Author: Alexis Long

Categories
Financial News

Restaurant Revitalization Fund | What’s in It for Restaurants

By BDO Alliance | Alicia Huffman, Ron Reed Jr, Adam Berebitsky

The American Rescue Plan Act of 2021, the $1.9 trillion COVID relief package signed into law by President Joe Biden on March 11, 2021, establishes the Restaurant Revitalization Fund (RRF) and provides for several additional benefits for restaurants listed below.

The RRF, which will be administered by the Small Business Administration (SBA), is broadly applicable and is intended to provide relief to various types of food establishments (we use the general term “restaurants” to refer to these businesses).

The RRF will provide $28.6 billion in relief grants to small to midsized restaurants that have been struggling as a result of the COVID-19 pandemic. Of the total $28.6 billion, $23.6 billion is available for the SBA to award in an equitable manner to different-sized businesses based on annual gross receipts. The remaining $5 billion is available to businesses with gross receipts of $500,000 or less during 2019.

Eligible restaurants may receive a tax-free federal grant equal to the amount of its pandemic-related revenue loss (reduced by any amounts received from PPP first and second draw loans in 2020 and 2021). The grant amount is capped at $10 million per business with a $5 million limit per physical location and may be used to cover eligible expenses retroactively to February 15, 2020.

Estimated Timeline

Although details of the application release date are presently unknown, the National Restaurant Association shared an expected timeline on their March 15, 2021 webinar regarding the RRF:

  • April 2021 – SBA releases rules and applications
  • May/June – 21-day priority period for women-, veteran-, and disadvantaged/minority-owned businesses
  • May/June – RRF open for all eligible restaurants

If the RRF funds have not been exhausted after 60 days, the SBA will have discretion to administer grants to eligible businesses without regard to annual gross receipts.

Are You Eligible?

To be eligible, the applicant must not own or operate more than 20 locations in total as of March 13, 2020, including any affiliated business, regardless of ownership type of the locations and whether those locations do business under the same or multiple names. By definition, an affiliated business is one that has a right to a profit distribution or an equity interest of 50% or more, or contractual authority to control the direction of the business in existence as of March 13, 2020.

Eligible entities are restaurants; food stands; food trucks; food carts; caterers; saloons; inns; taverns; bars; lounges; brewpubs; tasting rooms; taprooms; licensed facilities or premises of a beverage alcohol producer where the public may taste, sample or purchase products; or other similar places of business where patrons go for the primary purpose of being served food or drink.

Publicly traded companies, state or local government-operated businesses, entities that have more than 20 locations (as described above) and restaurants that have a pending application for, or that have received a grant under the shuttered venue operator grant program are not eligible for the RRF grant.

Grant Calculation

An eligible business can receive a grant equal to its pandemic-related revenue loss. The pandemic-related revenue loss is the difference between the business’s 2020 gross receipts and its 2019 gross receipts, reduced by any amounts received from PPP loans.

Eligible businesses that began operations in 2019 will need to annualize their average monthly gross receipts for 2019 and compare them to their annualized monthly gross receipts for 2020.

Eligible businesses that began operations in 2020 will calculate their grant amount by taking the difference between qualified grant expenses and their 2020 gross receipts.

If an eligible business is not yet in operation as of the application date but has incurred eligible expenses, then its grant will be equal to those expenses.

Eligible Expenses

A qualifying RRF grant recipient may use the funds for specified expenses, including:

  • Payroll (not including wages used for the Employee Retention Credit (ERC))
  • Principal or interest on mortgage obligations
  • Rent
  • Utilities
  • Maintenance, including construction to accommodate outdoor seating
  • Personal protective equipment, supplies and cleaning materials
  • Normal food and beverage inventory
  • Certain covered supplier costs
  • Covered operational expenses
  • Paid sick leave
  • Any other expenses the SBA determines to be essential to maintaining operations incurred from February 15, 2020 to December 31, 2021 are eligible

Additional Benefits to the Restaurant Industry in the American Rescue Plan

  • The ERC has been extended through December 2021.
  • The ERC has also been extended to new businesses that started after February 15, 2020 with average annual receipts of under $1 million. For these businesses, the credit cannot exceed $50,000 per quarter.
  • The Families First Coronavirus Response Act Paid Sick and Family Leave tax credit is extended beginning April 2021 through September 30, 2021.

