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BizBoost News Volume 10, Issue 16 For distribution 1/25/21; publication 1/27/21
How to Make Estimated Tax Payments
If you are paid a salary and receive a W-2 from your employer, part of your paycheck goes to Uncle Sam as federal withholding. These are payments toward your taxes. If you earn additional income beyond your salaried income, if you are under-withheld, or if you have your own business, you may need to make estimated tax payments through the tax year. These estimated tax payments can be made on a quarterly basis.
The general rule is that as you earn income, you should also be paying a portion in taxes. If you don’t pay in enough, you may be subject to penalties. To avoid penalties, the amount you pay as a minimum should be the lesser of 100% (or 110% depending on your income level) of your prior year tax or 90% of your current year tax during the year.
Whether the payments are made via withholdings or estimated tax payments, the IRS expects those payments to be made evenly and consistently throughout the year. If you don’t make any payments at all throughout the year and then pay a large amount late in December, you might get an estimated tax penalty because you didn’t remit payments as you earned the income.
Exceptions are allowed if your earnings substantially fluctuate throughout the year, quarter-by-quarter. You can complete Form 2210 to help minimize any penalty if you have fluctuating income and tax payments.
Generally, estimated tax payments become applicable when you have either Schedule C or flow-through business income or significant investment income (interest, dividends, and capital gains), because there is usually no withholding on that type of income.
To make a payment or get directions on how to make a payment, go to https://www.irs.gov/payments. Payments can be made by check (include estimated tax vouchers provided by IRS when you send them - 1040-ES forms) or online using a credit card or bank draft.
The due dates for remitting these payments are generally on the 15th of April, June, September, and January, unless one of those days is on a holiday or weekend (in which case payment would be due on the next business day). For 2021 estimated tax payments, these dates are as follows:
April 15th, 2021 (1st quarter payment) June 15th, 2021 (2nd quarter payment) September 15th, 2021 (3rd quarter payment) January 18th, 2022 (4th quarter payment)
If you have big payments due or big refunds due in April each year, then you are either paying too little or too much. Doing a good job at estimating your taxes will smooth out your payments throughout the year. If you’d like to get a projection for Tax Year 2021, feel free to reach out any time.
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Our latest blog article: “How to Make Estimated Tax Payments” is available now! Subscribe here: [link]
Taxes must be paid throughout the year as you earn income, and in some cases, if you do not have sufficient (or any) tax withholdings from some/all of your income, you must make estimated tax payments in order to minimize or avoid estimated tax penalties. Learn more in our latest blog article: [link]
Business Tip: Generally, estimated tax payments become applicable when you have either Schedule C or flow-through business income or significant investment income (interest, dividends, and capital gains), because there is usually no withholding on that type of income. Learn all about how to make estimated tax payments here: [link]
Learn all about how to make estimated tax payments in our latest blog article, and be sure to review your expected income/situation for 2021 with us to determine whether estimated tax payments will be necessary: [link]
DID YOU KNOW…The general rule for estimated tax payments is that you will want to have paid in the lesser of 100% (or 110% depending on your income level) of your prior year tax or 90% of your current year tax during the year. Learn more in our latest blog article: [link]
The due dates for remitting estimated tax payments are generally on the 15th of April, June, September, and January, unless one of those days is on a holiday or weekend (in which case payment would be due on the next business day). Find out more here! [link]
Remember, the IRS expects estimated tax payments to be made evenly/consistently throughout the year. Therefore, if you don’t make any payments at all throughout the year and then pay a large amount late in December, you are very unlikely to avoid an estimated tax penalty because you didn’t remit payments as you earned the income. Sign up for our newsletter to learn more: [link]
Do you know how to make estimated tax payments throughout the year in order to avoid penalties? Learn all about estimated tax payments in our latest blog article here: [link]
BizBoost News Volume 10, Issue 15 For distribution 1/11/21; publication 1/14/21
Form 1099-NEC – What Is It?
If you have a business with independent contractors, it is important to be aware of a recent reporting change that the IRS has implemented. Starting with the 2020 tax year, businesses must report nonemployee compensation (NEC) on Form 1099-NEC instead of Form 1099-MISC.
You may be surprised to learn that this is not a new form, but it hasn’t been used by IRS since 1982. It was brought back for the 2020 tax year with the goal of minimizing deadline confusion. The 1099-MISC is used to report other payments, and in some cases, there is a different filing deadline for reporting these payments. The 1099-NEC has one single filing deadline of January 31st.
If you pay a nonemployee $600 or more for services provided in your business during the year, you must report that on Form 1099-NEC and provide a copy to the recipient so it can be reported on his or her individual tax return. The tax treatment for recipients is the same as if they received a 1099-MISC.
What does this all mean for the 1099-MISC? The form has not gone away, but it will no longer be used to report nonemployee compensation. It is still applicable for reporting various other types of payments, including royalties, rents, prizes and awards, medical and health care payments, gross proceeds to attorneys from lawsuits, and other items.
A penalty can be assessed if you fail to provide a 1099-NEC to a qualifying recipient. There is also a penalty if you use the wrong form, e.g., 1099-MISC when a 1099-NEC should have been filed. If the wrong form is filed, you can void it as soon as possible by filing an amended statement showing $0 for nonemployee compensation on the 1099-MISC, and then filing the 1099-NEC. The longer it takes to correct it, the higher the IRS penalty could be.
