2020 YEAR-END TAX PLANNING – FOR BUSINESSES
What a year! As your business financial advisors, we want to provide you with some important year-end information. Some are reminders and some is new information, much of which will affect you as you head into the new year.
PPP Loan Forgiveness
The IRS has confirmed practitioners’ fears and clarified that if expenses are funded with a Paycheck Protection Program loan that has not yet been forgiven, that does not mean that businesses can take the deductions this year. “If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. Therefore, we encourage businesses to file for forgiveness as soon as possible,” said a Treasury statement. As of the date of this letter, there is still some hope that Congress will act, to legislate into law what they initially promised. We are asking that our clients prepare for the worst and hope for the best.
Most of you received a “Stimulus Check” this year during the summer. In many instances, the check was less than what you were owed. We can only determine any additional amount due if you let us know the amount received. The IRS informed you of that amount with Notice 1444, which, if you received it, we will need in order to reconcile. If you did not receive or keep the form, no problem! We will confirm the amount you received during the preparation of your 2020 tax return. Please keep in mind that the stimulus was really an advance on a 2020 tax benefit. If you did not receive this stimulus, you may receive this extra benefit with the filing of your 2020 return.
There is a new deduction for charity amounts that does not require you to itemize, so please let us know of all cash contributions you have made in 2020. Employee work-related business expenses are no longer deductible on the Federal return, but we may still need the information for your state return. If you incur a lot of these types of expenses, you need to discuss the use of an accountable plan with your employer.
The IRS has added a new question on the very first line of the 2020 Form 1040 asking whether you have bought, sold, traded, or spent any virtual currency and we must ask you to verify this for us to avoid IRS penalties.
In the current tax era of greatly increased requirements to itemize deductions, a tax “bunching” strategy can be very valuable. The “bunching” strategy recognizes that the best tax deductions are obtained by putting deductions in one year rather than spreading them amongst several years. For example, in years where your charitable contributions are very low, hold off until the next year to catch up, then also pay the full amount of the next year’s contributions in the “catch up” year to double your chances of itemizing. Similarly, few Americans receive medical deductions anymore, but if you incur a large expense for say, the deductible on surgery, then try to pay all your other medical items in the same year, such as dental and vision exams, check-ups, etc.
If you have a Health Savings Account, it is mandatory that you deposit some amount into it and leave a minimal balance at all times; the tax savings benefits are incredible and this is one of the single best plans available.
Retirement Plan Contributions
The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for expenses related to the birth or adoption of a child after December 31, 2019. To qualify, the distribution must be made during the one-year period beginning on the date the child is born or the adoption is finalized. Eligible adoptees are any individual who has not reached age 18 or is physically or mentally incapable of self-support. Qualified birth or adoption distributions are included in the taxpayer’s income in the year of withdrawal but are not subject to the 10% early withdrawal penalty or to the mandatory 20% tax withholding and may be repaid to the retirement plan at any time. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000.
Simplified Employment Pension Plans
Estate and Gift Taxes
The unified estate and gift tax exclusion and generation-skipping transfer tax exemption is $11,580,000 per person in 2020. The annual gift exclusion is $15,000, requiring no reporting nor reduction to the lifetime estate/gift exclusion. We suspect that the estate tax will become an issue again for many Americans, as many experts agree that the current exemption will be reduced under future administrations, and perhaps by a great deal. If the net value of your assets (to include life insurance) is several million dollars or more, we should begin discussing transfer strategies to protect your eventual estate from the punitive Estate tax. Our trust and estate team is ready to serve you in this regard.
Reminder of 1099 Rules
The law states that any individual (or non-corporate entity) that receives more than $600 during the year for services performed must be issued a new Form 1099-NEC by January 31st. The penalty for failing to timely file this form can be as much as $250 per form. Moreover, on all business entity returns, the IRS requires the taxpayer to respond to whether they were required to file and whether they did indeed file this form. We are happy to prepare 1099’s for our clients, we simply ask that you supply us the name, address, social security number, and amount paid to each subcontractor in early January. Given the volume of the forms we will be preparing and the earlier due date, we cannot guarantee timely filing when information is received any later than January 20th. Finally, please keep in mind that you should be requesting a Form W-9 to be completed by any service providers before they start work. This form can be quickly downloaded at www.irs.gov.
As most of you are aware, the deadline for distributing W-2’s to your employees and for most other payroll tax filings is January 31st. Please be mindful that the Federal copy of the W-2 filing is also due by January 31st. Thus, for those of you for whom we prepare payroll filings, please be sure to get us the most up-to-date employee information and any taxable fringe benefit “add-ons” by January 10th. This would include address changes, information on new hires, December payroll information, or any other information we may need to accurately prepare W-2’s, 941’s, etc. Also, please be mindful that health insurance premiums paid by a Corporation for greater than 2% owners of S-Corporations must be included on the W-2 as wages for that shareholder, with different treatments if the Company “discriminates” in their treatment of these premium payments versus if there is no discrimination. We will need you to provide us with health insurance paid on behalf of each such shareholder in order to properly prepare Form W-2. Please understand that, for the S-Corporation shareholder to deduct health insurance premiums in full, those premiums must be paid by or reimbursed by the corporation by year-end. Failure to do so will likely greatly limit the deduction.
