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The IRS, PPP and Tax Planning

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The IRS is creating tax planning challenges with regards to the PPP forgiveness. They have indicated the expenses associated with the funds, even when utilized appropriately, are not deductible as an expense.  This is a way of stating the forgiven PPP funds are taxable.  If this continues to be the case, it will be important to know what to do to minimize your tax liability.

Under the CARES Act, Congress said that the PPP (Paycheck Protection Plan) loan would be tax free. Initially, it is a loan but then you can apply for forgiveness and it therefore becomes a grant. Congress specifically said the grant was tax free.  This makes sense given that businesses were struggling to survive, not lay off employees during the shutdowns and determine how this will impact long-term.

However, the IRS rules indicated that the money could be tax free, but you were not allowed to take the deduction thereby decreasing your expenses and increasing your taxable income. 

The IRS indicated that if you expect to receive forgiveness, you must reduce your expenses. For example, let us say your Company received $100,000 in PPP funds.  After your period was up you applied for forgiveness for the entire amount since you utilized it according to the regulations.  The accounting of the loan is to zero out the loan and reduce the deductions by $100,000. In essence, the loan has now become taxable by reducing the allotted expenses. That is how debt forgiveness typically works – if you are released of a debt it becomes taxable income. This was not how Congress intended this particular program to work.

Congress has indicated they would correct this issue, but then they got busy with other things and a lot of partisan politics. The end results are that nothing has happened thus far. 

Now we have a new ruling from the IRS (Revenue Ruling 2020-27), and it is not good news.  

The IRS has now indicated that companies cannot deduct the expenses paid or incurred in 2020 if companies reasonably expect at year-end to receive forgiveness of the debt in 2021. In other words, even if the PPP is still a loan in 2020, you must account for it as it has been forgiven and pay tax on those funds.  Many questions have arisen if companies should wait to apply for forgiveness. With this new ruling, waiting does not appear to provide a benefit for 2020.

We are hopeful the current rulings will change to continue to help businesses who have struggled during the pandemic.  We are assuming this will not change by year-end and are planning accordingly.

What can you do now to pay less tax and plan accordingly? Contact us now to get your year-end tax strategy in place! 

Do You Qualify for the R&D Tax Credit?

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research and development taxYou don’t have to wear a white lab coat to claim the federal research and development tax credit if you meet the four criteria outlined in Internal Revenue Code Section 41 and its regulations. Learn why failing to explore this credit may be leaving money on the table.

Many manufacturing companies fail to take advantage of the generous research and development (R&D) tax credit simply because they don’t have staff working in a lab. The Internal Revenue Service’s (IRS) definition of R&D is codified at Internal Revenue Code Section 41 and its related regulations — and it may not be exactly what you think it is.

From 2018 to 2027, the estimated value of R&D tax credits to be claimed by U.S. companies is estimated at $163 billion, with $148 billion of that going to corporations.

You can take advantage of this tax credit as long as your company performs activities such as the following:

  • Redesigns its production process to be more efficient.
  • Introduces artificial intelligence or robotics into your manufacturing process.
  • Develops software that enhances your company’s processes or procedures.
  • Designs, constructs or tests product prototypes.
  • Develops second-generation or improved products.

This list is not all-inclusive. According to the IRS, many activities may qualify if they are performed in the United States and meet the following four-part test.

Part 1. Permitted purpose

The IRS test is to create a new or improved product, business component or process that increases performance, function, reliability, composition or quality or that reduces costs for your company. It does not have to be new to your industry.

Development of internal use software may meet the permitted purpose test if it:

  • is an innovation that provides economically significant results;
  • requires a certain amount of economic risk and use of resources to develop when recovery of the cost is uncertain over a reasonable time; and
  • is not commercially available for the intended purpose, although commercially available software may be eligible if it is significantly modified.

Part 2. Technological in nature

The research must fundamentally rely on the hard or physical sciences, such as engineering, physics, chemistry, biology or computer science.

Part 3. Uncertainty eliminated

You must be able to demonstrate that you’ve attempted to eliminate any uncertainty about the usefulness of the development, improvement or design.

