SEPTEMBER 2020 NEWSLETTER

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HENRY C KULIK, JR LLC – SEPTEMBER 2020 NEWSLETTER

09/20/20

Happy fall, everyone!

It is time for a tax update again. I tried to get one out earlier this year, especially with the COVID 19 rules for forgiveness ever changing, however, we have been extremely busy and running short handed all summer. Finally, we are fully staffed! (While the IRS and DOR are not)

Further, below I have done my best to outline tax differences between the two candidates for President (next section below) as I have every election year.

  1. Due date was 9/15 for all corporate (extended) tax returns on a calendar year. Since its already past that date, the late file penalty for S Corporate filings is $205 per month per K-1 shareholder. Those penalties start on 09/16/2020 as well as later filings for any 1120S tax return filing using the calendar year. Additional interest and penalties will apply too, compounded daily. If you have not turned in your books/records for your 2019 1120S tax return, please do so immediately! I have several ways out of the penalty, but specific conditions must be met.
  2. New “Payroll tax cut” was put in place for the employee’s benefit effective September 01, 2020, but it’s only a deferral or “loan.” They all must be repaid between January and April 2021 unless congress “forgives” the amount (NOT LIKELY). The entire program is voluntary. No employer is required to do this. In fact, I would not suggest taking any action on this matter.
  3. 2019 Individual returns (extended) are due 10/15/2020. Information must have reached us at least by October 01, or timely filing cannot be guaranteed.
  4. $1,200 + stimulus checks. Likely, if your 2019 tax return is not filed, as soon as you do, your stimulus will be released. IRS is starting to get on top of this, hiring another 5,000 people to help with numerous telephone calls, and inquiries. If you were entitled to it, but didn’t receive it because 2018 data was used instead of 2019, you can get the credit on the 2020 tax return
  5. IRS is still very behind on any letter or tax return filed paper. They are still running very short-handed, and most employees are working from home, sometimes with limited access to taxpayer files. Allow 9 months to 1 year for any response! Payments, responses, and filings should all be electronic Few delays generally occur there. Even IRS notices are going out late via US mail (NOT quick and speedy). Audits are way down using fewer agents in the field, however computer exams continue.
  6. NEW!! For 2020 if you do not itemize, you will be allowed a charitable deduction of $300 per return.
  7. Home office clarification: Regardless of “due to covid/”Chinese Virus” or not, employees working from home do not have any means to write-off home office expenses. Only for businesses, including Schedule C, can this deduction be used, and it must be your principal/necessary place of business (See form 8829).
  8. We can now (finally!) electronically file 2019 amended personal federal returns. Paper would take forever!
  9. NEW! Appeals court rules that a criminal’s IRA can be garnished in order to pay restitution
  10. IRS along with the Justice Department is cracking down on employers that withhold payroll taxes and withholdings but use the funds for personal or other business expenses. These funds are called “trustee” taxes since they do not belong to the employer, but only being held temporarily until due. Fines can include employees that have check-signing authority with decision making. (NEVER play with the Treasury’s cash!)
  11. Still time for a SEP IRA if self-employed. Due and funded by 10/15/2020 for tax year 2019
  12. No “final” word yet except that PPP loan “forgiveness” will not have to reported on a form 1040 as cancellation of debt income.
  13. Proposed tax cuts/changes by President Trump.
    1. Tax cuts for the middle class (no details).
    2. 2017 changes already made-make permanent. Otherwise, they expire after 2025.
    3. Capital gains rate- lower the top tier rate of 20% down to 15%, and index for inflation.
    4. Index basis for capital gains for inflation resulting in a lower amount of “gain” to be taxed.
    5. If the Supreme Court entirely throws out Obamacare, the 3.8% surtax on net investment income (includes rentals, winnings, etc.) along with about 1% on earned income would end.
    6. Reduce corporate taxation from the reduced 21% to 20%.
    7. Allow 100% deduction of business meals and entertainment.
    8. Tax breaks to companies that invest in our own US supply chains, so that jobs to the US from get pulled out of China and other countries.
    9. Make 100% bonus depreciation Enhance the R&D tax credit and enhanced business asset expensing
    10. New “Platinum” Plan for black business startups and expansion. Pledged $500B (Will need Congress to get that one) to further reduce poverty and encourage growth and higher incomes
    11. This past Thursday (9/24/2020) President Donald Trump introduced his plan for affordable, high-quality health care, called the America First Health Care Plan. This plan, issued in an executive order, is primarily aimed at protecting people with preexisting conditions and combating surprise medical billing.