Also, please be aware that the penalty for failure to file each Form W-2 has been increased to $250. Where this causes particular concern is in instances where taxpayers might be incorrectly treating employees as independent contractors. Again, the penalty is $250 per non-issued W-2 and the IRS can go back up to 6 years to assess penalties in this regard.
For those of you for whom we do handle your payroll, please be sure to forward any unemployment rate change notices or Federal or State payroll deposit frequency notices to our payroll department as soon as received.
Health Care Rules
Even though tax reform removed the penalty for not having minimum essential health insurance coverage on taxpayer’s 2020 1040 tax returns, the Patient Protection and Affordable Care Act (aka PPACA or “Obamacare”) still requires employers with 50 or more employees to issue a Form 1095-C to their employees in January along with their W-2. Additionally, these employer groups are mandated to provide health insurance to employees or face penalties.
The calculation of employment size is not as simple as one might think as there are special rules pertaining to seasonal and part-time employees. If you need help in determination of employment size, please call us immediately.
As a reminder, for income tax purposes, we are typically able to immediately expense as supplies, capital items with purchase prices up to $2,500. For items in excess of this threshold, IRC Section 179 provides us with a method of immediately expensing many capital items, up to $1,040,000 in aggregate. Bonus depreciation has been expanded to provide for 100% expensing of qualified property and the new laws no longer require the property to be “new.” The CARES Act permits Qualified Improvement Property to qualify for 15-year depreciation and therefore be also eligible for 100 percent first-year bonus depreciation.
There continues to be a significant allowance for accelerating the depreciation of automotive vehicles. Vehicles weighing more than 6,000 pounds continue to receive the best first-year depreciation allowance, in some cases as much as 100% of the acquisition cost. Lighter vehicles still provide for nice deductions but are subject to first-year depreciation caps.
Also, please be mindful that while the $2,500 threshold exists for the IRS and Virginia Department of Taxation for capitalizing an asset, local municipalities have no such provision for purposes of reporting tangible business personal property each year. In short, to ensure that we provide you with the best possible treatment of capital acquisitions and disposals, please be sure you notify us of any additions or deletions of equipment or other property that transpired during your tax year.
The IRS continues to place an increased emphasis on actual physical inventory on hand at your year-end. Please make sure to physically count your inventory, retain the records, and provide us with the accurate total cost of inventory on hand at your calendar or fiscal year-end. Do not include consignments you are holding from other people in this number. In the event of an audit, you must be able to provide copies of physical count sheets. Because of this, we are placing an increased emphasis upon obtaining correct year-end physical inventory amounts.
Business License/Business Tangible Property Tax Returns
Each municipality requires business license and property tax returns for cities in which you operate each year. The deadlines can vary by city, but March 1st is most common, locally. We like to prepare these returns, as it makes the cities regular audits much smoother, but we need to receive the applications no later than 2-weeks prior to the deadline. As some clients prefer to prepare their own, if we do not receive your business licenses and property tax forms, we will assume that you have chosen to self-prepare your own returns.
As we have done for several years, we will continue to issue monthly financials under the “Preparation” standard, pursuant to SSARS 21.
At year-end, we will continue to issue compilation or review reports based on each client’s requirements. These statements will include reports and we will have to have you sign an annual engagement letter, prior to issuance, as we have done in years past.
Please note that, should you prefer or require compiled financial statements, with a report attached, for an interim period or any other period, a separate charge will apply, as these statements involve additional disclosures and additional liability. While we would often provide interim, compiled financial statements at no cost previously, given the new standards, we do not feel we can continue this.
Finally, please note that for clients for which we prepare monthly work, we do not provide financial statements for the month of December, as certain adjustments for the year-end statements would skew this singular month.
Corporate Tax Returns
As a reminder, for December year-end tax returns, the deadline for S-corporate tax returns is March 15th and C-corporation tax returns is April 15th. We may be calling you with questions or additional information we need to complete your return. We never like to file an extension unless absolutely necessary, so we ask that you respond to any of our inquiries as expeditiously as possible so we can be sure to make the deadline. Remember, the statute of limitations for an IRS audit does not begin until the return is filed. Additionally, please consider this your reminder of the filing due date. It is not practical for us to call each and every client to remind them of their corporate deadline. Finally, we cannot provide any guarantees of a timely-filed return if work is not received at least two weeks prior to the filing deadline.
For December year-end returns, the deadline for Partnership and most LLC returns is March 15th. Again, please be sure to have the information to us prior to March 1st to ensure timely preparation and filing.
Business Entity Ownership Changes
As a reminder, be sure to notify us of any changes in ownership to your business that occurred during the tax year or any mailing address or other significant changes.
We believe that part of our value comes from our comprehensive approach to your financial well-being. Not only do we have a strategic partnership with a leading, local financial planning firm, we have two registered representatives on staff to assist with every aspect of personal and business financial planning to include investments, retirement plans, and insurance and estate planning. Imagine having a financial advisor working in complete concert with your accounting team. That is what we do.
More information on our strategic financial planning partner can be found at www.gofsg.com (Securities offered through Financial Security Management, Inc. Member FINRA/SIPC).