of opportunities, it’s important to do the proper research, and consider the logistics and the tax consequences of living abroad, according to Katelyn Minott, a CPA, managing partner of Bright!Tax and currently a resident of Rio de Janeiro.
"The pandemic has created a situation in which many are finding they can work from wherever their computer might be," she said. "And it’s created a global business environment that allows people to travel and follow their heart’s desire to live abroad. But beyond the lifestyle implications of a move abroad, there are financial and tax considerations of a move that many don’t plan for before they pull the trigger on moving."
The most common misunderstanding is the idea that you don’t have to file a tax return from abroad, according to Minott. "Many who live abroad assume that leaving the U.S. and living outside its jurisdiction means no tax returns," she said. "But once they have the basic understanding that U.S. taxes are going to follow them wherever they may be, there are certain mechanisms to reduce and often eliminate U.S. tax. It’s also important to consider that the new country may also have local tax requirements that need to be met."
Many of the countries that are attractive to those looking to relocate have little to no tax, making for significant tax savings overall, Minott observed: "Someone in the British Virgin Islands or the Cayman Islands will be able to take advantage of the low taxes to achieve overall tax savings."
There is quite a bit of recordkeeping involved in properly preparing a U.S. tax return, Minott indicated. "For example, one of the mechanisms utilized to lower U.S. taxable income is the requirement that the taxpayer report their travel to and from the U.S. each year," she said. "There are a couple of ways to qualify for the foreign earned income exclusion. One involves being absent from the U.S. for 330 days during the year. It’s important to keep track of travel, foreign housing expenses, and income earned stateside versus offshore."
A big issue, with possible extremely negative unexpected consequences, is the obligation to report the maximum account balance held in foreign bank and financial accounts to the Treasury Department. The report is made on a Report of Foreign Bank and Financial Accounts, or FBAR, on FinCEN Form 114. A United States "person," including a citizen, resident, corporation, partnership, limited liability company, trust and estate must file an FBAR.
"There are big penalties for failure to do this," said Minott. "The penalties start at $10,000. There’s no reason to miss filing — it’s just a disclosure, it doesn’t yield a tax liability."
State residency is an issue that needs to be carefully examined, according to Minott. "Every U.S. state has different rules surrounding what would be a tax residence," she said. "Some, like California and New York, make it very challenging to break state residency when you’re moving abroad."
"As a result, many taxpayers choose to relocate to a different U.S. state before moving abroad," she said. "Many taxpayers relocate to a non-income-tax state prior to relocation abroad. Texas and Florida are the most popular as interim relocation states."
Not every taxpayer moves to a low or no-tax jurisdiction such as the British Virgin Islands or the Caymans, Minott observed. "Many taxpayers find themselves moving to countries where they do, in fact, have a tax obligation. In those circumstances where they do have a foreign tax obligation, there are also mechanisms to reduce U.S. tax, based on the foreign tax they already paid. More often than not, they won’t be in a double-tax situation thanks to the foreign earned income exclusion, foreign tax credit or a tax treaty in effect with their country of residency."
But for the many freelancers that are taking advantage of the ability to work from anywhere, the self-employment tax does not go away, Minott cautioned. "Unless the country has a totalization agreement with the U.S., the U.S. taxpayer will continue to pay self-employment tax to the IRS," she said.
"Many taxpayers choose to set up a business in their new country," Minott remarked. "This can generate a number of international disclosure requirements with the IRS. Holding a foreign corporation or a partnership interest can create a complex filing situation on the U.S. side. It’s vital that the expat understand the implications of those business interests prior to incorporating or setting up a foreign entity."
The SBA recently issued more new guidance relating to tax-favored loans under the Paycheck Protection Program – this notice concerns responsibilities and procedures when there is a change of ownership for a business entity that has received a PPP Loan.
According to the new SBA guidance, there is a change of ownership for these purposes when at least one of the following occurs:
- At least 20% of the common stock or other ownership interest of a PPP borrower is sold or transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity;
- The PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value), whether in one or more transactions; or
- The PPP borrower is merged with or into another entity.
