Category Archives: Blog

Business Provisions of the Consolidated Appropriations Act 2021

January 9, 2021

On December 27, 2020 the President signed into law the 5,600 page Consolidated Appropriations Act (CAA), 2021. Within the CAA there are two COVID related bills, the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR). These bills contain many tax and non-tax related provisions. This update will focus on the some of the business tax provisions.

Taxation of Forgiven PPP Loans and Other CARES Act Financial Assistance

The bill specifically exempts the money received from PPP and EIDL loans as well as certain other repayment assistance from taxation. It also specifically allows for expenses paid for with the above mentioned assistance payments to be deductible. This overrules the earlier IRS ruling that the expenses would not be deductible. This applies for both round one and round two PPP funds.

PPP Round Two

The bill creates a “second draw” of PPP loans. To be eligible for the second draw a business must have less than 300 employees and have a quarter over quarter reduction in revenue of 25% or greater when 2020 is compared to 2019. Said differently, the revenue for any 2020 quarter must be at least 25% lower than the same quarter for 2019. The eligible entity may be any business structure type, partnership, corporation, etc., including 501(c)(3) and 501(c)(6) nonprofit organizations.
The maximum loan amount for round two is 2.5 times 12 months of qualified payroll expenses, with a cap of two million dollars. Restaurants/bars will be able to apply for a maximum loan amount that is 3.5 times 12 months of qualified payroll expenses, with a cap of two million dollars.
As with round one there will be a 24 week period in which the funds must be spent on eligible expenses. However, the group of eligible expenses has been greatly expanded. The eligible expenses from round one – payroll cost, mortgage interest, rent, and utilities – are still eligible for this round. However, operation expenses, property damage costs, supplier costs and worker protection expenses are also now covered expenses. The broad categories of operation expenses and supplier costs cover most of the expenses required to operate a business.

PPP Forgiveness Applications

The new Act provides a simplified process to apply for forgiveness for loans under $150,000. The Small Business Administration (SBA) is working to finalize details on this new process.

Payroll Tax Credits

The employer credit for paid federal emergency sick and family leave and the employee retention payroll credits were both set to expire on December 31, 2020. The new Act extends the federal emergency paid sick and family leave credit until March 31, 2021, however after December 31, 2020 employers are no longer mandated to provide this leave but can voluntarily provide the leave. The employee retention credit is extended through June 30, 2021.

Business Meals

The bill also added an additional tax deduction for business related meals. The cost of business meals provided by a restaurant between 1/1/21 and 12/31/22 will be 100% deductible. This replaces and enhances the current 50% deductibility of the cost.

read more

Individual Provisions of the Consolidated Appropriations Act 2021

January 9, 2021

On December 27, 2020 the President signed into law the 5,600 page Consolidated Appropriations Act (CAA), 2021. Within the CAA there are two COVID related bills, the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR). These bills contain many tax and non-tax related items. This update will focus on the some of the individual tax provisions.

New Stimulus Payments

The COVIDTRA portion of the Act includes an additional stimulus payment for individuals. Individual taxpayers will receive recovery rebates (stimulus payments) in the amount of $600 per taxpayer ($1,200 married filing jointly) as well as $600 per qualifying child. These payments are advances on 2020 tax credits. Eligibility will be determined based on 2019 adjusted gross income (AGI). The credit begins to phase out starting at AGI of $75,000 for single filers, $112,500 for heads of household, and $150,000 for joint filers. As done with the previous stimulus payment, funds will be received either via direct deposit or paper check.

Charitable Contributions

The CARES act that was passed in March of 2020 offers enhanced tax incentives for making charitable contributions for the 2020 tax year. This includes a $300 above-the-line deduction for individuals that do not itemize as well as the ability to make cash contributions up to 100% of AGI for taxpayers that itemize. The TCDTR portion of the new bill extends both of these new provisions through 2021 and increases the 2021 deduction for married filing joint filers to $600.

Educator Expense Deduction

Eligible educators were previously allowed a $250 deduction for unreimbursed expenses for classroom materials, such as books, supplies, or other equipment. The COVIDTRA expands the deduction to include unreimbursed expenses for the cost of personal protective equipment, disinfectant and other supplies for the prevention of the spread of COVID-19. The new law will apply to expenses paid or incurred after March 12, 2020.

Child Tax (CTC) and Earned Income Tax (EIC) Credits

The child tax and earned income tax credits are based on earned income from wages, salaries, tips and other employee compensation. Under the new TCDTR for 2020 credit calculations, taxpayers may elect to substitute their 2019 earned income, if higher than 2020, for the calculation of these two credits.

Emergency Financial Aid Grants

Under the new Act, emergency financial aid grants previously authorized by the CARES Act will be excluded from the gross income of college and university students. This provision applies to grants made after March 26, 2020.

read more

Is a Roth IRA Conversion Right for You This Year?

December 21, 2020

The COVID-19 pandemic has been causing havoc in the global markets and the U.S. economy. In these uncertain times, it’s important to stay on top of your financial status, including taking measures to protect your retirement nest egg over the long term. This article discusses what to consider when determining whether a Roth IRA conversion makes financial sense.

