Everything we do is focused on the core belief that we succeed in life by helping others succeed.
This letter is one complimentary piece of our intense planning and research effort throughout the year to help in your success. Feel free to share it with anyone you know who could benefit.
What changed with the IRS as a result of COVID?
COVID drastically changed the way the IRS does business and they are still trying to adapt and catch up. Back in April when many states had stay at home orders in place, the IRS also sent their employees home. That meant there was no one to even open the mail and the processing of all paper returns was suspended. Since the mail was not being opened many checks were not deposited. If one of your payments to the IRS has not yet cleared do not put a stop payment on it!!!!! If you mail another check, you will owe penalties for late payments. If you wait until they open the mail, they will post it as timely paid based on the postmark. You would think opening the mail would not take long but think again. During the pandemic IRS had as many as 23 million pieces of mail unopened sitting in semi-trailers on their lots. That is a mountain of mail. As of October 28, 2020 the IRS announced they were down to just 5 million more pieces of mail to open. With so much unopened mail they had to halt much of their collections action. So if you sent the IRS any paper documents, responses to tax notices, checks, manually filed returns, etc., don’t call them to ask the status. It will simply be a waste of your time and theirs, probably get your blood pressure up and not accomplish anything. One of the other changes brought on by COVID was an end to in person IRS audits. Don’t think they quit doing audits, they just do it all with correspondence for now which just drags things out longer than ever.
IRS Audits, Who is in the crosshairs?
Small business is still one of the top audit risks. The IRS added a new Fraud Enforcement Office located in the Small Business/Self Employed Division. They are using more data-mining to sort through lots of sources and look for suspicious activity, unreported income, etc. With all the electronic records out there the old saying “they will never know” is most likely just wishful thinking. IRS is looking for noncompliance in tip reporting, virtual currency reporting, payroll tax dodgers, businesses treating workers as independent contractors, businesses with big losses, high income taxpayers, pass through entities like partnerships and S corporations and basis on S corp shareholders deducting losses. When they come knocking they are asking for all kinds of things including overseas transactions, estate planning transactions, family limited partnerships, large charitable transactions, etc. So what are your chances in the audit lottery? The latest IRS statistics show the small business owner is 120 times more likely to be audited than other types of tax returns. The other group getting lots of audits is taxpayers making under $25,000 because there is lots of fraud in the earned income credit. As a result, small businesses showing losses or little profit have a double risk of winning the IRS audit lottery. If the IRS does come knocking and you think it might be a scam, they must show you two forms of official credentials and both will include a serial number and a photo of the IRS employee.
A big change in 1099 reporting:
With the new emphasis on tracking down businesses who treat employees as independent contractors, the IRS now has a special 1099 form just for reporting of independent contractors. There is a new form 1099-NEC for independent contractors and the old 1099-MISC is still used for reporting rents etc. The business owner must get a W-9 from every independent contractor you issue a 1099 to because that is the only proof the independent contractor is stating they do not owe taxes to the IRS and therefore you do not have to withhold money from payments you make to the independent contractor. Watch out for businesses giving you a business name and a social security number or an individual name and a federal ID number. If the information they give you does not match the IRS file you will get a letter from the IRS saying you must get corrected information or start withholding from the independent contractor. The maximum penalty for any one business from refusing to file 1099s is only $556,600 – so you decide whether it is worth the risk to ignore the 1099 reporting rules.
Minimum wage changes Jan 1, 2021 for Missouri employers:
In November 2019 voters passed a new law the eventually increases the minimum wage in MO to $12 per hour in 2023. The new Missouri minimum wage for 2020 was $9.45 and Jan 1, 2021 the rate increases to $10.30 per hour. This law does not apply to retail or service businesses whose annual gross income is less than $500,000.
