December 31, 2020 is fast approaching. Below are year-end planning updates for charitable contributions and qualified medical expenses.
- The above-the-line charitable deduction. Any individual taxpayer is entitled to a charitable deduction this year. Typically, there is no tax benefit for donations to charity unless you itemize deductions. However, the CARES Act created an above-the-line deduction of up to $300 for cash contributions by taxpayers who do not itemize. Cash donations include those made by check, credit card or debit card. This does not include securities, household items or other property. Cash contributions to most publicly supported charitable organizations qualify. Contributions to non-operating private foundations or donor-advised funds are not eligible. If you would like to take advantage of this provision, be sure to make a cash donation before the end of the year.
- Expanded Adjusted Gross Income (AGI) limitation for itemized charitable deductions. Individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Contributions in excess of the 60% AGI limitation may be carried forward in each of the succeeding five years. The CARES Act suspends the 2020 AGI limitation for qualifying cash contributions and instead permits individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 up to the amount of their AGI. Any excess carries forward as a charitable contribution that is usable in the succeeding five years. Contributions to non-operating private foundations or donor-advised funds are not eligible for the 100% AGI limitation.
QUALIFIED MEDICAL EXPENSES
- The new CARES Act expands eligible expenses for various tax-advantaged accounts including HSAs, Health FSAs, HRAs, and Archer MSAs. Certain over the counter (OTC) drugs and medications are now qualified medical expenses.
- The CARES Act restores the ability to use these accounts to purchase certain OTC drugs and medications, like aspirin and other pain medications, allergy medication, etc., without a doctor's prescription.
- Items such as thermometers, batteries for medical devices, contact lenses and solution, prescription glasses, cold and allergy medicine, and first aid items like bandages, gloves and cleansing wipes are all covered.
- For the first time feminine hygiene products are considered qualified medical expenses for payment or reimbursement from these accounts.
- Both provisions for OTC and feminine hygiene products apply to amounts paid or expenses incurred on or after January 1, 2020. This provision does not have an expiration date.
- Some HSA/FSA administrators are covering the costs of Personal Protective Equipment (PPE) - to prevent/stop the flow of disease. This may include, but not limited to, face masks, face shields, gloves, disinfecting wipes, and hand sanitizer. PLEASE CONSULT YOUR HSA/FSA PROVIDER TO CONFIRM THEIR POLICY REGARDING PPE.
If you have any questions regarding charitable contributions or qualified medical expenses, please contact our office. We are happy to assist you.
“Wherefore Art Thou?”
- 1. Famous line from Romeo and Juliet?
- 2. What employers need to be asking their employees to determine their state tax obligations for 2020?
- 3. Both of the above.
Unfortunately, No. 3 maybe the right answer.
The COVID-19 pandemic has changed the way many employers operate and has forced some employees out of the office to work from home. In some cases, employees have worked remotely from another state. Employees are working at their parents’ home, with their in-laws, with friends, in the mountains, or by the water. The internet has opened the possibilities for where employees can work. In addition, what was thought to be a short-term pandemic has turned long term with many employees now working remotely in excess of 6 months during 2020 and still counting.
These trends have highlighted state nexus rules, nexus being defined as a company’s connection to a state. Generally, when an employee works outside of the state(s) where the employer operates, physical nexus is created, subjecting the employer to the tax rules of the other state(s) jurisdiction.
With many employees hunkered down and working remotely in different states during 2020, one could anticipate numerous employers unwittingly creating nexus in new states for 2020. As a result, the employers become subject to new state and local tax requirements. The requirements vary, but could include state and local income tax withholding for employees, payment of workers’ compensation and unemployment insurance, as well as state and local income taxes.
The prospect of navigating the obligations brought about by a remote workforce scattered throughout the country may be daunting for employers. In response to the COVID-19 pandemic, many states are addressing nexus rules and withholding requirements.
The approach varies from state to state and not all jurisdictions have addressed the issues directly. Nevertheless, several states have provided relief from their typical nexus framework, asserting that changes in the temporary work locations of a business’ employees due to the COVID-19 pandemic will not be used to establish nexus in that state. In other cases, the length of time remote workers spend in a state is consequential.
Notably, several states have not provided comparable provisions addressing nexus during the pandemic. The patchwork of rules that currently apply requires due diligence by employers. Employers with employees that worked remotely in other states during 2020 should review their nonresident income tax withholding requirements and be cognizant of the potential assertion of nexus in states where employees work in 2020.
If you have questions about remote employees and its impact on your business, please contact our office. We are happy to assist you.
On August 17, 2020, the Nebraska Advantage Act was replaced by the ImagiNE Nebraska Act, which will take effect on January 1, 2021. Applications for the Nebraska Advantage Act filed on or before December 31, 2020, can be amended to choose the ImagiNE Nebraska Act if the new program better fits your needs. No new Nebraska Advantage Act applications will be accepted after December 31, 2020.
The ImagiNE Nebraska Act was put in place to offer tax incentives to businesses to encourage investment and employment growth in the state. Specific provisions target high-wage jobs and investment in distressed and rural areas.
There are several differences between the qualifications and applications required for the ImagiNE Nebraska Act and the Nebraska Advantage act, including the following:
- Applications for the ImagiNE Nebraska Act are now reviewed by the Department of Economic Development. The Department of Revenue will still be responsible for approving the refunds, credits, and exemptions a business receives.
- The application must:
- Request an agreement identifying the taxpayer’s levels of employment.