Another possible impact of this change is that businesses may need to file the 1099-NEC separately with the state as well as IRS, where in the past they might not have needed to. This is because 1099-MISC forms were provided to certain states automatically as part of the IRS Combined Federal/State Filing Program, so businesses in those states did not need to file anything else once they filed with IRS. The 1099-NEC is not part of this combined program, so if a state requires a copy it must be filed separately. Several states have released specific guidance about this, so it is important for businesses to double check with their state tax or revenue authority where the business is established, where the contractor resides, and/or where the services are being performed.
If you need help complying with the new 1099-NEC guidelines, feel free to reach out to us any time.
Insert a link to your newsletter, website or blog before you post these:
Our latest blog article: “Form 1099-NEC – What Is It?” is available now! Subscribe here: [link]
If you have a business with independent contractors, it is important to be aware of a recent reporting change that the IRS has implemented. Get full details in our latest blog article here: [link]
Starting with the 2020 tax year, businesses must report nonemployee compensation (NEC) on Form 1099-NEC instead of Form 1099-MISC. You may be surprised to learn that this is not a new form, but it hasn’t been used by the IRS since 1982! Find out more here: [link]
DID YOU KNOW… The threshold that triggers the 1099-NEC filing requirement is no different than what it was for the 1099-MISC – if you pay a nonemployee $600 or more for services provided in your business during the year, you must report that on Form 1099-NEC. Get full details here: [link]
The IRS just brought back Form 1099-NEC for the 2020 tax year with the goal of minimizing confusion and differentiating between types of payments that would normally all be reported on Form 1099-MISC. Learn all about this reporting change in our new blog article: [link]
Have you heard of Form 1099-NEC? You’ll want to learn everything about this new reporting change the IRS has implemented before the end of January. Learn more here: [link]
DID YOU KNOW… With the new reporting change to Form 1099-NEC, you may have to file with the IRS and the State, as it may not be covered in your state’s IRS Combined Federal/State Filing Program. Find out more here: [link]
Learn all about the switch to Form 1099-NEC that the IRS is implementing for the 2020 tax year in our latest blog article! Sign up for our newsletter here: [link]
BizBoost NewsVolume 10, Issue 14For distribution 12/28/20; publication 12/31/20
ABLE Accounts – Final Regulations
ABLE (Achieving a Better Life Experience) accounts are for eligible individuals with a disability – they are tax-favored savings accounts to which contributions can be made to help pay for qualified disability expenses. The IRS recently released final regulations providing guidance related to various issues surrounding the requirements for 529A ABLE accounts.
ABLE accounts were established under the ABLE Act of 2014, in an effort to address the financial hardships for families with children having disabilities, as well as the anticipated increasing financial needs throughout those disabled individuals’ lifetimes. Proposed regulations were released in 2015, and then again in 2019 to address modifications under the Tax Cuts and Jobs Act (TCJA). The regulations provide a transition period of two years for ABLE programs to implement applicable provisions, and it is expected that IRS may issue additional guidance during that time as uncertainties and concerns arise.
Here are a few of the key areas of ABLE accounts.
Multi-State Programs: The final regulations clarify that an ABLE program may be maintained by two or more states if each of the states in the program sets all the terms of the program and is actively involved in its administration.
Persons Eligible to Set Up ABLE Account: A beneficiary can designate any person to establish an ABLE account, and if a beneficiary is incapable of setting up his/her own account, it can be set up by a power of attorney, conservator or legal guardian, spouse, parent, sibling, grandparent, or representative payee (in that order). A certification by an individual (under penalties of perjury) that he/she is authorized to set up the ABLE account on behalf of the beneficiary may also be accepted by ABLE programs, per the final regulations.
Persons with Signature Authority: The final regulations offer several options as far as who (and how many) may have signature authority on an ABLE account. The person who established the account generally does, although the beneficiary can replace that person’s signature authority with his/her own, or a specified designee. An ABLE program may allow co-signatories and may also permit the person with signature authority to establish sub-accounts within the ABLE account with different signatories for each.
One Account Rule: An ABLE account may not be set up for a beneficiary who already has an existing ABLE account open. If it is found that a previous ABLE account exists after a subsequent ABLE account has been set up, the subsequent account will maintain ABLE status if, by the due date of the tax return for the year in which the second account was established, all of the contributions to the new account (and any income earned) are returned to the contributor(s) or transferred to the beneficiary’s pre-existing ABLE account.
Disability Certification/Eligibility Recertifications: The final regulations permit an ABLE program to rely upon a certification signed by the beneficiary or an individual setting up the account on his/her behalf. The certification must state that the individual either has a medically determinable physical or mental impairment that can be expected to result in death or last for a period of not less than 12 months, or that he/she is blind and that such disability occurred before the age of 26. The regulations require ABLE programs to obtain annual recertifications unless an alternative method is established (giving ABLE programs broad discretion to create their own recertification methods).
Loss of Eligibility: The final regulations state that even if a beneficiary who was eligible when an ABLE account was established later loses eligibility due to an improvement in his/her condition, the ABLE account continues to be an ABLE account. The program must stop accepting contributions to the account on the first day of the first year a beneficiary is no longer considered an eligible individual. Withdrawals made from the account on any date after the date that the beneficiary is no longer considered disabled are not qualified disability expenses.