Change of ownership does not absolve a borrower of responsibilities concerning their PPP loans. It continues to be responsible for:
- Performance of all obligations under the PPP loan;
- Certifications made under the PPP loan application, including the certification of economic necessity;
- Continued compliance with all other PPP loan requirements, and
- Obtaining, preparing and retaining the necessary forms and documentation and providing those forms and documents to the PPP lender, servicer or SBA upon request.
Under the procedural notice, a PPP borrower must notify its lender before it completes a change of ownership and provide documentation of the transaction. SBA approval may be required; the SBA has 60 days to review the submission and make a determination.
In addition, there are different procedures to be followed, depending on whether or not the PPP loan has been satisfied. If a loan hasn’t been satisfied, the borrower must establish an escrow account, controlled by the lender that includes the amount of the outstanding PPP loan balance. The escrow funds must be used first to repay any remaining PPP loan balance after forgiveness has been approved.
The new notice also addresses situations where the new business owner has a PPP loan of its own. It provides details for segregating PPP funds and expenses along with specifying the documentation required.
Recipients of Paycheck Protection Program (PPP) loans of $50,000 or less will be able to apply for forgiveness using a simplified application that was just released by Treasury and the U.S. Small Business Administration (SBA).
Under the interim final rules, PPP borrowers of $50,000 or less are exempted from any reductions in forgiveness based on:
- Reductions in full-time-equivalent (FTE) employees; and
- Reductions in employee salary or wages.
If you are an employee receiving PFL benefits, be aware the payments come from the state. If your employer participates in New York State’s Paid Family Leave program, you need to know the following:
The new application form, SBA Form 3508S, can be used by PPP borrowers applying for forgiveness on PPP loans with a total loan amount of $50,000 or less, unless those borrowers together with their affiliates received loans totaling $2 million or more. Instructions for Form 3508S also were released.
Of the 5.2 million PPP loans approved by the SBA, about 3.57 million were for $50,000 or less. Those loans accounted for about $62 billion of the $525 billion in PPP loans. About 1.71 million PPP loans of $50,000 or less were made to businesses that reported having zero employees or one employee.
The interim final rules streamline the forgiveness process for PPP borrowers of $50,000 or less because they will not be required to perform potentially complicated FTE or salary reduction calculations. Borrowers of $50,000 or less still will have to make some certifications and provide documentation to the lender for payroll and non-payroll costs.
For PPP loans of all sizes, the interim final rules also contain guidance on lender responsibilities with respect to the review of borrower documentation of eligible costs for forgiveness in excess of a borrower’s PPP loan amount.
According to the interim final rules, when a borrower submits Form 3508S or the lender’s equivalent form, the lender will be required to:
- Confirm receipt of the borrower certifications contained in the form; and
- Confirm receipt of the documentation the borrower is required to submit to aid in verifying payroll and non-payroll costs, as specified in the instructions to the form.
The borrower is responsible for providing an accurate calculation of the loan forgiveness amount. The borrower will attest to the accuracy of the reported information and calculations on the loan forgiveness application. Lenders are permitted to rely on borrower representations.
In addition, the guidance addresses what a lender should do if a borrower submits documentation of eligible costs that exceed the borrower’s PPP loan amount. According to the interim final rules, the amount of loan forgiveness that a borrower may receive cannot exceed the principal amount of the PPP loan.
Whether a borrower submits SBA Form 3508, 3508EZ, or 3508S, or a lender’s equivalent form, the lender is required to confirm receipt of the documentation the borrower is required to submit to aid in verifying payroll and non-payroll costs. If applicable, the lender also is required to confirm the borrower’s calculations on the loan forgiveness application, up to the amount required to reach the requested forgiveness amount.
Are medical expenses taking a bite out of your budget? This may be your last chance for deducting medical and dental expenses because the threshold for qualifying for deductions is set to revert to its higher level after 2020.
For 2020, the IRS allows all taxpayers to deduct the total qualified unreimbursed medical care expenses that exceeds 7.5% of their Adjusted Gross Income. Prior to that, ACA raised the bar to 10% of AGI (except for seniors). Subsequently, the Tax Cuts and Jobs Act returned the threshold to the 7.5% of AGI level for 2017 and 2018. Still with us? Extender legislation enacted by Congress late last year, called the Taxpayer Certainty and Disaster Tax Relief Act, restored the 7.5% of AGI limit for 2019 and 2020. And that’s where we stand now. There is no guarantee the threshold will not revert back to 10%, so try to take full advantage of the lower threshold for this year if you expect to itemize deductions. Make sure you count all the expenses that qualify for the deduction.
