Mark Your Calendars!

With a new year, comes new deadlines to keep in mind. Mark your calendars for these important tax deadlines for the first quarter of 2020.

January 15 — Individual taxpayers’ final 2019 estimated tax payment is due.

January 31 — File 2019 Forms W-2 (“Wage and Tax Statement”) with the Social Security Administration and provide copies to your employees.

  • File 2019 Forms 1099-MISC (“Miscellaneous Income”) reporting nonemployee compensation payments with the IRS and provide copies to recipients.
  • Most employers must file Form 941 (“Employer’s Quarterly Federal Tax Return”) to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2019. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 11 to file the return. Employers who have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944 (“Employer’s Annual Federal Tax Return”).
  • File Form 940 (“Employer’s Annual Federal Unemployment [FUTA] Tax Return”) for 2019. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 11 to file the return.
  • File Form 943 (“Employer’s Annual Federal Tax Return for Agricultural Employees”) to report Social Security, Medicare and withheld income taxes for 2019. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 11 to file the return.
  • File Form 945 (“Annual Return of Withheld Federal Income Tax”) for 2019 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, etc. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 11 to file the return.

February 28 — File 2019 Form 1096, along with copies of information returns with the IRS.

March 16 — 2019 tax returns must be filed or extended for calendar-year partnerships and S corporations. If the return isn’t extended, this is also the last day for those types of entities to make 2019 contributions to pension and profit-sharing plans.

Every Business Owner Needs an Exit Strategy

As a business owner, you have to keep your eye on your company’s income and expenses and applicable tax breaks. But you also must look out for your own financial future. And that includes creating an exit strategy.


Buy-Sell Agreement

When a business has more than one owner, a buy-sell agreement can be a powerful tool. The agreement controls what happens to the business if a specified event occurs, such as an owner’s retirement, disability or death. A well-drafted agreement provides a ready market for the departing owner’s interest in the business and prescribes a method for setting a price for that interest. It also allows business continuity by preventing disagreements caused by new owners.

A key issue with any buy-sell agreement is providing the buyer(s) with a means of funding the purchase. Life or disability insurance often helps fulfill this need and can give rise to several tax issues and opportunities. One of the biggest advantages of life insurance as a funding method is that proceeds generally are excluded from the beneficiary’s taxable income, provided certain conditions are met.

Succession Within the Family

You can pass your business on to family members by giving them interests, selling them interests or doing some of each. Be sure to consider your income needs, the tax consequences, and how family members will feel about your choice.

Under the annual gift tax exclusion, you can currently gift up to $15,000 of ownership interests without using up any of your lifetime gift and estate tax exemption. Valuation discounts may further reduce the taxable value of the gift.

With the gift and estate tax exemption approximately doubled through 2025 ($11.4 million for 2019), gift and estate taxes may be less of a concern for some business owners. But others may want to make substantial transfers now to take maximum advantage of the high exemption. What’s right for you will depend on the value of your business and your timeline for transferring ownership.

Get Started Now

To be successful, your exit strategy will require planning well in advance of retirement or any other reason for ownership transition. Please contact us for help.

What to do About Fraudulent Credit or Debit Card Charges

It’s an awful feeling to learn that someone has used your credit or debit card to make fraudulent charges. Whether you’re liable typically depends on the type of card, whether you still possess the card and when you alert the issuer.


Credit Cards

If your card is lost or stolen and you report it to the card provider before your card is used in a fraudulent transaction, you can’t be held responsible for any unauthorized charges. If you report it after unauthorized charges have been made, you may be responsible for a specified dollar amount in charges. Some card issuers have decided not to hold their customers liable for any fraudulent charges regardless of when they notify the card company. And if your account number is stolen but not the actual card, your liability is $0. But either you or the card issuer must identify the fraudulent transactions for them to be removed.

When reporting a card loss or fraudulent transaction, contact the issuer via phone. Then follow up with a letter or email. This should include your account number, the date you noticed the card was missing (if applicable), and the date you initially reported the card loss or fraudulent transaction.

Debit Cards

If you report a missing debit card before any unauthorized transactions are made, you aren’t responsible for any unauthorized transactions. If you report a card loss within two business days after you learn of the loss, your maximum liability for unauthorized transactions is $50.

But if you report the card loss after two business days but within 60 calendar days of the date your statement showing an unauthorized transaction was mailed, liability can jump to $500. Finally, if you report the card loss more than 60 calendar days after your statement showing unauthorized transactions was mailed, you could be liable for all charges.

What if you notice an unauthorized debit card transaction on your statement, but your card is still in your possession? You have 60 calendar days after the statement showing the unauthorized transaction is mailed to report it and avoid liability.

