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Retirement Plan Updates for 2020

Video Overview

CPA, Elizabeth Owen, gives an update on the SECURE Act and CARES Act related to retirement plans. Watch the video here.

 

The SECURE Act

The SECURE Act makes a variety of tax law changes related to retirement plans. Notably, it repeals the maximum age of 70 ½ for making traditional IRA contributions, and it increases the age for beginning required minimum distributions, or RMDs, from age 70 ½ to age 72, for taxpayers who didn’t turn age 70 ½ before January 1, 2020.

The CARES Act

In addition to the SECURE Act, the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, provides some temporary relief to retirement plan owners in response to the COVID-19 crisis. For owners who don’t need funds from their accounts this year, the act waives retirement plan required minimum distributions for 2020. For owners who need funds from their accounts to help them financially, the act waives the 10% early withdrawal penalty on COVID-19-related distributions up to $100,000.

Speak with your ATA tax advisor to learn how these acts may affect your retirement plan contributions or distributions. Click here to speak with one of our accounting professionals about your tax planning needs.

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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.
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What’s Next for a Stimulus Bill?

The Senate Republicans’ slimmed-down stimulus bill recently failed to materialize after receiving less than the 60 votes needed to move forward. The “skinny” stimulus bill, with a price tag of only $650 billion, was intended to be a way to quickly inject stimulus into the economy and bypass both the multi-trillion-dollar Republican HEALS Act and the Democratic HEROES Act.

The current stimulus limbo leaves millions of Americans in a position of uncertainty. Four main areas that the Senate bill intended to address but are now up in the air include a second round of stimulus checks and the impact on struggling tenants and homeowners, as well as the long-term unemployed.

Next Round of Stimulus Checks

The first stimulus bill, the CARES Act, sent more than $300 billion in stimulus checks to Americans back in March to help mitigate the effects of COVID-19 slowdowns. While this helped millions, many people’s jobs or businesses remain impaired due to the economic impact of the pandemic, and they are hoping for a second stimulus check to help them get by.

With the failure of the Senate bill and the stalemate in the House, the chances of a second round of checks continues to diminish. On the bright side, the U.S. Treasury noted it is ready to print and mail the checks as soon as something is authorized.

Troubled Tenants and Homeowners

The economic fallout from the pandemic placed many tenants and homeowners in the position of being evicted or foreclosed. The CARES Act from March placed a temporary moratorium on evictions and foreclosures, sparing millions. Following this measure, President Trump issued an executive order in August granting the CDC authority to cease evictions as a measure to prevent the spread of COVID-19. The CDC took this order and announced a stop to all evictions until the end of 2020.

For homeowners with federally backed mortgages, the CARES Act moratoriums on single-family foreclosures were also extended until the end of 2020. Moreover, many states passed laws protecting those without federally backed loans from foreclosure.

For both renters and homeowners, these protections will disappear once we enter 2021 unless the government steps in with new legislation or regulations. Keep in mind that for both renters and mortgage holders, payments are being deferred and not canceled – so ultimately, they will still need to make the payments.

Long-Term Unemployment

Millions remain unemployed due to the pandemic; without federal help, their unemployment benefits will expire soon. The CARES Act gave an additional 13 weeks of benefits on top of the initial 26 weeks of unemployment insurance benefits; however, for those impacted on the front-end of the pandemic, these extended benefits will expire at the end of November.

The Senate bill included $300 per week of benefits through the last week of 2020; however, with this failing and without additional aid to state funds, the long-term unemployed won’t have anything to rely on if Congress does nothing.

Conclusion

Democrats responded with a smaller version of their original second-round stimulus bill, coming in a price tag of $2.2 trillion, down from the original $3.4 trillion. This is likely too high a price tag still to garner Republican support. If nothing happens before the mid-October recess, then we will all be waiting until after the Nov. 3 election.

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IRS Mail Backlog

COVID-19 is causing operational delays for the IRS, as it has with many businesses. An IRS official recently acknowledged that the tax agency is experiencing delays in processing paper returns and other mail due to limited staffing. As of Oct. 2, around 5 million pieces of unopened mail (about half of which are tax returns) remain unopened and are stored at various IRS processing centers. This unopened mail backlog also consists of tax payments and taxpayer correspondence. The IRS said that it will “systemically abate” late-payment penalties for paper checks mailed by the extended July 15 due date, once it has processed all the backlogged mail. Learn more about IRS Operations during COVID-19 here.