- Include specific information and acknowledgements.
- Include a $5,000 nonrefundable application fee.
- Incentives under the ImagiNE Nebraska Act may be claimed immediately after meeting the required thresholds. Under the Nebraska Advantage Act, a Qualification Audit was required before incentives could be claimed, a process that frequently lasted for months or years.
- The Nebraska Advantage Act required companies to segregate qualified and non-qualified activities for locations. Under the ImagiNE Nebraska Act, if a majority of the activities at a location qualify, then all the activities at that location are qualified.
- The definition of a qualified activity now encompasses a wider range of activities, including:
- Testing laboratories
- Rail or truck transportation
- Insurance carriers
- Wired or wireless telecommunications carriers (except satellite)
- Telemarketing providers
- Data processing or computer facilities management services
- Warehousing and storage
- Administrative management of the taxpayer's activities
- Logistics facilities
- Services provided on aircraft
- Research, development or testing for scientific, agricultural, animal husbandry, food product, industrial or technology purposes
- Production of electricity using renewable energy
- Computer systems design
- Financial services
- Any other business location where at least 75% of revenue is from sales made and delivered to unrelated customers outside Nebraska
- The levels of investment and employment that qualify for various incentives are:
- 20 new employees
- Investment of at least $250,000 but less than $1 million and five new employees within economic redevelopment areas
- Investment of at least $1 million and 10 new employees
- Investment of at least $5 million and 30 new employees
- Investment of at least $250 million and 250 new employees
- Investment of at least $50 million
- Approved agreements last for 15 years and all application levels can be changed up to one year after the year in which desired investment levels are met.
There are also several changes to the factors used to compute the credit, including:
- The requirements for qualified employees included in the count has changed significantly.
- Employees must now be Nebraska residents.
- Part-time employee hours are not included in the calculation of new FTEs hired after the base year.
- Benefits (such as health insurance) must be offered to new full-time employees.
- Part-time employee hours worked will no longer be included.
- Average wage requirements are higher than under the Nebraska Advantage Act.
- For applications filed in 2021, base year employment will be determined by the greater of employment in 2019 or 2020.
- For applications filed in 2022 and beyond, base year employment will be determined based on the prior calendar year.
Refunds available will be capped at $25 million for both 2021 and 2022, with the cap increasing to $100 million in 2023 and 2024, and $150 million for 2025. Beginning in 2026, incentives will be capped at three percent of state net tax receipts.
If you have questions about the ImagiNE Nebraska Act and its effects on your business, please contact our office. We would be happy to assist you.
Never has the lifetime exemption been so high, and current interest rates are at unprecedented lows. Change may be on the horizon which makes planning today so important.
- The 2020 lifetime exemption is $11,580,000 per individual; $23,160,000 for a married couple.
- The 2020 annual gift tax exclusion is $15,000 per individual; $30,000 for a married couple.
An effective wealth transfer option for you to consider is an Intentionally Defective Grantor Trust (IDGT).
An IDGT is an estate planning tool used to transfer wealth to family members during the life of the Grantor.
- “Intentionally Defective” means that the Grantor reports the taxable income earned by the trust on the Grantor’s personal income tax return.
- Assets in the trust continue to appreciate in value and are excluded from the Grantor’s estate for estate tax purposes.
Funding Options – Gift and Installment Sale
- The Grantor makes an irrevocable gift of selected assets to the IDGT.
- Gifting appreciating assets is beneficial since the appreciation can be retained by the trust and passed to the beneficiaries free of estate and gift tax.
- Transfers to an IDGT are taxable gifts that will reduce the Grantor’s remaining lifetime exemption.
- The Grantor may also sell assets to an IDGT.
- The sale is not taxable for income tax purposes because the IDGT is a Grantor trust for income tax purposes. The Grantor is treated as having sold the assets to himself/herself.
- The Grantor receives an interest-bearing promissory note from the trust in exchange for the sale of the assets.
- Interest payments must be made annually.
- Principal can be paid during the term of the note or postponed until the end of the note term.
- The annual interest payments to the Grantor are not taxable.
- The interest rate can be based on the Applicable Federal Rate which is only 0.67 percent for an installment sale created in October 2020.
The beneficiaries of IDGTs are typically children or grandchildren who will receive assets that have been able to grow without reductions for income taxes.
The IDGT can also be created as a Dynasty Trust allowing assets to pass to future generations free of estate tax.
An additional effective wealth transfer option is a Grantor Retained Annuity Trust (GRAT).
A GRAT is created when a donor (the Grantor) contributes assets with appreciation potential to a fixed term, irrevocable trust. A GRAT allows the Grantor to transfer future appreciation to the next generation with little or no gift tax liability.
- Securities, business interests, or real estate with expected appreciation are the ideal assets to use with this technique.
- A GRAT exists for a specified number of years referred to as the term.
- During the term of the trust, the GRAT’s taxable income is reported on the Grantor’s personal income tax return.
- The Grantor receives an annuity payment each year during the term equal to a percentage of the initial fair market value of the GRAT assets plus an interest factor based on the IRS Section 7520 rate.
- The October 2020 Section 720 rate is a very low 0.4 percent.
- The annual annuity payment may be paid in cash or paid with assets held in the GRAT.
- The annuity payment is not taxable to the Grantor.
- At the end of the term, the remaining GRAT assets are distributed to named beneficiaries.
- The value of the assets remaining in the GRAT at the end of the fixed term will not be included in the Grantor’s gross estate and pass to the beneficiaries free of gift tax.