You can deduct payments for the diagnosis, cure, mitigation, treatment, or prevention of disease. You can also deduct payments for treatments affecting any structure or function of the body. Included are health insurance premiums and a portion of premiums paid for long-term care insurance (LTCI) policies based on the insured’s age. In addition:
- Fees for doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and other medical practitioners
- In-patient hospital care or nursing home services, including the cost of meals and lodging charged by the hospital or nursing home
- Acupuncture treatments or inpatient treatment at a center for alcohol or drug addiction, for participation in a smoking-cessation program and for drugs to alleviate nicotine withdrawal if they require a prescription
- Expenses to participate in a weight-loss program for a specific disease or diseases, including obesity, diagnosed by a physician
- Insulin and prescription drugs
- Payments for false teeth, reading or prescription eyeglasses or contact lenses, hearing aids, crutches, wheelchairs, and for guide dogs for the blind or deaf
- Transportation needed to obtain necessary medical treatment such as fares for taxis, buses, trains and ambulances. If you use your own vehicle, you can deduct the portion of actual costs attributable to medical-based travel or use a standard rate. The standard rate, which is adjusted annually, is 17 cents per mile in 2020.
To claim the medical expenses deduction, you must itemize your deductions, which means you do not take the standard deduction. If your itemized deductions are greater than your standard deduction then it makes sense to claim the medical expenses deduction. If appropriate, you may want to schedule doctor and dentist visits before year end to clear the 7.5% of AGI threshold or boost an existing deduction. More details on eligible medical and dental expenses here: https://www.irs.gov/pub/irs-pdf/p502.pdf
Is your organization or some of its key employees working remotely? By now, the work should be flowing well and your employees should be transitioning nicely to performing their jobs at home. Everything probably seemed ok, up until your employees realized that according to the TCJA if they are employed they are not allowed to take the home office deduction. So now, many are most likely asking about reimbursement for cell phones, computers, and internet. This leads to the question, with more employees working remotely, how much of their business expenses can employers reimburse tax-free?
Employers may need to pay employees back for some infrastructure improvements they had to make so they could work remotely. If an employee had to upgrade their home internet service to handle extra data requirements, they may be entitled to reimbursement for those costs. An employer may have to cover the cost of upgrading or replacing a worker’s laptop that is ok for entertainment but too slow for work.
Under federal law, employers only have to reimburse employees if job-related expenses reduce their pay below minimum wage. State laws, however, vary widely in their reimbursement requirements.
Some Background: Listed property (technically, tax code Section 280F) is luxury property. If luxury property is used for business, heightened substantiation requirements apply. At one time, cell phones and computers were both listed property. Cell phones were removed early in the last decade. The TCJA removed computers and peripherals.
After cell phones, tablets, etc., were removed from the listed property category, the IRS released guidance waiving the accountable plan rules requirements for employer-provided equipment. Employees don't have to keep track of their business use. Their personal use is considered a tax-free de minimis fringe benefit.
The only limitation is that employers must have a substantial non-compensatory reason for providing phones to employees. But even there, the bar is set pretty low. You have a substantial non-compensatory business reason if you need to contact employees in a work-related emergency. Conveniently, "work-related emergency” was never defined.
Importantly, the IRS applied the same rules to employees who use their own phones for business. So, you can reimburse employees for their substantiated basic monthly phone and data plan charges (i.e., employees have to submit their bills to you) and employees don't have to account to you for the percentage of their business use.
With so many EEs working from home right now, are there any reimbursement rules that apply when employers pick up the tab for employees' internet access? The IRS never released similar guidance after computers and peripherals were removed. That has left everyone to guess what rules apply when employers reimburse employees who use their home internet access for business.
Reimbursement rules for internet and cell phones
The IRS Small Business Division says you can reimburse employees' home internet access as a business expense, but the regular accountable plan rules apply. The accountable plan rules, which set the rules for tax-free reimbursements of employees’ business expenses, require that:
- Employees incur expenses in connection with their performance of services for their employers and have a business connection for accessing the internet (working at home would suffice),
- Employees must substantiate their business use by submitting an accounting of their internet use by providing you with their cable or phone bill and the percentage used for business.
