Tax Do Overs: Opportunities to Correct Mistakes and Get Cash Back

Tax Do Overs: Opportunities to Correct Mistakes and Get Cash Back


Filing your income tax return may not be the end of the tax story for the year. You may revisit taxes for the year by means of an amended return. Due to various law changes resulting from the pandemic, there are several refund opportunities you may qualify for and obtain a tax refund if you file an amended return; the IRS doesn’t send such refunds automatically. These refund opportunities are in addition to the usual ones. Here are some issues to consider in filing an amended return.



Correcting Tax Mistakes

Generally, you must file a refund claim within three years of the due date of the return or, if the return is filed after the original due date, then the actual filing date. However, other periods apply to special situations, such as refunds where no return was filed or for refunds related to bad debts or worthless securities. If you miss the deadline, you can’t obtain a refund under any circumstances even though you would have if you’d filed on time.

File the Right Form

Each type of taxpayer—individual, partnership, corporation—has its own type of form to make a refund claim.

  • Individuals (including sole proprietors and owners of pass-through entities) file Form 1040-X. An amended return for 2019 can be filed electronically. Amended returns for earlier years must be filed on paper.
  • S corporations file Form 1120-S, the usual tax return, and check the box to indicate that it’s an amended return. Amended Schedule K-1s must be issued to shareholders.
  • C corporations file Form 1120-X.
  • Partnerships usually file Form 1065-X. However, small partnerships that have elected out of the centralized audit procedures file the usual Form 1065, check the box to indicate it’s an amended return, and issue amended Schedule K-1s to partners. Note that for certain refund opportunities created by the CARES Act in response to the pandemic, partnerships that would otherwise file Form 1065-X to amend 2018 and 2019 returns had been permitted to Form 1065 by September 30, 2020.

You may be eligible to file for a “quick refund” even before filing a return in certain situations. For example, if you expect 2020 to be a bad year, you may be able to file a refund claim against all of the prior five years on one form before you submit your 2020 return and obtain cash that you can use for your business. If you report on a calendar year, you could submit the quick refund claim on January 1, 2021 (a quick refund must be filed within one year after the end of the year in which the net operating loss arises). This is a tentative refund process where you receive the money promptly, but the IRS has the right to review the claim in greater detail and may disallow or alter the refund amount.

Look for Refund Opportunities

There are a variety of reasons to file an amended return to get money back. These include (but are not limited to):

  • Net operating loss carryback. The CARES Act introduced a 5-year carryback for net operating losses arising in 2018, 2019, and 2020. This allows the loss to offset income in the carryback years and generate a tax refund. Any remaining losses can be carried forward and used in future years.
  • Qualified improvement property. If you made changes to the interior of your commercial building in 2018 or 2019, a law change may allow you to file for a refund.
  • Disaster losses. If you suffered damage or destruction to your property as a result of a federally-declared disaster and the loss is not covered by insurance, you can opt to deduct the loss on the return for the prior year. For example, if you suffered a loss due to the wildfires September in the West Coast or Hurricanes Laura and Sally, you don’t have to wait to file your 2020 return to take the loss; you can claim it on a 2019 return. The IRS lists disaster designations by year. But watch the special deadlines if you want to change a prior election (e.g., you claim the 2020 loss on a 2019 return but then want to change to 2020).
  • General business credits. If you can’t use all of the income tax credits for your business because of the general business credit limitation, there’s a one-year carryback. Unused amounts are then carried forward for up to 20 years (or used up in the final year of business).

You may also file for a refund if you simply overlooked a deduction or tax credit to which you were entitled.

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Consider the Cost of Filing

If you do it yourself, filing an amended return merely involves your time and effort. If you rely on a CPA or other tax professional, there are fees involved. Be sure the amount of the refund expected is large enough to justify the fees.

A common question is whether there’s an increased risk of being audited if you file an amended return. Most experts say that filing an amended return likely doesn’t increase the risk of being audited, and given limited IRS resources at this time, audit rates are very low. But you never know.

Final Thought

Don’t waste an opportunity to recoup taxes you paid if you’re eligible for a refund. But determine whether or not to do so. Discuss the matter with your CPA or other tax advisor.

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What’s the Qualified Business Income Deduction and Can You Claim It?

What’s the Qualified Business Income Deduction and Can You Claim It?


The Tax Cuts and Jobs Act passed in December of 2017. It drastically cut the corporate tax rate, but it also introduced the Qualified Business Income (QBI) deduction.

The QBI deduction offers a way to lower the effective tax rate on the profits of owners of pass-through entities — trade or business where the income “passes through” to the owner’s individual tax return. These include the sole proprietorship (including independent contractors), partnerships, limited liability companies, and S corporations. Some trusts and estates may also be eligible to take the deduction. Income earned through a C corporation or services provided as an employee are not eligible, however.

The qualified business income (QBI) deduction can prove to be a significant tax reduction for those business owners who qualify. But because it remains a deduction and not a tax rate reduction, its effectiveness depends on an owner’s tax bracket. It represents a temporary measure in the tax law, which sunsets after 2025 unless Congress acts. It can also prove very, very complicated.

Here is a summary of what the deduction entails:

  • The QBI deduction is a personal write-off for owners of domestic pass-through businesses where owners pay business taxes on their personal tax return.
  • The deduction can be up to 20% of QBI minus the net capital gains.
  • Business owners can take the deduction in addition to the ordinarily allowable business expense deductions.
  • Deductions for higher-income individuals may be limited or ineligible.
  • This deduction is in place for tax years 2018 through 2025.

Here are answers to some commonly asked questions about the QBI deduction that may help you understand whether you qualify and, if so, how to gain the most benefit possible.



What is a Qualified Business Income Deduction?

A qualified business income(QBI) deduction allows domestic small business owners and self-employed individuals to deduct up to 20% of their QBI plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income on their taxes, or 20% of a taxpayer’s taxable income minus net capital gains.