Annual Contribution Limit/Additional Contributions: The annual limit for contributions to an ABLE account is the same as the annual gift tax exclusion amount ($15,000 for 2020). However, certain employed or self-employed beneficiaries may qualify to make additional contributions. An ABLE program may rely on certification from the beneficiary (or a person acting on his/her behalf) that the employee is an “employed designated beneficiary” and therefore eligible to make the additional annual contributions.
Other Issues Addressed:
Payment of administrative and investment fees out of ABLE accounts do not constitute distributions for tax purposes.
The beneficiary may treat expenditures made in the first 60 days of a calendar year as having been made in the prior year (for purposes of matching qualified disability expenses with distributions in a given tax year).
Upon death of a beneficiary, after the expiration of any statute of limitations for filing Medicaid claims against a beneficiary’s estate, an ABLE program may distribute the balance of the account to a successor beneficiary or, if none, to the deceased beneficiary’s estate.
Gift tax and generation-skipping transfer tax do not apply to transfers of an ABLE account by rollover, program to program transfer, or change in beneficiary. Any other transfer is considered a taxable gift or transfer of the entire account by the beneficiary.
If you’d like to discuss how ABLE accounts could impact your taxes, please feel free to contact us.
Our latest blog: ABLE Accounts – Final Regulations Subscribe here: [link]
The IRS recently released final regulations for 529A ABLE accounts (Achieving a Better Life Experience) – tax-favored savings accounts to which contributions can be made to help pay for qualified disability expenses. Get full details here: [link]
The final regulations offer several options as far as who (and how many) may have signature authority on an ABLE (Achieving a Better Life Experience) account. Learn everything you need to know here: [link]
New regulations require ABLE (Achieving a Better Life Experience) programs to obtain annual recertifications unless an alternative method is established. Get full details here: [link]
ABLE accounts are tax-favored savings accounts to which contributions can be made to help pay for qualified disability expenses. Learn more here: [link]
ABLE (Achieving a Better Life Experience) accounts were established under the ABLE Act of 2014, in an effort to address the financial hardships for families with children having disabilities, as well as the anticipated increasing financial needs throughout those disabled individuals’ lifetimes. Learn more here: [link]
The annual limit for contributions to an ABLE (Achieving a Better Life Experience) account is $15,000 for 2020. However, certain employed or self-employed beneficiaries may qualify to make additional contributions. Find out more here: [link]
ABLE Accounts – Final Regulations Sign up for our newsletter: [link]
BizBoost NewsVolume 10, Issue 13For distribution 12/14/20; publication 12/17/20
Meals and Entertainment Expenses – Final Regulations
On September 30, 2020, IRS released final regulations providing guidance related to the deductibility of meals and entertainment expenses under Section 274 of the Internal Revenue Code. These final regulations clarify several areas of Section 274 that were impacted by changes under the 2017 Tax Cuts and Jobs Act (TCJA). Except for a few small modifications, the final regulations substantially adopted the guidance in the proposed regulations (released in February 2020).
TCJA Background
As part of the tax reform under TCJA, deductions of any expenses related to activities considered entertainment, recreation or amusement were eliminated. Furthermore, the deductibility of food and beverage (meal) costs became much more restrictive, with many costs that were previously deductible at 100% now being limited to the 50% deduction like other types of meal costs. However, there was some lack of clarity regarding how to determine what costs are considered entertainment, and how food and beverage costs related to entertainment activities should be handled.
The final regulations provide clarification on these areas, and they provide additional guidance on criteria that should be met for any food and beverage costs to be deducted at 50%.
Highlights
1) Food/beverages for employees served on the business premises 2) Expenses for services, goods and facilities treated as wages (however, if recipient is a certain individual such as an officer, director, or 10% shareholder (or related person), the employer’s deduction is limited to the amount of compensation reported) 3) Reimbursed expenses 4) Recreational expenses primarily for non-highly compensated employees 5) Expenses of business meetings for employees, stockholders, agents, or directors 6) Expenses necessary for attending a business meeting of a tax-exempt business league (like a chamber of commerce or a board of trade) 7) Expenses for goods, services, and facilities available to the public 8) Expenses for entertainment sold to customers for appropriate consideration 9) Expenses incurred in providing entertainment to a non-employee, if included in the recipient’s income
1) The expense must be ordinary and necessary to the business 2) The expense should not be lavish or extravagant, and must be provided when an employee/taxpayer is present 3) The food or beverage must be provided to a current or potential business client, customer, consultant, or similar 4) Food and beverages provided as part of an entertainment activity must be purchased separately, or the costs must be separately-stated from the entertainment activity itself on the receipt or bill (if not, those costs are also considered entertainment costs and therefore are not deductible at all)
If you have questions about deductibility of meals and entertainment in your business, feel free to reach out to us any time.