Contact your ATA representative to discuss this assistance relief further. Visit SBA’s website for more information on the Restaurant Revitalization Fund.

This article originally appeared in BDO USA, LLP’s “Selection” blog (Spring 2021). Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com

Categories
Construction Helpful Articles Memphis, TN Nashville, TN

The Post-Covid Urban Revival: What’s Next For Big Cities?

Today, more than four out of five people in the United States live in cities and urban areas. Over the country’s long history of urbanization, cities like New York, San Francisco and Chicago swelled not only in population, but also in their prominence as American cultural icons. That cachet helped these metropolises thrive even when economic conditions were challenging elsewhere, providing landlords and other commercial real estate stakeholders with a level of stability and security smaller cities couldn’t match.

In recent years, though, these storied cities started falling victim to their own success. Unebbing demand for limited residential and commercial space led to skyrocketing costs, and near-constant expansions and enhancements to government services necessitated new fees and higher taxes. At the same time, the emergence of remote working meant that people didn’t have to move to these uber-expensive cities to work for the companies that called them home. New technology, combined with cost of living and quality of life concerns, chipped away at that old preeminence, and businesses and individuals started choosing Atlanta over New York, Denver over Chicago and Austin over San Francisco. A Brookings Institution study found that population growth in the country’s largest urban areas dropped by almost half through the 2010s.

Download the below article to find out how the COVID-19 pandemic amplified some of the disadvantages of living and working in densely populated cities and accelerated migration to smaller cities and more rural areas.

Categories
Tax

Tax Advantages of Hiring Your Child at Your Small Business

As a business owner, you should be aware that you can save family income and payroll taxes by putting your child on the payroll. Here are some considerations.

Shifting business earnings

You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.

For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $12,550 standard deduction for 2021 to shelter his earnings. Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10% rate, instead of being taxed at your higher rate.

Income tax withholding

Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year. However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,100 for 2021 (and includes more than $350 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.  Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.

Social Security tax savings

If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent isn’t considered employment for FICA tax purposes. A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.

Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.

Retirement benefits

Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $58,000 for 2021).

Contact your ATA representative if you have any questions about these rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too. © 2021

Categories
Financial Institutions and Banking

Bank Wire

CAA provides COVID-19 relief for banks

The Consolidated Appropriations Act (CAA), passed in late December 2020, contains a variety of COVID-19 relief provisions, including a second round of stimulus payments to individuals, enhanced unemployment benefits, and expansion of the Paycheck Protection Program (PPP). The act also offers some bank-specific relief. For example, it:

  • Delays the compliance deadline for the current expected credit loss (CECL) accounting standard until the earlier of 1) the first day of the bank’s fiscal year that begins after termination of the COVID-19 public health emergency, or 2) January 1, 2022; and
  • Extends the time during which banks may elect to temporarily suspend troubled debt restructuring (TDR) accounting for certain COVID-19-related loan modifications until the earlier of 1) 60 days after the public health emergency ends, or 2) January 1, 2022.

It also establishes a $9 billion fund to provide low-cost, long-term capital investments to qualifying banks. To qualify, they need to be community development financial institutions or minority depository institutions.

SBA guidance on PPP loans

After the CAA authorized “second-draw” forgivable PPP loans, the Small Business Administration (SBA) and Treasury Department issued rules for these loans. Among other things, the rules clarify that: the SBA will guarantee 100% of second-draw loans; no collateral or personal guarantees will be required; the interest rate will be 1%, calculated on a noncompounding, nonadjustable basis; maturity will be five years; and all loans will be processed by lenders under delegated authority.

It may rely on borrower certifications to determine the borrower’s eligibility and use of loan proceeds. (Note: The borrower must substantiate compliance with eligibility requirements by the time they submit a forgiveness application.)

Simplified PPP forgiveness application

The CAA simplifies the forgiveness application for businesses that borrow less than $150,000. These borrowers will submit a one-page application that includes the total loan value, the estimated portion of the loan spent on payroll, and the number of employees retained as a result.

