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Helpful Articles Tax

Claiming Available Tax Credits for Businesses

The U.S. offers a variety of tax credits and other incentives to encourage employment and investment, often in targeted industries or areas such as innovation and technology, renewable energy and low-income or distressed communities. Many states and localities also offer tax incentives. Businesses should make sure they are claiming all available tax credits for 2021 and begin exploring new tax credit opportunities for 2022.

  • The Employee Retention Credit (ERC) is a refundable payroll tax credit for qualifying employers that have been significantly impacted by COVID-19. Employers that received a Paycheck Protection Program (PPP) loan can claim the ERC but the same wages cannot be used for both programs. The Infrastructure Investment and Jobs Act signed by President Biden on November 15, 2021, retroactively ends the ERC on September 30, 2021, for most employers.
  • Businesses that incur expenses related to qualified research and development (R&D) activities are eligible for the federal R&D credit.
  • Taxpayers that reinvest capital gains in Qualified Opportunity Zones may be able to defer the federal tax due on the capital gains. An additional 10% gain exclusion also may apply if the investment is made by December 31, 2021. The investment must be made within a certain period after the disposition giving rise to the gain.
  • The New Markets Tax Credit Program provides federally funded tax credits for approved investments in low-income communities that are made through certified “Community Development Entities.”
  • Other incentives for employers include the Work Opportunity Tax Credit, the Federal Empowerment Zone Credit, the Indian Employment Credit and credits for paid family and medical leave (FMLA).

There are several federal tax benefits available for investments to promote energy efficiency and sustainability initiatives. In addition, the Build Back Better Act proposes to extend and enhance certain green energy credits as well as introduce a variety of new incentives. The proposals also would introduce the ability for taxpayers to elect cash payments in lieu of certain credits and impose prevailing wage and apprenticeship requirements in the determination of certain credit amounts.

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Tax

Getting a new business off the ground: How start-up expenses are handled on your tax return

Despite the COVID-19 pandemic, government officials are seeing a large increase in the number of new businesses being launched. From June 2020 through June 2021, the U.S. Census Bureau reports that business applications are up 18.6%. The Bureau measures this by the number of businesses applying for an Employer Identification Number. Entrepreneurs often don’t know that many of the expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your federal tax bill.

How to treat expenses for tax purposes
If you’re starting or planning to launch a new business, keep these rules in mind:

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one. Under the tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t go very far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000.

Any remaining costs must be amortized over 180 months on a straight-line basis. No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to start earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

Eligible expenses
In general, start-up expenses are those you make to: investigate the creation or acquisition of a business, create a business, or engage in a for-profit activity in anticipation of that activity becoming an active business. To qualify for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service. To be eligible as an “organization expense,” an expense must be related to establishing a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the election described above. Record-keeping is critical.

To see how ATA can help grow your emerging business, visit our website. © 2021

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Helpful Articles Tax

Child Tax Credit Update

Recently, there were changes made to the child tax credit that will benefit many taxpayers. As part of the American Rescue Plan Act that was enacted in March 2021, the child tax credit:

  • Amount has increased for certain taxpayers
  • Is fully refundable (meaning you can receive it even if you don’t owe the IRS)
  • May be partially received in monthly payments

The new law also raised the age of qualifying children to 17 from 16, meaning some families will be able to take advantage of the credit longer.

The IRS will pay half the credit in the form of advance monthly payments beginning July 15. Taxpayers will then claim the other half when they file their 2021 income tax return.

Though these tax changes are temporary and only apply to the 2021 tax year, they may present important cashflow and financial planning opportunities today. It is also important to note that the monthly advance of the child tax credit is a significant change. The credit is normally part of your income tax return and would reduce your tax liability. The choice to have the child tax credit advanced will affect your refund or amount due when you file your return. To avoid any surprises, please contact ATA.

Qualifications and how much to expect

The child tax credit and advance payments are based on several factors, including the age of your children and your income.

  • The credit for children ages five and younger is up to $3,600 –– with up to $300 received in monthly payments.
  • The credit for children ages six to 17 is up to $3,000 –– with up to $250 received in monthly payments.

To qualify for the child tax credit monthly payments, you (and your spouse if you file a joint tax return) must have:

  • Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS your information using the non-filer tool
  • A main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year
  • A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number
  • Income less than certain limits

You can take full advantage of the credit if your income (specifically, your modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. The credit begins to phase out above those thresholds.

Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but may also choose to receive monthly payments.

Taxpayers generally won’t need to do anything to receive any advance payments as the IRS will use the information it has on file to start issuing the payments.

IRS’s child tax credit update portal

Using the IRS’s child tax credit and update portal, taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children. Parents may also use the online portal to elect out of the advance payments or check on the status of payments.

The IRS also has a non-filer portal to use for certain situations.

Let us help you.

With any tax law change, it’s important to revisit your full financial roadmap. We can help you determine how much credit you may be entitled to and whether advance payments are appropriate. How you choose to receive the credit (partially advanced via monthly payments or solely on your next year’s return) could have many impacts to your financial plans.

Please contact one of our offices today to discuss your specific situation. As always, planning ahead can help you maximize your family’s financial situation and position you for greater success.

*Article from AICPA

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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
Helpful Articles Tax

What are the tax implications of buying or selling a business?

Merger and acquisition activity in many industries slowed during 2020 due to COVID-19, but analysts expect it to improve in 2021 as the country comes out of the pandemic. If you are considering buying or selling a business, it’s important to understand the tax implications. 

Two ways to arrange a deal 

Under current tax law, a transaction can be structured in two ways: 

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes. The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive.

  1. C corporation pros: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The current law’s reduced individual federal tax rates have also made ownership interests in S corporations, partnerships and LLCs more attractive.

  1. S corporation pros: The passed-through income from these entities also is taxed at lower rates on a buyer’s personal tax return. However, current individual rate cuts are scheduled to expire at the end of 2025, and, depending on actions taken in Washington, they could be eliminated earlier. Keep in mind that President Biden has proposed increasing the tax rate on corporations to 28%. He has also proposed increasing the top individual income tax rate from 37% to 39.6%. With Democrats in control of the White House and Congress, business and individual tax changes are likely in the next year or two. 

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines, and it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

  1. Preferences of buyers. For several reasons, buyers usually prefer to buy assets rather than ownership interests. In general, a buyer’s primary goal is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after a transaction closes. A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.
  2. Preferences of sellers. In general, sellers prefer stock sales for tax and nontax reasons. One of their objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling assets. With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).
  3. Obtain professional advice. Be aware that other issues, such as employee benefits, can also cause tax issues in M&A transactions. Buying or selling a business may be the largest transaction you’ll ever make, so it’s important to seek professional assistance. After a transaction is complete, it may be too late to get the best tax results.

Get in touch with one of our partners about your upcoming business endeavors and the tax implications regarding your plans. © 2021

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News

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.