      The executive order directs the Departments of Health and Human Services (HHS), Labor and the Treasury to maintain and build upon existing actions to: Expand options for affordable health care and access to affordable medicines; Ensure consumers have access to meaningful price and quality information before the delivery of care; and Reduce waste, fraud and abuse in the health care system.

      The executive order specifically directs HHS to work with Congress to reach a legislative solution to end surprise medical billing by Dec. 31, 2020. If a legislative solution is not reached by that date, the executive order directs HHS to take administrative action to prevent out-of-pocket expenses that cannot be reasonably foreseen.

  14. Proposed tax changes by Former Vice President Biden campaign
    1. Reversal of the 2017 Trump tax cuts. No specifics.
    2. Increased taxes (not sure where/how/who) to finance bold new spending ($4 Trillion was discussed)
    3. Higher teacher pay and more teachers
    4. More stimulus for families (for example, direct payments from the US Government)
    5. education incentives and payments.
    6. student loan forgiveness.
    7. Make employers offer payroll deduction for IRAs. Sounds like what former President Obama proposed back in 2016. No further details.
    8. Wants to “normalize” the differences between the 401K and the IRA deduction on paychecks; no details available, except that if MAX for 401K is $28,000, so will IRA max be the same.
    9. (Note: specific information is difficult to find)- I have researched campaign websites, and tax newsletters, among others. All I can really find are similar things that the Obama/Biden administration used and a few speech talking points. Items appear to be vague at this time.

Still time to schedule your tax planning for 2020 tax year! Just call the front desk and we can schedule you!

We are also booking NOW for remaining available slots for tax season 2021 to prepare 2020 tax returns.

I don’t know if we will be offering in-office meetings, or telephone/facetime only. If the vaccine (4 pending) works after level 3 trials, we likely will be offering in or out of office meetings. Some clients preferred telephone, especially if live far away! You can also pre-request an extension and book into the early summer or later if you wish. We are open year-round!

Have a great rest of 2020!!

STILL TIME TO GET ECI PAYMENT

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VA benefit recipients: If you didn’t file taxes for 2018 or 2019 and have children, act now to get your full Economic Impact Payment from #IRS. For those who missed the earlier deadline, sign up by 9/30: http://irs.gov/nonfilereip #COVIDreliefIRS @DeptVAAffairs
9:00 PM · Sep 26, 2020

Coronavirus Updates 3/31/2020

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SPECIFIC CORONAVIRUS INDIVIDUAL AND BUSINESS CHANGES, CREDITS

03/31/2020

Dear Client:

We hope that you are keeping yourself, your loved ones, and your community safe from COVID-19 (commonly referred to as the Coronavirus). Along with those paramount health concerns, you may be wondering about some of the recent tax changes meant to help everyone coping with the Coronavirus fallout. In addition to the summary of IRS actions and earlier-enacted federal tax legislation that I previously sent you, I now want to update you on the tax-related provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress’s gigantic economic stimulus package that the President signed into law on March 27, 2020.

Recovery rebates for individuals.  To help individuals stay afloat during this time of economic uncertainty, the government will send up to $1,200 payments to eligible taxpayers and $2,400 for married couples filing joints returns. An additional $500 additional payment will be sent to taxpayers for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit).

Rebates are gradually phased out, at a rate of 5% of the individual’s adjusted gross income over $75,000 (singles or marrieds filing separately), $122,500 (head of household), and $150,000 (joint). There is no income floor or ‘‘phase-in’’—all recipients who are under the phaseout threshold will receive the same amounts. Tax filers must have provided, on the relevant tax returns or other documents (see below), Social Security Numbers (SSNs) for each family member for whom a rebate is claimed. Adoption taxpayer identification numbers will be accepted for adopted children. SSNs are not required for spouses of active military members. The rebates are not available to nonresident aliens, to estates and trusts, or to individuals who themselves could be claimed as dependents.

The rebates will be paid out in the form of checks or direct deposits. Most individuals won’t have to take any action to receive a rebate. IRS will compute the rebate based on a taxpayer’s tax year 2019 return (or tax year 2018, if no 2019 return has yet been filed). If no 2018 return has been filed, IRS will use information for 2019 provided in Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement.

Rebates are payable whether or not tax is owed. Thus, individuals who had little or no income, such as those who filed returns simply to claim the refundable earned income credit or child tax credit, qualify for a rebate.

Waiver of 10% early distribution penalty. The additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus (a qualified individual). Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread out. Employers may amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.

Waiver of required distribution rules. Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019.