- The Grantor must outlive the term of the GRAT for the planning to be successful.
Please contact our office if you would like to discuss using an IDGT, GRAT or both as a tool(s) for your estate planning.
The CARES ACT, passed by Congress in early 2020, contains various economic tools to assist businesses as they navigate through the financial impacts of COVID-19. Some of the opportunities in the CARES ACT are easily overlooked by taxpayers. We would like to bring an important item to your attention.
One of the economic tools contained in the CARES ACT is the ability to carryback a net operating loss incurred by a taxpayer during their 2018, 2019 or 2020 tax years. The loss can be carried back to offset income in up to five prior tax years.
Taxpayers that paid Federal income taxes during their 2014 through 2018 taxable years have an opportunity to recoup all or a portion of the Federal income taxes previously paid by using the five-year carryback provision. The CARES ACT change is intended to help businesses that incur losses in 2019 or 2020 to generate cashflow from the losses and hopefully assist their businesses through the economic downturn caused by COVID-19. Prior to this change, most taxpayers could not carryback but instead had to carryforward any net operating loss they incurred.
Timing is everything for a taxpayer to take advantage of the five-year carryback opportunity as the losses must be incurred in their 2019 or 2020 tax years. The law reverts to the original provisions in 2021. Planning strategies can be reviewed to maximize the losses and generate as much tax refund cashflow as possible.
For example, taxpayers can use bonus depreciation and certain accounting method change adjustments to increase the available loss carryback. The CARES ACT also made changes to the bonus depreciation rules and the IRS has liberalized the accounting method change rules to assist businesses in taking advantage of the five-year carryback rule.
We are available to assist you in evaluating the potential benefits of the five-year carryback provision.
Identity theft is an ongoing battle and occurred in the EIDL program according to the Small Business Administration (SBA).
- Stolen identities and identification numbers were used to obtain EIDL funds illegally.
- We are not aware of similar reports about the Paycheck Protection Program (PPP), but the forgiveness review process by banks and the SBA is discovering various types of PPP fraud.
We recommend that you periodically check the EIDL and PPP lists of grantees and borrowers published by the SBA to verify that your company and your name are not incorrectly included on the lists. The PPP list includes only the names of borrowers for loans of $150,000 or more.
- EIDL: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/economic-injury-disaster-loans
- PPP: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program
If you find your name or company incorrectly listed as a borrower or grantee or are contacted by your bank or the SBA about forgiveness of a loan you did not receive:
Who is eligible to defer employment tax deposits?
- All employers are eligible.
- The ability to defer deposit and payment of employment taxes applies to all employers, whether or not the employers are entitled to Families First Coronavirus Relief Act (FFCRA) paid leave credits and CARES Act employee retention credits.
- No special election is required.
What employment taxes and deposits may be deferred?
- The employer’s share of social security tax or 50% of the social security tax on net earnings from self-employment income (collectively “employment tax”) may be deferred.
- The deferral applies to deposits and payments of employment tax required to be paid during the period beginning March 27, 2020 and ending December 31, 2020.
- Form 941 will be revised for the second quarter of 2020. The IRS indicates it will provide instructions soon regarding how to report deferrals for the first quarter of 2020.
- For self-employed individuals, the deferral applies to employment tax included in estimated tax payments due during the period beginning March 27, 2020 and ending December 31, 2020.
When is the deferred employment tax required to be deposited (applicable dates)?
- 50% of the deferred amount must be deposited on or before December 31, 2021.
- The remaining 50% must be deposited on or before December 31, 2022.
What is the effect of a Payroll Protection Plan (PPP) loan on the deferral?
- Employers that have received a PPP loan, but whose loan has not yet been forgiven, may defer employment tax as described above.
- When an employer receives the lender’s decision that the PPP loan is forgiven, employment tax due after that date may not be deferred.
- The amount of employment tax deferred through the date the PPP loan is forgiven continues to be deferred and due on the applicable dates.
What are the effects of FFCRA paid leave credits and CARES Act employee retention credits on the deferral?
- An employer may defer employment tax as described above prior to determining:
- If the employer is entitled to FFCRA paid leave credits or the CARES Act employee retention credit
- AND prior to determining the amounts of:
- Employment tax deposits that the employer may retain for these credits,
- Amount of advance payments of these credits, OR
- Amount of refunds of these credits.
Who is eligible for a PPP loan for sole proprietorships and independent contractors?
- A sole proprietorship is a business reporting income on Form 1040, Schedule C.
- Farmers are sole proprietorships reporting income on Form 1040, Schedule F.
- Independent contractors are sole proprietorships reporting income on either
Form 1040, Schedule C or Form 1040, Schedule 1, Line 8, Other Income.
- Sole proprietorships, farmers and independent contractors pay self-employment tax on their earned income.
- An individual can have self-employment income from multiple sources.
- Self-employed income from all sources is reported on Form 1040, Schedule SE, Line 3.
- Individual partners in service-providing partnerships pay self-employment tax on their share of partnership’s net income. The SBA has not yet verified if individual partners are eligible for an individual PPP loan.
What is the PPP loan amount for sole proprietorships and independent contractors?
- The PPP loan amount is 2.5 times average monthly payroll costs.
- Payroll costs are defined as net earnings from self-employment.
- Certain adjustments apply to sole proprietorships with employees.
How is the PPP loan amount calculated for a sole proprietorship without employees?
- (1) Determine the net earnings from self-employment reported on the 2019 Form 1040, Schedule SE, Line 3, limited to $100,000.