Fintech partnership guide

Community banks are increasingly partnering with “fintech” companies to offer their customers access to the latest banking technology tools. But these partnerships are fraught with practical and regulatory compliance challenges. Recently, a member of the Federal Reserve Board announced that the Fed would work with other banking agencies to develop a fintech vendor due diligence guide for community banks as well as enhanced interagency guidance for third-party risk management. This guidance is expected to “eliminate the need for community banks to navigate multiple supervisory guidance documents on the same issue” and “enhance clarity on supervisory expectations for community bank partnerships with fintech companies.”

 

©2021

 

Categories
Financial Institutions and Banking

Online Account Opening: Managing the Risk

In recent years, banking customers have increasingly relied on electronic banking tools to open accounts, make deposits, transfer funds and otherwise manage their money — and the COVID-19 pandemic has accelerated this trend. All of these activities increase an institution’s Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance risks, particularly the opening of online accounts. So, while offering these conveniences can be attractive to current and prospective customers, you’ll need to implement policies, procedures and controls to mitigate the risk.

Recognizing risk factors

In its BSA/AML Manual, the Federal Financial Institutions Examination Council (FFIEC) emphasizes that accounts opened online — that is, without face-to-face contact — pose a greater risk for money laundering and terrorist financing because:

  • It’s more difficult to positively verify the applicant’s identity,
  • The customer may be outside the bank’s targeted geographic area or country,
  • Customers — particularly those with ill intent — may view online transactions as less transparent,
  • Transactions are instantaneous, and
  • Online accounts may be used by a “front” company or unknown third party.

In light of this enhanced risk, the FFIEC cautions banks to consider how an account was opened as a factor in determining the appropriate level of account monitoring.

Minimizing risks

To reduce the risks associated with online account opening, banks should develop an effective customer identification program (CIP) and ongoing customer due diligence (CDD) processes as part of a robust, risk-based BSA/AML compliance strategy.

To comply with CIP requirements, an individual opening an account must provide, at a minimum, his or her name, date of birth, address and taxpayer identification number (or other acceptable identification number for non-U.S. persons). In addition, if an account is opened for a legal entity — such as a corporation, partnership or LLC — the bank must verify the identities of the entity’s beneficial owners.

Verifying applicants’ identities

A significant challenge in electronic banking is verifying the identity of someone opening an account online (including a person opening an account on behalf of a legal entity). For in-person transactions, bank personnel often examine identification documents, such as driver’s licenses or passports, but this may not be possible for accounts opened online.

For online transactions, banks should develop reliable nondocumentary methods of verifying an individual’s identity. These may include comparing the information provided at account opening with information from a credit reporting agency, public database or other source. They also may include contacting the person (for example, calling them at work or sending them a piece of mail they must respond to), checking references with other financial institutions, obtaining a financial statement, or asking “out of wallet” questions, such as previous addresses, former employers or mortgage loan amounts.

The bank should develop alternate or backup verification methods for situations in which one of these methods fails. For example, if there’s an identification mismatch, the applicant may be required to bring identification in person to a bank branch.

In addition, as with accounts opened in person, the bank should check the person’s name against lists of known or suspected terrorists or terrorist organizations maintained by the Office of Foreign Assets Control. It’s also a good idea, for ongoing monitoring and CDD purposes, to collect information about the purpose of the account, the occupations of the account owners and the source of funds.

Due diligence

After an account is opened online and the applicant’s identity is verified, you’ll want to conduct ongoing customer due diligence. That means, among other things, monitoring account activity for unusual or suspicious activities.

©2021

Categories
Financial Institutions and Banking

Should your bank use third-party vendors?

In the uncertain economy resulting from the COVID-19 pandemic, community banks continue to streamline operations, improve efficiency and eliminate waste so that they can survive — and thrive. To help in this process, they’re increasingly turning to outside vendors to provide specialized services beyond the bank’s usual offerings. If your bank uses third-party vendors, though, you need to be aware of the ins and outs.

Evaluate liability

Outsourcing to a third party doesn’t relieve a bank from responsibility and legal liability for compliance or consumer protection issues. And as banks and vendors increasingly rely on evolving technologies to deliver products and services, their exposure to ever-changing cybersecurity risks demands constant vigilance.