Qualified REIT dividends include most of the real estate investment trust dividends that people earn. Also, to qualify, you must hold the real estate investment trust for longer than 45 days. The payment must be for you, and it cannot be a capital gains dividend or regular qualified dividend. Qualified income from a PTP includes your share of income, gains, deductions, and losses from a PTP.

To qualify for the deduction, the 2019 taxable income must be under $321,400 for couples who are married filing jointly, $160,725 for married filing separately, or $160,700 for all other taxpayers. In 2020, those figures increase to $326,000 for couples married filing jointly and $163,300 for everyone else.

Anything higher and the IRS invokes a series of complicated rules that place limits on whether the trade or business income qualifies for a full or partial deduction. Deduction limitations include such factors as the trade or business type, taxable income, and the amount of W-2 wages paid by the company.

Some refer to the qualified business income (QBI) deduction as the Section 199A deduction. It does not really fit the description of a business deduction, however, even though it’s based on income. And it doesn’t reduce gross income like other business-related deductions. Take, for example, the self-employed health insurance deduction and one-half of self-employment tax. It doesn’t impact self-employment tax at all.

What the QBI deduction does offer is a personal tax deduction based on trade or income. You claim it on your individual income tax return (1040) as the owner whether you use the standard deduction or itemize personal deductions.

You get to take the deduction if you qualify for it. However claiming the deduction doesn’t require any purchase or outlay of cash, as with other types of deductions.

What is Qualified Business Income?

According to the IRS, qualified business income represents the net amount of qualified income, gain, deduction, and loss from any qualified trade or business. (Simply put, that means your share of the business’s net profit.) The trade or business must also be located in the U.S.

The IRS only counts items included in taxable income, such as:

  • Payments to an S corporation owner
  • Investments gains or losses
  • Interest income on outstanding receivables.

Certain items are excluded from QBI deductions when figuring qualified income, including:

  • Capital gains and losses
  • Certain dividends and interest income
  • Wage income paid to the S corporation owner
  • Income earned outside the U.S.
  • Commodities, transactions or foreign currency gains or losses
  • Annuities, unless received in connection with the trade or business
  • Amounts paid to a taxpayer acting outside of his or her capacity as a partner for services
  • Reasonable compensation received by S corporation owner-employees
  • Guaranteed payments received by partners.

The IRS also states, solely for section 199A, a safe harbor is available to individuals and owners of pass-through entities who seek to claim the deduction under section 199A for a rental real estate enterprise. It treats a rental real estate enterprise as a trade or business for purposes of the QBI deduction if specific criteria are met.

You must also reduce qualified business income by personal deductions connected to having that income. These include:

  • Gain from transactions reported on Form 4797, including gain from the sale of business property
  • Deduction for one-half of self-employment tax
  • Deduction for self-employed SEP, SIMPLE, or other retirement plans
  • Unreimbursed partnership expenses claimed by a partner on his or her personal return
  • A self-employed health insurance deduction.

Special rules for the treatment of multiple businesses and the impact of losses apply. Also, in some cases, patrons of horticultural or agricultural cooperatives are required to reduce their deduction under section 199A of the tax code.

Do You Qualify for the QBI Deduction?

To qualify for the qualified business income (QBI) deduction, you must be an owner of a pass-through entity within the U.S., have qualified business income, and not be barred from taking the deduction due to having substantial income and operating in a particular type of business. This will be explained in detail later.

Sole proprietorships, partnerships, S corporations and limited liability companies (LLCs) are the pass -through entities eligible.

You do not qualify if your business is a C corporation or if you are simply an employee who does not own an interest in a pass-through entity.

It does not matter whether you are active in the day-to-day activities of the trade of business or merely a silent investor. Any eligible taxpayer with income from a trade or business may be entitled to the QBI deduction assuming they satisfy the requirements of section 199A. This is regardless of their level of involvement.

You also do not qualify if your taxable income exceeds the specified threshold amount in a given tax year, and you are in a specified service trade or business (SSTB).

The SSTB exception does not apply to the taxpayer’s taxable income below the threshold amount. In other words, SSTBs below the limit get the deduction just like any other business owner. Also, the deduction is phased in for taxpayers with taxable income above the threshold amount.

S corporations and partnerships qualify because they are typically not taxable and cannot take the deduction themselves. Instead, all S corporations and partnerships report each shareholder’s or partner’s share of qualified business income, W-2 wages paid, UBIA of qualified property, qualified real estate investment trust dividends, and qualified PTP income items on a Schedule K-1, which allow the shareholders or partners to determine their deduction amount.

Take the following steps to decide whether you qualify for the QBI deduction:

  • Determine if your trade or business is a pass-through entity.
  • Figure out the amount of net income from that business for the year. (Some income isn’t included.)
  • Estimate your total taxable income. Keep in mind that the deduction amount may be reduced or eliminated if your income is over the limit.

How is the Qualified Business Income Deduction Calculated?

Calculating your QBI deduction is no easy task by anyone’s estimation. Fortunately, your tax return preparer or online tax return software can take care of that for you. To better understand the process, however, follow these steps:

  1. Start by gathering documents that list your eligible income. It’s helpful to have a copy of Schedule K-1, with the necessary information included.
  2. Calculate your taxable income. This is your gross income after subtracting your deductions and personal exemptions.
  3. Make a final determination. Decide whether the income is related to a qualified trade or business in which you have a business interest.
  4. Then it’s time to run the numbers. Calculate the qualified business income for each trade or business for the tax year and your net taxable income — the net amount of the business’s qualified items of income, gain, deduction, and loss.
  5. Calculate your QBI limitations. Once you have calculated your qualified business income for each business, move on to calculating your limitation. This will help you decide whether aggregating your businesses works for or against you when getting the highest deduction.

It is necessary to calculate your limits if you have an ownership interest in a trade or business, and your taxable income for tax year 2019 is more than $321,400 as a couple married filing jointly, more than $160,725 if married and filing separately, or $160,700 otherwise. If your taxable income is under these amounts, there is no need to calculate the limitation. You can take the straight 20% deduction.

Here is how to calculate the limitation.