- (2) Divide Line (1) by 12 to arrive at average monthly payroll costs.
- (3) Multiple Line (2) by 2.5 to arrive at the PPP loan amount.
Income tax deductions for the sole proprietor’s 50 percent of self-employment tax, self-employed health insurance and self-employed retirement plans are not factored into self-employment earnings.
How is the PPP loan amount calculated for a sole proprietorship with employees?
- Payroll costs are calculated as:
- (1) Net earnings from self-employment reported on the 2019 Form 1040, Schedule SE, Line 3, limited to $100,000.
- (2) Add back:
- Employee wages reduced by wages over $100,000 paid to any employee.
- Employer paid health insurance cost for employees.
- Employer contributions to a retirement plan for employees.
- (3) The sum of Line (1) plus Line (2) equals annual payroll costs.
- (4) Divide payroll costs by 12 to arrive at average monthly payroll costs.
- (5) Multiply by 2.5 to arrive at the PPP loan amount.
Income tax deductions for the sole proprietor’s 50 percent of self-employment tax, self-employed health insurance and self-employed retirement plans are not factored into self-employment earnings.
What portion of the PPP loan is eligible for forgiveness?
- The sole proprietorship PPP loan is eligible for forgiveness if:
- (1) At least 75 percent of the loan funds are spent on payroll costs, including the portion of payroll costs equal to the net earnings from self-employment considered in the loan amount calculation.
- (2) The remaining 25 percent of the loan funds are spent for payments of interest on existing mortgages, rent and utilities.
- (3) The above expenditures must be paid within the eight weeks following receipt of the loan proceeds.
- (4) Details are pending regarding the calculation of amounts spent for payroll costs for self-employed individuals.
When does the application period begin?
- Sole proprietors and independent contractors can apply for a PPP loan at any SBA provider financial institution beginning April 10, 2020.
Labenz & Associates LLC Disclosure: The information provided is general in nature based on provisions as of April 10, 2020. Additional provisions may apply. Please discuss the provisions with your tax advisor and SBA lender.
The CARES Act has changed the life of Qualified Improvement Property (QIP) from 39 years to 15 years, thus making it eligible for bonus depreciation. This is a technical correction for the QIP issue and is a retroactive change, back to January 1, 2018.
- QIP is any improvement to an interior, non-structural portion of a commercial building.
IRA distributions up to $100,000 made in 2020 will not be subject to the 10% early withdrawal penalty if it’s a “coronavirus-related distribution”. It is still subject to Federal and state income tax, however.
- The CARES Act also removes the requirement for Required Minimum Distributions for 2020.
Starting in 2020, a taxpayer is able to deduct up to $300 for charitable contributions, even if they do not itemize deductions on their Federal income tax return.
- This is a permanent change.
- If they do itemize, then all of the charitable contributions must be deducted below the line and reported on Schedule A.
For 2020 only, donations made to charities that are subject to the 60% AGI limit are now allowed up to 100% of AGI for 2020.
- For corporate donors, the limit is increased from 10% to 25%.
The Tax Cuts and Jobs Act (TCJA) changes to NOL loss carrybacks and carryforwards have been temporarily replaced.
- Losses from 2018 - 2020 may be carried back for up to 5 years (instead of no carryback allowed by TCJA).
- Losses carried forward to 2019 or 2020 may be used to offset 100% of taxable income (instead of the 80% rule put into place by the TCJA).
The TCJA rules regarding limitations on excess business losses have also been repealed for 2018 - 2020.
- Instead of the limit to $250,000/$500,000 on losses, no limit exists.
The 30% limit on business interest expense is raised to a limit of 50% for 2019 and 2020.
- In 2020, the adjusted taxable income calculation will be based on the higher of 2019 or 2020 adjusted taxable income.
Enhanced Unemployment Benefits
- Eligible if unable to work due to COVID-19 or business is shut down
- Self-employed individuals are eligible
- Benefit based on income plus $600 per week provided by Federal government
- Benefits for 39 weeks
- Extra $600 from Federal government, will last up to 4 months
- Use https://neworks.nebraska.gov to apply
- Appears applications are available for employees
- Does not appear to be set up for self-employed persons yet – will need to call
Payroll Protection Program
- Eligible if less than 500 employees, including sole proprietorships, independent contractors and nonprofit organizations
- Loan to cover payroll and other operating expenses
- Immediate cash loans and a portion may be forgivable
- Maximum loan is 250% of average monthly payroll
- Example: Monthly payroll $10,000 x 250% = $25,000 maximum loan
- Monthly payroll includes:
- Group health benefits
- Retirement benefits
- State and local payroll taxes
- Sole proprietor and independent contractor compensation (up to $100,000 per year)
- Loan may be used for:
- Payroll costs
- Interest on mortgages and other debt incurred before 3-1-2020
- Loan is forgiven to the extent loan proceeds are used for payroll costs, rent, interest on specified loans and utilities
- Interest rate is 0.5% (one-half percent) and maximum term is 10 years
- Payments can be deferred from 6 months to 1 year
- Application is required for forgiveness providing documentation of costs paid
- Loan forgiveness is reduced in proportion to reduction in number of employees or employee salaries are reduced by more than 25%
- Reduction in forgiveness can be avoided if employees are rehired or compensation is increased in allotted time period
- Apply for Payroll Protection Program loan through any SBA lender (referred to as a 7(a) lender)
Economic Injury Disaster Loan (EIDL) and Grants
- Eligible if under 500 employees, including sole proprietorships, independent contractors and nonprofit organizations
- Emergency $10,000 GRANT is available
- Apply at https://www.sba.gov/page/disaster-loan-applications
- Use the link at the top of the page in the yellow area
- Should be direct deposited within 3 days of accepted application
- Grant does not need to be repaid
- EIDL Loan
- Working capital loan up to $2 million
- Can be used for any costs that could have been paid if the disaster had not occurred
- Interest rate is 3.75% for businesses and 2.75% for private nonprofits
- Maximum loan term is 30 years
- Apply for loan online, by mail, in person or by phone
- Online application site is https://www.sba.gov/page/disaster-loan-applications
- Businesses can apply for both a Paycheck Protection Plan loan and an EIDL loan
- EIDL loan must be used for purposes other than those for the Paycheck Protection Plan loan
- Working capital loan up to $2 million
Labenz & Associates LLC Disclosure: The information provided is general in nature based on provisions as of March 31, 2020. Additional provisions may apply. Please discuss the provisions with your tax advisor and SBA lender.