Charitable deduction liberalizations. The CARES Act makes four significant liberalizations to the rules governing charitable deductions:

(1) Individuals will be able to claim a $300 above-the-line deduction for cash contributions made, generally, to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.

(2) The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.

(3) Similarly, the limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required.

(4) For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

Exclusion for employer payments of student loans. An employee currently may exclude $5,250 from income for benefits from an employer-sponsored educational assistance program. The CARES Act expands the definition of expenses qualifying for the exclusion to include employer payments of student loan debt made before January 1, 2021.

Break for remote care services provided by high deductible health plans.  For plan years beginning before 2021, the CARES Act allows high deductible health plans to pay for expenses for tele-health and other remote services without regard to the deductible amount for the plan.

Break for nonprescription medical products. For amounts paid after December 31, 2019, the CARES Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren’t paid under a prescription. And, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements.

Business only provisions 

Employee retention credit for employers. Eligible employers can qualify for a refundable credit against, generally, the employer’s 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax) for 50% of certain wages (below) paid to employees during the COVID-19 crisis.

The credit is available to employers carrying on business during 2020, including non-profits (but not government entities), whose operations for a calendar quarter have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also available to employers who have experienced a more than 50% reduction in quarterly receipts, measured on a year-over-year basis relative to the corresponding 2019 quarter, with the eligible quarters continuing until the quarter after there is a quarter in which receipts are greater than 80% of the receipts for the corresponding 2019 quarter.

For employers with more than 100 employees in 2019, the eligible wages are wages of employees who aren’t providing services because of the business suspension or reduction in gross receipts described above.

For employers with 100 or fewer full-time employees in 2019, all employee wages are eligible, even if employees haven’t been prevented from providing services. The credit is provided for wages and compensation, including health benefits, and is provided for the first $10,000 in eligible wages and compensation paid by the employer to an employee. Thus, the credit is a maximum $5,000 per employee.

Wages don’t include (1) wages taken into account for purposes of the payroll credits provided by the earlier Families First Coronavirus Response Act for required paid sick leave or required paid family leave, (2) wages taken into account for the employer income tax credit for paid family and medical leave (under Code Sec. 45S) or (3) wages in a period in which an employer is allowed for an employee a work opportunity credit (under Code Sec. 51). An employer can elect to not have the credit apply on a quarter-by-quarter basis.

The IRS has authority to advance payments to eligible employers and to waive penalties for employers who do not deposit applicable payroll taxes in reasonable anticipation of receiving the credit. The credit is not available to employers receiving Small Business Interruption Loans. The credit is provided for wages paid after March 12, 2020 through December 31, 2020.

Delayed payment of employer payroll taxes. Taxpayers (including self-employeds) will be able to defer paying the employer portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022. Taxes that can be deferred include the 6.2% employer portion of the Social Security (OASDI) payroll tax and the employer and employee representative portion of Railroad Retirement taxes (that are attributable to the employer 6.2% Social Security (OASDI) rate). The relief isn’t available if the taxpayer has had debt forgiveness under the CARES Act for certain loans under the Small Business Act as modified by the CARES Act (see below). For self-employeds, the deferral applies to 50% of the Self-Employment Contributions Act tax liability (including any related estimated tax liability).

Net operating loss liberalizations. The 2017 Tax Cuts and Jobs Act (the 2017 Tax Law) limited NOLs arising after 2017 to 80% of taxable income and eliminated the ability to carry NOLs back to prior tax years. For NOLs arising in tax years beginning before 2021, the CARES Act allows taxpayers to carryback 100% of NOLs to the prior five tax years, effectively delaying for carrybacks the 80% taxable income limitation and carryback prohibition until 2021.

The Act also temporarily liberalizes the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit). For tax years beginning after 2021, taxpayers will be eligible for: (1) a 100% deduction of NOLs arising in tax years before 2018, and (2) a deduction limited to 80% of taxable income for NOLs arising in tax years after 2017.

The provision also includes special rules for REITS, life insurance companies, and the Code Sec. 965 transition tax. There are also technical corrections to the 2017 Tax Law effective dates for NOL changes.

Deferral of noncorporate taxpayer loss limits.  The CARES Act retroactively turns off the excess active business loss limitation rule of the TCJA in Code Sec. 461(l) by deferring its effective date to tax years beginning after December 31, 2020 (rather than December 31, 2017). (Under the rule, active net business losses in excess of $250,000 ($500,000 for joint filers) are disallowed by the 2017 Tax Law and were treated as NOL carryforwards in the following tax year.)