Know the amount of W-2 wages paid and the amount of qualified property owned. Qualified property is personal or real property that is subject to depreciation. Land does not count as qualified property. Items like furniture, equipment, and machinery do.

This is where it can get complicated.

Your qualified business income is limited to either 20% of your QBI or one of these options:

  • 50% of the company’s W-2 wages
  • The sum of 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property.

Choose whichever of the two wage options above gives you a higher deduction.

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6. That’s it! Once you make that determination, you have successfully calculated your deduction amount.

To claim the QBI deduction for 2019, complete Form 8995, Qualified Business Income Deduction Simplified Computation, or Form 8995-A, Qualified Business Income Deduction. Both forms take you through the process of adding up your qualified business income, real estate investment trust dividends, and PTP income to determine the amount of your deduction.

Use Form 8995 if your taxable income is less than the income threshold and Form 8995-A if your taxable income is more than the specified threshold. Attach the form to your tax return. That’s Form 1040 for most business owners.

QBI Deduction Examples

These two examples illustrate how the process works for a business owner who qualifies for the QBI deduction without limitations and one who qualifies but with limitations:

Jill owns a retail business that generates $100,000 in qualified business income. She is married and does married filing jointly.

Her taxable income is less than $321,400 for couples married filing jointly. Her business paid $30,000 in wages and has $50,000 in qualified property.

Because Jill’s taxable income is less than the threshold, she can claim the full 20%, which in her case is $20,000.

Jack owns a warehouse storage company. He is also married, but rather than filing jointly chooses to file separately, so his threshold to qualify is $160,700 for the tax year 2019.

His qualified business income is $125,000. He paid $50,000 in wages and has $150,000 in qualified property. His taxable income, however, is $415,000, which is over the threshold. That means he cannot automatically claim the 20% deduction and has to calculate his limitation.

Jack performs both wage tests to find the highest deduction.

Test 1 is 50% of the company’s W-2 wages or 50% x $50,000 for a total of $25,000

Test 2 is 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property, which comes to $16,250.

Jack chooses the higher deduction, so his total QBI deduction amount is $25,000.

There’s one more item to note: Whatever the amount of your QBI deduction, it can’t exceed more than 20% of your total taxable income without the QBI deduction. So, calculate the numbers to determine if the qualified business income deduction is within IRS guidelines.

Other QBI Deduction Factors

Here are some other factors to take into consideration when calculating QBI deductions.

  • If the net amount of your combined qualified business income during the tax year is a loss, you carry it forward into the next tax year.
  • You can deduct 20% of qualified real estate investment trust dividends, cooperative dividends, and PTP income, but don’t include these items when calculating your QBI.
  • You can combine multiple sources of income to calculate your total QBI.
  • If you have two or more qualified businesses (i.e., pass-through business), the IRS allows you to combine the qualified business incomes, W-2 wages, and basis of qualified property for each, and then apply the W-2 wage and qualified property limitations. You are not required to combine (or aggregate) your businesses, although it is allowed and may increase the QBI deduction amount and lower your tax bill.
  • If you have a loss on one trade or business and profit on another (including aggregated trades and businesses), you must net their qualified business income, including losses. The negative QBI from one business will offset positive QBI from other trades or businesses in proportion to the net income of the trades or businesses with positive QBI. If the total QBI from all of your businesses is less than zero, then you have a negative amount that you must carry forward to the next year.

Is Qualified Business Income an Itemized Deduction?

The qualified business income deduction is a personal write-off that you can claim whether or not you itemize your tax return using Schedule A or take the standard deduction. That is different from other deductions, which require you to itemize.

Importance of Taxable Income

Taxable income governs eligibility for the credit. Business owners with taxable income that does not exceed a set amount can take a 20% deduction of qualified business income plus 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income. This is without regard to the QBI deduction and it depends on their filing status.

The taxable income amounts are adjusted annually for inflation. This straightforward deduction applies regardless of the type of business you’re in. For those with taxable income over their applicable limit, things are not so straightforward.

Qualified Business Income Deduction Formula

If taxable income exceeds the taxable amount for your filing status, then use the following formula to figure the qualified business income deduction. This is all subject to additional limits for a specified service trade or business, explained below.

The deduction is the greater of: (1) 50% of W-2 wages (wages paid by the business, including amounts to S corporation owner-employees), or (2) 25% of W-2 wages, plus 2.5% of the unadjusted basis (usually cost without regard to any depreciation) of property that hasn’t reached the end of its recovery period set by law.

How to Maximize Your QBI Deduction

If you find that you are above the qualified business income threshold, there are certain planning strategies you can employ to maximize QBI deductions, whether yours is an SSTB or not. Consider using some of the following procedures:

  • Keep your income under the threshold. Below the threshold, the deduction is less restrictive.
  • Consider filing your tax return separately if you are married. If you file jointly, your trade or business is a specified service subject to the phase-out.
  • Create a separate entity that provides business and administrative support to a disqualified business. Forming a new LLC to offer such services is best.
  • To get a larger deduction, decrease the compensation you as the owner receives as long as the amount is still reasonable.
  • Increase the amount of wages paid to employees, if possible, or purchase assets.
  • Take a second job to increase taxable income.
  • Aggregate multiple businesses to optimize the three components and limitations (QBI, Wages, UBIA). Complicated rules govern the ability to aggregate businesses, however, so take all factors into account. Also, SSTBs do not qualify for aggregation.
  • If you have a high-deductible health insurance plan, make a pre-tax contribution to a Health Savings Account for up to $3,550 for an individual plan or $7,100 for a family plan in 2020.
  • Make a retirement plan contribution to lower the taxable amount in the current year.
  • Lump several years worth of future expected charitable giving contributions into the current year. It may put you over the standard deduction limit and let you reap the tax benefits of itemizing a large charitable gift.
  • If you can control the timing of your business income, delay future projects until the following year to keep income levels below the threshold. You could also accelerate the payment of some expenses to the current year to reduce income levels.

This list is not an exhaustive list of options, so speak with your CPA or tax preparer for advice on how to qualify for a full or partial QBI deduction.