Our latest blog: Meals and Entertainment Expenses – Final Regulations Subscribe here: [link]
As part of the tax reform under TCJA, deductions of any expenses related to activities considered entertainment, recreation or amusement were eliminated. Get full details here: [link]
On September 30, 2020, the IRS released final regulations providing guidance related to the deductibility of meals and entertainment expenses under Section 274 of the Internal Revenue Code. Learn everything you need to know here: [link]
Confused about what entertainment and meal expense deductions you can claim? Get full details here: [link]
There are nine exceptions to expenses that otherwise might be considered entertainment/be completely nondeductible. Click here to learn what those nine exceptions are: [link]
DID YOU KNOW: Under the TCJA, the deductibility of food and beverage (meal) costs became much more restrictive, with many costs that were previously deductible at 100% now being limited to the 50% deduction like other types of meal costs. Learn more here: [link]
There are four main criteria one has to meet to be able to deduct 50% of food and beverage costs under the TCJA. Find out more here: [link]
Meals and Entertainment Expenses – Final Regulations Sign up for our newsletter: [link]
BizBoost NewsVolume 10, Issue 12For distribution 11/30/20; publication 12/3/20
9 Things to Do Before Year-End to Reduce Your Tax Bill
Who doesn’t want to pay less taxes, as long as it’s legally permitted? Here are nine tips to consider taking action on before 2020 comes to a close.
1. Maximize Retirement Contributions Through Your Employer’s 401(k) Plan
This type of plan allows you to contribute pre-tax dollars to retirement, and contributions directly reduce taxable wage income. While contributions to IRAs and other types of retirement accounts can be done after year-end/up through the due date of your tax return, deferrals through an employer 401(k) plan must be completed by year-end, so make sure you will be able to contribute the desired amount for the year by December 31, 2020.
For tax year 2020, you can contribute up to $19,500 if under age 50, and $26,000 if 50 or older by year-end.
2. Harvest Investment Losses to Offset Capital Gains
If you have sold stock or other property that has generated capital gains, consider whether you have investment losses you can generate before year-end to reduce to overall capital gain you report and pay tax on. For example, if you have stock that you’ve held for some time that has consistently been in a loss position, selling by year-end will allow you to offset those other capital gains – and also possibly find a better use for those funds that were invested.
It is always ideal to time capital gains and losses in the same year if you can because they can offset each other, and you are only able to deduct up to $3,000 of overall loss per year. So, if you have a large capital gain in one year and a large capital loss in the next, you will have had to pay tax on that capital gain in that first year, but then might not fully realize the benefit of the loss in the latter year for a number of years, because of that $3,000 per year limitation (unless other capital gains come up to offset it). If they happen in the same year, they would be netted together and the tax benefit would be fully received in the current year. Timing is everything!
3. Bunch Deductions So You Can Itemize
Because the Tax Cuts and Jobs Act (TCJA) both increased the standard deduction and capped the deduction for state and local income taxes paid when itemizing at $10,000, many taxpayers are finding that they benefit more from taking the standard deduction. However, this prevents them from receiving any direct benefit or deduction for certain expenses, like charitable donations and health care costs over a certain level.
One way around this is to strategically time the payment of these costs so you can bunch them together and take advantage of itemizing deductions every other year. For example, if you already made donations earlier in the year and know that you plan to for 2021, consider paying your 2021 donations early - by year-end 2020 - in order to exceed the standard threshold and take advantage of itemizing for the 2020 tax year.
4. Defer Income
If you are self-employed or an independent contractor, consider delaying invoicing clients for work to time it so you receive the income in January 2021 instead of December 2020. This will allow you to keep that income off of your 2020 return, and therefore hold off on paying tax on that income for another year.
5. Donate Appreciated Stock to Charity
The benefits of doing this are two-fold: you avoid capital gains tax and also receive a charitable deduction for the appreciated value of the stock. Just be sure that you are actually going to itemize and that you won’t be taking the standard deduction, because the charitable deduction benefit is only available to you if you itemize deductions.
6. Purchase Business Equipment
If you are a business owner and have been thinking about purchasing equipment for your business (machinery, computers, software, a vehicle, etc.), now is the time to do it!
With the expanded accelerated depreciation options that came out of the TCJA (which will be reduced in future years), many of these items qualify for significantly higher deductions – possibly even 100 percent. Whereas in prior years you may have had to deduct the cost of these items over a number of years, you will now likely be able to deduct them fully in the year purchased, or at least take a much higher first-year deduction. This will reduce the taxable profit of your business, which directly reduces your taxable income and tax liability.
7. Install Solar Panels
Consider installing solar panels on your home prior to year-end to take advantage of a Federal tax credit that is set to expire in 2022. When you install a solar system, 26 percent of your total project costs can be claimed as a credit on your IRS tax return (this will decrease to 22 percent for 2021). So, if you spend $10,000 on the system, you will directly reduce your tax bill by $2,600.
8. Invest in a Qualified Opportunity Zone
As part of TCJA, taxpayers can now defer payment of capital gains tax to 2026 by investing the proceeds of a sale in a qualified opportunity zone. These zones are located all over the country and were designated as areas that would benefit from economic development. Tax can be deferred on the portion of the gain that was used to benefit the distressed zone.
The investment must be made within 180 days of the sale that generated the capital gains, so if you’ve already had a property sale in 2020 and would like to explore this, you’ll want to pay attention to the timeframe and act accordingly (also note that due to the COVID-19 pandemic, the 180-day rule was relaxed for those who would have hit the 180-day mark on or after April 1, 2020 and before December 31, 2020 – all now have until December 31, 2020 to invest the gain in a Qualified Opportunity Zone).
9. Meet with Your Tax Professional to Review Your Projected Tax Bill and Discuss Strategies
It can be extremely beneficial to meet with your tax professional before year-end and review a projection of your tax situation for the year, discussing possible strategies for reducing your tax bill. You may be able to strategize to get yourself in a lower tax bracket and allow for taking advantage of more deductions and credits, which might not be available to you at a higher income level.