Even if you have a solid vendor risk management program in place, you’ll need to review it periodically. Banking regulators expect your program to be “risk-based” — that is, the level of oversight and controls should be commensurate with the level of risk an outsourcing activity entails. But here’s an important caveat: That risk can change over time. Some vendors, such as appraisal and loan collection companies, have traditionally been viewed as relatively low risk. But in today’s increasingly cloud-based world, any vendor with access to your IT network or sensitive nonpublic customer data poses a substantial risk.

Assess risk

Here are some ways to review your vendor risk management program:

Conduct a risk assessment. Determine whether outsourcing a particular activity is consistent with your strategic plan. Evaluate the benefits and risks of outsourcing that activity as well as the service provider risk. This assessment should be updated periodically.

Generally, examiners expect a bank’s vendor management policies to be appropriate in light of the institution’s size and complexity. They also expect more rigorous oversight of critical activities, such as payments, clearing, settlements, custody, IT or other activities that could have a significant impact on customers — or could cause significant harm to the bank if the vendor fails to perform.

Thoroughly vet your service providers. Review each provider’s business background, reputation and strategy, financial performance operations, and internal controls. The depth and formality of due diligence depends on the risks associated with the outsourcing relationship and your familiarity with the vendor. If your agreement allows the provider to outsource some or all of its services to subcontractors, be sure that the provider has properly vetted each subcontractor. The same contractual provisions must apply to subcontractors and the provider should be contractually accountable for the subcontractor’s services.

Diversify vendors. Using a single vendor may provide cost savings and simplify the oversight process, but diversification of vendors can significantly reduce your outsourcing risks, particularly if a vendor has an especially long disaster recovery timeframe.

Ensure contracts clearly define the parties’ rights and responsibilities. In addition to costs, deliverables, service levels, termination, dispute resolution and other terms of the outsourcing relationship, key provisions include compliance with applicable laws, regulations and regulatory guidance; information security; cybersecurity; ability to subcontract services; right to audit; establishment and monitoring of performance standards; confidentiality (in the case of access to sensitive information); ownership of intellectual property; insurance, indemnification and business continuity; and disaster recovery.

Review vendors’ disaster recovery and business continuity plans. Be sure that these plans align with your own and are reviewed at least annually, and that vendors have the ability to implement their plans if necessary.

Monitor vendor performance. Monitor vendors to ensure they’re delivering the expected quality and quantity of services and to assess their financial strength and security controls. It’s particularly important to closely monitor and control external network connections, given the potential cybersecurity risks.

Conduct independent reviews. Banking regulators recommend periodic independent reviews of your risk management processes to help you assess whether they align with the bank’s strategy and effectively manage risks posed by third-party relationships. The frequency of these reviews depends on the vendor’s risk-level assessment, and they may be conducted by the bank’s internal auditor or an independent third party. The results should be reported to the board of directors.

Stay aware

Having a robust vendor risk management program in place at your bank is the key to benefiting from vendors’ specialized skills and abilities while avoiding legal and regulatory problems. We can help you stay on top of the latest regulations and rules pertaining to third-party vendor use.

©2021

Categories
Financial Institutions and Banking

5 Tips for Fair Lending Compliance

Community banks need to develop and follow fair lending practices; providing customers with nondiscriminatory access to credit is, of course, the right thing to do. What’s more, violations of fair lending laws and regulations can result in costly litigation and enforcement actions, hefty monetary penalties and serious reputational damage.

What are the laws?

The two primary fair lending laws are the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA). The FHA prohibits discrimination in residential real estate-related transactions based on race or color, national origin, religion, sex, familial status (for example, households with one or more children under 18, pregnant women, or people in the process of adopting or otherwise gaining custody of a child), or handicap.

Similarly, the ECOA prohibits discrimination in credit transactions based on race or color, national origin, religion, sex, marital status, age (assuming the applicant has the capacity to contract), an applicant’s receipt of income from a public assistance program, or an applicant’s good faith exercise of his or her rights under the Consumer Credit Protection Act.

The Home Mortgage Disclosure Act (HMDA) requires certain lenders to report information about mortgage loan activity, including the race, ethnicity and sex of applicants. Finally, the Community Reinvestment Act (CRA) provides incentives for banks to help meet their communities’ credit needs.

How can you comply?