The CARES Act clarifies, in a technical amendment that is retroactive, that an excess loss is treated as part of any net operating loss for the year, but isn’t automatically carried forward to the next year. Another technical amendment clarifies that excess business losses do not include any deduction under Code Sec. 172 (NOL deduction) or Code Sec. 199A (qualified business income deduction).

Still another technical amendment clarifies that business deductions and income don’t include any deductions, gross income or gain attributable to performing services as an employee. And because capital losses of non-corporations cannot offset ordinary income under the NOL rules, capital loss deductions are not taken into account in computing the Code Sec. 461(l) loss and the amount of capital gain taken into account cannot exceed the lesser of capital gain net income from a trade or business or capital gain net income.

Acceleration of corporate AMT liability credit. The 2017 Tax Law repealed the corporate alternative minimum tax (AMT) and allowed corporations to claim outstanding AMT credits subject to certain limits for tax years before 2021, at which time any remaining AMT credit could be claimed as fully-refundable. The CARES Act allows corporations to claim 100% of AMT credits in 2019 as fully-refundable and further provides an election to accelerate the refund to 2018.

Relaxation of business interest deduction limit. The 2017 Tax Law generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income (ATI). The CARES Act generally allows businesses, unless they elect otherwise, to increase the interest limitation to 50% of ATI for 2019 and 2020, and to elect to use 2019 ATI in calculating their 2020 limitation. For partnerships, the 30% of ATI limit remains in place for 2019 but is 50% for 2020. However, unless a partner elects otherwise, 50% of any business interest allocated to a partner in 2019 is deductible in 2020 and not subject to the 50% (formerly 30%) ATI limitation. The remaining 50% of excess business interest from 2019 allocated to the partner is subject to the ATI limitations. Partnerships, like other businesses, may elect to use 2019 partnership ATI in calculating their 2020 limitation.

Technical correction to restore faster write-offs for interior building improvements. The CARES Act makes a technical correction to the 2017 Tax Law that retroactively treats (1) a wide variety of interior, non-load-bearing building improvements (qualified improvement property (QIP)) as eligible for bonus deprecation (and hence a 100% write-off) or for treatment as 15-year MACRS property or (2) if required to be treated as alternative depreciation system property, as eligible for a write-off over 20 years. The correction of the error in the 2017 Tax Law restores the eligibility of QIP for bonus depreciation, and in giving QIP 15-year MACRS status, restores 15-year MACRS write-offs for many leasehold, restaurant and retail improvements.

Accelerated payment of credits for required paid sick leave and family leave. The CARES Act authorizes IRS broadly to allow employers an accelerated benefit of the paid sick leave and paid family leave credits allowed by the Families First Coronavirus Response Act by, for example, not requiring deposits of payroll taxes in the amount of credits earned.

Pension funding delay. The CARES Act gives single employer pension plan companies more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until January 1, 2021. At that time, contributions due earlier will be due with interest. Also, a plan can treat its status for benefit restrictions as of December 31, 2019 as applying throughout 2020.

Certain SBA loan debt forgiveness isn’t taxable. Amounts of Small Business Administration Section 7(a)(36) guaranteed loans that are forgiven under the CARES Act aren’t taxable as discharge of indebtedness income if the forgiven amounts are used for one of several permitted purposes. The loans have to be made during the period beginning on February 15, 2020 and ending on June 30, 2020.

Suspension of certain alcohol excise taxes. The CARES Act suspends alcohol taxes on spirits withdrawn during 2020 from a bonded premises for use in or contained in hand sanitizer produced and distributed in a manner consistent with FDA guidance related to the outbreak of virus SARS-CoV- 2 or COVID-19.

Suspension of certain aviation taxes. The CARES Act suspends excise taxes on air transportation of persons and of property and on the excise tax imposed on kerosene used in commercial aviation. The suspension runs from March 28, 2020 to December 31, 2020.

IRS information site. Ongoing information on the IRS and tax legislation response to COVID- 19 can be found at https://www.irs.gov/coronavirus.

I will be pleased to hear from you at any time with questions about the above information or any other matters, related to COVID-19 or not.

I wish all of you the very best in a difficult time.

IMPORTANT OFFICE UPDATE

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IMPORTANT OFFICE UPDATE FROM HENRY KULIK, CPA

March 20, 2020
11:00AM

Dear clients and friends:

At this time, our services remain running at normal business hours through this crisis. We are all getting prepared to work remotely from home if required. That has not happened here yet, however, with the portal system and other tools we have installed, I would expect a smooth transition. I anticipte that the only downside to a remote operation would be that the electronic Portal copy of your tax return would be your only copy (for now).