Safest Choice

If you’re unsure about the specific conditions that trigger liability for unauthorized charges, contact your card issuer.

Determining an Employee’s “Home” for Reimbursement Purposes

Despite the prevalence of Web-based meetings, many of today’s businesses still have plenty of employees who travel. If you still have sales staff or other workers out on the road, and you’re reimbursing them on a tax-free basis for their travel expenses, it’s important for you as the employer to stay up to date on the rules that determine the location of a person’s tax home.


Principal Workplace

Internal Revenue Code Section 162 imposes three requirements for travel expense deductions: 1) The expenses must be ordinary and necessary, 2) they must be incurred while traveling away from the individual’s tax home, and 3) they must be incurred in pursuit of business.

An employee’s “tax home” is generally determined by where he or she works, not by where the employee lives. A tax home isn’t limited to one building or property; it includes the entire city or area in which the tax home is located. For employees with one regular workplace, their tax home is that workplace. If an employee has more than one regular workplace, his or her tax home is the employee’s principal workplace.

If an employee has no principal workplace, his or her tax home is the employee’s “regular place of abode in a real and substantial sense.” Those who have no principal workplace and no regular abode are considered “itinerants,” and their tax home is wherever they work. Itinerants can never get a travel expense deduction or qualify for tax-free reimbursement of their travel expenses because they’ll never be “away from home.”

Three-Factor Test

The IRS uses a three-factor test to determine whether an employee with no principal workplace has a tax home or is itinerant. The three factors involve whether the employee:

1. Performs a portion of his or her work near the claimed abode and uses that abode for lodging purposes when working there,
2. Must leave the abode to perform his or her job, which duplicates the employee’s living expenses incurred at the abode, and
3. Hasn’t abandoned the vicinity of his or her historical place of lodging and the abode; has marital or lineal family members currently residing at the abode; or uses the abode frequently for lodging.

If all three factors are satisfied, the individual’s abode is the tax home. If only two are satisfied, the answer will depend on the facts and circumstances, so you may need to consult with your tax advisors. If only one factor is satisfied, the employee is an itinerant.

The actual or expected length of an employee’s assignment to another location may affect whether the expenses are treated as incurred while “away from home.” Assignments of indefinite duration can change a taxpayer’s tax home, but temporary assignments won’t if the assignment is realistically expected to last, and in fact lasts, for one year or less.

Importance of Substantiation

Finally, keep in mind that travel expenses generally must be substantiated with information about the amount, time, place and business purpose of each expense. We can help you determine your employees’ respective tax homes and follow the rules.

Pump the Breaks Before Donating that Vehicle to Charity

Many people might consider donating their vehicles to charity at year end to start the new year. Why not get a fresh ride and a tax deduction, eh? Pump the brakes — this strategy doesn’t always work out as intended.

Donating an old car to a qualified charity may seem like a hassle-free way to dispose of an unneeded vehicle, satisfy your philanthropic desires and enjoy a tax deduction (provided you itemize). But in most cases, it’s not the most tax-efficient strategy. Generally, your deduction is limited to the actual price the charity receives when it sells the car.

You can deduct the vehicle’s fair market value (FMV) only if the charity 1) uses the vehicle for a significant charitable purpose, such as delivering meals to homebound seniors, 2) makes material improvements to the vehicle that go beyond cleaning and painting, or 3) disposes of the vehicle for less than FMV for a charitable purpose, such as selling it at a below-market price to a needy person.

If you decide to donate a car, be sure to comply with IRS substantiation and acknowledgment requirements. And watch out for disreputable car donation organizations that distribute only a fraction of what they take in to charity and, in some cases, aren’t even eligible to receive charitable gifts. We can help you double-check the idea before going through with it.

Five Last-Minute Tax Moves for Your Business

The days of the calendar year are vanishing quickly, but there still may be some last-minute strategies that business owners can use to lower their 2019 tax bills. Here are five to consider:

  1. Postpone invoices. If your business uses the cash method of accounting, and it would benefit from deferring income to next year, wait until early 2019 to send invoices. Accrual-basis businesses can defer recognition of certain advance payments for products to be delivered or services to be provided next year.
  2. Prepay expenses. A cash-basis business may be able to reduce its 2019 taxes by prepaying certain expenses — such as lease payments, insurance premiums, utility bills, office supplies and taxes — before the end of the year. Many expenses can be deducted up to 12 months in advance.
  3. Buy equipment. Take advantage of 100% bonus depreciation and Section 179 expensing to deduct the full cost of qualifying equipment or other fixed assets. Under the Tax Cuts and Jobs Act, bonus depreciation, like Sec. 179 expensing, is now available for both new and used assets. Keep in mind that, to deduct the expense on your 2019 return, the assets must be placed in service — not just purchased — by the end of the year.
  4. Contribute to retirement plans. If you’re self-employed or own a pass-through business — such as a partnership, limited liability company or S corporation — one of the best ways to reduce your 2019 tax bill is to increase deductible contributions to retirement plans. Usually, these contributions must be made by year end. But certain plans — such as SEP IRAs — allow your business to make 2019 contributions up until its tax return due date (including extensions).
  5. Qualify for the pass-through deduction. If your business is a sole proprietorship or pass-through entity, you may qualify for the pass-through deduction of up to 20% of qualified business income. But if your taxable income exceeds $160,700 ($321,400 for joint filers), certain limitations kick in that can reduce or even eliminate the deduction. One way to avoid these limitations is to reduce your income below the threshold — for example, by having your business increase its retirement plan contributions.

Most of these strategies are subject to various limitations and restrictions beyond what we’ve covered here, so please consult us before you implement them. We can evaluate your current tax liability and offer guidance based on your particular situation.

Year-End Tax and Financial To-Do List for Individuals

With the dawn of 2020 on the near horizon, here’s a quick list of tax and financial to-dos you should address before 2019 ends:


Check your Flexible Spending Account (FSA) balance. If you have an FSA for health care expenses, you need to incur qualifying expenses by December 31 to use up these funds or you’ll potentially lose them. (Some plans allow you to carry over up to $500 to the following year or give you a 2½-month grace period to incur qualifying expenses.) Use expiring FSA funds to pay for eyeglasses, dental work or eligible drugs or health products.

Max out tax-advantaged savings. Reduce your 2019 income by contributing to traditional IRAs, employer-sponsored retirement plans or Health Savings Accounts to the extent you’re eligible. (Certain vehicles, including traditional and SEP IRAs, allow you to deduct contributions on your 2019 return if they’re made by April 15, 2020.)

Take required minimum distributions (RMDs). If you’ve reached age 70½, you generally must take RMDs from IRAs or qualified employer-sponsored retirement plans before the end of the year to avoid a 50% penalty. If you turned 70½ this year, you have until April 1, 2020, to take your first RMD. But keep in mind that, if you defer your first distribution, you’ll have to take two next year.

Consider a qualified charitable distribution (QCD). If you’re 70½ or older and charitably inclined, a QCD allows you to transfer up to $100,000 tax-free directly from your IRA to a qualified charity and to apply the amount toward your RMD. This is a big advantage if you wouldn’t otherwise qualify for a charitable deduction (because you don’t itemize, for example).

Use it or lose it. Make the most of annual limits that don’t carry over from year to year, even if doing so won’t provide an income tax deduction. For example, if gift and estate taxes are a concern, make annual exclusion gifts up to $15,000 per recipient. If you have a Coverdell Education Savings Account, contribute the maximum amount you’re allowed.

Contribute to a Section 529 plan. Sec. 529 prepaid tuition or college savings plans aren’t subject to federal annual contribution limits and don’t provide a federal income tax deduction. But contributions may entitle you to a state income tax deduction (depending on your state and plan).

Review withholding. The IRS cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld because of changes under the Tax Cuts and Jobs Act. Use its withholding estimator (available at https://www.irs.gov/individuals/tax-withholding-estimator ) to review your situation.

If it looks like you could face underpayment penalties, increase withholding from your or your spouse’s wages for the remainder of the year. (Withholding, unlike estimated tax payments, is treated as if it were paid evenly over the year.)

For assistance with these and other year-end planning ideas, please contact us.

Holiday Hours

Our offices will be closed on Wednesday, December 25th for Christmas Day and Wednesday, January 1st for New Years Day so our employees can spend time with those they love.

We wish everyone a safe and happy Holiday season!

Asset Protection is Just as Important as Tax Planning

Like many financially savvy individuals, you’re probably already thinking about filing your tax return next year. But don’t overlook another critical and equally important aspect of financial planning: asset protection. Here are some fundamental strategies to consider.


Buy Liability Insurance

Liability insurance policies help protect your assets from the financial risks associated with personal liability that results from an adverse legal judgment. Auto and homeowner’s policies, for example, usually include some liability coverage. Increasing your liability coverage beyond the standard amounts will provide additional asset protection.

Personal liability umbrella insurance can give you even more liability coverage above the limits of your auto and homeowner’s policies. For instance, if you were sued for causing a car accident or found liable for injuries suffered by a visitor to your home, umbrella insurance could provide coverage up to the policy limits (such as $1 million).