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2020 ELECTION TAX WATCH: COMPARING CANDIDATES’ POTENTIAL TAX POLICIES

The U.S. presidential election is just over a month away, yet neither candidate has released a formal, detailed plan addressing his vision for the tax code. We can, however, gain a sense of how their approaches differ through casual mentions of some aspects of tax policy on the campaign trail.

Tax policy underpins business decisions and consumer behavior, so an understanding of the candidates’ more detailed vision for tax policy will be intrinsic to successfully navigating the economic downturn triggered by the pandemic. Savvy businesses and individuals should pay close attention to how any proposed policy may ultimately alter their total tax liability.

It’s also important to keep in mind the fundamental role of Congress in passing tax legislation.  Depending on the makeup of the White House, Senate, and House of Representatives, passing tax legislation may be challenging.  For example, if both the Senate and House are of the same party as the successful presidential candidate, any changes in tax law may still have to be passed through the budget reconciliation process, because 60 votes in the Senate generally would be needed to avoid using the reconciliation process (and it is very doubtful that there would be 60 members of the Senate of the same party). Both in 2017 and 2001, passing tax legislation through reconciliation meant that most of the changes were not permanent; that is, they expired within the 10-year budget window. If any of the White House, Senate, or House are of a majority party different than the others, the chances of passing and enacting any agreed-to tax legislation becomes more doubtful.

The following table contains side-by-side snapshots of current and potential future tax policies of the presidential candidates as of September 22, 2020, from what has been mentioned informally on the campaign trail.

 

Current Tax Law
(TCJA–present)
Biden’s stated goals
Trump’s stated goals
Corporate tax rates
and AMT
Corporations have a flat 21% tax rate and no corporate alternative minimum tax (AMT), which were both changed by the TCJA.
These do not expire.
Biden would raise the flat rate to the pre-TCJA level of 28% and reinstate the corporate AMT on profits of $100 million or more.
Trump has not announced changes and has no plans to reinstate a corporate AMT.
Capital gains and dividends
The top tax rate is 20% for income over $441,450 for individuals and $496,600 for married filing jointly. There is an additional 3.8% net investment income tax.
Biden would eliminate breaks for capital gains and dividends for income above $1 million. Instead, these would be taxed at ordinary rates.
Trump would reduce the capital gains tax rates, index capital gains for inflation and create a capital gains tax holiday that would eliminate capital gains taxes for a period of time TBD.
Payroll taxes
The 12.4% payroll tax is divided evenly between employers and employees and applies to the first $137,700 of an individual’s income.
Biden would maintain the 12.4% tax split between employers and employees and keep the $137,700 cap but would institute
the tax on earned income above $400,000. The gap between the two wage levels would gradually close with annual inflationary increases.
Trump issued an executive order to temporarily postpone social security tax for employees from Sept. 1 through Dec. 31, 2020.
He has indicated he would make this temporary reprieve permanent.
Estate taxes
The estate tax exemption for 2020is $11,580,000.  Transfers of appreciated property at death get a step-up in basis.
The exemption is scheduled to revert to pre-TCJA levels, or $5,800,000, in 2025.
Biden would maintain the 2025 reversion and eliminate the current step-up in basis on inherited assets.
Trump would push to extend the exemption and would not change the transfer of appreciated property step-up in basis.
Individual tax rates
The top marginal rate is 37% for income over $518,400 for individuals and $622,050 for married filing jointly. This was lowered from 39.6% pre-TCJA.
Biden would restore the 39.6% rate for taxable income above $400,000. This represents only the top rate.
Trump would keep the current status quo of 37%. In addition, he would enact a 10% rate cut for middle-class taxpayers, which would lower the 22% rate to 15%.
For 2020, the 22% rate applies to income over $40,125 for individuals and $80,250 for married filing jointly.
Individual tax credits
Currently, individuals can claim a maximum of $2,000 Child Tax Credit (CTC)plus a $500 dependent credit.
Individuals may claim a maximum dependent care credit of $600 ($1,200 for two or more children).
The CTC is scheduled to revert to pre-TCJA levels ($1,000) after 2025.
Biden would increase the CTC to $8,000 ($16,000
for two or more children).
Trump would extend the $2,000 CTC past 2025, however, he would also require social security numbers to be eligible to take any of these credits.
Education
Forgiven student loan debt is included in taxable income.
There is no tax credit for contributions to state-authorized organizations that sponsor scholarships.
Biden would exclude forgiven student loan
debt from taxable income.
Trump would provide a tax credit for individual and corporate donations to state-authorized organizations that sponsor scholarships.
Itemized deductions
For 2020, the standard deduction is $12,400 for single/married filing separately and $24,800 for married filing jointly.
After 2025, the standard deduction is scheduled to revert to pre-TCJA amounts, or $6,350 for single /married filing separately and $12,700 for married filing jointly.
The TCJA suspended the personal exemption and most individual deductions through 2025.
It also capped the SALT deduction at $10,000, which will remain in place until 2025, unless repealed.
Biden would enact a provision that would cap the tax benefit of itemized deductions at 28%.
SALT cap: Senate minority leader Charles Schumer has pledged to repeal the cap should Biden win in November (the House of Representatives has already passed legislation to repeal to the SALT cap).
Trump would extend beyond 2025 and make permanent the deductions established by the TCJA.