- Employees substantiate their expenses within a reasonable period of time
Due to the pandemic, cellphones become more and more essential to everyday operations and work, so the question about reimbursement for usage is fair.
When it comes to reimbursing employees or providing a monthly stipend for the use of their personal cellphones for business purposes, yes, this a non-taxable fringe benefit - provided that your reimbursement is reasonably calculated to actually reimburse the employees for the actual costs of maintaining the phone.
The Internal Revenue Code provides that gross income includes compensation for services, including fees, commissions, fringe benefits, and similar items. A fringe benefit provided by an employer to an employee is presumed to be income to the employee unless it is specifically excluded from gross income by another section of the Code. Luckily, the Internal Revenue Code also permits an employer to take deductions for any "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.
So an employer could deduct as a business expense the costs of providing telephone services to its employees. For this reason, the IRS has concluded that the value of cellphone services provided by an employer will not be taxable to the employee if there are substantial reasons relating to the employer's business, and the reimbursement is not simply a way to provide tax-free compensation to the employee.
If you would like to reimburse workers for the cost of their cellphones, you need to adhere to the regular accountable plan rules mentioned above. However, if you provide cellphone reimbursements to boost morale, promote goodwill, or for recruiting purposes, the IRS will consider the phone costs taxable wages.
Sensitive company material and client information should not be stored on employees' personal computers. That makes buying your telecommuters separate laptops a wise investment. These are working condition fringe benefits, which you can provide to employees tax-free. Employees must be told they can only use the new devices for work; any personal use of a laptop is taxable.
Can you reimburse employees who need to purchase computer desks and chairs in order to work from home? These items could qualify as fringe benefits, but employees would have to keep track of their business and personal use, which isn't reasonable.
Instead it would be better to buy those items for employees but keep the items on the company's books. Depreciate them, as you would any business property, or write them off. If this is a long term move to reduce office space, you could allow employees to take their office stuff home. You must normally value and tax items employees take home, but if the value is de minimis because the stuff is old or been depreciated down to $0, you probably won't have a problem.
The New York State Department of Taxation and Finance provided guidance regarding the tax treatment of deductions from employee wages used to finance paid family leave premiums, and the tax treatment of Paid Family Leave (PFL) benefits to be received by eligible employees.
Background: Paid Family Leave Benefits, available to employees as of January 1, 2018, may be financed by deductions from wages under a formula set by the New York State Superintendent of Finance. Employers were permitted, but not required, to begin taking deductions from employee wages shortly thereafter.
If you are an employer subject to state-mandated paid family leave, you were probably wondering if employee contributions are taxable? The current states that mandate PFL (except for Washington D.C.) require employees to pay into the fund.
- Deducting the employee’s portion before withholding taxes means their contributions are not taxable (e.g., pre-tax deduction).
- Deducting the employee’s portion after withholding taxes means their contributions are taxable (e.g., post-tax deduction).
So, which is it? Are employee PFL contributions pre-tax or post-tax deductions?
After reviewing the paid family leave statute, the final regulations, applicable laws, case law and federal guidance, and after consulting with the Internal Revenue Service, the DOTF issued guidance stating essentially that employee PFL contributions are post-tax deductions, therefore their contributions are subject to taxes. Guidance for employers below:
- Premiums are to be deducted from employee's after-tax wages.
- Paid Family Leave Benefits paid to employees will be taxable, non-wage income that must be included in federal gross income.
- Taxes will not automatically be withheld from benefits. Employers should report employee contributions on an IRS Form W-2 using Box 14, State disability taxes withheld.
- Paid Family Leave Benefits should be reported by the New York State Insurance Fund (NYSIF) on IRS Form 1099-G and by all other payers (either private carriers or self-insured employers) on IRS Form 1099-Misc.
If you are an employee receiving PFL benefits, be aware the payments come from the state. If your employer participates in New York State’s Paid Family Leave program, you need to know the following:
- Any benefits you receive under this program are taxable and included in your federal gross income. However, PFL benefits are not subject to Social Security and Medicare taxes, or federal unemployment (FUTA) tax.