Part 4. Process of experimentation

You must be able to demonstrate during the research process that you’ve experimented and evaluated alternatives. This may have been done through research techniques like modeling, simulation, trial and error or some other method.

Documenting R&D Activities

Claiming the credit requires a lot of supporting documentation, however. It is worth taking the time to assess whether the amount of tax relief you’ll get is worth the effort. For example, you’ll need to determine how much of a credit your company is eligible for, how difficult it will be to document your company’s R&D activities, whether the credit can be used to offset alternative minimum tax liability and whether you can claim previously unused credits.

Many, if not all, manufacturers may find they can reduce their taxes by taking advantage of the federal R&D tax credit. In addition, many states have an R&D credit that is available to manufacturers. It’s worth investigating and we can help. Contact us today to determine whether you should be claiming this credit.

Changes in Individual Tax Deductions 2019

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New tax law changes2019 tax filing season is well under way and BGMF CPAs have been planning and working diligently to prep for the incoming tax documents and ensuring we’re well educated on the new tax laws for your benefit.

For individuals we wanted to provide a refresher of the changes related to the new tax laws to help you prepare accordingly not only for tax filing, but for 2020 tax planning.

The recently enacted tax reform law made some significant changes to the system of income tax deductions used by consumers. Here are highlights of the changes.

The standard deduction is increased.

The standard deduction has grown. Because of the significant increases, many taxpayers who formerly itemized their deductions may now benefit from the standard deduction instead.

 

Changes in Standard Deductions
Filing Status Old Law New Law
Single $6,500 $12,000
Married filing jointly $13,000 $24,000
Head of Household $9,550 $18,000
Married filing separately $6,500 $12,000

The deduction for state and local taxes is reduced.

For those who itemize their deductions, the maximum amount permitted for all state and local taxes (SALT) combined is $10,000 per year ($5,000 for married individuals filing separately). How the new limit affects you will depend on your specific situation. If you live in a high-tax state, you may see much of your SALT deduction reduced, and that could mean that itemizing deductions is no longer the better option.

The mortgage interest deduction has a lower cap.

For mortgage debt incurred after December 15, 2017, you may only deduct interest on debt value up to $750,000 ($375,000 for married individuals filing separately). Previously, the limit was $1 million. For home equity debt, the deduction for interest is suspended through 2025, unless the proceeds are used to buy, build, or substantially improve the home that secures the loan.

Casualty and theft losses are not now generally deductible.

Beginning this year, only losses that occur as the result of a federally-declared disaster may be deducted. Formerly, casualty and theft losses had generally been deductible to the extent they exceeded 10% of adjusted gross income (AGI).

Miscellaneous itemized deductions are suspended.

Various miscellaneous expenses, such as unreimbursed employee business expenses and tax preparation expenses, were formerly deductible as an itemized deduction to the extent they totaled more than 2% of the taxpayer’s AGI. The new law suspends the deduction for these expenses.

Charitable contributions are still deductible if you itemize.

Cash contributions will now be allowed up to 60% of the taxpayer’s “contribution base,” up from 50%. A taxpayer’s contribution base is generally equal to AGI exclusive of any net operating loss carryback for the year. This change will affect only those taxpayers who contribute a significant proportion of their income to charity.

Medical expense rules become more generous.

Taxpayers with substantial medical expenses who also itemize can now deduct unreimbursed medical expenses in excess of 7.5% of their AGI, down from the deductibility threshold of 10% previously.

Moving expenses lose their tax advantage.

The deduction for qualified moving expenses, which can be claimed even if a taxpayer doesn’t itemize, has been suspended, except for members of the Armed Forces on active duty (provided certain conditions are met).

The alimony deduction for payers is eliminated.

The tax treatment of alimony payments will change significantly under the new law. Such payments will no longer deductible by the payer (and the recipient will no longer be required to include the alimony in income). The change applies to alimony paid under any divorce or separation agreement executed after December 31, 2018.