In order for your tax professional to project your tax situation/liability for the year, you’ll need to provide information regarding your income for the year – pay stubs, Profit & Loss reports if you have a business, information regarding investment income, details regarding any other types of income, and any changes to your situation from the prior year.
Schedule a time with us in November or early December if you can, to give yourself time to take any necessary actions to reduce your tax bill for the year!
Our latest blog: 9 Things to Do Before Year-End to Reduce Your Tax Bill
Subscribe here: [link]
If you are self-employed or an independent contractor, consider delaying invoicing clients for work to time it so you receive the income in January 2021 instead of December 2020. [link]
It can be extremely beneficial to meet with your tax professional before year-end and review a projection of your tax situation for the year. [link]
If you are a business owner and have been thinking about purchasing equipment for your business, now is the time to do it! [link]
As part of TCJA, taxpayers can now defer payment of capital gains tax to 2026 by investing the proceeds of a sale in a qualified opportunity zone. [link]
Consider installing solar panels on your home prior to year-end to take advantage of a Federal tax credit that is set to expire in 2022. [link]
In order for your tax professional to project your tax situation/liability for the year, you’ll need to provide information regarding your income for the year. [link]
9 Things to Do Before Year-End to Reduce Your Tax BillSign up for our newsletter: [link]
BizBoost NewsVolume 10, Issue 11For distribution 11/16/20; publication 11/19/20
Deduction Limitations on Business Interest Expense: Final Regulations Are Released
Treasury and the IRS recently released final regulations under Section 163(j) of the Tax Code, which relates to limitations on the deduction of business interest expense. This section was revised as part of the 2017 Tax Cuts and Jobs Act (TCJA) and was further modified as part of the CARES Act provisions.
Background
As part of the TCJA changes, Section 163(j) limits the amount allowed as a deduction for business interest to the sum of:
A CARES Act provision increased the ATI percentage from 30 percent to 50 percent for 2019 and 2020 (with exceptions for partnerships).
The deduction limitation does NOT apply to the following:
Key Highlights of the Final Regulations
One highlight of the final regulations involves the expanded definition of the word “interest.” Interest now excludes expenditures for commitment fees, debt issuance costs, partnership guaranteed payments, and hedging gains or losses.
The regulations also enhanced the existing Anti-Avoidance rule, which generally requires that any expense or loss is treated as interest for 163(j) purposes if 1) the expense or loss is economically equivalent to interest and 2) the main goal of the structuring of the transaction is to reduce the taxpayer’s interest expense.
A couple of things need to be kept in mind when calculating ATI (taxable income +/- certain specified adjustments, including adding back depreciation and amortization).
The rules state that a certain order must be followed for these components:
If you’d like to know more about how these final regulations impact your tax return, please feel free to reach out any time.
Our latest blog: Final Regulations Under Section 163(j) – Business Interest Expense
Treasury and the IRS recently released final regulations under Section 163(j) of the Tax Code. Click here to see those regulations: [link]
As part of the TCJA changes, Section 163(j) limits the amount allowed as a deduction for business interest. Find those numbers here: [link]
Are you aware that a CARES Act provision increased the ATI % from 30% to 50% for 2019 and 2020 (with exceptions for partnerships)? More details here: [link]
Learn about how the new regulations for business interest expense deduction expands the definition of interest. More info here: [link]
Final regulations clarified that 163(j) is not a method of accounting. More details here: [link]
Click here for full details on the final regulations under Section 163(j): [link]
Final Regulations Under Section 163(j) – Business Interest Expense Sign up for our newsletter: [link]
BizBoost NewsVolume 10, Issue 10For distribution 11/2/20; publication 11/5/20
Tax Considerations of a Chapter 11 Bankruptcy Filing
Chapter 11 bankruptcy is a form of bankruptcy that can be filed by businesses or individuals. Its goal is to give the filer time to reorganize and reduce their debt rather than discharge it. Under this type of bankruptcy, businesses can continue to operate, and individuals can keep certain assets that might otherwise be sold under a different type of bankruptcy.
Going through a Chapter 11 bankruptcy process doesn’t necessarily guarantee that any tax debts will be reduced or discharged, and it doesn’t get the debtor out of current and future tax obligations and filing requirements.
Tax Filing and Payment Requirements When Chapter 11 Bankruptcy Has Been Filed
Regardless of the type of bankruptcy filed, a debtor is still subject to Federal income tax laws and must continue to file tax returns in a timely fashion. Failing to file returns can result in conversion of the bankruptcy to a different type, or even dismissal of the proceedings.
In general, debtors under Chapter 11 bankruptcy should not incur additional debt during the process. They must also make sure they are capable of meeting financial obligations moving forward, including paying taxes due in a timely fashion.
Under bankruptcy law, when an individual debtor files a bankruptcy petition under Chapter 11, a separately taxable bankruptcy estate is set up to take ownership of the debtor’s assets. A separate tax return is required to be filed for that estate, and any taxes due must be paid in a timely manner. This is in addition to the individual tax return and liability that the debtor is required to file and pay. The return must be filed by the trustee of the estate, who in some cases is the bankruptcy filer.