- Employers do not withhold taxes on an employee’s PFL benefits because they are not included in payroll. State governments do not automatically withhold paid family leave federal tax from an employee’s PFL benefits.
- An employee can request to have income taxes withheld by filing Form W-4V, Voluntary Withholding Request.
- You will receive either Form 1099-G or Form 1099-MISC from your employer showing your taxable benefits.
- Your employer will deduct premiums for the Paid Family Leave program from your after-tax wages.
- Your premium contributions will be reported to you by your employer on Form W-2 in Box 14 as state disability insurance taxes withheld.
These pandemic times have hit many family members hard. We all want to be generous to our kids and grandkids who are out of work, be helpful to that brother or sister that got the virus, and financially support our elderly parents in quarantine for their safety, BUT most folks do not realize what is involved in making a sizable loan to a loved one. Of course you expect to be repaid. But if there is no specific time for repayment and the loan carries no interest, are there tax consequences for giving cask to your kin? Yes indeed!
Some folks think they can give large amounts of money to their children and call it a loan to avoid the hassle of filing a gift tax return. The IRS is hard to fool. When you make a non-interest-bearing loan there are various tax consequences. The borrower is treated as having made interest payments to the lender, based on IRS-prescribed interest rates (around 2.35 to 2.70%) known as the Applicable Federal Rate. Unless the loan does not exceed $10,000, and the loan is not directly attributable to the purchase or carrying of an income-producing asset, then the interest rate can be below market and no imputed interest will be required to be calculated.
In the case of a parent-child loan, the imputed interest represents taxable income to the parent. Even though the parent will not actually receive any interest payments, the parent must nevertheless report the amount each year as taxable income on their personal income tax returns and pay tax on it. The parent has to file a gift tax return if the imputed interest exceeds the annual gift tax exclusion, which is $15,000 per donor. That can be doubled if a husband and wife each make such a gift, to $30,000 annually. Odds are you as the parent won’t have to pay a dime in gift tax, even if the loan amount—also known as a gift, for tax purposes—exceeds $15,000, or $30,000 if from a married couple. The amount is excluded from your lifetime gift tax exemption.
If gift tax consequences are a concern, have your child start paying interest to you each year until the loan is fully repaid. You can increase the loan amount to provide additional cash to your child to cover the interest payments. While the interest will still be subject to income tax, you can at least avoid the gift tax filing and any unintended use of your estate and gift tax exemption.
How to handle the paperwork for such loans and avoid tax traps? Appropriate documentation should be in place to establish the principal repayment obligation, otherwise the IRS might claim that the full amount of the loan you made was a gift.
- Create a promissory note or similar document setting up your loved one’s obligation to repay the loan to you.
- Set the rate at or above the Applicable Federal Rate (AFR) in effect when the loan is originated.
- Maintain records that reflect a true loan transaction, including timely payments.
If there is no specific repayment date, the promissory note can provide for payment to be made upon demand by you as lender. Hence, the debt will become due and required to be repaid when you choose. This way, you gain the flexibility of not being tied to a specific repayment schedule.
Do not have a prearranged schedule to forgive the loan. Forgiveness is okay as long as it is not expected or prearranged. If your loved one refuses to repay the loan to you, or dies before you, you can at least show you have a formal arrangement in place, and the transferred money was indeed a loan. That avoids complications.
One of the advantages of a loan contract is that if your child doesn’t pay, you can take a deduction for a non-business bad debt. Additionally, you don’t have to pay gift tax to the IRS on the amount like you would if you had gifted the money. To take a bad debt deduction, you must prove that you tried to collect the debt. The debtor should make a written statement that he or she cannot pay. The statement should also include a reason for why they are unable to make the payments.
HHS issued its long-awaited Provider Relief Fund (PRF) Reporting Requirements late in September. It specified the data that providers who received more than $10,000 in PRF payments will be required to submit as part of a post-payment reporting process. Providers should call their attention specifically to how HHS plans to calculate and limit the use of payments for lost revenues.
As part of the required reports, providers must report certain data for 2019 and 2020.
Healthcare related expenses attributable to Coronavirus: Providers will be expected to report expenses in two categories: general and administrative expenses, and healthcare related operating expenses. Providers are advised that only those expenses not reimbursed by other sources can be reported here. Providers who received between $10,000 and $499,999 in aggregate PRF payments can report their expenses in aggregate by category. However, providers receiving $500,000 or more in PRF payments will report their expenses in detail within each of the categories.