Our telephone numbers would remain the same, but may have to change the fax number if this happens.  A new fax number will be posted on our website if needed.

Meantime, we are fully staffed at our Leominster office until further notice however, I am moving all client meetings to either:

  1. a Telephone Interview
  2. a Skype or Facetime Video (so you can watch me type!)
  3. or Mail In

We MUST limit face to face meetings until the new drugs become more widely available, and this thing is defeated.

For any telephone or video conferencing, please make sure you send in all your information using our secure portal, or encrypted email.

We are also following CDC and federal/state guidelines to keep safe distances under “social distancing” rules and maintaining a clean environment us much as possible.

PLEASE BE AWARE:

The IRS Treasury Secretary under the direction of the President has extended individual FILING DUE DATES to 7/15/20 rather than 04/15/20.  At first it was only tax payments could be as late as 7/15/20, but now the filing itself can be 90 days later as well.

Please call the office if you have any questions!

Sincerely,

Henry C. Kulik, Jr CPA LLC

TAX PREP OPTIONS W/VIRUS OUTBREAK

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My office is now undergoing daily sanitized cleaning following CDC guidelines. Plenty of soap and water as well as Sanitizer are plentiful through the office.
Clients may opt for an appointment with Henry via telephone or Face-Time/Skype if desired.

We continue to operate under normal business hours and services. The IRS has not pushed the deadline back at this time, thus the 3/15 and 4/15 deadlines still rule.
Thank You

Henry C Kulik, Jr

Certified Public Accountant LLC

IRA RULES CHANGED- WATCH OUT! EFFECTIVE 01/01/20- JUST PASSED IN DC

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WHY DOES WASHINGTON DO EVERYTHING AT THE LAST MINUTE??

 

December 22, 2019

On January 1, 2020, the Secure Act will take effect which will include five significant changes in the rules and regulations for IRA’s.
Massachusetts Income Tax (and the MA IRA Withholding) Rate Drops to 5.00% on January 1, 2020
Previously approved by the House of Representatives, the Senate passed this legislation on Thursday December 19th. President Trump then signed it into law late Friday December 20th.
Thus the SECURE Act is set to become effective on January 1, 2020.
The SECURE Act includes five significant changes to IRA Rules and Regulations:
Age Limit Eliminated for Traditional IRA Contributions – Beginning for Tax Year 2020 and beyond, the new law eliminates the age limit for Traditional IRA contributions (formerly age 70½). Thus as with a Roth IRA, those with eligible earned income can continue to contribute to a Traditional IRA regardless of their age.
RMD Age Raised to 72 – The SECURE Act increases the age for commencing RMDs to age 72. IRA owners reaching age 70½ after December 31, 2019 will not have to take their first RMD until the year in which they attain age 72.
New Exception to the 10% Penalty for Birth or Adoption – The SECURE Act adds a new 10% penalty exception for birth or adoption. The distribution is still subject to tax. It is also limited to $5,000 over a lifetime. But the birth or adoption distribution amount can be re-contributed back at any future time

IRA Contributions with Fellowship and Stipend Payments – Additionally, the new law allows taxable non-tuition fellowship and stipend payments to be treated as eligible compensation to qualify for IRA contributions.

Most Importantly…The “Stretch IRA” Disappears for Many – Beginning for deaths after December 31, 2019, the “Stretch IRA” rules will be replaced with a “Ten Year” distribution rule for most IRA beneficiaries. The rule will require accounts to be emptied by the end of the tenth year following the year of death of the IRA owner. There will be no requirements for annual Beneficiary RMDs as currently exist. The only RMD required of a Beneficiary of an Inherited IRA will be the full Inherited IRA balance being withdrawn by the end of the 10th year after the IRA owner’s death. But for deaths in 2019 or in prior years, the old Beneficiary RMD “Stretch IRA” rules will remain in place.