Can Tax Debt Be Forgiven in Chapter 11 Bankruptcy?
The rules surrounding the ability to reduce or discharge tax debt in Chapter 11 bankruptcy can be complicated, but in general, three elements must be satisfied for tax debt to be dischargeable:
1) Taxes can’t be discharged until at least three years after they were due. Example: 2016 taxes were due in April 2017, so they would not be dischargeable until April 2020. 2) A tax return for the taxes owed must have been filed at least two years before bankruptcy. Example: if the 2016 return was filed late or not filed until 2019, the tax wouldn’t be dischargeable until 2021. 3) The taxes must have been assessed within 240 days (roughly eight months) before the bankruptcy filing. In the case of an audit where taxes were reassessed, you would need to wait until 240 days after the audit for the taxes to be dischargeable.
Note that any taxes a debtor attempted to evade willfully as well as penalties for tax fraud are never dischargeable. Also, even if taxes are discharged, a tax lien will remain on the debtor’s property if the IRS recorded it prior to the bankruptcy filing.
Other Considerations
In some situations, the IRS considers canceled debt taxable income, but NOT in the case of Chapter 11 bankruptcy. So, if taxes that were owed are discharged as part of the bankruptcy process, the forgiven amount will not need to be reported as taxable income on your tax return.
If a taxpayer is considering Chapter 11 bankruptcy due to unpaid tax debt, it may be worth exploring other options first, like entering into an installment agreement or offer-in-compromise with IRS. There are fees associated with an installment agreement and penalties and interest continue to accrue, and IRS won’t always accept an offer in compromise, but these are other possible alternatives.
As always, due to the complicated rules surrounding bankruptcy and taxes, it’s important to get legal advice from a bankruptcy lawyer when deciding whether filing for Chapter 11 bankruptcy is the right choice or not.
Our latest blog: Chapter 11 Bankruptcy – Tax Considerations Subscribe here: [link]
Even when a debtor is going through the Chapter 11 bankruptcy process, that doesn’t necessarily guarantee that any tax debts will be reduced or discharged. Get full details here: [link]
Thinking about filing for Chapter 11 Bankruptcy? Learn everything you need to know here: [link]
The rules surrounding the ability to reduce or discharge tax debt in Chapter 11 bankruptcy can be complicated. Get full details here: [link]
In general, three elements must be satisfied for tax debt to be dischargeable. Click here to learn what those three elements are: [link]
DID YOU KNOW: Regardless of the type of bankruptcy filed, a debtor is still subject to Federal income tax laws and must continue to file tax returns in a timely fashion. : [link]
Under bankruptcy law, when an individual debtor files a bankruptcy petition under Chapter 11, a separately taxable bankruptcy estate is set up to take ownership of the debtor’s assets. Learn more here: [link]
Chapter 11 Bankruptcy – Tax Considerations - Sign up for our newsletter: [link]
Tax Tips Volume 10 Issue 9 For distribution 10/19/20; publication 10/22/20
Section 139: Qualified Disaster Payments
At this point, most people have heard about relief measures the government has enacted in the wake of Covid-19, but there remains one opportunity to harvest that has had little discussion surrounding it—Section 139 Qualified Disaster Payments.
Section 139 of the Internal Revenue Code was established as a response to the terrorist attacks on 9/11, giving employers the ability to offer non-taxable reimbursement to their employees for certain expenses incurred during a federally declared disaster.
On March 13, 2020, in accordance with the Stafford Act, President Trump declared the Coronavirus pandemic to be a federal disaster. Since the national emergency order extends to all 50 states, the relief that employers can offer to employees under Section 139 applies country-wide. Section 139 will be available to be utilized until the President officially declares an end to the pandemic.
What Is Covered and How Can It Benefit Both Employers and Employees?
Employers can pay for or reimburse employees with tax-free payments for certain expenses not covered by insurance, such as:
Medical -- over the counter medications, hand sanitizers, home disinfectant supplies, increased costs from unreimbursed health-related expenses
Childcare — employers can subsidize an employee’s child care expenses or tutoring due to school closures
Work from home expenses — reimbursable items can include expenses for setting up a home office, increased utility expenses, increased internet costs, etc.
Transportation — instead of using mass public transit, employers can pay for their employees to use car services, such as Uber or a taxi, for increased transportation costs
Food/Shelter Assistance — while there is a lack of guidance from the IRS as to exactly what qualifies, assistance for basic necessities, such as food and housing, could be covered
Section 139 states that employers are allowed to “reimburse or pay reasonable and necessary personal, family, living, and funeral expenses incurred as a result of a qualified disaster” – while there is a lack of guidance from IRS on exactly what qualifies in the midst of a global pandemic such as this, basic necessities (as listed out above, and even also possibly including food/shelter assistance) should qualify. Note that amounts designated as wage replacement or reimbursed by insurance or other means, as well as payments for non-essential items, do not qualify under Section 139.
Practical Application—Who Can Benefit the Most?
While many employers will utilize this reimbursement as a way to reduce taxable income, the big winners of Section 139 are the small business owners, who are frequently both the employer and the employee of their business.