Specified Service Trade or Business (SSTBs)

A Specified Service Trade or Business (SSTB) refers to a business providing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investment and investment management, trading, or securities.

This also includes any business where the principal asset is the reputation or skill of one or more owner or employee. Of course, every business depends on the reputation and skill of these individuals. Fortunately, regulations say that an business is an SSTB only if the person receives fees or compensation for endorsing a product or service, licensing his or her image, likeness, or voice, or receiving payment for appearing at an event or in the media.

The SSTB line can be a bit fuzzy as to what professions are subject to the guidelines. For example, under IRS regulations, consultants — those who provide professional advice — are considered SSTBs, but salespeople who offer sales training courses are not. Similarly, physicians fall under the “health” definition and qualify as an SSTB, but fitness instructors do not.

To complicate matters further, some businesses can be a combination of SSTB and non-SSTB. In those cases, the de minimus rule applies. If income from the SSTB side is below a certain threshold, the business can be fully eligible for the QBI deduction.

Regardless, if you are in a specified service trade or business and your taxable income exceeds your applicable limit, the items taken into account in figuring the qualified business income deduction — QBI, W-2 wages, the unadjusted basis of certain property — are phased out. Once the taxable amount reaches a specific limit, no QBI deduction can be claimed by an owner of an SSTB.

For the tax year 2019, those figures are as follows:

If your taxable income is between $321,400 and $421,400 for those married filing jointly, between $160,725 and $210,725 for those married filing separately, or between $160,700 and $210,700 for single filers, your deduction is subject to additional limitations. If it is higher, then you are fully phased out and not eligible for the QBI deduction.

Conclusion

If you’re confused about the qualified business income deduction, you’re not alone. It’s a very complex write-off that many businesses fail to claim. It is a deduction you should be concerned with, however, if your trade or business is a pass-through entity because it provides a generous tax break for qualifying businesses.

One thing is sure: Determining who can claim the QBI deduction and calculating it is no easy task. The good news is that your tax return preparer or tax software can figure the deduction for you. To learn more about the QBI deduction, check out IRS FAQs as well as instructions to Form 8995 and Form 8995-A.

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Everything You Need to Know About Buying or Leasing a Business Vehicle in 2020 

Everything You Need to Know About Buying or Leasing a Business Vehicle in 2020 


Just about every business needs a vehicle. Some use cars to visit customers, clients, vendors, or run business chores—to the bank, to see an attorney or other business advisor, or to scope out new business. Others use vans to carry tools of the trade to worksites. And still, others use cars or trucks to make deliveries or tote equipment. Whatever the purpose, business practicalities and tax rules impact buying and leasing business vehicles in 2020.



Buy or Lease Company Vehicle in 2020?

The perennial question that many small business owners ask when considering a new vehicle is whether to buy or lease. As a rule of thumb, leasing enables owners to obtain more costly vehicles than what they could afford if they’d have to buy them.

From a tax perspective, in claiming a deduction for business driving, the same standard mileage rate (e.g., 57.5 cents per mile in 2020) applies whether the vehicle is owned or leased. Those who deduct the actual cost of business driving need to figure which option—buy or lease—produces the greater write-offs. When a vehicle purchased in 2020 is a “luxury vehicle” (one costing over $90,000), special dollar limits cap the amount of depreciation that may be claimed. These limits can be adjusted annually; 2020 limits are here.

However, heavy SUVs aren’t subject to these dollar limits. There’s a special first-year expensing limit ($50,900 in 2020). And due to a special allowance called bonus depreciation, the full purchase price of such a vehicle can effectively be written off in 2020.

Leasing a vehicle valued at more than $50,000 requires the deduction for lease payments to be reduced by a so-called “inclusion amount,” but such amount is very modest. Again, 2020 inclusion amounts are here.

Taxes aside, as a practical matter, leasing may be out of the question if you expect to do a lot of driving. Most leases make it too expensive if annual mileage exceeds 15,000 or so (of course, depending on the terms of a particular lease).

Which vehicle to get?

Assess the driving for which the vehicle will be used. Factor in the cost of fuel (very low now but could rise in the future), insurance, and other operating costs to budget appropriately.

Consider that you may qualify for a tax credit if you buy a plug-in electric drive vehicle. The credit for a 4-wheel vehicle is up to $7,500. However, credits may be lower. The IRS has a list of eligible vehicles and their credit limits. For example, while the 2021 Toyota Rav 4 prime plug-in hybrid qualifies for the top credit of $7,500, the 2020 Ford Escape plug-in hybrid has a credit limit of $6,843. (There’s a credit for a 2-wheel electric vehicle, which expires at the end of 2020 unless extended.)

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Note that no credit can be claimed when the manufacturer sells more than 200,000 vehicles, a benchmark passed by both Tesla and GM. As a result, no credit is allowed for a Tesla vehicle purchased in 2020, and the credit for a GM vehicle is only $1,875 for purchases in the first quarter of 2020 (i.e., no credit for a GM vehicle purchased after March 31, 2020).

What to do when employees use company vehicles?

If you let employees drive company vehicles, consider restrictions on personal use to conform with your insurance coverage. Also, think about how to deal with the tax implications of any personal driving. Allowing employees to use company vehicles after hours triggers a taxable fringe benefit (there are limited exceptions). There are different ways to figure the amount of the benefit:

  • General valuation rule. Figuring how much an employee would have to pay a third party to lease the same or similar vehicle. This determination must factor in comparable terms and the geographic location. You may find this valuation rule hard to use because it is so facts specific
  • Cents-per-mile rule. Multiply the number of miles driven for personal use by the annual IRS-set standard mileage rate (57.5¢ per mile in 2020). While this option is easy to figure, it can only be used if various conditions are met. For example, the vehicle’s value when first made available to the employee doesn’t exceed a set amount ($50,400 in 2020).
  • Commuting rule. Multiply the number of one-way trips for which the vehicle is used by the employee by $1.50 if you require the employee to commute in the vehicle under a written policy and the employee is a “control employee” (e.g., owner or one who’s highly paid).
  • Lease value rule. Figure personal use by looking at an IRS table of annual lease values. The table doesn’t change from year to year.