While the candidates’ tax policy plans are not yet publicly formalized, more details may be released as we approach election day. We will be updating election tax policy content as it becomes available.

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CARES Act Made Changes to Excess Business Losses

The Coronavirus Aid, Relief and Economic Security (CARES) Act made changes to excess business losses. This includes some changes that are retroactive and there may be opportunities for some businesses to file amended tax returns. If you hold an interest in a business, or may do so in the future, here is more information about the changes.

Deferral of the excess business loss limits

The Tax Cuts and Jobs Act (TCJA) provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year. The covered taxpayers are individuals, estates and trusts that own businesses directly or as partners in a partnership or shareholders in an S corporation. The $500,000 and $250,000 limits, which are adjusted for inflation for tax years beginning after calendar year 2018, were scheduled under the TCJA to apply to tax years beginning in calendar years 2018 through 2025.

 

But the CARES Act has retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025. The postponement means that you may be able to amend: Any filed 2018 tax returns that reflected a disallowed excess business loss (to allow the loss in 2018) and any filed 2019 tax returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover). Note that the excess business loss limits also don’t apply to tax years that begin in 2020.

Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment (see below).

Changes to the excess business loss limits

The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 TCJA. Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to employment aren’t taken into account in calculating an excess business loss. This means that excess business losses can’t shelter either net taxable investment income or net taxable employment income.

Be aware of that if you’re planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021. Another change provides that an excess business loss is taken into account in determining any NOL carryover but isn’t automatically carried forward to the next year. And a generally beneficial change states that excess business losses don’t include any deduction under the tax code provisions involving the NOL deduction or the qualified business income deduction that effectively reduces income taxes on many businesses. And because capital losses of non-corporations can’t offset ordinary income under the NOL rules: Capital loss deductions aren’t taken into account in computing the excess business loss and The amount of capital gain taken into account in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.

Contact your ATA representative with any questions or email info@atacpa.net regarding how the CARES Act may affect your business. © 2020

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What qualifies as a “coronavirus-related distribution” from a retirement plan?

As you may have heard, the Coronavirus Aid, Relief and Economic Security (CARES) Act allows “qualified” people to take certain “coronavirus-related distributions” from their retirement plans without paying tax. So how do you qualify? In other words, what’s a coronavirus-related distribution?

Early distribution basics

In general, if you withdraw money from an IRA or eligible retirement plan before you reach age 59½, you must pay a 10% early withdrawal tax. This is in addition to any tax you may owe on the income from the withdrawal. There are several exceptions to the general rule. For example, you don’t owe the additional 10% tax if you become totally and permanently disabled or if you use the money to pay qualified higher education costs or medical expenses.