The U.S. Small Business Administration is offering designated states and territories low-interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of the Coronavirus (COVID-19).
- SBA’s Economic Injury Disaster Loans offer up to $2 million in assistance and can provide vital economic
support to small businesses to help overcome the temporary loss of revenue they are experiencing.
- These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid
because of the disaster’s impact. The interest rate is 3.75% for small businesses. The interest rate for
non-profits is 2.75%.
This loan is different from the loan included in the FFCRA. Clients who are affected by closed businesses are recommended to get their name on the list.
Website link: https://disasterloan.sba.gov/
On March 18, 2020, President Trump signed the Families First Coronavirus Response Act (FFCRA) into law. Below is a brief summary of the tax-related provisions, which are effective April 2, 2020, and expire December 31, 2020.
Paid Sick Leave
- Small to mid-size employers (1 to 499 employees) are required to provide:
- Full-time employees are eligible for up to 80 hours of paid sick leave.
- Part-time employees are eligible for the average amount of hours the employee would work over a
- Paid sick leave covers days when the employee is unable to work (or telework) due to any of the following:
- An employee is caring for a child whose school/day care is closed for reasons related to COVID-19;
- The employee is experiencing COVID-19 symptoms and is seeking a medical diagnosis; or
- An employee (or a family member whom the employee cares for) is self-quarantined as advised by a health
care provider or Federal/state or local quarantine order related to COVID-19.
- These wages are exempt from the employer’s portion of Social Security tax and an additional payroll tax credit
is allowed for the amount of Medicare tax paid on those wages.
Payroll Tax Credits
The paid sick time payroll tax credit can be claimed on a quarterly basis, equal to 100 percent of the amount of sick leave wages paid. The credit is limited to up to $511 per day ($5,110 total) if an employee is taking time off to care for themselves; or up to $200 per day ($2,000 total) if the sick leave is to care for an individual who is quarantined or showing symptoms of COVID-19 or a minor child whose school/daycare is closed. The credit is refundable if it exceeds the amount the employer owes in payroll tax.
For employers who pay family leave wages under the FFCRA, a separate payroll tax provision allows a 100 percent credit against the employer’s share of the payroll tax for each employee, limited to $200 per day, or a total of $10,000 per employee. The credit is refundable if it exceeds the amount the employer owes in payroll tax.
Self-employed workers, including independent contractors also can claim a credit against their regular income taxes related to sick or family leave. The credit covers 100 percent of self-employed individuals’ daily self-employment income or 67 percent if an individual is taking care of a minor child whose school/daycare is closed. The per-day amount is limited to the lesser of $511 per day if for themselves, $200 per day for a minor child or their average daily self-employment income
Labenz & Associates LLC is doing our best to balance the spread of the COVID-19 virus and the tax filing season. We have taken the following steps to keep both our valued clients and our staff healthy.
- Client meetings in our office have been suspended for the next few weeks.
- Please provide your tax return information by mail, PDF or use the drop box in our office vestibule.
- We are fully available to discuss your questions or provide assistance by email or phone (402) 437-8383.
Thank you for your understanding and patience.
A few weeks ago, the IRS released a draft of the new 1040 Schedule 1 form for the upcoming 2019 tax season. Taxpayers will now be required to check ‘yes’ or ‘no’ to the very first question on this new tax form:
“At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
What does this mean?
This means that ALL taxpayers must now inform their tax preparer whether they have any cryptocurrency (virtual currency) related activities during the year.
Labenz & Associates LLC will add a question to our tax organizers requesting whether or not our clients participated in any cryptocurrency transactions during 2019. If yes, information will need to be provided to report these cryptocurrency transactions.
The Nebraska legislature recently passed LB 512 requiring each S corporation, limited liability company and partnership with income from Nebraska sources to file a Nebraska income tax return for all tax years beginning on or after January 1, 2019.
Prior to the legislation, these pass-through entities were not required to file Nebraska returns if all shareholders, members and partners were Nebraska residents and all the entity’s income was from Nebraska sources.
The Nebraska Department of Revenue encourages all taxpayers to file tax returns electronically and requires tax preparers who file more than 25 Nebraska corporate or partnership income tax returns to file electronically as well.
Electronically filing a Nebraska corporate or partnership return requires a Nebraska identification number that is assigned by the Department of Revenue.
- A business that remits payroll income tax withholding or sales tax to Nebraska will already have an assigned Nebraska identification number to use when electronically filing the Nebraska pass-through return.
