We’ve reached 2021, but it has already been an eventful January. Tax season is in full swing, so we want to share a few things:
As you know, there is another round of stimulus payments. Many have already received them. The 2020 stimulus payments will be reconciled on the tax return. These payments are not income.
We will need to know the amount of 2020 stimulus payment you received. At this time, the IRS website only tells us if you received a payment, not how much the payment was. You may not have received the correct amount due to you. For example, if you had a child in 2020, you qualify for an additional $500. If you want to check on your stimulus payment go to this IRS website.
If you do not itemize deductions, you may qualify for a $600 charitable contribution deduction. This must be a cash donation, not a donation of goods typically given to Goodwill, etc.
Medical expense deduction starts at 7.5% of income, not 10% previously allowed. Keep in mind most people do not qualify for this deduction due to income levels or insurance payments.
Educator expenses now include protective equipment expenses. The maximum credit remains at $250.
Private mortgage insurance premiums can be deductible again for the 2020 tax season.
The standard mileage rate is .56 per mile in 2021.
Did you take a distribution from your qualified retirement plan or IRA? If so, and it was for COVID-19 reasons you will not incur the 10% early withdrawal penalty. Also, you have options on how much to report on your tax return. For example, if you withdrew $60,000 from your IRA you can report the entire amount in 2020 or spread this out over three years.
If you repay the loan within three years amended returns can be filed to refund the tax paid on the distribution. Contact us for the COVID-19 rules on this distribution.
Congress recently passed, and President Trump signed, a new law providing additional relief for businesses and individuals during the COVID-19 pandemic.
The CAA permits certain smaller businesses who received a PPP loan to take out a “PPP Second Draw Loan” of up to $2 million. To qualify, you must:
Eligible entities include for-profit businesses (including those owned by sole proprietors), certain nonprofit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, independent contractors and small agricultural co-operatives.
Loan terms. Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the year preceding the loan or the calendar year.
However, borrowers in the hospitality or food services industries may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.
Gross receipts and simplified certification of revenue test. PPP Second Draw Loans of no more than $150,000 may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement.
Nonprofits and veterans’ organizations may use gross receipts to calculate their revenue loss standard.
Loan forgiveness. Like the first PPP loan, a PPP Second Draw Loan may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as rent, mortgage interest and utilities of 40%. Forgiveness of the loans isn’t included in income as cancellation of indebtedness income.
Application of exemption based on employee availability. The CAA extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, it applies the rule of reducing loan forgiveness for a borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25%.
Deductibility of expenses paid by PPP loans. The CARES Act didn’t address whether expenses paid with the proceeds of PPP loans could be deducted. The IRS eventually took the position that these expenses were nondeductible. The CAA, however, provides that expenses paid both from the proceeds of loans under the original PPP and PPP Second Draw Loans are deductible.
Contact David Mills, CPA, LLC with any questions you might have about PPP loans, including applying for a Second Draw Loan or availing yourself of forgiveness.
Some might say the end of one calendar year and the beginning of another is a formality. The linear nature of time doesn’t change, merely the numbers we use to mark it.
Others, however, would say that a fresh 12 months — particularly after the arduous, anxiety-inducing nature of 2020 — creates the perfect opportunity for business owners to gather their strength and push ahead with greater vigor. One way to do so is to ring in the new year with a systematic approach to renewing everyone’s focus on profitability.
Create an idea-generating system Without a system to discover ideas that originate from the day-in, day-out activities of your business, you’ll likely miss opportunities to truly maximize the bottom line. What you want to do is act in ways that inspire and allow you to gather profit-generating concepts. Then you can pick out the most actionable ones and turn them into bottom-line-boosting results. Here are some ways to create such a system:
Share responsibility for profitability with your management team. All too often, managers become trapped in their own information silos and areas of focus. Consider asking everyone in a leadership position to submit ideas for growing the bottom line.
Instruct supervisors to challenge their employees to come up with profit-building ideas. Leaving your employees out of the conversation is a mistake. Ask workers on the front lines how they think your business could make more money.
Target the proposed ideas that will most likely increase sales, cut costs or expand profit margins. As suggestions come in, use robust discussions and careful calculations to determine which ones are truly worth pursuing.