Payroll Protection Program (PPP):
The CARES act authorized a low interest forgivable loan to every small business for 2 ½ months of payroll and owner profit to help businesses offset the effects of the COVID shutdown. I compliment congress and the president on their quick action. Now for the details of how you report this on taxes. The CARES act clearly said the forgiveness of the loan would not be taxable income. Then the IRS announced their normal practice for dealing with tax exempt income was to disallow the expenses paid with the tax exempt income. That basically made the loan taxable because without deducting the payroll the loan was used for, the business simply shows more profit. Some members of congress said that was not the intent of the law and proposed a law to allow the business to deduct expenses paid with PPP funds but that bill has gone nowhere. The next question is when do you report the tax consequence. November 18 the IRS finally issued more detail on how to handle PPP forgiveness. The IRS ruling indicates if you paid normally deductible expenses with the PPP funds you may not deduct those expenses on your 2020 tax return so long as you reasonably expect the loan to be forgiven. It does not matter whether you applied for forgiveness with your bank before or after Dec 31, 2020 or when the loan is actually forgiven. If you reasonably expect to receive forgiveness you cannot deduct the expenses on the 2020 tax return. The only flexibility the taxpayer has is if part of the loan is later not forgiven, you have the choice to amend the 2020 tax return and report the deduction in 2020 or take the disallowed portion of the loan as a deductible expense in 2021 or 2022 when you actually found out the amount of the loan that was not forgiven.
Many banks have delayed filing with the SBA for forgiveness because the program seems to keep changing. The SBA started acting on forgiveness applications and paying off those loans in November but for many it is obvious you will not be able to apply for forgiveness or know the amount forgiven until after December 31. The new IRS position eliminates the potential to protect the deductibility of the expenses in 2020.
Everyone expects to get 100% of the PPP loan forgiven, but for those who applied for the PPP and the Economic Income Disaster loan (EIDL) you most likely received a $10,000 grant when you applied for the EIDL. All the literature at the time said you simply got to keep the grant even if you didn’t get the EIDL loan. There is a surprise in the PPP forgiveness. That $10,000 grant you received will reduce the forgiveness on your PPP loan so you may owe $10,000 to the bank after the SBA pays the bank all but the $10,000.
Now let’s look at tax law changes:
Charitable contributions:
There is a new $300 deduction for charitable contributions for those who take the standard deduction. This new deduction is for 2020 only and then it goes away. The deduction is per return so a married couple gets the same $300 deduction as a single person. Don’t ask me why. Nobody ever said tax law was fair. Just remember you must have receipts for any charitable deduction. It no longer works to say you give $10 cash each week to church. IRS says no receipt…..no deduction.
Energy credits:
The residential energy credit is back and expires at the end of 2020 again. This deduction reminds me of the promotion for the McRib sandwich…..it just keeps expiring and coming back. They brought back the $500 tax credit for energy efficient improvements made to your home like insulation, windows, doors, etc. The credit is 10% of what you spend and it is limited to one $500 limit in your lifetime so if you took the credit in the past, you don’t get it again. The credit for solar energy and ground source heating systems does not expire at the end of 2020 but the credit drops from 30% of the cost to 26% for 2020. This credit drops to 22% in 2021 and ends at the end of 2021.
Other deductions extended for 2020 only:
The deduction for mortgage insurance premiums is back. Medical expenses are again limited to those that exceed 7.5% of your income which goes back to the 10% limit again after this year. You have the option of deducting tuition and fees if that deduction is better than the tuition tax credits.
Tax credit for employers who start a 401k plan:
Starting in 2020 employers get a tax credit of $250 per eligible employee up to a maximum credit of $5,000. There is also a $500 credit for employers who have an existing plan and add an auto enrollment feature. The idea to automatically enroll every new employee in the plan unless they opt out is a great idea to force people to start to save for their retirement. Unfortunately there are big penalties for the employer if they miss enrolling someone or forget to bump their contribution on the annual renewal date so be careful.
Kiddie tax:
The unearned income of children will once again be taxed at the parent’s tax rate instead of at the trust tax rates. This applies to any dependent under age 18 and extends to age 24 for students.
New rules for 529 college savings plans:
Withdrawals from 529 plans can now pay for certain apprenticeship programs and up to $10,000 can be withdrawn tax free one time per student to pay off student loans.