Meet Steve, the sole employee of his S-Corporation. Steve has underlying health concerns and typically incurs significant annual medical expenses, but those expenses aren’t large enough to exceed the standard deduction on his individual income tax return. Under Section 139, Steve’s S-Corporation can reimburse Steve, the employee, for some of the costs of his unreimbursed health-related expenses. As a greater-than-2%-shareholder, Steve’s medical expenses would ordinarily not be deductible by the S-Corporation, so this could be a significant opportunity. This benefits the S-Corporation by being able to treat this reimbursement as an expense, thereby reducing the corporation’s pass-through taxable income. This benefits Steve (the owner-employee) by not only reducing the pass-through S-Corporation profit that he is paying tax on, but also by allowing him to pay for his medical expenses with tax-free income and still take the standard deduction on his individual income tax return, which is the most favorable for his situation.
Another example: meet Lynn, an employee at an architecture firm, who used to work in her company’s office prior to the Coronavirus pandemic. Following shelter-in-place rules, her employer closed the office and encouraged employees to work remotely from home. Lynn’s home office set-up was less than ideal—she only had her laptop to work from, no desk, and her internet connection was poor. Lynn’s employer offered to purchase desk equipment and an additional computer monitor for her as well as cover the monthly difference in price for better internet coverage. None of this is taxable to Lynn, and her employer benefits by being able to write off these less-traditional expenses, thereby reducing the employer’s taxable profit.
Documentation
The recipient of the non-taxable funds does not need to provide documentation of the expense(s) to the employer! Provided that the amount of the payment is reasonable for the type of expense(s) incurred, the IRS will not require individuals to account for disaster-related expenses. For employers, this lack of documentation eases the compliance burden that would normally be associated with a deductible business expense.
Employers do not have to provide the same assistance amount for each employee; they can opt to offer this benefit to only certain employees. They also have flexibility with how the assistance is offered, whether it be reimbursing actual expenses, or offering a flat amount to every eligible staff member. Even with the lack of documentation requirements, it is still a best practice to draft a company policy regarding qualifying Section 139 expenses and maintain adequate documentation if possible.
Our latest blog: Section 139: Qualified Disaster Payments. Subscribe here: [link]
Are you familiar with Section 139 Qualified Disaster Payments and how it provides relief in wake of COVID-19? Find out more: [link]
Tax Tip: Section 139 of the Internal Revenue Code gives employers the ability to offer non-taxable reimbursement to their employees for certain expenses incurred during a federally declared disaster.[link]
Under Section 139 of the Internal Revenue Code, employers can pay for or reimburse employees with tax-free payments for certain expenses that are not usually covered by insurance. Learn more: [link]
Section 139 can be an incredibly important for small business owners, who are usually both the employer and an employee of their business. [link]
The IRS will not require individuals to account for disaster-related expenses under Section 139 as long as they are reasonable in proportion for the type of expense incurred. Find out more here: [link]
Want to learn about what’s covered under Section 139 and who benefits? Find out more in our latest blog post: [link]
Sign up for our newsletter: Section 139: Qualified Disaster Payments. [link]
Tax TipsVolume 10 Issue 8For distribution 10/5/20; publication 10/8/20
Are You Withholding Taxes on Your State Unemployment Compensation?
Many people erroneously believe that state unemployment compensation is not considered taxable income, resulting in quite an unpleasant surprise at tax time when they realize their mistake. With a record number of Americans filing for unemployment benefits due to the Covid-19 pandemic and struggling to make ends meet, it’s important to plan ahead in order to not have a shortfall.
Unemployment Compensation is Taxable Income
While taxpayers don’t pay Medicare or Social Security taxes on unemployment compensation, they are still required to pay federal taxes on the income. Additionally, most states count unemployment compensation as taxable income, too. Currently, only California, Montana, New Jersey, Oregon, Pennsylvania, and Virginia do not require income tax to be paid on unemployment compensation. This also applies to states that don’t have state income taxes, such as Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
Establishing Withholding
If your state allows you to specify withholding, take advantage of it! However, it doesn’t necessarily mean that the amount withheld will satisfy your tax burden. Some states only calculate withholding on the state unemployment portion of the income, not on the additional $600/week federal pandemic unemployment compensation component.
To illustrate, say your weekly state unemployment compensation benefit is $300 and you qualify for the additional $600 federal pandemic unemployment assistance, giving you a combined weekly benefit of $900. You select 10% withholding, thinking that you will have $90 withheld, but notice that the actual withholding is only $30. Consequently, this lack of withholding could result in a balance owed at tax time.
How to Fix Under-Withholding of Taxes
If you are having little or no income taxes withheld from your unemployment compensation, the first step in making a course correction is to determine what your effective tax rate (not tax bracket—effective rate is the actual percentage of taxes you pay to the IRS) was for the prior year. While current year income may have trended up or down this year, knowing your prior year effective tax rate provides a good starting point. Compare that number to the percentage of tax that is being withheld from your unemployment compensation—if it is less, there’s a good chance you’re not having enough tax withheld and will owe when you file your tax return. Consider taking one or more of the following steps:
1. If your state allows it, increase your withholding percentage on your unemployment compensation. If you are at the maximum amount of withholding and don’t believe that it will be sufficient, look to step 2 below. 2. Make quarterly estimated tax payments. In order to avoid both a large balance owed at tax time and possibly neutralize an underpayment penalty, initiate quarterly estimated tax payments for the amount you believe you may be under-withholding. Using the example in the paragraph above where there is a difference of $60 not being withheld each week, a taxpayer could earmark those funds for taxes and remit an estimated tax payment to the IRS on a quarterly basis. 3. Adjust withholdings on a secondary W-2. In a situation where you have a spouse who continues to receive W-2 income, consider increasing the amount of tax withholding on that activity in order to offset the lack of withholding on the unemployment compensation.