- A pass-through entity without an assigned Nebraska identification number will need to apply for a number prior to electronically filing a 2019 Nebraska tax return.
- Nebraska identification numbers can be obtained online at www.revenue.nebraska.gov/electron/online_f20.html.
All S corporations, limited liability companies and partnerships for which we will prepare 2019 initial Nebraska income tax returns will receive a letter and form from our office to complete and return as soon as possible, regarding the Nebraska identification number required to electronically file the 2019 tax return.
The 2018 tax preparation season is upon us and Labenz & Associates will need more information than ever before from our clients to file certain tax returns.
One of the new tax benefits for 2018 tax returns is the 20% Qualified Business Income (QBI) tax deduction. This is a great tax benefit for those clients who qualify. But as discussed below, the new deduction will require us to obtain additional information from our clients to assess qualification and to determine the amount of the deduction.
In certain instances, these will be difficult assessments. The better the information clients can provide to us, the better we will be able to determine the eligibility to claim the new tax benefits.
For noncorporate taxpayers – individuals, estates and trusts who own a business activity – the key question for their 2018 tax returns is: Will you qualify for the 20% QBI deduction? The analysis will apply to individuals, estates and trusts with:
- One or more rental properties,
- Ownership interest in an LLC, partnership or S corporation, and
- Businesses operated as a sole proprietorship.
A simple example: Mary and Bob own a hardware store through an S corporation. The business earned a $100,000 profit in 2018. Will Mary and Bob qualify for a $20,000 deduction on their 2018 tax return?
The purpose of this Alert is to provide an overview of the 20% QBI deduction, including some recently issued IRS guidance, so our clients can help us assess their ability to claim the deduction. If a client does qualify, we may need more information to quantify the deduction when we prepare the 2018 tax return.
The 20% QBI deduction is determined differently for taxpayers above or below certain taxable income threshold amounts. Taxpayers below the threshold amount must satisfy one requirement whereas taxpayers above the threshold must satisfy three requirements.
TAXABLE INCOME UNDER $157,500 SINGLE AND $315,000 JOINT
Single individuals, estates and trusts with 2018 taxable income at or under $157,500 and married filing jointly with taxable income at or under $315,000 (the threshold amount) can qualify for the 20% QBI deduction by satisfying one requirement – their business activity must be classified as a “trade or business activity”.
A trade or business activity is not a defined term, but prior Court cases and the recently released IRS guidance shed some light on activities that will be considered a trade or business. Examples:
- Taxpayer, employees of the business activity or their agents must be involved in the activity with continuity and regularity.
- A hobby or amusement type activity does not qualify.
- Operating five days a week as a plumbing business, hardware store, dental practice or law practice are clear examples of a trade or business.
- Farmland and rental properties are the most difficult business activities to determine whether they rise to the IRS requirement of a trade or business activity. Examples are below:
- An individual owns farmland which is cash rented or crop shared with a tenant. The farm owner pays certain bills and is involved in certain decisions.
- An individual owns two or three duplexes and collects rents, pays bills and arranges maintenance.
- Do either of these business activities rise to being defined as a “trade or business activity”?
To address rental situations, the IRS offered a safe harbor. The rental activity (or multiple activities, if the taxpayer chooses to treat them as a combined enterprise) can be classified as a trade or business activity if all the requirements below are met.
- Separate books and records are maintained for each rental activity (or the combined enterprise, if grouped together).
- There are at least 250 hours or more of rental services performed per year for the activity.
- Starting January 1, 2019, taxpayer maintains contemporaneous records, including time reports or similar documents, which support the 250 hours of rental service activities.
- The taxpayer includes a statement on their tax return, under penalties of perjury, verifying the rental enterprise meets the above requirements.
- Note: Commercial and residential rental properties cannot be combined for the above requirements.
Triple net leases and vacation homes do not qualify as a trade or business activity under the safe harbor even if the 250 hours requirement can be documented. Self-rentals do qualify even if the 250 hours requirement is not met if the self-rental is combined with a trade or business activity that is commonly owned by the taxpayer that is not a C corporation.
TAXABLE INCOME OVER $157,500 SINGLE AND $315,000 JOINT
Taxpayers with taxable income over the threshold amounts who have business activities that satisfy the trade or business requirement outlined above either by itself or on a combined enterprise basis must satisfy two additional requirements to claim the 20% QBI deduction:
Requirement #1 – THE TRADE OR BUSINESS CANNOT BE A SPECIFIED SERVICE TRADE OR BUSINESS.
For whatever reason, when Congress created the new 20% QBI deduction, certain trades or businesses were specifically excluded from claiming the deduction if the taxpayer’s income is above the threshold amount. These trades or businesses are defined as Specified Service Trade or Businesses (SSTB) and include the following:
- Trade or business of performing services as an employee, or
- Trade or business of performing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.
IRS guidance tried to address questions about who is and who is not an SSTB. For example, with the right facts, surgery centers could fall outside the health field, as well as research, testing and the sale of pharmaceuticals and medical devices.
If your taxable income is above the threshold amount and your business activity includes an SSTB, a decision will need to be made if your business activity qualifies when we prepare your 2018 tax return.
The IRS provided a de minimis exception to address situations where a business activity with multiple trades or businesses, of which one or more is an SSTB, could still qualify for the 20% QBI deduction.
For business entities with gross receipts less than $25 million for a taxable year:
- The business qualifies for the deduction if less than 10% (lowered to 5% if gross receipts greater than $25 million) of gross receipts are from SSTB activities.