Note that some of these provisions are scheduled to sunset in 2019 or 2026 unless Congress acts to extend them. Talk to one of our tax advisors to see how the law may ultimately impact your situation.

Now is a great time to consider buying rental real estate or starting or buying a business to take advantage of other aspects of the new tax laws. Contact us today to set up a time to discuss these strategies.

BGMF in the News 2020

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BGMF CPAs team of Bill Groeber, Christiann Arimany and Joe Collinsworth recently sat down with the Springfield News-Sun to share with the community that Bill is entering his 50th tax season.

He was kind enough to share some of his insights over the years, changes he’s witnessed and we provided some tips on how to keep your personal information safe and what to do with regards to IRS scams.

Click here to view the Springfield News-Sun Article with BGMF

Below are some additional insights related to fraud and scams:

  1. Phone scams. The IRS will not start with a call nor threaten/demand payment.
  2. Phishing scams. Typically these come in the form of emails wanting you to click a link to provide information. The IRS won’t email.
  3. Phony letters. The IRS tends to begin correspondence with a letter and now scammers are utilizing fake letters to taxpayers.
  4. False tax returns & promises. Scammers will file false tax returns under your social security number to get the refund.
  5. False tax preparers. They will promise large refunds by inflating deductions/credits and charge large fees.
  6. False charities. You may receive a phone call or email requesting donations.

Tips to Avoid Potential Scams or Fraud:

  1. Never give out social security number, bank information or other personal information.
  2. Don’t engage on the phone or respond to emails (do not click on the links).
  3. Utilize reputable preparers and verify organizations you donate to.
  4. If you receive a potential scam call, email, or letter talk with your advisor immediately.
  5. Consider credit monitoring if concerned about identity theft.
  6. Contact the IRS and authorities.
  7. Protect your personal information both at home and when in public.
  8. Change your passwords often and use strong, unique passwords.

This is not an exhaustive list and protecting your identity is becoming more important.  Contact our firm today for tax preparation services or if you have concerns related to scams or fraud so we can assist you in dealing with these matters.

Do You Need to File Information Returns?

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Do you need to file information returns or are you expecting to receive these forms to file your taxes? Every January we receive a series of questions related to the requirement to file information returns and what qualifies.

Below is an overview of whether you should prepare and remit information returns or if you should plan to receive one prior to filing.

If you made or received a payment in a calendar year as a small business or self-employed individual, you most likely are required to file an information return to the IRS.  BGMF CPAs assists clients in preparing the necessary forms to ensure compliance with the IRS.  Contact us if you need help in January with form filings or have questions.

If you engaged in certain financial transactions during the calendar year as a small business or self-employed (individual), you are most likely required to file an information return to the IRS.

Below are some of the transactions that you have to report.

  • Services performed by independent contractors — those not employed by your business.
  • Prizes and awards, as well as certain other payments — termed other income.
  • Rent.
  • Royalties.
  • Backup withholding or federal income tax withheld.
  • Payments to physicians, physicians’ corporation or other suppliers of health and medical services.
  • Substitute dividends or tax-exempt interest payments, and you are a broker.
  • Crop insurance proceeds.
  • Gross proceeds of $600 or more paid to an attorney.
  • Interest on a business debt to someone (excluding interest on an obligation issued by an individual.
  • Dividends and other distributions to a company shareholder.
  • Distribution from a retirement or profit plan, or from an IRA or insurance contract.
  • Payments to merchants or other entities in settlement of reportable payable transactions — any payment card or third-party network transaction.

Review the IRS guide to information returns.

Being in receipt of a payment may also require you to file an information return. Some examples include:

  • Payment of mortgage interest (including points) or reimbursements of overpaid interest from individuals.
  • Sale or exchange of real estate.
  • You are a broker and you sold a covered security belonging to your customer.
  • You are an issuer of a security taking a specified corporate action that affects the cost basis of the securities held by others.
  • You released someone from paying a debt secured by property, or someone abandoned property that was subject to the debt or otherwise forgave their debt to you (1099-C).
  • You made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than in a permanent retail establishment.