There are five categories of “eligible designated beneficiaries” who will be exempt from this new 10-year post-death payout rule and who can still use the existing Stretch RMD rules over their life expectancy. These are:
surviving spouses
minor children
disabled individuals
the chronically ill, and
beneficiaries not more than ten years younger than the IRA owner

NEW- what travel expense allowed without LOG BOOK

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Travel Expenses Allowed Without Log Book
Cross References • Maki, T.C. Summary Opinion 2019-34 In general, travel expenses have strict substantiation requirements. A taxpayer must maintain records that include: • The amount of the expense, • The time and place of travel, • The business purpose of the expense, and • The business relationship between the taxpayer and persons provided meals. Courts generally require that the taxpayer produce a contemporaneous log book documenting the above information for each business trip taken. The taxpayer in this case regularly traveled to take care of and monitor timber on his land. The round trip from his residence to and from the land is about 300 miles for each visit. During the trips, the taxpayer would plant new trees and care for them so that they could be harvested for future timber sales. Two of his properties had trees with a harvest value of over $1 million. The taxpayer testified that in a previous year while he was very sick and not able to check on his land, the fir trees were illegally harvested. Commercial timber companies hire people to regularly check and patrol their timberland to curb or thwart illegal harvesting. The taxpayer was not able to afford the cost of hiring people to check and patrol his land. That is one of the reasons why he regularly visits his timber properties. The taxpayer maintained a log listing the days that he visited and stayed on the land. The log, along with other records, was maintained in the building he uses when visiting the land. During an IRS audit, the taxpayer used the log to make a summary of his visits during the tax year that was under audit. After he prepared the summary, the original contemporaneous logs and other records were stolen when the building in which they were maintained was vandalized. The summary reflected that the taxpayer was present at the properties a total of 161 days during the year at issue. The summary also reflects that the taxpayer made 47 round trips from his residence to the timber properties. Some visits were as short as one day, but most were three-day visits. For the year at issue, the taxpayer reported zero income on Schedule C for his timber activity. Expenses included $7,011 for travel, and $55,925 for away from home per diem. The IRS disallowed these two deductions because the taxpayer did not adequately substantiate the expenses with a contemporaneous log book. The Tax Court noted that the IRS did not question whether or not the taxpayer was engaged in a business activity or whether he was away from home when he visited the tim
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© 2019 Tax Materials, Inc. TheTaxBook News 2
ber properties. The IRS only argued that the taxpayer did not substantiate his deductions by providing a log book. The court stated the taxpayer established a normal pattern of travel. He always traveled to the same locations. His testimony that he maintained a log is credible, and his summary presented as evidence to the court was extracted from that log book. The repetitive pattern of travel is easily verified because it was essentially the same each week. That fact along with the taxpayer’s credible testimony was sufficient to show the occasions on which he traveled to and visited the timber properties. The court also agreed that the travel expenses were ordinary and necessary because of the need to monitor the timber and to maintain and plant trees. The court agreed with the taxpayer that he made 47 trips and spent 161 days at his timber properties. The $7,011 for travel was allowed by the court because it reflected the permitted standard mileage rate for the total miles driven to and from the timber properties. The court reduced the per diem deduction to $7,406 to reflect the standard meal allowance for the number of days away from home. The per diem for lodging was not allowed because the taxpayer did not provide any evidence of the lodging expenses actually incurred in the timber activity during the year.
Receipts for expenses are not required for deducting the standard mileage rate or the standard meal allowance. Receipts for actual expenses are required to deduct lodging expenses. The per diem rate for lodging is only used to determine the amount of employer reimbursement that meets the accountable plan rules. Self-employed taxpayers who are not reimbursed for lodging cannot use the per diem rate method for deducting lodging expenses

Fall/Winter 2019 TAX UPDATE

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Hello Clients and Friends!

First, I would say Thank You all for your business and good relationships built. Please never hesitate to contact myself or Maureen if anything seems amiss.

End of year planning

Yes, there is still plenty of time for year-end planning meetings, analysis, or even via telephone and email. If you want to get a good grip on the tax outcome early, give us a call!

IRS ALERT!

The IRS is cracking down (audits) on certain Partnerships and S Corporations. Using their tight budget, the IRS is relying more on 3rd party collections and computer data integration. Shorter period times before penalties and bank levies automatically get slapped on. We have been getting warned on keeping good basis records. Many of you, I am sure, heard us asking for basis information this past year. Now the IRS has launched a program audit; it involves:

  1. Comparing your S Corp/Partnership basis calculations.
  2. Reviewing size of “officer compensation” along with size of distributions.
  3. Any distributions? Do they exceed your salary?
  4. Are you lacking receipts or substantiation for business expenses?
  5. Do you keep a mileage log? If you have automobile deductions, you should.

Agents tell me that these audits should produce some easily calculated (negative) results for     the taxpayer. Cash or items for personal use on the company tab. They both count as distributions, which are fine, so long as the rules are followed. Even if accurate and verifiable, its never worth having an audit just to prove you were right all along.

We are already changing the strategies to avoid these which have already begun. IRS targets 2017/2018 right now, which allows them to audit 3 years of tax returns if necessary.

