“Small” is bigger than ever
Oct 16,2020
Small businesses enjoy several tax advantages that may allow them to reduce their tax bills, defer taxes and simplify the reporting process. Until recently, federal tax rules generally defined “small business” as one with average annual gross receipts of $5 million or less ($1 million or $10 million in some cases) for the three preceding tax years. But the Tax Cuts and Jobs Act (TCJA) increased the threshold to $25 million for tax years beginning after 2017. The new threshold expands eligibility for small business tax benefits to a greater number of companies. It also simplifies tax compliance by establishing a uniform definition of “small business.” Previously, different thresholds applied depending on the tax accounting rules involved, as well as a company’s industry and whether it carried inventories. Small business benefits Potential benefits of small business status include: Cash accounting. Businesses that pass the gross receipts test are eligible to...
Relaxed limit on business interest deductions
Oct 16,2020
To provide tax relief to businesses suffering during the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily relaxes the limitation on deductions for business interest expense. Here’s the story. TCJA created new limitation Before the Tax Cuts and Jobs Act (TCJA), some corporations were subject to the so-called “earnings stripping” rules. Those rules attempted to limit deductions by U.S. corporations for interest paid to related foreign entities that weren’t subject to U.S. income tax. Other taxpayers could generally fully deduct business interest expense (subject to other tax-law restrictions, such as the passive loss rules and the at-risk rules). The TCJA shifted the business interest deduction playing field. For tax years beginning in 2018 and beyond, it limited a taxpayer’s deduction for business interest expense for the year to the sum of: Business interest income, 30% of adjusted taxable income (ATI), and Floor plan financing interest expense...
The ins and outs of the easing of loss limitation rules
Oct 16,2020
To provide businesses and their owners with some relief from the financial effects of the COVID-19 crisis, the Coronavirus Aid, Relief, and Economic Security (CARES) Act eases the rules for claiming certain tax losses. Here’s a look at the — mostly temporary — modifications. Liberalized rules for NOL carryforwards The CARES Act includes favorable changes to the rules for deducting net operating losses (NOLs). First, it eases the taxable income limitation on deducting NOLs. Under an unfavorable provision included in the 2017 Tax Cuts and Jobs Act (TCJA), an NOL arising in a tax year beginning in 2018 or beyond and carried forward to a later tax year couldn’t offset more than 80% of the taxable income for the carryforward year (the later tax year), calculated before the NOL deduction. For tax years beginning before 2021, the CARES Act removes the TCJA taxable income limitation on deductions for prior-year NOLs...
When 15-year depreciation for QIP might be better than 100% bonus depreciation
Oct 16,2020
Earlier this year, Congress finally passed legislation that corrects a drafting error related to real estate qualified improvement property (QIP). The correction is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The correction retroactively allows real property owners to depreciate QIP faster than before, either 100% the year the QIP is placed in service or over a 15-year period. The 100% bonus depreciation might sound a lot better, but in some cases 15-year depreciation will provide more tax savings in the long run. Background QIP is defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was first placed in service. However, QIP doesn’t include any expenditures attributable to: The enlargement of the building, Any elevator or escalator, or The building’s internal structural framework. When drafting the Tax Cuts and Jobs Act (TCJA) in 2017, members...
The proper care and feeding of your S corporation
Oct 16,2020
The S corporation continues to be a popular entity choice, combining the liability protection of a corporation with many of the tax benefits of a partnership. But these benefits come at a price: S corporations must comply with strict requirements that limit the number and type of shareholders, prohibit complex capital structures, and impose other restrictions. Advantages of S corporation status Like a traditional corporation, an S corporation shields its shareholders from personal liability for the corporation’s debts. At the same time, it provides many (though not all) of the tax benefits associated with partnerships. The most important tax benefit is that an S corporation, like a partnership, is a “pass-through” entity, which means that all of its profits and losses are passed through to the owners, who report their allocable shares on their personal income tax returns. This allows S corporations to avoid the double taxation that plagues traditional...