Traditional vs. Roth

First, let’s review the key differences between traditional and Roth IRAs:

Traditional IRAs. Contributions to a traditional IRA may be wholly or partially tax-deductible. But deductions are phased out if these two conditions are met:

1. Your modified adjusted gross income (MAGI) exceeds a specified level, and
2. You (or your spouse if you’re married) are an active participant in an employer-sponsored retirement plan.

Therefore, depending on your situation, some or all of your traditional IRA may not reflect deductible contributions.

Traditional IRA distributions that are attributable to deductible contributions or growth in the account are taxable at ordinary income rates.

Roth IRAs. Contributions to a Roth are never tax-deductible, regardless of your MAGI (though your ability to contribute in a given year may be phased out if your MAGI exceeds certain limits).

Qualified distributions from a Roth IRA that’s been in existence for at least five years are 100% tax-free. For this purpose, qualified distributions include withdrawals:

• Made after age 59½,
• Made on account of death or disability, or
• Used to pay qualified first-time homebuyer expenses (up to a lifetime limit of $10,000).

Nonqualified Roth IRA distributions are taxed at ordinary income rates under special “ordering rules.” When you take a distribution, contributions are treated as coming out first, so this part is exempt from tax because the contributions weren’t deductible. This treatment is followed by conversion and rollover amounts and, finally, earnings. These ordering rules reduce any potential tax liability during the first five years of the account’s existence.

In other words, when you convert assets in a traditional IRA to a Roth, you’re usually doing it for the lure of tax-free payouts in the future. But a conversion isn’t a slam-dunk by any means.

Factors to Consider

Under prior law, you had until October 15 of the same year to reverse (or “recharacterize”) an ill-fated conversion. For example, a reversal might have been advised if you converted the account and then asset values subsequently declined. However, under the Tax Cuts and Jobs Act, for 2018 and beyond, you can no longer recharacterize a Roth IRA back into a traditional IRA.

So, it’s important to think through the details before you convert to a Roth IRA. Some of the questions to ask when deciding whether (and when) to make a conversion include:

How much tax will you owe? When you convert to a Roth IRA, you must pay tax on the funds transferred, just like a traditional IRA distribution. You might not want to convert if your account balance is high and you expect asset values to drop. Conversely, a declining value might encourage a conversion.

Do you have money to pay the conversion tax bill? If you don’t have enough cash on hand to cover the taxes owed on the conversion, you may have to dip into your retirement funds. For example, you might arrange to pay the tax out of the funds being converted. This will erode your nest egg, however. The more money you convert and the higher your tax bracket, the bigger the tax hit.

What’s your retirement horizon? Your stage of life can affect your decision. Typically, you wouldn’t convert a traditional IRA to a Roth IRA if you expect to soon retire and start drawing down on the account right away. Usually, the goal is to allow the funds to grow and compound over time without any tax erosion.

How do you expect your tax rate to change in retirement? If you anticipate being in a lower tax bracket when you retire than you’re in now, you may not want to convert — it might be easier to absorb tax on future distributions than it is to pay a conversion tax this year. On the other hand, if you expect to be in a higher tax bracket in retirement than you’re in now, a conversion now often makes sense, absent any other extenuating circumstances. To complicate matters, Congress could change tax rates in the future.

Will you have other sources of retirement income, besides your IRAs? If most of your retirement funds are invested in assets that would trigger taxes on distribution — such as growth stocks or a 401(k) plan — a Roth conversion may provide some flexibility later in life. It can help meet your lifestyle or estate planning objectives without triggering tax on every withdrawal. Because you can’t predict how the tax laws will change over time, it’s a good idea to build some tax diversification into your accounts.

Another important factor to consider is required minimum distributions (RMDs). While RMDs have been waived for 2020 due to the COVID-19 pandemic, normally with a traditional IRA, you must begin taking RMDs by April 1 of the year after the year you turn age 72. (This age was raised from age 70½ by the SECURE Act, effective for taxpayers who didn’t turn age 70½ before January 1, 2020 – that is, who were born after June 30, 1949.) For each subsequent tax year, an RMD must be made by December 31 of that year.
However, there are no mandatory lifetime distributions with a Roth IRA. This can help preserve wealth for your heirs.

A Common Misconception

Converting a traditional IRA to a Roth IRA isn’t an all-or-nothing deal. You can convert as much or as little of the money from your traditional IRA account as you like. So, you might decide to gradually convert your account to spread out the tax hit over several years.

A gradual conversion strategy can allow you to pay the conversion tax from money currently at your disposal instead of tapping into your retirement funds. As a result, your nest egg won’t be diluted by the amount you have to subtract to pay the tax.

Furthermore, if you convert a traditional IRA in stages, you may pay less tax overall because more of the transferred amount will be taxed at lower rates under the federal graduated income tax rate system.

What’s Right for You?

Please feel free to contact us before converting a traditional IRA to a Roth IRA. We can discuss the pros and cons, along with providing other retirement planning recommendations.

read more

Other Locations : Kansas   Oklahoma