New exception

Under the CARES Act, you can take up to $100,000 in coronavirus-related distributions made from an eligible retirement plan between January 1 and December 30, 2020. These coronavirus-related distributions aren’t subject to the 10% additional tax that otherwise generally applies to distributions made before you reach age 59½. What’s more, a coronavirus-related distribution can be included in income in installments over a three-year period, and you have three years to repay it to an IRA or plan. If you recontribute the distribution back into your IRA or plan within three years of the withdrawal date, you can treat the withdrawal and later recontribution as a totally tax-free rollover. In new guidance (Notice 2020-50) the IRS explains who qualifies to take a coronavirus-related distribution. A qualified individual is someone who: Is diagnosed (or whose spouse or dependent is diagnosed) with COVID-19 after taking a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or Experiences adverse financial consequences as a result of certain events.

To qualify under this test, the individual (or his or her spouse or member of his or her household sharing his or her principal residence) must: Be quarantined, be furloughed or laid off, or have work hours reduced due to COVID-19; Be unable to work due to a lack of childcare because of COVID-19; Experience a business that he or she owns or operates due to COVID-19 close or have reduced hours; Have pay or self-employment income reduced because of COVID-19; or Have a job offer rescinded or start date for a job delayed due to COVID-19.

Favorable rules

As you can see, the rules allow many people — but not everyone — to take retirement plan distributions under the new exception. If you decide to take advantage of it, be sure to keep good records to show that you qualify. Be careful: You’ll be taxed on the coronavirus-related distribution amount that you don’t recontribute within the three-year window. But you won’t have to worry about owing the 10% early withdrawal penalty if you’re under 59½. Other rules and restrictions apply. Contact us if you have questions or need assistance. © 2020

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Fortunate enough to get a PPP loan? What you need to know about certain deductions that aren’t allowed.

The IRS has issued guidance clarifying that certain deductions aren’t allowed if a business has received a Paycheck Protection Program (PPP) loan. Specifically, an expense isn’t deductible if both:

1. The payment of the expense results in forgiveness of a loan made under the PPP.

2. The income associated with the forgiveness is excluded from gross income under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

PPP Basics

The CARES Act allows a recipient of a PPP loan to use the proceeds to pay payroll costs, certain employee healthcare benefits, mortgage interest, rent, utilities and interest on other existing debt obligations. A recipient of a covered loan can receive forgiveness of the loan in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the loan’s origination date: 1) payroll costs, 2) interest on any covered mortgage obligation, 3) payment on any covered rent, and 4) covered utility payments. The law provides that any forgiven loan amount “shall be excluded from gross income.”

Deductible Expenses

So the question arises: If you pay for the above expenses with PPP funds, can you then deduct the expenses on your tax return? The tax code generally provides for a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Covered rent obligations, covered utility payments, and payroll costs consisting of wages and benefits paid to employees comprise typical trade or business expenses for which a deduction generally is appropriate. The tax code also provides a deduction for certain interest paid or accrued during the taxable year on indebtedness, including interest paid or incurred on a mortgage obligation of a trade or business.

No Double Tax Benefit

In IRS Notice 2020-32, the IRS clarifies that no deduction is allowed for an expense that is otherwise deductible if payment of the expense results in forgiveness of a covered loan pursuant to the CARES Act and the income associated with the forgiveness is excluded from gross income under the law. The Notice states that “this treatment prevents a double tax benefit.”

To learn more about the Paycheck Protect Program and deductible expenses, contact our tax experts. © 2020

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The CARES Act liberalizes net operating losses

The Coronavirus Aid, Relief, and Economic Security (CARES) Act eliminates some of the tax-revenue-generating provisions included in a previous tax law. Here’s a look at how the rules for claiming certain tax losses have been modified to provide businesses with relief from the novel coronavirus (COVID-19) crisis.

NOL deductions

Basically, you may be able to benefit by carrying a net operating loss (NOL) into a different year — a year in which you have taxable income — and taking a deduction for it against that year’s income. The CARES Act includes favorable changes to the rules for deducting NOLs. First, it permanently eases the taxable income limitation on deductions. Under an unfavorable provision included in the Tax Cuts and Jobs Act (TCJA), an NOL arising in a tax year beginning in 2018 and later and carried over to a later tax year couldn’t offset more than 80% of the taxable income for the carryover year (the later tax year), calculated before the NOL deduction.