Here are five tips for developing an effective compliance program:

  1. Conduct a risk assessment. Conduct a thorough assessment to identify your bank’s fair lending risks based on its size, location, customer demographics, product and service mix, and other factors. This assessment can pinpoint the bank’s most significant risks. It also can reveal weaknesses in the bank’s credit policies and procedures and other aspects of its credit operations. It’s particularly important to examine the bank’s management of risks associated with third parties, such as appraisers, aggregators, brokers and loan originators.
  2. Develop a written policy. A comprehensive written fair lending policy is key to help minimize your bank’s risks. And by demonstrating your commitment to fair lending, this document can go a long way toward mitigating the bank’s liability in the event of a violation. The policy should cover all of the bank’s products, services and credit operations and provide details about which practices are permissible and which aren’t.
  3. Analyze your data. Analyzing data about your lending and other credit decisions is important for two reasons: First, it’s the only way to determine whether disparities in access to credit exist for members of the various protected classes. These disparities don’t necessarily signal that unlawful discrimination is taking place — but gathering this data is the only way to make this determination.

Second, lending discrimination isn’t limited to disparate treatment of protected classes. Banks are potentially liable under the FHA and ECOA if their lending practices have a disparate impact on protected classes. For example, a policy of not making single-family mortgage loans under a specified dollar amount may disproportionately exclude certain low-income groups, even though the policy applies equally to all loan applicants. Banks can defend themselves against allegations of discrimination based on disparate impact by showing that the policy was justified by business necessity and that there was no alternative practice for achieving the same business objective without a disparate impact.

  1. Provide compliance training. Even the most thorough, well-designed policy won’t be worth the paper it’s printed on unless you provide fair lending compliance training for bank directors, management and all other relevant employees (and evaluate its effectiveness). Indeed, lack of training is a red flag for bank examiners. (See “Discrimination risk factors” at X.)
  2. Monitor compliance. You’ll need to monitor your bank’s compliance with fair lending laws and promptly address any violations or red flags you discover. You can do this by, among other things, performing regular data analysis, monitoring and managing consumer complaints, keeping an eye on third-party vendors, and conducting periodic independent audits of your compliance program (by your internal audit team or an outside consultant).

Reduce your risk

Fair lending laws are complex, and guidance can sometimes be ambiguous. Although a full discussion of the subject is beyond the scope of this article, the five tips outlined here are a good start in helping you evaluate the effectiveness of your fair lending compliance program.

Sidebar: Discrimination risk factors

A useful source of guidance on fair lending compliance is the Interagency Fair Lending Examination Procedures used by federal financial agencies. Among other things, the guidelines list the following compliance program discrimination risk factors:

  • Overall compliance record is weak,
  • Legally required monitoring information is nonexistent or incomplete,
  • Data or recordkeeping problems compromise the reliability of previous examination reviews,
  • Fair lending problems were previously found in one or more products or subsidiaries, and
  • The bank hasn’t updated compliance policies and procedures to reflect changes in law or in agency guidance.

If any of these problems are present in your institution, it’s important to rectify them as soon as possible. That way, you’ll avoid penalties and at the same time contribute to fair lending practices.

©2021

Categories
News

Biden Administration Unveils Tax Blueprint as Part of American Jobs Plan

The Biden administration on March 31, 2021, unveiled a jobs and infrastructure plan, the American Jobs Plan, to address the nation’s pressing infrastructure needs. The plan calls for about $2 trillion in spending over eight years. To pay for these expenditures, the plan also includes a proposed overhaul of the corporate tax system that would increase the corporate tax rate and the global minimum tax, eliminate federal tax benefits for fossil fuel companies, and strengthen enforcement against corporations.

While the proposed spending would be spread out over eight years, the tax increases would continue for 15 years.

Proposed Tax Measures–The White House released a Fact Sheet that lists the proposed tax measures under the plan:

Corporate Tax Rate — The Biden plan would increase the corporate tax rate from 21% to 28%. The rate had been reduced by the Trump administration from 35% to the current rate of 21%.

Global Intangible Low-Taxed Income (GILTI) Modifications – President Biden’s proposal would increase the effective rate on GILTI for U.S. corporations to 21% and calculate GILTI on a country-by-country basis. It also would eliminate the rule that allows U.S. companies to reduce their GILTI inclusion by 10 percent of their average adjusted basis of qualified business asset investments.