Find details about these valuation rules, as well as employment taxes on this fringe benefit, in IRS Publication 15-B.

What to do when employees use personal vehicles for company business?

Companies may not have to buy or lease vehicles if employees use their own cars, vans, or trucks for business driving. Commuting to and from work is never deductible. In the past, employees who itemized deductions were able to write off their business driving as a miscellaneous itemized deduction, but this option is suspended for 2018 through 2025.

Companies can help employees cover their business driving costs in a tax-advantaged way that benefits both employees and the companies. If an employer adopts an “accountable plan” (explained in IRS Publication 463), then reimbursement to employees for the business driving in their personal vehicles isn’t taxable to them. It’s not even reported on their Form W-2. The employer can deduct the reimbursements as business expenses and they aren’t subject to employment taxes.

Final thought

Before taking any action, review your options with your CPA or other advisors to determine the best way to go.

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How Has COVID 19 Altered Your Retirement Plan?

How Has COVID 19 Altered Your Retirement Plan?


Qualified retirement plans are a key component of financial security for owners and their employees. The SECURE Act in December 2019 and the CARES Act in March 2020 made significant changes in various rules related to retirement plans. Incentives for small businesses to adopt plans have increased and special rules related to COVID-19 have been put in place to enable employees to tap their accounts now. But taking advantage of favorable law changes requires owners to take action. 



COVID-19 Actions for Existing Retirement Plans

Your company’s 401(k) or other retirement plan can be a source of financial help to employees that may be struggling as a result of the pandemic. The plan isn’t required but can permit qualified individuals to take COVID-1 distributions up to $100,000 (with special tax treatment for participants who take them) and loans up to $100,000 (with special rules for the suspension of loan repayments) from March 27, 2020, through December 31, 2020.

Follow the rules. The plan isn’t required to offer these COVID-19 incentives, but if it does, be sure to comply with tax rules. COVID-19 distributions means they are restricted to an individual, spouse, or dependent who is diagnosed with the disease, experiences adverse financial consequences as a result of the pandemic, or meets other specified conditions (defined by the IRS). Some things to consider:

  • Understand the scope of the rules. For example, those who take distributions can repay them within 3 years. The plan administrator can accept the recontributions during this period only if the recontributions are eligible for direct rollover treatment (they were initially made as COVID-19 distributions as certified by the participant, which is explained later),
  • Follow special reporting rules for Form 1099-R. Reporting is required even if funds recontributed. Instructions to this form explain new reporting requirements (instructions for the 2020 form are not yet available).
  • Develop reasonable procedures for identifying when distributions are treated as coronavirus-related distributions. The plan administrator can rely on an individual’s certification that he or she meets the tests described earlier (there’s a sample acceptable certification form here).
  • Follow certain basic rules. For example, when making a distribution from a pension plan, spousal consent is still required).
  • Don’t withhold 20% on the distribution. That’s what the IRS says.

Make plan amendments. If the plan offers COVID-19-related distributions and loans, the plan must be amended to reflect this. The deadline for amendments is the last day of the first plan year beginning on or after January 1, 2022, so there’s plenty of time to act.

Mid-year Plan Changes

Typically, employers commit to their contributions to 401(k) plans at the start of the year. This can influence employees’ decisions on their salary reduction contributions. If the business is experiencing financial difficulties and can’t continue to make promised contributions for employees in 2020, the employer is allowed to make mid-year changes under certain circumstances. Under a safe harbor, certain notice to employees must be given to employees.

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No Plan Yet? Consider One

If your business doesn’t have a qualified retirement plan, consider adding one. It is an important employee benefit for attracting and retaining valuable employees. And there are helpful tax breaks for employers and employees. For example, employers can deduct contributions to the plan, while employees who make salary reduction contributions are not currently taxed on the compensation used for this purpose. And employees may be eligible for a tax credit for their contributions.

Which plan to choose? There are many different types of options. Some are funded entirely by employers, some by employees (with optional employer contributions), and some with employee contributions along with certain employer-matching contributions. The plan you choose depends on many factors, including the size of your staff and what your company can afford. Find a comparison of retirement plan options in IRS Publication 3998.

Tax breaks for initiating plans. If you are a small business (defined as one with 100 or fewer employees who received at least $5,000 in compensation from you in the preceding year), you may qualify for one or both of the following tax credits as an offset to administrative costs.

  • Startup plan. The tax credit for starting a plan that covers at least one participant who isn’t an owner or owner’s spouse is the greater of (1) $500 or (2) the lesser of (a) $250 for each employee eligible to participant who isn’t highly compensated or (b) $5,000. The credit can be claimed for up to 3 years. This credit replaces a much smaller credit that applied to a plan adopted before 2020. The credit can only be claimed if you didn’t have a plan for employees in the 3 years before the first year of the plan for which you’re claiming the credit.
  • Automatic enrollment plan. If you start a plan that automatically enrolls eligible employees (who can still decide to opt out or reduce their contributions) or you convert an existing plan to automatic enrollment, you can take a tax credit of up to $500 per year for up to 3 years. This credit can be claimed in addition to the startup credit. It’s new starting in 2020.

Final Thought

When it comes to retirement plans, the opportunities are great, but the pitfalls are numerous and can easily lead to penalties and other problems. Because the subject of qualified retirement plans is highly complicated, be sure to discuss your situation with your CPA or a benefits advisor.

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Changes to Donation to Charity You Need to Know

Changes to Donation to Charity You Need to Know


The Coronavirus Pandemic brought out the best in many small business owners despite their own financial difficulties. Many have given generously to help others in their communities and beyond. You have supported concerns with cash and other types of donations. <! – ->



Are charitable donations tax-deductible?

The tax law rewards the above donations with depreciation. And the CARES law improves the deduction options.