How to avoid tax scams
Oct 16,2020
Scam artists seem to come out of the woodwork when there’s money involved — and taxes are no exception. Fortunately, if you familiarize yourself with common tax scams and understand what the IRS will and won’t do, it’s easy to avoid them. Common scams Here are some common tax fraud schemes: Calls from IRS impersonators. Fraudsters impersonating IRS employees call or leave a message, typically using fake names and phony identification badge numbers and often altering the caller ID to make it look like a legitimate IRS number. They tell victims that they owe money to the IRS and threaten them with arrest, suspension of business or driver’s licenses, or even deportation unless they pay promptly using gift cards, prepaid debit cards or wire transfers. Phishing. Fraud perpetrators send fake emails, designed to look like official communications from the IRS, tax software companies or even victims’ tax advisors. The intention...
5 tips for safe intrafamily loans
Oct 16,2020
If a relative needs financial help, offering an intrafamily loan might seem like a good idea. But if not properly executed, such loans can carry negative tax consequences — such as unexpected taxable income, gift tax or both. Here are five tips to help avoid any unwelcome tax surprises: Create a paper trail. In general, to avoid undesirable tax consequences, you need to be able to show that the loan was bona fide. To do so, document evidence of: o The amount and terms of the debt, o Interest charged o Fixed repayment schedules o Collateral o Demands for repayment, and o The borrower's solvency at the time of the loan. Be sure to make your intentions clear — and help avoid loan-related misunderstandings — by also documenting the loan payments received. Demonstrate an intention to collect. Even if you think you may eventually forgive the loan, ensure the borrower...
Rolling over capital gains into a qualified opportunity fund
Oct 15,2020
If you’re selling a business interest, real estate or other highly appreciated property, you could get hit with a substantial capital gains tax bill. One way to soften the blow — if you’re willing to tie up the funds long term — is to “roll over” the gain into a qualified opportunity fund (QOF). What is a QOF? A QOF is an investment fund, organized as a corporation or partnership, designed to invest in one or more Qualified Opportunity Zones (QOZs). A QOZ is a distressed area that meets certain low-income criteria, as designated by the U.S. Treasury Department. Currently, there are more than 9,000 QOZs in the United States and its territories. QOFs can be structured as multi-investor funds or as single-investor funds established by an individual or business. To qualify for tax benefits, at least 90% of a QOF’s funds must be QOZ property, which includes: QOZ business...
Is a Roth IRA conversion right for you this year?
Oct 15,2020
The COVID-19 pandemic has been causing havoc in the global markets and the U.S. economy. In these uncertain times, it’s important to stay on top of your financial status, including taking measures to protect your retirement nest egg over the long term. One idea to consider is converting a traditional IRA to a Roth IRA. Traditional vs. Roth First, let’s review the key differences between traditional and Roth IRAs: Traditional IRAs. Contributions to a traditional IRA may be wholly or partially tax-deductible. But deductions are phased out if these two conditions are met: Your modified adjusted gross income (MAGI) exceeds a specified level, and You (or your spouse if you’re married) are an active participant in an employer-sponsored retirement plan. Therefore, depending on your situation, some or all of your traditional IRA may not reflect deductible contributions. Traditional IRA distributions that are attributable to deductible contributions or growth in the...
Gig workers, know your tax responsibilities
Oct 15,2020
Let’s say you drive for a ride-sharing app, deliver groceries ordered online or perform freelance home repairs booked via a mobile device. If you do one of these jobs or myriad others that are similar, you’re likely a gig worker — part of a growing segment of the economy. For taxpayers who’ve turned to gig work this year, due to losing their job during the COVID-19 crisis or some other reason, it’s critical that they understand the income tax consequences. A different way No matter what the job or app, all gig workers have one thing in common: income tax obligations. But the way you’ll pay taxes differs from the way you would as an employee. To start, you’re typically considered self-employed. As a result, and because an employer isn’t withholding money from your paycheck to cover your tax obligations, you’re responsible for making federal income tax payments. Depending on...

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