Our latest blog: Are You Withholding Taxes on Your State Unemployment Compensation? Subscribe here: [link]
Did you know that unemployment compensation is taxable income? Find out more: [link]
Tax Tip: If your state allows you to specify withholding, be sure to take advantage of it. [link]
While taxpayers don’t pay Medicare or Social Security taxes on unemployment compensation, they are still required to pay federal taxes on the income. [link]
Are you having little to no income taxes withheld from your unemployment compensation? The first step in making a course correction is to determine what your effective tax rate is. Learn more here: [link]
If you’re not having enough tax withheld from your unemployment compensation and will owe when you file your tax return, there are a few steps you may want to take to fix the issue. Learn more: [link]
Worried about under-withheld taxes on your state unemployment compensation? Check out our latest blog post on how you can plan ahead and avoid an unpleasant surprise at tax time: [link]
Sign up for our newsletter: Are You Withholding Taxes on Your State Unemployment Compensation? [link]
Tax TipsVolume 10 Issue 7For distribution 9/21/20; publication 9/24/20
Real Estate Enterprise: How to Qualify for a Section 199a Deduction
At the end of 2019, the IRS issued updated guidance on a new rental real estate safe harbor rule which allows certain rental real estate to be considered an “enterprise” eligible for a Section 199a deduction.
What is Section 199a deduction?
Section 199a gives owners of pass-through business entities an extra deduction of up to 20 percent of their qualified business income. A pass-through entity can be a sole proprietor, a partner in a partnership, a real estate investor, or an S-corporation shareholder. Qualified business income is generally defined as a business’s net profit.
How does that benefit a taxpayer with rental income?
If you have a rental property that generates positive cash flow, that amount is added to your taxable income and is taxed at your ordinary income tax bracket rate. Under the new safe harbor rules, provided that you meet specific criteria, you can take a deduction of up to 20 percent of the rental profits for the purpose of offsetting taxable income.
How many properties do I need to own to be treated as a real estate enterprise?
You can own any number of properties—even if it’s only a single property—to potentially qualify as a real estate enterprise. However, the properties must be the same type, meaning that residential real estate and commercial real estate cannot be mingled. In the case of a taxpayer who owns both commercial and residential real estate, each type could potentially be classified as its own real estate enterprise.
What are the safe harbor requirements?
In order to qualify for the Section 199a deduction, all four qualifications must be met for each real estate enterprise:
1. Separate books and records must be maintained for each rental real estate enterprise. When a real estate enterprise contains more than one property, this requirement may be satisfied if income and expense information statements for each property are maintained and then consolidated. 2. 250 or more hours of rental services must be performed per year for each real estate enterprise. 3. Contemporaneous records must be maintained that document hours, dates, and types of services performed as well as the person who performed the services. 4. The taxpayer must attach an election statement to their return.
Safe harbor requirements must be met annually; it is possible to qualify as a real estate enterprise in one tax year and not in a subsequent year!
Clarifying the 250-hour requirement
Rental services that count toward satisfying the 250-hour requirement can be performed by owners, employees, agents, or independent contractors hired by the owner and include time spent on the following:
1. Advertising to rent/lease the real estate 2. Negotiating and executing leases 3. Verifying information contained in prospective tenant applications 4. Collection of rent 5. Daily operation, payment of expenses, maintenance and repair of the property, including the purchase of materials and supplies 6. Management of real estate 7. Supervision of employees and independent contractors
The following activities do not count toward satisfying the 250-hour requirement:
1. Arranging financing 2. Procuring property 3. Studying reports on operations 4. Planning, managing, or construction of improvements 5. Hours spent traveling to and from real estate
Real estate enterprises that have been in existence for less than four years must meet this requirement annually. If the real estate enterprise has operated for at least four years, the taxpayer must perform 250 or more hours of rental services in any three of the five consecutive tax years to fulfill the requirement.
Consult your tax professional
Because there are many nuances that could potentially apply to your individual situation, be sure to contact us for advice tailored specifically to you.
Our latest blog: Real Estate Enterprise: How to Qualify for a Section 199a Deduction. Subscribe here: [link]
Do you own rental property that generates positive cash flow? You may be eligible for a Section 199a deduction. Find out more: [link]
Tax Tip: The rental real estate safe harbor requirements must be met annually; it is possible to qualify as a real estate enterprise in one tax year and not in a subsequent year! [link]
In order to qualify for the Section 199a deduction under the rental real estate safe harbor rule, there are four qualifications that must be met for each real estate enterprise. Read more about the four qualifications here: [link]
Whether you own ten properties or a single property, you can still potentially qualify as a real estate enterprise. However, residential real estate and commercial real estate cannot be mingled. [link]
To qualify for the Section 199a deduction, one of the requirements is that 250 hours of rental services must be performed per real estate enterprise. Time spent procuring property does not count. Find out more here: [link]
Wondering if your rental property qualifies you as a real estate enterprise eligible for a Section 199a deduction? Find out more in our latest blog post: [link]
Sign up for our newsletter: Real Estate Enterprise: How to Qualify for a Section 199a Deduction. [link]