- If the 10% de minimis exception is not met, but taxpayer has separate books and records, it may be possible to split the business between SSTB and non-SSTB activities. If the qualifications are met, some portion of the business activity may still qualify for the 20% QBI deduction.
Requirement #2 – THE TRADE OR BUSINESS MUST HAVE WAGES OR INVESTMENT IN DEPRECIABLE ASSETS.
For taxpayers above the threshold amount, the 20% QBI deduction for non-SSTB business activities are limited to the greater of the following:
- 50% of wages paid to employees during the taxable year and reported on Form W-2, or
- 25% of the wages paid to employees during the taxable year plus 2.5% of the original cost of depreciable tangible property owned at the end of the taxable year.
- Note: Wages paid to owners only qualify if paid by an S corporation.
How this limitation impacts taxpayers above the threshold will vary greatly by taxpayer and by type of business activity. For example:
We have found most banks have sufficient wages, whereas real estate investors will generally rely on the 25% of wages and 2.5% of depreciable tangible property to cover their 20% QBI deduction.
Taxpayers who own farmland that is either crop share or custom farmed and have no wages and limited tangible property will have a significantly reduced 20% QBI deduction due to these limitations.
ALL IS NOT LOST
Remember – even if your business activity does not qualify for the 20% QBI deduction, all is not lost.
Early planning in 2019 may enable the business activity to qualify in 2019. For example:
- Triple net leases could be converted to a more active type lease;
- Partnerships or LLC’s could be converted to S corporations and wages paid to owners;
- Business structures or ownerships can be adjusted; or
- Taxpayers close to the threshold amounts can utilize planning techniques to insure their 2019 taxable income is below the threshold, making qualification simpler.
Please discuss your qualification for the 20% QBI Deduction with your Labenz & Associates tax advisor. We are here to help.
The Internal Revenue Service (IRS) has issued regulations regarding partnership audit rules effective for partnership tax years beginning on or after January 1, 2018 and may require an amendment to the partnership’s operating agreement.
Partnerships must designate a partnership representative (PR) with a substantial U.S. presence.
- Substantial presence requires availability to meet with the IRS in the U.S., a U.S. taxpayer identification number (TIN), a street address in the U.S. and a telephone with a U.S. area code.
- The PR receives all audit and other IRS correspondence and has the authority to bind the partnership.
- Designation of the PR is made on the partnership’s Form 1065 tax return for the tax year to which the designation applies and is effective on the date the partnership return is filed.
- The PR is not required to be a partner in the partnership.
- If no PR is appointed, the IRS will designate one.
- In general, it makes sense for a new partnership to designate its PR when formed.
Partnership audits will be conducted at the partnership level.
- IRS adjustments will be determined, and any tax will be assessed and collected, from the partnership, generally at the highest individual or corporate tax rate in effect for the year the audit adjustments become final.
- The adjustments and tax will NOT be assessed and collected from the partners for the year under audit at each partner's tax rate.
- Partners are not able to opt out of the partnership procedures.
Eligible small partnerships with 100 or fewer partners can elect out of the partnership audit rules for any tax year. The election must be made every year on the timely filed Form 1065.
- If the election out is made, all adjustments and tax will be assessed and collected on amended returns from the partners for the year under audit at each partner’s tax rate.
- The election out is only available if each of the partners are eligible: Individuals, C corporations, estates of deceased partners, certain foreign entities and S corporations are eligible partners.
- A partnership that has an S corporation partner must furnish the names and TINs of each S corporation shareholder. Also, each of the S corporation shareholders must be counted as a partner for determining the 100-partner threshold.
- Partners that prevent the entire small partnership from being able to elect out are partnerships, trusts, disregarded entities, estates of individuals that are not deceased partners and certain foreign entities.
If not eligible for the small partnership election out, the partnership can make a valid “push-out” election within 45 days after receipt of the final IRS audit adjustments.
- The partnership must provide statements to the IRS and to each of the partners from the audited year showing each partner’s share of the adjustments.
- The partners pay tax on the adjustments in the year the statement is furnished, plus interest.
All partnerships for which we prepare tax returns will receive a form from our office to complete and return as soon as possible, regarding specific information about partners and the partnership representative to be designated.
As the end of 2018 rapidly approaches, we are sharing this alert as a reminder that 2018 is not business as usual from a Federal and state income tax year-end planning perspective.
The 2018 tax year is the first year the changes made by the 2017 Tax Cuts and Jobs Act go into effect for most businesses and individuals.
MAJOR BUSINESS CHANGES
- Corporate tax rate. The C corporation tax rate was reduced to a flat 21 percent rate. For some corporations this will be a tax rate increase.
- Section 199A pass-through deduction. A new 20 percent tax deduction was created for businesses, including farming and rental real estate, operating as a sole proprietorship, S corporation, limited liability company or partnership. The new tax deduction comes with a great deal of complexity and requires review prior to year-end for optimization.
- Depreciation. More liberal depreciation rules were put into effect starting September 17, 2017. The new rules carry over into 2018 and future tax years. Both new and used equipment purchases qualify for some of these new liberalized rules, including business acquisitions. Coordinating with the new Section 199A tax deduction is required.
- Like-kind exchanges. Like-kind exchange of personal property was repealed. Now all car and equipment trade-ins are taxable.
- Cash method of accounting. Expansion of the ability to utilize the cash method of accounting may provide an opportunity for additional flexibility for year-end planning.