Donating money

If you or your company have given money to charitable organizations, you may be able to make higher deductions due to changes in tax law. Donations need not be limited to support from COVID-19. All donations of money to tax-exempt organizations (except certain private foundations and donor-advised funds) in 2020 qualify for the new tax relief.

  • For donations from C-companies . Charitable donations for cash donations in 2020 are limited to 25% of taxable income (compared to the usual 10% of taxable income).
  • For other donors . Contributions from sole proprietorships, partnerships, limited liability companies and suburban companies are not claimed by the companies. They go to owners who claim them for their personal returns. Donations of money can be deducted from people who provide their personal deductions, rather than claiming the standard deduction of up to 100% of adjusted gross income in 2020 (from the usual 60% of adjusted gross income). Typically, those who don't provide information can't deduct anything, but for 2020, those who claim the standard deduction can write off up to $ 300 in charitable donations in a 2020 income tax return. This dollar limit applies to each "control unit", so the same amount applies regardless of whether you are single or married and submit together.

Donations of food inventory

<! – -> Companies that have given away food from their inventory can make higher deductions for 2020 thanks to changes in the law. These tax breaks apply as long as the food is "apparently healthy food", which means that it meets state standards for quality and labeling.

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The increased deduction depends on your entity type:

  • For C companies. The deduction is typically the lower of (1) base plus half the market value that exceeds the base, or (2) double base. For 2020, the deduction is subject to 25% of taxable income (the same limit applies to cash donations).
  • For other entities. Donations of food inventories by sole proprietors, partnerships, limited liability companies, and suburban companies are typically limited to 15% of the net income from these through transactions. For 2020 this limit will be raised to 25%.

What has not changed

While some things have changed when it comes to deducting charitable donations, some things remain the same.

  • The tax treatment of donations from stocks other than food remains unchanged. Generally, the deduction is limited to the lower cost or fair market value of the items. These items will be removed from the opening inventory. For C companies, there is an increased deduction for donations to organizations that care for the sick, the elderly or infants.
  • You cannot withdraw donations directly from anyone, no matter how needy they are. Only donations to organizations approved by the IRS can be deducted. Browse the list of such organizations from the IRS .
  • Contributions that exceed the applicable limits (e.g. donations from C companies that account for more than 25% of taxable income) can be carried out for up to five years.
  • It is still important to obtain the necessary evidence. Without them, legitimate donations are not deductible. For donations over $ 250, the required justification means a written confirmation from the charity. Different rules of justification apply to other types of donations. For more information on the reasons, see IRS Publication 526 .

Final Thought

Amid the COVID 19 crisis, many fake charities have emerged to steal money and the personal identity of generous people. Of course, continue to be as generous as your heart and wallet allow, but beware of the party you give

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Corporate Structure Tax Comparison – Where Can You Save Money?

Corporate Structure Tax Comparison – Where Can You Save Money?


Companies of all sizes and industries were literally put under pressure in 2020. Nobody could have predicted the consequences of the corona virus for entrepreneurs from independent contractors to C companies and everyone in between. <! – ->

However, it is positive that the tax period has been postponed to July 15, 2020.

Company structure tax comparison for 2020

That said, there is still time to learn about tax issues based on your business unit and to take advantage of some tax savings regardless of your legal structure.

Sole proprietorship <! – ->

In a sole proprietorship there is no legal separation between the business owner and the company. Property and liabilities are held on behalf of the owner. Usually the owner is an individual, but it can also be a married couple. Company taxes are submitted as personal income using Schedule C (company profit or loss) filed with IRS Form 1040.

Although it is the simplest and cheapest type of business that needs to be founded and maintained, there is a disadvantage that the owner is personally legally and financially liable for the company. For example, if the company is affected by a lawsuit or the company is unable to pay its debts, the personal assets of the owner (bank accounts, apartment, car, pension, etc.) are at risk.

In most countries, starting a sole proprietorship can be as easy as submitting a fictional name, also known as a DBA (Doing Business As). But even that may not be necessary if the owner uses his first and last name in the company name. Depending on the type and location of the company, licenses or permits may be required. Otherwise, the formalities for start and ongoing compliance are minimal.

A sole proprietorship is usually sufficient for: <! – ->

  • Domestic companies
  • A business with only one owner
  • Companies without employees
  • A company that offers products and services with minimal legal risks.

Company income is subject to self-employment tax. Entrepreneurs of individual companies were therefore entitled to funding through the CARES law from both the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) and EIDL Advance. According to the PPP and EIDL advance rules, the business owner would not have to repay or repay the PPP as long as 75 percent of the proceeds are used to replace income and the other 25 percent are used to qualify business expenses. However, since the PPP application required 2.5 months' worth of income documentation, some independent contractors may not have enough expenditure to be considered forgivable. This means that the remaining amount must be repaid at a fixed interest rate of 1.00%. The balance of the PPP loan is due in two years and payments are deferred by six months. The good news is that business loan interest is deductible as long as the money is used for business purposes.

Although the self-employed are normally not entitled to unemployment benefits, they are entitled to the special program Pandemic Unemployment Assistance (PUA) under the CARES Act if they are qualified. How much PUA pays varies by state, as does regular state unemployment insurance (UI) programs, which are funded by the federal government. Taxes on PUA payments can be withheld on request. (S Corps and LLCs are also entitled to PUA benefits.)

<! – -> Another option for taxpayers who claim loss of business on their individual income: due to the coronavirus crisis previous restrictions on individual business loss deductions ($ 500,000 for couples and $ 250,000 for other applicants were suspended for the period 2018-2020.

Partnership

In its simplest form, the partnership structure reflects an individual company. It is used when there is more than one owner of the company. In a partnership, the owners share the legal, financial and management responsibilities for the company. In fact, one partner's actions could make another partner's personal assets liable.

Partners should have a detailed partnership agreement with their lawyer to determine the division of property and duties. As with a sole proprietorship, there is no separation between the company and its owners. Trade tax obligations are transferred to the individual owners.