Lost revenues: This calculation becomes relevant if all PRF dollars received were not consumed by the COVID-19 healthcare related expenses. Lost revenues are defined as, “year-over-year net patient care operating income (i.e., patient care revenue less patient care related expenses for the Reporting Entity).” This approach is more limited than previous HHS guidance which permitted "any reasonable method of estimating lost revenue." Previously, providers could compare budgeted to actual, or use a year-over-year comparison. In addition, HHS appears to cap the application PRF payments toward lost revenues up to either:
- The amount of a provider’s 2019 net gain from healthcare related sources, or
- Up to a net zero gain/loss in 2020, if the provider reported negative net operating income in 2019.
- Calendar year expenses and revenues for each of the years;
- Other types of assistance received, such as Paycheck Protection Program funds, FEMA CARES Act dollars, state and local government assistance and other funds.
- Personnel Metrics such as total personnel by labor category, hire/re-hires, separations
- Patient Metrics including total number of admits, visits and residents.
- Facility Metrics like total available staffed beds.
Key dates to keep in mind:
- January 1, 2021: Opening the reporting system will not take place until early 2021.
- February 15, 2021: Deadline by which to submit a first report due for PRF expenditures through December 31, 2020
- July 31, 2021: Deadline by which to submit a second and final report for January 1 – June 30, 2021 revenues and expenditures.
The reporting guidance confirms that PRF payments can be used through June 2021. It is not clear if these timelines may shift should Congress appropriate additional dollars for the Provider Relief Fund. Note the public health emergency (PHE) has been extended another 90 days beyond October 23, 2020.
In addition to the reporting requirements, providers receiving more than $750,000 in federal awards, which include Provider Relief Funds, are subject to single audit requirements. More information here: https://www.hhs.gov/sites/default/files/post-payment-notice-of-reporting-requirements.pdf
Keep in mind: The IRS has confirmed that Provider Relief Fund payments cannot be excluded from taxation under a disaster relief exemption. Therefore, the payments do constitute gross taxable income, unless otherwise carved out under an existing exclusion, such as if the provider is a 501(c) nonprofit. Given that many healthcare providers may ultimately return unused payments from the Provider Relief Fund, taxpayers should be conscious of the tax consequences of payments received in one tax-year and returned in another year. Additionally, the guidance only applies for federal tax purposes so taxpayers should also consider the state and local tax treatment of the payments.
The financial challenges which Coronavirus brought forced companies to reimagine themselves and change how they do business to survive. Reducing your business income tax burdens has become more important than ever. Through the CARES Act, the government granted many forms of relief, so be sure that by December you are taking advantage of available tax changes that can provide liquidity.
- When the TCJA repealed the corporate AMT, it allowed corporations to claim all their unused AMT credits in the tax years beginning in 2018, 2019, 2020 and 2021. The CARES Act accelerates this timeline, allowing corporations to claim all remaining credits in either 2018 or 2019. The fastest method for many companies to get a quick refund will be filing a tentative refund claim on Form 1139, but you must file by December 31, 2020 to claim an AMT credit this way.
- The CARES Act also resurrected a provision allowing businesses to use current losses against past income for immediate refunds. Net operating losses (NOLs) arising in tax years beginning in 2018, 2019 and 2020 can be carried back five years for refunds against prior taxes. These losses can even offset income at the higher tax rates in place before 2018. Consider opportunities to accelerate deductions into a loss year to benefit, but remember any non-automatic changes you want to make effective for the 2020 calendar year must be made by the end of the year. The fastest way to obtain a refund is generally by filing a tentative refund claim, but these must be filed by December 31, 2020, for the 2019 calendar year. If your losses will be in 2020, start preparing to file early because you cannot claim an NOL carryback refund until you file your tax return for the year.
- The CARES Act fixed a technical problem with bonus depreciation, a generous provision that allows companies to immediately deduct the full cost of many types of business investments. The legislation expands bonus depreciation to apply to a generous category of qualified improvement property (QIP). QIP is commonly thought of as a retail and restaurant issue, but it is much broader and applies to almost any improvement to the interior of a building that is either owned or leased. The fix is retroactive, so you can fully deduct qualified improvements dating back to January 1, 2018, which may offer relatively quick refunds. Taxpayers who filed 2018 and 2019 returns before the law changed can amend both the 2018 and 2019 returns to apply bonus depreciation for QIP in each of those years.