As explained below, under the TCJA, most NOLs arising in tax years ending after 2017 also couldn’t be carried back to earlier years and used to offset taxable income in those earlier years. These unfavorable changes to the NOL deduction rules were permanent — until now. For tax years beginning before 2021, the CARES Act removes the TCJA taxable income limitation on deductions for prior-year NOLs carried over into those years. So NOL carryovers into tax years beginning before 2021 can be used to fully offset taxable income for those years.

For tax years beginning after 2020, the CARES Act allows NOL deductions equal to the sum of: 100% of NOL carryovers from pre-2018 tax years, plus the lesser of 100% of NOL carryovers from post-2017 tax years, or 80% of remaining taxable income (if any) after deducting NOL carryovers from pre-2018 tax years. As you can see, this is a complex rule. But it’s more favorable than what the TCJA allowed and the change is permanent.

Carrybacks allowed for certain losses

Under another unfavorable TCJA provision, NOLs arising in tax years ending after 2017 generally couldn’t be carried back to earlier years and used to offset taxable income in those years. Instead, NOLs arising in tax years ending after 2017 could only be carried forward to later years. But they could be carried forward for an unlimited number of years. (There were exceptions to the general no-carryback rule for losses by farmers and property/casualty insurance companies). Under the CARES Act, NOLs that arise in tax years beginning in 2018 through 2020 can be carried back for five years. Important: If it’s beneficial, you can elect to waive the carryback privilege for an NOL and, instead, carry the NOL forward to future tax years.In addition, barring a further tax-law change, the no-carryback rule will come back for NOLs that arise in tax years beginning after 2020.

Past year opportunities

These favorable CARES Act changes may affect prior tax years for which you’ve already filed tax returns. To benefit from the changes, you may need to file an amended tax return. Have questions? Contact us on our leadership page.  © 2020

 

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Have tax questions related to COVID-19? Here are some answers!

The coronavirus (COVID-19) pandemic has affected many Americans’ finances. Here are some answers to questions you may have right now.

My employer closed the office and I’m working from home. Can I deduct any of the related expenses? Unfortunately, no. If you’re an employee who telecommutes, there are strict rules that govern whether you can deduct home office expenses. For 2018–2025 employee home office expenses aren’t deductible. (Starting in 2026, an employee may deduct home office expenses, within limits, if the office is for the convenience of his or her employer and certain requirements are met.) Be aware that these are the rules for employees. Business owners who work from home may qualify for home office deductions.

My son was laid off from his job and is receiving unemployment benefits. Are they taxable? Yes. Unemployment compensation is taxable for federal tax purposes. This includes your son’s state unemployment benefits plus the temporary $600 per week from the federal government. (Depending on the state he lives in, his benefits may be taxed for state tax purposes as well.) Your son can have tax withheld from unemployment benefits or make estimated tax payments to the IRS.

The value of my stock portfolio is currently down. If I sell a losing stock now, can I deduct the loss on my 2020 tax return? It depends. Let’s say you sell a losing stock this year but earlier this year, you sold stock shares at again. You have both a capital loss and a capital gain. Your capital gains and losses for the year must be netted against one another in a specific order, based on whether they’re short-term (held one year or less) or long-term (held for more than one year). If, after the netting, you have short-term or long-term losses (or both), you can use them to offset up to $3,000 ordinary income ($1,500 for married taxpayers filing separately). Any loss in excess of this limit is carried forward to later years, until all of it is either offset against capital gains or deducted against ordinary income in those years, subject to the $3,000 limit.

I know the tax filing deadline has been extended until July 15 this year. Does that mean I have more time to contribute to my IRA? Yes. You have until July 15 to contribute to an IRA for 2019. If you’re eligible, you can contribute up to $6,000 to an IRA, plus an extra $1,000 “catch-up” amount if you were age 50 or older on December 31, 2019.

What about making estimated payments for 2020? The 2020 estimated tax payment deadlines for the first quarter (due April 15) and the second quarter (due June 15) have been extended until July 15, 2020.

Need help? These are only some of the tax-related questions you may have related to COVID-19. Contact one of our experts if you have other questions or need more information about the topics discussed above or email info@atacpa.net. ©2020