The $1200 stimulus payment:
Most people got a $1,200 per person ($500 for dependents age 17-24) stimulus payment during the COVID shutdown. That payment was actually an advance against a credit that will be reported on the 2020 tax return. That means if you did not get the check and you are entitled to it, you will get that credit on your 2020 tax return. However, that also means you must report the credit if you did receive it so you don’t apply for it again when you file your tax return. Good news is if you received a credit you were not entitled to you may not have to pay it back. Bad news is you will need to report to your tax preparer the actual credits you did receive.
Changes to retirement accounts:
Under the old rules you had to start withdrawing money from your retirement accounts at age 70 ½. The new rules extend the required beginning date for distributions to age 72. You can also continue to contribute to your IRA now at any age as long as you have earned income. In the past you could no longer make contributions once you had to start required minimum distributions. You never knew getting old would be so good!!!!!
Under the old rules if you inherited an IRA from someone you got to spread the withdrawals out over your life expectancy. This was often referred to as a stretch IRA. Congress was looking for ways to pay for all the stimulus money and their answer was to change inherited IRAs to where they had to be withdrawn in 10 years instead of over your life expectancy. You can wait until the 10th year and take it all at once or spread it out any way you like but it must be withdrawn in 10 years. There are some exceptions that get to keep the old stretch rules. A spouse or a dependent within 10 yr of the age of the decedent get to use the old stretch rules. One other winner in the rules was allowing a stretch for benefits paid to a special needs trust to support a handicapped person, etc.
Anyone who inherited an IRA from an individual who died before 2020 continues under the old rules where you can stretch the distribution over your life expectancy.
Self-employed qualify of COVID sick and emergency leave tax credit:
One of the laws passed during the COVID crisis reimbursed employers 100% of an employee’s wages if they had COVID or 2/3 of the wages if they were off to care for a family member. That law has been extended to self-employed individuals and partners. If the business owner meets the sick or emergency leave criteria, there is a reimbursement by claiming the credit on your personal income tax return. This is done on new form 7202 and the calculation of the credit is based on your self-employment income for the year.
A wake up call….. One way to minimize your risk on computer security issues:
If your business maintains any kind of personal information on employees or customers and your system gets hacked you have an obligation to notify those affected their personal information may have been accessed. Unfortunately the hackers continue to get more sophisticated in their methods and as a result, more and more businesses are experiencing hacks. The one piece of advice every business should heed is to get any information for inactive clients or employees off your network. That way if you get hacked you don’t have to notify someone you no longer do business with that their records may have been stolen. You still need to retain this information for the required number of years but store it on a backup disk off your network.
Penalty free withdrawal from IRA:
Anyone can now withdraw $5,000 penalty free from an IRA for the birth or adoption of a child. You can also recontribute the money back into the IRA. In addition, you can withdraw $100,000 from your retirement accounts for coronavirus-related distributions without penalty and the tax on the withdrawal can be paid over three years. If you recontribute the funds within the three years it will simply be treated as a rollover and not taxed.
A refresher on meals and entertainment:
Many still want to deduct business entertainment expenses but those deductions are gone for good. However, the IRS came out with proposed rules to clarify whether meals are partially or fully deductible as a business expense. The cost of food and beverage as part of a holiday party is 100% deductible because it is a recreational, social or similar activity provided for non-highly compensated employees. On the other hand if the employer provides free drinks and snacks in a break room for all employees that is only 50% deductible because it is not a recreational, social or similar activity. Who lays awake at night and thinks this stuff up????
30 Documents You Need Before You Die:
It seems every year we get to assist someone who lost a loved one unexpectedly and there is one statement we hear over and over…..”I wish I had known that before he or she died”. To help those who want to organize their financial affairs we put together a list of 30 documents you need before you die. We have a copy of this list with some checklists in our reception area along with a simple fireproof safe to give you an idea of how we suggest you organize those documents. If you would like a copy of this list please call or email our office or check our blog (click here) so that you can start to organize your records. After death, it is too late to ask questions of where items are kept, too late to change how items are titled, etc. Please spend a little time organizing your personal information so it is easier for your loved ones to pick up the pieces and carry out your wishes.
One Last Thanks—To Our Valued Clients
Without you we would not be here today. We are passionate about helping you achieve success.
We are both honored and humbled to serve you. THANK YOU!!!!!!!
And now for the required “you can’t believe or trust anything or anyone disclosures”……