There are other types of partnerships, including:

  • Limited Partnerships : A partnership in which some or all of the partners have limited partnerships.
  • Professional partnerships : The unit consists of two or more professionals such as accountants, doctors or lawyers who provide the public with professional services.
  • Limited partnerships : A partnership with a general partner (runs the business and is personally liable for the debts and obligations of the business) and a limited partner (limited partnership and does not participate in the management).

A partnership is usually sufficient for:

  • Business partners who do not intend to reinvest money in the business
  • Company with several owners without employees
  • Multi-owner company that offers minimal legal risk products and services

Unless there is a special agreement between the partners, the IRS considers all partners to be the same when assessing tax obligations. You are taxed equally in a partnership, regardless of whether you are a partner who contributed financial assets or nothing.

C Corporations

In contrast to sole proprietorships and partnerships, a C Corp. a legal entity separate from its owners – all actions of the company belong only to the company. Owners are employees, and therefore C Corp offers its owners (shareholders) a significant degree of personal liability protection. The ability to sell shares in the company provides the ability to raise capital to fund initiatives and drive growth. The status as a C corporation often makes a company more attractive to external investors.

A company must submit its own income tax return (IRS Form 1120) and can deduct business expenses, which reduces its tax liability when it generates revenue. Dividends paid to shareholders are deemed to be income for shareholders and must be claimed on their shareholders' individual tax forms. The term "double taxation" is often used to describe how a company's earnings are taxed, and then profits that are distributed as dividends (which are not deductible as expenses for the company) are taxed to shareholders.

Establishing a company involves submitting statutes to the state and involves higher start-up costs and higher administrative complexity than running a company as a sole proprietorship, partnership or LLC. A company must have statutes and a board of directors, hold regular meetings, and comply with other regulations to maintain its status.

The advantages of a C Corp are:

  • The company is a separate legal identity.
  • There is limited liability for the owners
  • Business is ongoing
  • There are no restrictions on who can hold shares
  • Easily transferable shares
  • to prefer venture capitalists and other investors
  • Possibility to offer stock options

The Law on Tax Reductions and Employment from 2017 reduced the corporate tax rate from 35 percent to a flat rate of 21 percent. However, the law also removed deductions for maintenance costs and transportation services for workers, such as local passports, commuter vehicles, and parking permits.

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The CARES 2020 law introduced some tax benefits that C Corp owners can take advantage of, including:

NOL (Net Operating Loss) transfers . The CARES Act temporarily lifted the NOL exclusion that was removed under the 2017 Tax Cut and Employment Act. The net operating losses that occurred in 2018, 2019 and 2020 can now be traced back up to five years. In addition, the taxable income limit of 80 percent for the use of NOL for the years 2018 to 2020 has been lifted.

Extended interest deduction . The 2017 tax cuts and jobs law limited the deduction that companies could claim for interest on corporate debt to 30 percent of adjusted taxable income (ATI). The CARES law limits net interest depreciation to 50 percent for 2019 and 2020.

Charitable Donation . C Corps may deduct a charity donation, but only up to 10 percent of its taxable annual income. According to the CARES law, the C Corps can temporarily use up to 25 percent for cash donations in 2020. In addition, donations for food stocks were increased from 15 percent to 25 percent.

S Corporation

S Corp is a subtype of the corporate structure. It enables a C-company to choose taxation as a partnership, with all business income being taxed at the owner (shareholder) level at the tax rate for natural persons. This avoids the double taxation that companies normally face. A possible tax advantage for owners is that instead of the entire business income, only the salaries of the owners are collected. Profits granted to shareholders as distributions are not.

Some other advantages of a C Corp, such as personal liability protection, are retained. On the other hand, for an S Corp. a number of restrictions on ownership of shares. For example, it can only issue one share class, it can only have up to 100 shareholders, and it cannot have shareholders who are non-residents.

Today, the IRS allows several types of companies to be taxed as S Corp. For example, an LLC, just like a company, could be taxed as an S Corp if it applied for the election of S Corp the required time period.

S Corp is preferable if:

  • C Corp shareholders or LLC members want to minimize their tax burden for the self-employed
  • The company wants to avoid double taxation of dividend income.
  • A company need not issue more than one share class or have more than 100 shareholders.

Again, the main advantage of S Corp's election status is that only the income paid on the payroll is subject to the self-employment tax. Profits paid as distributions / dividends are not subject to social security and Medicare tax.

Limited Liability Company (LLC)

The LLC structure combines the advantages of a company with those of a partnership or a sole proprietorship. It can be a single member LLC or a multiple member LLC. An LLC is considered a separate entity from its members, so it offers some liability protection to its owners. In general, LLC members' personal assets are not at risk if the company is sued or unable to pay its debts.

In an LLC, members can choose how their business divides the company's profits and losses among its owners. This enables members to consider not only the money invested, but also the time and effort involved in distributing profits. The LLC is a pass-through unit, like a sole proprietorship and a partnership, in which all income flows to the members and is shown in their personal tax returns. However, the LLC can also choose to be taxed as a C Corp or S Corp.

The LLC structure also offers management flexibility. It can be managed by members, with the owners performing the day-to-day administration. Or an LLC can refer to a person (or people) as a manager, which is referred to as an LLC managed by managers. Most states view an LLC as "member-managed" by default, unless the founding documents state that it is an LLC managed by managers. Learn more about the options of Member-Managed LLC and Manager-Managed LLC.

The LLC structure is preferable if:

  • Entrepreneurs want limited personal liability, but not a company's compliance formalities.
  • Entrepreneurs want flexibility who owns and manages their company.
  • The company does not plan to apply for venture capital and equity.

LLC business profits that are passed on to individual members are subject to Social Security and Medicare tax. This can lead to an unfavorable financial situation for LLC owners as they have to pay self-employment taxes on their distribution share of the LLC's profit even if they invest that money back in the business rather than distributing these profits.