REAL ESTATE REPORT

A recent move by the Federal Housing Finance Agency is causing Uncle Sam’s footprint in multifamily lending to shrink. They closed loopholes that have previously allowed Fannie Mae and Freddie Mac to exceed their previous caps.

According to Mortgage Bankers Association, lenders have had a 14% increase over 2018 on mortgages secured by malls, hotels, apartments etc. Commercial real estate property loans will continue to increase in 2020.

Also, large real estate losses reported, especially by professional are being eyed by the IRS. To fully deduct their rental losses, “real estate professionals” must satisfy the two time test. They must spend over 750 hours materially participating in real estate activities and over half of the working hours. Very few taxpayers will escape an audit using the “professional” title and deduct unlimited losses. Otherwise, you will get up to $25,000 loss on rental properties, so long as your Adjusted Gross Income doesn’t exceed $150,000. That’s the top end of the loss/phaseout of passive income. Laws still there since the 80’s and never really changed

Good news

The new business deduction (started for the 2018 tax returns), is called the 20% “qualified business income deduction” (aka “QBID) may apply if you have income from rental properties. But first, you must meet the QBI requirements. Taxpayers must devote no less than 250 hours to the rental activity, unless owned for four or more years. In that case, the 250-hour requirement must be satisfied within three of the most recent five years. Please be aware that time spent traveling to and from the property and arranging finances are not to be included in hours. Time spent providing tenant services, advertising, property management, collecting rent, and repair and maintenance are counted in the 250-hour requirement.

GIVING

Are you feeling generous this year? Make the most of your charity donations by contributing appreciated assets (stocks, etc.) In most cases, you can deduct the full value. Donating depreciated (business) assets would be a waste of the capital loss.  Be sure to meet timing expectations to lock in your donations for 2019. KEEP RECEIPTS!

CORPORATIONS/BUSINESS SCH C/LLCS

Most taxpayers that operate a business, regardless if Schedule C,E,F, or an S Corporation or Trust. Just a reminder that getting information in to us the earliest in January as possible will help ensure a good return time.

2019 TAX ORGANIZERS

The 2019 tax organizers should be installed soon. Generally, after proofing and IT maintenance our goal is to make those available to you by January 01, 2020. Watch your email from the portal system

NEW FOR 2019 RETURNS

Standard deduction up by $400 Married Filing Jointly; up $200 Single

IRC Section 179 immediate write-off- limit increased to $1,020,000 from $1M in 2018

Gift tax – annual exclusion remains at $15,000, will be same in 2020

IRA limits are up- $6,000; $7,000 (age 50 +)

401K are up too- $19,000; $25,000 (age 50+)

SIMPLE IRA- up $500 ($13,000; to $16,000 if 50 or older)

November 2018 Tax Update

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Overview of tax-saving moves for the rest of 2018.

Hi Everyone and Merry Christmas/Happy New Year!

YES there is still time for 2018 tax planning if you have not scheduled a meeting yet. The tax laws have changed in a very big way.

*Please note that we no longer use the Chelmsford office location. We’ll keep everything at our Leominster, MA location.

We would like to welcome two of our new accounting staff! Manager Terry Neff, EA, and Staff Accountant Madhu Saiprsad. A third new person begins next week. We will now be able to increase our bookkeeping and other work for clients that want it done right!

There are so many tax changes for 2018, it would be impossible to go into detail for each here.

Fortunately, the economy is buzzing ahead at record pace! This helps everyone and helps generate tax revenue for the country (without increasing our taxes).

Year-end tax planning for 2018 takes place against the backdrop of legislative changes that fundamentally alter the tax rules for individuals and businesses. For 2018, the Tax Cuts and Jobs Act (TCJA) does away with many familiar, long-standing tax rules and introduces a host of new ones. For individuals, there are new, lower income tax rates, a substantially increased standard deduction that for some makes up for severely limited itemized deductions and eliminated personal exemptions, an increased child tax credit (extra $1,000 per child under age 17), and a watered-down alternative minimum tax (AMT), among many other changes. For businesses, the corporate tax rate is cut to 21 %, the corporate AMT is gone, there are new limits on certain business interest deductions, and significantly liberalized expensing and depreciation rules. And the domestic production activities deduction (DAPD) is repealed, although there is a new deduction for non-corporate taxpayers with qualified business income from pass-throughs.

Despite this atmosphere of change, the time-honored approach of deferring income and accelerating deductions to minimize taxes still works for many taxpayers, along with the tactic of “bunching” expenses into this year or the next to get around deduction restrictions.

