2020 Business Year End Tax Planning

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.

Stimulus Check

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.

Deductions

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.

Compliance

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.

Planning

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.

  • Previously, individuals were not able to contribute to their traditional IRAs in or after the year in which they turn 70½. The SECURE Act eliminates this age cap.
  • The SECURE Act changes the age for required minimum distributions (RMDs) from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for individuals who were born on July 1, 1949, or later is due by April 1 of the year after the year in which they turn 72.
  • The SECURE Act generally requires that designated beneficiaries of persons who die after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not subject to this rule.
  • The CARES Act allows eligible individuals to withdraw up to $100,000 from qualified retirement plans during 2020 without incurring the 10% early distribution penalty. Individuals or their spouses, dependents or other household members affected by COVID-19 may qualify for this relief. Such taxable distributions can be included in gross income ratably over three years. Taxpayers may recontribute the withdrawn amounts to a tax-qualified plan or IRA at any time within three years after the distribution. These repayments will be treated as a tax-free rollover and are not subject to that year’s cap on contributions.

Kiddie Tax

  • The SECURE Act reinstates the kiddie tax previously suspended by the Tax Cuts and Jobs Act (TCJA). For tax years beginning after December 31, 2019, the unearned income of a child is no longer taxed at the same rates as estates and trusts. Instead, the unearned income of a child will be taxed at the parents’ tax rates if those rates are higher than the child’s tax rate. Taxpayers can elect to apply this provision retroactively to tax years that begin in 2018 or 2019 by filing an amended return.

Simplified Employment Pension Plans

  • Small businesses can contribute up to 25% of employees’ salaries (up to an annual maximum set by the IRS each year) to a Simplified Employee Pension (SEP) plan. The SEP contribution must be made by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2020 was $57,000. The maximum SEP contribution for 2021 is projected to be $58,000.
  • The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).

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.

Payroll

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 31stPlease 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.

  • Warning:  Misclassification of Employees:  If you feel that you might have misclassified employees as independent contractors, the key is to be proactive to correct the issue.  While you think you may be “outfoxing” the IRS, the penalties, if you are caught, can run into the hundreds of thousands of dollars.  The IRS has publicly acknowledged this issue to be one of their top target campaigns beginning in 2020.
  • Good NewsIf you feel like you may be violating the rules, please call us so we can discuss this issue.  One good alternative might be to apply for relief under the “Voluntary Contractor Special Relief Program.”  If eligible, the employer only has to pay 10% of the employment tax liability that would have been due for the most recent year, will not face penalties or interest, and will be exempt from an employment tax audit with respect to the reclassified workers for prior years.  This deal is too good to overlook.  For many of you for whom we do not currently handle all aspects of your payroll, you really should consider allowing us to take this time-consuming, liability-ridden task off your hands.  It is very affordable; items such as direct deposit of employee’s checks, electronic remittance of tax deposits and online access of payroll reporting are included in our singular fee.  Finally, if you are using a national third-party payroll service provider, why not consider the ease of having your local accounting firm provide this service.

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.

Depreciation Provisions

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.

Inventory

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.

Financial Statements

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. 

Partnership/LLC Returns

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.

Financial Planning

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). 



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