Keep in mind that information is for businesses and not all types of business entities are required to receive various information returns. You will not have to file an information return if you are not engaged in a trade or business. You also will not have to file an information return if you are engaged in a trade or business and 1) the payment was made to another business that’s incorporated, but wasn’t for medical or legal services or 2) the sum of all payments made to the person or unincorporated business was less than $600 in one tax year.

In addition, a question that arises often is what if I don’t receive a 1099 for income earned because it was less than the thresholds?  The answer is you are still required to report the income on your tax return whether you receive an information form (i.e. 1099-Misc) or not.

Finally, if your company does business in a foreign country, has a bank account or assets outside the United States, there may be additional informational filing requirements that must be completed. The new tax laws brought many changes to foreign filing requirements.

This is just an introduction to a complicated topic, and the mechanics of filing such a return are filled with essential details. If you’re running a business, even a small one, be sure to discuss the details with one of our qualified professionals today!

Tax Planning and Strategies to Pay Less Tax

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tax saving strategiesYear-end is upon us again! Time to celebrate the holidays with family and friends, set those new year resolutions and of course do some tax planning!

Is tax planning a must? That is an excellent question and depends on your strategy to expand and grow your business and wealth.  BGMF CPAs always recommends tax planning in your strategy.

Waiting to plan when you file your taxes is not a good course of action. There isn’t much to do at that point to ensure you don’t overpay. It’s your money, not the governments and the tax law is written primarily to reduce your taxes.

Taxes are stealing your money (sometimes up to 50% or more), time and future so now is the time to stop the bleeding. Ever wonder where your money goes? We’ve seen a lot of changes in tax laws the last decade and we find that many tend to ignore the realities. This is due to a variety of factors, such as not understanding the tax code and how to make it work for them or trying to plan alone.

I’ll have you consider that the tax law is a map to vast amounts of wealth. If you follow the law carefully, you will be shocked to uncover secrets within the code which can allow you to amass huge amounts of cash flow and wealth.  The reason for this relates back to the government wanting the economy to grow through investment and spending in various sectors.

What you make is important, but even more so is what you keep. That is where your advisors come into play. A high-quality advisor will help you navigate the tax code to keep more of your hard-earned money and make better investment decisions.

Taxes Are a Major Expense & What You Can Do to Save

Consider that taxes are one of your biggest expenses and too many people ignore taxes in their strategy. When you meet with our tax planning team, we’ll look at a variety of factors, but we’ve boiled tax savings into a few different categories; type of taxpayer, changing the year, type of income, changing the deductions.

As a business owner or investor, we’ll review entity structure and if changing the taxpayer makes sense (i.e. switch to a C Corporation). We’ll also consider the year in which income and expenses occur to plan accordingly for deductions and credits. In addition, we’ll review type of income and deductions that are either being taken or not utilized.  For example, are you truly taking advantage of all expenses that could be considered legitimate business deductions (i.e. travel, home office)?

As an individual, we’ll review your overall situation to determine where you can save in taxes. In addition, we’ll review any major changes in your life such as getting married, having children, buying a home, college planning, divorce, retirement or other.  We’ll also discuss potential opportunities that may not be as apparent such as areas to invest, starting a business or taking advantage of deductions and credits that you may be missing.

We also work with your other advisors so everyone on your team is working in unison to keep money in your pocket.

How to Hire a Tax Advisor

When hiring an advisor to review tax planning with you, beware of those who promise to lower your taxes and cross the line to cheating.  There are plenty of legal ways to reduce taxes with the right plan.

Tax advisors and CPAs come with a variety of skill sets and beware of advisors who aren’t willing to understand the code to utilize the tax saving strategies available. Ask a lot of questions and ensure you’re comfortable and confident with the team you’re working with.

In summary, we’ll leave you to consider this – taxes are unique to each individual and based on your specific facts and circumstances. Change those and you will change your tax!

In other posts, we’ll provide specific tax saving strategies, but this overview of why tax planning is important will help you take the right steps prior to year end to ensure you have the opportunity to save in taxes now!

Call us at 937-325-0623 x5 or

Schedule a consult with one of our advisors today