While many taxpayers will come out ahead by following the traditional approach (deferring income and accelerating deductions), others, including those with special circumstances, may want to consider accelerating income and deferring deductions. Most traditional techniques for deferring income and accelerating expenses can be reversed to achieve the opposite effect. For instance, a cash method professional who wants to accelerate income can do so by speeding up his business’s billing and collection process instead of deferring income by slowing that process down. Or, a cash-method taxpayer who sells property in 2018 on the installment basis and realizes a large long-term capital gain can accelerate income by electing out of the installment method.

Some of the key considerations to take into account when formulating a year-end tax saving plan include the following:

Capital gains. Long-term capital gains are taxed at a rate of 0%, 15% or 20%. And, the 3 .8% surtax on net investment income may apply

Low-taxed dividend income. Qualified dividend income is taxed at the same favorable tax rates that apply to long-term capital gains. However, the 3.8% surtax on net investment income may apply, converting investment income taxable at regular rates into qualified dividend income can achieve tax savings and result in higher after-tax income.

Expensing deduction. For qualified property placed in service in tax years beginning in 2018, the maximum amount that may be expensed under the Code Sec. 179 dollar limitation is $1,000,000, and the beginning-of-phase-out amount is $2,500,000. (Code Sec. 179(b))

First-year depreciation deduction. Most new as well as used machinery and equipment bought and placed in service in 2018 qualifies for a 100% bonus first-year depreciation deduction.

New qualified business income deduction. For tax years beginning after 2017, taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income.

For 2018, if taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction is subject to multiple limits based on the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid with respect to the qualified trade or business, and/or the unadjusted basis of qualified property held by the trade or business. (Nothing is simple here!)

The highest tax rates do not start until you exceed about $600,000 (changes each year for inflation) in taxable income, rather than the old $200,000.

More businesses entitled to use the cash method of accounting. A five-fold increase in a key gross receipts test means many more businesses can choose to use the cash (rather than the accrual) method of accounting. Cash method taxpayers may find it easier to defer income and accelerate expenses!

Changes in individual’s tax status may call for acceleration of income. Changes in an individual’s tax status, due, say, to divorce, marriage, or loss of head of household status, must be considered, see Alternative minimum tax (AMT).

For 2018, the vast majority of individuals no longer have to factor in the AMT when conducting general tax planning or year-end tax planning. That’s because the exemption amounts (and the amounts used to determine the phase-out of the AMT exemption amounts) have been increased, and most of the AMT preferences and adjustments for individuals have effectively been eliminated. And the corporate AMT has been repealed.

Time value of money. Any decision to save taxes by accelerating income must take into account the fact that this means paying taxes early and losing the use of money that could have been otherwise invested.

Estimated tax. For how the estimated tax rules can be affected when taxable income is shifted from one tax year to another, Obstacles to deferring taxable income. The Code contains a number of rules that hinder the shifting of income and expenses. These include the passive activity loss rules, requirements that certain larger businesses use the accrual method, and limitations on the deduction of investment interest.

Charitable contributions. The timing of charitable contributions can have an important impact on year-end tax planning. Individual taxpayers who are at least 70-½ years old can contribute to charities directly from their IRAs without having the amount of their contribution included in their gross income. By making this move, some taxpayers reduce their tax liability even more than they would have if they had received the distribution from their IRA and then contributed the amount distributed to charity. As explained, some taxpayers who could take advantage of this tax break for this year, should consider deferring until the end of the year their required minimum distributions (RMDs) for 2018.

Call the office anytime at 978-514-8829 or FAX at 978-514-8820

All email should go to INFO@henrykulikcpa.com to allow it to be received in properly where it is tagged, scanned, and forwarded appropriately.

PLEASE do not send requested information or any source documents to an individual accountant’s mailbox. We can always ask another accountant to work on your case if need be, or collaborate with the first. The new updated and very qualified staff (plus the others that remain like me and more!) will ensure things will go as smoothly as possible for everyone.

The few appointment slots that remain open with me are mid- January and after April 15. (Plus there always a few cancellations- we still use the call list) Also, other qualified, experienced staff will be available for interviews too. It was truly a blessing to find these people who want to work hard for the benefit of the client. Of course. Clients may mail in everything if you desire, or send in via the online portal system. Either one will result in a telephone call to review and ask questions.

Thank You for letting us serve you, our valued clients! May you enjoy this joyous Holiday season safely and I look forward to hearing from everyone and seeing you soon!

Henry C Kulik, Jr.
Certified Public Accountant, LLC