Look to Statutory Protection

Federal or state law exempts certain kinds of property and assets from creditor liens. Thus, some assets you own may automatically be protected due to statutory guidelines. Qualified retirement plans are this type of asset, as are IRAs and 401(k) plans, life insurance proceeds and Section 529 college savings plans. But keep in mind that inherited assets may not have the same degree of protection.

The amount of home equity that’s protected (generally called the “homestead exemption”) depends on state law. In some states, it’s very generous, but in others it’s extremely limited, given the value of homes today. In a couple of states, there’s no protection. Consult with an attorney about your state’s laws.

Establish a Trust

Assets placed in an irrevocable trust can’t be removed, nor can the trust terms be changed. Thus, you’ve effectively relinquished control over the assets and put them out of reach of your creditors. The asset transfer must be done in advance of the act that created the liability, or the transfer could be nullified. In other words, the time to think about setting up such a trust is before you need to take advantage of it.

An irrevocable trust also can help you protect assets for your children and grandchildren. Consider structuring the trust in a way that effectively gives future generations the benefit of the assets without transferring ownership of them to your heirs. This can shield those assets from your descendants’ future creditors.

If you decide to use trusts as part of your asset protection strategy, remember that they may be subject to higher income tax rates and additional tax filing requirements. Trusts also may be costly to set up and require expert legal counsel to administer and maintain.

Obtain Expert Assistance

The details involved in implementing asset protection strategies can be complex. We can offer you guidance in your case.

 

Sidebar: Asset Ownership Structure is Key

Ownership of your assets plays an important role in whether they can be seized by creditors. Thus, it might be wise in some situations to transfer ownership of certain assets to your spouse. If you’re at a high risk of liability — for example, you’re a business owner — one strategy might be to retain ownership of assets with statutory protection, as mentioned in the main article, and transfer ownership of all other assets to your spouse.

Business Owners, Your Bad Debts May be Deductible

If you hold a business-related debt that’s become worthless or uncollectible, a “bad debt” deduction may allow you to cut your losses. But there are a few hoops to jump through.


Business or Nonbusiness

Business bad debts generate ordinary losses; nonbusiness bad debts are reported as short-term capital losses. The latter can be used only to offset capital gains (plus up to $3,000 in ordinary income). Also, you can’t take a deduction for partially worthless nonbusiness bad debts. They must be totally worthless to be deductible.

A business bad debt is a loss related to a debt that was either created or acquired in a trade or business or closely related to your trade or business when it became partly or totally worthless. Common examples include credit sales to customers for goods or services, loans to customers or suppliers and business-related guarantees.

Some debts are considered both business and nonbusiness (personal). For example, say you guarantee a loan on behalf of one of your best customers, who also is a friend. If your friend later defaults, the test for whether your loss is business or nonbusiness is whether your “dominant motivation” in making the guarantee was to help your business or your friend.

If a bad debt is related to a loan you made to your business, the IRS may deny a bad debt deduction if it finds that the loan was a contribution to capital.

To qualify for a bad debt deduction, the underlying debt must be bona fide. That is, you must have loaned the money or extended credit with the expectation that you would be repaid and with the intent to enforce collection if you weren’t repaid. Proper documentation is key.

Included in income?

Not all bad debts are deductible. The purpose of the deduction is to offset a previous tax liability. So, you must have previously included the receivable in your income.

Typically, that’s not the case with respect to accounts receivable if your business uses the cash-basis method of accounting. Cash-basis taxpayers generally don’t report income until they receive payment. If someone fails to pay a bill, the business simply doesn’t include that amount in income. Permitting a bad debt deduction on top of that would give the business a windfall from a tax perspective.

Accrual-basis taxpayers, on the other hand, report income as they earn it, even if it’s paid later. So, a bad debt deduction may be appropriate to offset uncollectible amounts previously included in income.

Pursuing a Deduction

Review your business debts to assess whether any became partially or totally worthless during 2019. If so, and if you’re an accrual-basis taxpayer, we can help you pursue a deduction.

 

Sidebar: Handle Acounting for “Charge-Offs” Carefully

You can deduct a partially worthless portion of business debt, but only if that amount has been “charged off” for accounting purposes during the tax year. The IRS takes the position that simply recording an allowance or reserve for anticipated losses isn’t enough. You must treat the amount as a sustained loss, which requires specific language in your books. Deductions for totally worthless debts don’t require a charge-off. But it’s a good idea to do so anyway because, if the IRS determines the debt was only partially worthless, it can disallow the deduction absent a charge-off.