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2020 Business Tax Planning
Month: November 2020
Categories
Backup Withholding
As part of National Small Business Week (May 5-11), the IRS issued a reminder about a change in backup withholding. Under the Tax Cuts and Jobs Act, the backup withholding tax rate dropped from 28% to 24%, effective 1/1/18.
Backup withholding applies in various situations, including when a taxpayer fails to supply a correct taxpayer identification number (TIN) to a payer. Usually, a TIN is a Social Security number, but in some cases, it can be an employer identification number, individual taxpayer identification number or adoption taxpayer identification number. Backup withholding also applies when a taxpayer underreported interest or dividend income on a federal tax return.
What’s happening with deductions in 2020?
The standard deduction has once again been increased for inflation. The 2020 amounts for separate filers is $12,400 and for joint filers is $24,800. Itemized deductions are more beneficial if taxpayers ‘bunch’ deductions into one year. The itemized deductions that may be able to be shifted from year-to-year are real estate taxes, state income tax estimates, and charitable contributions. An example of this would be paying your 2020 and 2021 real estate taxes in the same year. This bunching strategy needs to be discussed with your tax advisor to be most beneficial. Also need to remember there is a $10,000 cap on the amount of property and income taxes you deduct.
If you don’t itemize deductions, normally you can’t deduct charitable donations. But, the CARES Act allows taxpayers who claim the standard deduction to deduct up to $300 of cash donations to qualified charities in 2020.
Here’s a Tip: If you know you’re not going to have more than the standard deduction, then don’t worry about gathering the itemized deduction documentation and turning them into your CPA.
As a reminder, Itemized deductions consist of the following: medical expenses, sales and real estate taxes, mortgage interest, charitable contributions. Talk to your CPA if you have any questions on what may qualify.
-Single Standard Deduction $12,400
-Married Filing Jointly Deduction $24,800
Tax expert, Abby Norville, CPA, gives a timely overview on year-end tax planning for deductions. Watch the video to learn more on key information for itemized deductions.
Portability allows a surviving spouse to apply a deceased spouse’s unused federal gift and estate tax exemption amount toward his or her own transfers during life or at death. For 2020, the exemption amount is $11.58 million, and the IRS just announced that that amount will increase to $11.7 million for 2021. To secure these benefits, however, the deceased spouse’s executor must have made a portability election on a timely filed estate tax return. The return is due nine months after death, with a six-month extension option. Unfortunately, estates that aren’t otherwise required to file a return (because they don’t meet the filing threshold) often miss the deadline.
Qualifying for an automatic extension. In 2017, the IRS made it easier for estates to obtain an extension of time to file a portability election. For all deaths after 2010, the IRS grants an automatic extension, provided: The deceased was a U.S. citizen or resident, The executor wasn’t otherwise required to file an estate tax return and didn’t file one by the deadline, The executor files a complete and properly prepared estate tax return on Form 706 within two years of the date of death, and The following language appears at the top of the return: “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER §2010(c)(5)(A).”
Other considerations. Bear in mind that portability isn’t always the best option. All relevant factors should be considered, including nontax reasons that might affect the distribution of assets under a will or living trust. For instance, a person may want to divide assets in other ways if matters are complicated by a divorce, a second marriage or unusual circumstances. Also, absent further legislation, the federal gift and estate tax exemption is slated to revert to pre-2018 levels after 2025. Portability continues, though, for those whose estates will no longer be fully sheltered, so additional planning should be considered.
Don’t miss the deadline. If your spouse predeceases you and you’d benefit from portability, be sure that your spouse’s estate files a portability election by the applicable deadline.
Contact us with any questions you have regarding portability.
Categories
Business costs and tax deductions
Generally, a taxpayer can deduct costs incurred in the course of operating a business if the costs can be proven. This includes costs for “listed property” (property used for transportation, entertainment or recreation). To prove business use of listed property, taxpayers must keep adequate records of total use and business use, plus dates and the business purpose. One married couple purchased a yacht and an RV and contributed them to a marina they owned. They deducted depreciation for both on their tax return, but the IRS denied the deduction. The 10th Circuit Court of Appeals agreed, noting that records didn’t prove the vehicles were used in the marina business. Discuss business costs and tax deductions with one of our experts.
Cash flow is a top concern for most businesses today. Cash flow forecasts can help you predict potential shortfalls and proactively address working capital gaps. They can also help avoid late payments, identify late-paying customers and find alternative sources of funding when cash is tight. To keep your company’s cash flow positive, consider applying these four best practices.
- Identify peak needs. Many businesses are cyclical, and their cash flow needs may vary by month or season. Trouble can arise when an annual budget doesn’t reflect, for example, three months of peak production in the summer to fill holiday orders followed by a return to normal production in the fall. For seasonal operations — such as homebuilders, farms, landscaping companies, recreational facilities and many nonprofits — using a one-size-fits-all approach can throw budgets off, sometimes dramatically. It’s critical to identify peak sales and production times, forecast your cash flow needs and plan accordingly.
- Account for everything. Effective cash flow management requires anticipating and capturing every expense and incoming payment, as well as — to the greatest extent possible — the exact timing of each payable and receivable. But pinpointing exact costs and expenditures for every day of the week can be challenging. Companies can face an array of additional costs, overruns and payment delays. Although inventorying all possible expenses can be a tedious and time-consuming exercise, it can help avoid problems down the road.
- Seek sources of contingency funding. As your business expands or contracts, a dedicated line of credit with a bank can help meet your cash flow needs, including any periodic cash shortages. Interest rates on these credit lines can be comparatively high compared to other types of loans. So, lines of credit typically are used to cover only short-term operational costs, such as payroll and supplies. They also may require significant collateral and personal guarantees from the company’s owners.
- Identify potential obstacles. For most companies, the biggest cash flow obstacle is slow collections from customers. Your business should invoice customers in a timely manner and offer easy, convenient ways for customers to pay (such as online bill pay). For new customers, it’s important to perform a thorough credit check to avoid delayed payments and write-offs. Another common obstacle is poor resource management. Redundant machinery, misguided investments and oversize offices are just a few examples of poorly managed expenses and overhead that can negatively affect cash flow.
Adjusting as you grow and adapt your company’s cash flow needs today likely aren’t what they were three years ago — or even six months ago. And they’ll probably change as you continue to adjust to the new normal. That’s why it’s important to make cash flow forecasting an integral part of your overall business planning. We can help. Contact us at www.ata.net.