CARES Act Tax Changes for Employers

Deferral of income tax . Companies with employees are entitled to late wage tax payments according to the CARES law. This means that the company can postpone the company's share in social security tax on workers' wages from March 27 to December 31, 2020. As an employer, you must pay half of the deferred amount by December 31, 2021 and December 31, 2021, the other half by December 31, 2022. Self-employed workers can also defer half of the self-employment tax they owe. However, employers who have received a PPP loan cannot postpone the deposit and payment of the employer's contribution to the social security tax once the company has been informed that the PPP loan has been granted.

tax credit for employee retention . If a company had to completely or partially shut down operations in a quarter of 2020 due to the pandemic, the company is entitled to the tax credit for employee retention . The company is also eligible if the gross income has decreased significantly. Again, a company cannot claim the employee retention tax credit if the company has received PPP funding. The credit corresponds to 50 percent of employee wages from March 12, 2020 and before January 1, 2021, but the self-employed are not entitled to this tax credit. According to the IRS, authorized employers can then use the funds to pay wages to receive the employee retention loan. A company can either use the money saved for wages or request an advance on the loan from the IRS for the amount of the loan that is not funded through access to federal labor tax deposits by submitting Form 7200, Prepaid by employer credit based on COVID-19 .

Families First Coronavirus Relief Act (FFCRA) . With effect from April 2, 2020 to December 31, 2020, FFCRA will expand FMLA services and offer companies reimbursement of paid sick leave due to the coronavirus. Employers must pay paid sick leave if:

  • The employee has to quarantine or isolate himself due to the corona virus.
  • An employee has coronavirus symptoms and is waiting for a diagnosis.
  • The employee is a caregiver for a person (does not have to be a family member) who has to be quarantined or isolated himself.
  • An employee looks after his child because his school or childcare is closed.
  • Employers then receive a refundable tax credit equal to 100 percent of the family vacation wages paid . The FFCRA also applies to the self-employed.

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All registration deadlines for 2020 are not the same

All registration deadlines for 2020 are not the same


April 15 was formerly a tax day. Due to COVID-19 the IRS changed a number of filing deadlines so that most filing and payment deadlines for taxes will typically fall from April 1, 2020 to July 14, 2020 until extended to July 15, 2020. Some new amendments to the federal law also affect some due dates. But not all federal tax deadlines have changed. And not all countries have followed suit, which has created a very confusing situation. <! – ->



Deadlines for filing taxes until 2020

Here's what you need to know about tax periods … federal, state, and local periods.

Federal income tax return

The due date for filing federal tax returns for 2019 and paying the tax amount due this year for individuals and businesses in calendar year C is July 15, 2020. If more time is required to file a tax return, there is one automatic renewal available for asking. Individuals submit Form 4868 and companies use Form 7004 to receive an extension of registration until October 15, 2020. However, there is no time left to pay the balance for the 2019 return. July 15 is the last payment deadline. From that day on, interest and penalties will apply. The IRS offers a variety of options for those who cannot pay all or part of their tax bill until July 15th.

State income tax return

<! – -> All states and municipalities with income taxes have also granted extension exemptions, but this was not uniform. The vast majority have provided federal term extensions, but some have shorter or longer extensions. For example, the Idaho period was only extended until June 15, 2020, while the Iowa period was extended until July 31, 2020. The AICPA contains a list of the extension dates at the state level. Be sure to monitor these deadlines. Additional extensions may be provided for you.

Estimated taxes

In general, the first two installments of the federal government's estimated taxes for 2020 would have been due on April 15 and June 15. Both payments are now due by July 15, 2020. However, due to a change in the law, the self-employed can choose to defer payment of the so-called employer's share of the social security taxes that are part of the self-employment tax (the self-employment tax is part of the estimated taxes). Self-employed persons who use this deferral option and reduce their estimated taxes accordingly for 2020 will then pay 50% of the deferred amount by December 31, 2021 and the other 50% by December 31, 2022.

Note: If you have previously scheduled tax payments for April 15 and June 15 through EFPTS.gov you can change your payment date . If you've never used this free electronic payment method but want to, remember that registration can take up to 5 business days. So don't delay your online application.

At the state level, different extensions apply to estimated taxes. For example, Iowa did not extend the 2020 deadline for paying estimated taxes, even though a penalty was granted until late July. New Jersey extended the first rate of estimated tax for 2020 (due April 15) to July 15; No extension was planned for the second installment due on June 15th. But California and Massachusetts, like the federal government, extended both the first and second installments until July 15. The District of Columbia did not provide an extension for estimated taxes.

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Employment increases

Employers are required to file labor taxes according to their current schedule (which depends on the amount of their payroll) and to submit certain employer declarations. The deadline for filing labor taxes has not changed. The due dates for the quarterly employer declarations (Form 941) have not changed. <! – ->

These forms can be used to apply for reimbursement of certain labor taxes when employers are required to provide paid sick leave and paid family vacation, or when applying for the employee retention loan. Here you will find instructions for the paid vacation programs and the employee loyalty loan of the IRS. In addition, the IRS is exempt from the penalty for not paying labor taxes for employers who are eligible for these reimbursable credits, but only in the amount of those credits.

Employers may also be required to withhold state income taxes and to deposit them in good time. And employers have to pay state unemployment taxes. Again, the rules for these actions may or may not have changed in your state.

Deadlines for other tax measures

<! – -> In addition to income and employment taxes, the deadline for certain other tax measures has been extended:

  • If a tax refund is due to you from 2016, the IRS has extended this deadline for filing a refund claim to July 15, 2020. If you owe a state income tax refund from 2016, check if you have a similar extension. Your time to file a refund for state and / or local income taxes may have expired on April 15.
  • If you have sold real estate at a profit and would like to defer the tax by investing the proceeds in a qualified opportunity fund and the 180-day investment period has decreased between April 1, 2020 and July 14, 2020, the deadline is for the completion of the investment July 15, 2020.

Conclusion on the registration deadlines for 2020

You can monitor federal tax deadlines through the corona virus tax relief for businesses and IRS tax-exempt companies . Check your state's deadlines through your Department of Revenue, Finance, or Tax. You can find the contact information for your country here . And work with your CPA or other tax advisor to set the applicable deadlines for your tax measures now.

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