- Interest expense deduction. A limitation on the use of interest expense as a tax deduction was enacted for larger corporations.
MAJOR INDIVIDUAL CHANGES
- Section 199A deduction. The Section 199A deduction from pass-through entities is discussed above. Managing your taxable income is important to maximizing your Section 199A deduction.
- Standard deduction increase. For many individuals, the increased standard deduction may limit the ability to itemize tax deductions each year. Bunching deductions in alternative years will become an important planning tool for many individual taxpayers.
- Limit on state and location tax deduction. The itemized deduction for state income tax, real estate tax and personal property taxes is limited to a combined $10,000 annually.
- Charitable giving alternatives. Direct charitable gifts from IRA accounts for individuals over 70 ½ and the use of donor advised funds will become important planning tools for those with charitable giving objectives.
- Reduced Federal withholding. The 2018 Federal income tax withholding tables could cause individual taxpayers to owe money when they file their 2018 tax return. Check your withholding before year-end so you can plan for this possibility.
Meals and Entertainment
Office holiday parties,
Meals 50% deductible
Meals with prospects
Events such as theatre
Charitable event tickets –
Tickets to qualified charitable
Business meetings of employees,
Expenses for attendance at a
Meals – 50% deductible
Employee travel meals
Meals provided for the
100% deductible if a
Meal with a client in town (not
Meal with a client while traveling
All employee meeting with food
Open house for customers and
Employee portion –
Employee portion –
Company sponsors a table at a
Value of meals – 50% if
Meals – 50% deductible
Golf sponsorship and outings
Meals – 50% deductible if
(Remainder is charitable contribution)
Meals and golf –
- Note the cost of the meal must not be lavish or extravagant under the circumstances.
- Assumes appropriate documentation exists in all instances.
- Additional guidance and clarification from the IRS is still forthcoming.
On June 21, 2018, the U.S. Supreme Court (the Court) issued a decision in South Dakota v. Wayfair, overturning the physical presence standard requirement for states to impose sales and use tax filing obligations on companies doing business in a state. As a result, companies are in the process of understanding how the Wayfair decision impacts their sales and use tax filing requirements.
We are alerting our clients that the Wayfair decision could also have other state tax filing implications, including income and franchise taxes as examples.
The Court observed in their Wayfair ruling that targeted advertising and electronic sales may allow a business to have “substantial virtual connections” to a state without traditional physical presence. The Court noted that other functions of e-commerce, such as websites leaving cookies on customer hard drives and applications that can be downloaded on customer phones, may be considered to create something akin to a physical presence in a taxing state.
Given the Court's conclusion that “physical presence is not necessary to create substantial nexus”, the Wayfair decision could impact other state taxes, such as state income or franchise taxes, for companies conducting business activities in a state without necessarily having a physical presence.
For example, even prior to Wayfair, many state and Federal courts have taken the position that the physical presence standard does not apply for purposes of state income taxes. Many states have been emboldened to enact “factor presence” laws tied to sales, property or payroll in their state. Wayfair decision type states have attempted to subject companies to their state tax regime if they are doing business in their state even without physical presence.
The Court has declined to hear challenges to economic nexus laws for state income tax filing purposes. With the test announced in Wayfair, more states may enact aggressive legislation. Effects are likely to be especially pronounced in the handful of states that have taken the position that physical presence is not necessary for the state to assert income tax nexus against a company doing business in their state. Physical presence is not required to establish nexus with Nebraska. [Neb. Rev. Stat. §77-2734.04(5)].
We believe the Wayfair decision may empower states to not only enact legislation, but also pursue audit and collection activities against companies doing business in their state that currently are not subject to their state taxing regime.
Therefore, we believe it is necessary for companies that have customers or clients in multiple states to actively review their state filing positions in light of the recent Wayfair decision.
Please contact us if you need assistance with such a review or have questions about the Wayfair alert.
Congress is currently working on a massive tax reform proposal that could change many aspects of income tax law. It is uncertain what the final version of the bill will look like or if anything will get passed at all, but there are still income tax planning opportunities available under the current law. We highlight below a few strategies you may want to consider before the end of the year to reduce your 2017 taxes.
- Postpone income until 2018 and accelerate deductions into 2017 including:
- Maximize your charitable contributions including prepayment of athletic event seating donations.
- Prepay real estate taxes, state income taxes and miscellaneous itemized deductions (e.g., investment fees) unless you are in an alternative minimum tax situation.
- Defer any year-end bonuses.
- If you have a health savings account (HSA), maximize your contributions for 2017 in December.
- For individuals age 70 ½ or older, consider making charitable gifts up to $100,000 per person directly from your individual retirement account (IRA).
- Maximize your retirement plan contributions.
- Reduce potential capital gains by selling securities in a loss position.
We also want to alert you to some new rules that will affect our partnership and LLC clients.
- Beginning with partnership tax years starting on or after January 1, 2018, the partnership will be liable for any assessments levied on prior years’ tax returns.
- This will eliminate the need to proceed against individual partners.
- Current partners will be held responsible for tax liabilities of prior partners.
- The “tax matters partner” will be replaced with a “partnership representative.”
- This person will have complete authority to act on behalf of the partnership and the partners when dealing with the IRS.
- This person also has the authority to make various elections.
In light of these changes, we recommend you review your partnership or LLC agreement with your attorney as soon as possible to ensure it addresses the significant changes required.
If you would like our assistance with any of your year-end planning questions, please let us know.