- The CARES Act allows employers to defer paying their 6.2% share of Social Security taxes for the rest of 2020. Half of the deferred amount is due by December 31, 2021, with the other half due by December 31, 2022. This provides a great liquidity benefit, but taxpayers should consider the impact on deductions before the end of the year. Businesses generally cannot deduct their share of payroll taxes until paid.
- The Cares Act increases the ceiling for business interest deductions from 30% to 50% of adjusted taxable income for tax years 2019 and 2020. https://www.fuoco.com/component/content/article/596-cares-act-modifies-business-interest-deductions-
- Be sure you are fully taking advantage of Family Leave and Paid Sick Leave credits, as well as the Employee Retention Credit. If you need a credit “refresher” click the links below:
- https://www.fuoco.com/component/content/article/548-put-families-first-coronavirus-response-act-to-work-for-you (scroll to bottom of article for tax credit info)
You can’t predict the political future but you can plan for it! Here are some estate planning ideas for consideration based on uncertainty as to what proposed income tax law changes might be in 2021 and beyond. Keep in mind that due to fluctuating political winds there are also proposals on the table related to estate, gift and generation-skipping taxes. Many of these have been bandied about for a while now; we would be remiss if we did not mention them:
- Reduce the current estate and gift tax (and probably the generation-skipping tax) exemption from $11.58 million per person ($23.26 million for married couples) to an inflation adjusted $5.49 million per person ($10.98 million for married couples).
- Increase the current estate, gift and generation-skipping tax rates from a flat 40% to a progressive scale with rates from 40% to 77%.… or more.
- Limit the number of $15,000 annual exclusion gifts.
- Eliminate the use, or reduce the effectiveness, of valuation discounts.
- Eliminate the use, or reduce the effectiveness, of Intentionally Defective Grantor Trusts (“IDGT”) and Grantor Retained Annuity Trusts (“GRAT”).
- Eliminate the basis step-up at death.
- Impose a capital gains tax at death on unrealized gains.
Not all of these will have the same impact on every TFGFA client, but if any of them might be of particular concern to you in your situation, you may want to discuss your options before the end of 2020 in order to mitigate the effect on your portfolio and estate:
- Make gifts to use up some or all of your $11.58 million exemption. The IRS has already said that gifts in excess of a future reduced exemption amount will NOT be “clawed-back” for purposes of computing the estate tax on your estate. If you are a NY resident and survive the gift by three years, the gift will not be taken into account in computing the NY estate tax on your estate.
- Make gifts in excess of your $11.58 million exemption and pay a gift tax at a 40% rate. Unless you believe that the gift and estate taxes will be repealed, or that rates will be reduced, paying a gift tax is less expensive than paying an estate tax.
- If you are married and concerned that the gifts would reduce cash flow to an unacceptable level, consider creating a Spousal Lifetime Access Trust (“SLAT”) where one spouse uses his/her gift tax exemption to create a trust for the other spouse.
- Make gifts of other than cash or marketable securities in order to take advantage of valuation discounts.
- With interest rates at historical lows (the September Applicable Federal Rates (“AFR”) are 1% or less), make AFR loans to family members and/or create GRATs. See our prior article HERE.
The suggestions above are just the tip of the iceberg. There are additional estate planning tactics like putting your gifts into Intentionally Defective Grantor Trusts (“IDGTs”), and other options we would be happy to discuss with you.
Reach Out To Us: There is no crystal ball. However waiting until after the election, and the myriad delays promised due to the pandemic and the counting of the mail-in ballots, may prevent you from accomplishing what financial moves you might want to make before December 31st. Now is the time to set up, review, or to finalize your estate planning documents with your attorney, Fuoco Group accountants and your TFGFA financial advisory team all working in tandem.
Feel free to contact me, Paul Wieseneck, CPA, Senior Financial Advisor, at 561-209-1102, with any questions regarding financial planning for your estate. At TFGFA, we believe in customized investment portfolio design and personalized asset management.