Encourage Other Countries to Adopt a Minimum Tax Regime – The plan proposes to encourage other countries to adopt strong minimum taxes on corporations, and deny deductions to foreign corporations on payments that could allow them to strip profits out of the U.S. if they are based in a country that does not adopt a strong minimum tax.

Inversions – In addition to enacting reforms that would remove incentives for U.S corporations to invert, President Biden’s proposal would make the inversion process more difficult.

Offshoring/Onshoring Jobs –President Biden’s reform proposal would deny companies deductions generated by offshoring jobs and would also propose a tax credit to support the onshoring of jobs.

Eliminate the Foreign Derived Intangible Income (FDII) deduction and Invest in R&D Incentives – The Biden plan proposes the complete elimination of the FDII deduction, which was introduced as part of the Tax Cuts and Jobs Act. The revenue collected as a result of the repeal of the FDII deduction would be used to expand other R&D investment incentives.

Minimum Tax on Book Income – The plan includes a proposed 15 percent minimum tax on U.S. corporations’ book income, which would apply only “to the very largest corporations,” according to the Fact Sheet.

Tax Preferences for Fossil Fuels – Biden’s plan would eliminate all subsidies, loopholes, and special foreign tax credits for the fossil fuel industry.

Enforcement – The plan calls for increased investment in enforcement so that the Internal Revenue Service has the necessary resources to effectively enforce the tax laws.

Categories
Financial News

Paycheck Protection Program (PPP) Extension Act of 2021

President Biden has signed the Paycheck Protection Program Extension Act of 2021, which extends the covered period for the PPP. Before the law was passed, the loan application deadline was set to expire on March 31, 2021.

The new law extends the deadline to May 31, 2021. In addition, the Small Business Administration (SBA) is given until June 30, 2021 to process loan applications submitted before June 1. The PPP permits the SBA to provide loans to qualified businesses affected by the pandemic. The loans must be used for payroll and certain other costs. Visit SBA’s website for more information. 

Contact us if you have questions about forgivable PPP loans or if you would like to apply for one so you can retain employees at your business. 

Categories
Helpful Articles Tax

Didn’t contribute to an IRA last year? There may still be time.

If you’re getting ready to file your 2020 tax return, and your tax bill is higher than you’d like, there might still be an opportunity to lower it. If you qualify, you can make a deductible contribution to a traditional IRA right up until the April 15, 2021 filing date and benefit from the tax savings on your 2020 return.

Who is eligible? You can make a deductible contribution to a traditional IRA if:

You (and your spouse) aren’t an active participant in an employer-sponsored retirement plan, or you (or your spouse) are an active participant in an employer plan, but your modified adjusted gross income (AGI) doesn’t exceed certain levels that vary from year-to-year by filing status.

For 2020, if you’re a joint tax return filer and you are covered by an employer plan, your deductible IRA contribution phases out over $104,000 to $124,000 of modified AGI. If you’re single or a head of household, the phaseout range is $65,000 to $75,000 for 2020. For married filing separately, the phaseout range is $0 to $10,000. For 2020, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with modified AGI of between $196,000 and $206,000.

Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59 1/2, unless one of several exceptions apply).

IRAs often are referred to as “traditional IRAs” to differentiate them from Roth IRAs. You also have until April 15 to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA aren’t. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you’re age 59 1/2 or older. (There are also income limits to contribute to a Roth IRA.)

Here are two other IRA strategies that may help you save tax.

1. Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2020? That may help you in the future when you take tax-free payouts from the account. However, the contribution isn’t deductible. If you realize you need the deduction that a traditional IRA contribution provides, you can change your mind and turn a Roth IRA contribution into a traditional IRA contribution via the “recharacterization” mechanism. The traditional IRA deduction is then yours if you meet the requirements described above.

2. Make a deductible IRA contribution, even if you don’t work. In general, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner and you are a homemaker. In this case, you may be able to take advantage of a spousal IRA. What’s the contribution limit? For 2020 if you’re eligible, you can make a deductible traditional IRA contribution of up to $6,000 ($7,000 if you’re 50 or over).

In addition, small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for their returns, including extensions. For 2020, the maximum contribution you can make to a SEP is $57,000.

If you want more information about IRAs or SEPs, contact one of our partners or ask about it when we’re preparing your tax return. We want to help you save the maximum tax-advantaged amount for retirement. © 2021