Tie each chosen idea to measurable financial goals. When you’ve picked one or more concepts to pursue in real life, identify which metrics will accurately inform you that you’re on the right track. Track these metrics regularly from start to finish.
Name those accountable for executing each idea. Every business needs its champions! Be sure each profit-building initiative has a defined leader and team members.
Follow a clear, patient and well-monitored implementation process. Ideas that ultimately do build the bottom line in a meaningful way generally take time to identify, implement and execute. Don’t look for quick-fix measures; seek out business transformations that will lead to long-term success.
A carefully constructed and strong-performing profitability idea system can not only grow the bottom line, but also upskill employees and improve morale as strategies come to fruition. Our firm can help you identify profit-building opportunities, choose the right metrics to evaluate and measure them, and track the pertinent data over time.
The Consolidated Appropriations Act 2021 is expected to be signed by President Trump today. There are key provisions for both individuals and businesses.
This is a 5,600-page document so it will take some time to provide all the details but the following is what has been released so far:
For Individuals: The full credit is $600 per individual, $1,200 per couple, and $600 for children. Children 17 and older are not eligible for the credit. There are income limits as in the first round of payments.
Payments are expected to start early next week. If you have not received the first payment or it was incorrect, you will be able to receive this on your 2020 tax return filing.
If you do not receive the second payment or it is an incorrect amount, you can claim this on your 2020 tax filing. For example, if a family has a child born in 2020 the additional $600 will not be included in the next round of payments. This amount will be claimed as a credit when filing the 2020 tax return.
Unemployment assistance is extended by 16 weeks. Supplemental federal unemployment benefits will continue to April 2021 instead of ending in December. The current CDC eviction moratorium will be extended until January 31, 2021.
For Businesses: Business expenses paid for with PPP proceeds are tax-deductible and the funds are not income. This will be the same rule for the second round of PPP funds.
There will be a second round of PPP funding (PPP2) to both first-time borrowers and those who have received a previous loan.
Previous PPP recipients may apply if:
PPP2 first time borrowers include:
Borrowers that returned all or part of a previous PPP loan can reapply for the maximum amount available to them. As with the first round of PPP, you will apply through your bank for funds.
More details will follow as they’re available. If you have any questions, contact us at David Mills, CPA, LLC.
With a difficult year almost over, and another one on the horizon, now may be a good time to assess the size of your sales force. Maybe the economic changes triggered by the COVID-19 pandemic led you to downsize earlier in the year. Or perhaps you’ve added to your sales team to seize opportunities. In either case, every business owner should know whether his or her sales team is the right size.
To determine your optimal sales staffing level, there are several steps you can take. A good place to start is with various key performance indicators (KPIs) that enable you to quantify performance in dollars and cents.
The KPIs you choose to calculate and evaluate need to be specific to your industry and appropriate to the size of your company and the state of the market in which you operate. If you’re comparing your sales numbers to those of other businesses, make sure it’s an apples-to-apples comparison.
In addition, you’ll need to pick KPIs that are appropriate to whether you’re assessing the performance of a sales manager or that of a sales representative. For a sales manager, you could look at average annual sales volume to determine whether his or her team is contributing adequately to your target revenue goals. Ideal KPIs for sales reps are generally more granular; examples include sales by rep and lead-to-sale percentage.
Rightsizing your sales staff, however, isn’t only a mathematical equation. To customize your approach, think about the specific needs of your company.
Consider, for example, how you handle staffing when sales employees take vacations or call in sick. If you frequently find yourself coming up short on revenue projections because of a lack of boots on the ground, you may want to expand your sales staff to cover territories and serve customers more consistently.
Then again, financial problems that arise from carrying too many sales employees can creep up on you. Be careful not to hire at a rate faster than your sales and gross profits are increasing. If you’re looking to make aggressive moves in your market, be sure you’ve done the due diligence to ensure that the hiring and training costs will likely pay off.
Last, but not least, think about your customers. Are they largely satisfied? If so, the size of your sales force might be just fine. However, salespeople saying that they’re overworked or customers complaining about a lack of responsiveness could mean your staff is too small. Conversely, if you have market segments that just aren’t yielding revenue or salespeople who are continually underperforming, it might be time to downsize.
By regularly monitoring the headcount of your sales staff with an eye on fulfilling reasonable revenue goals, you’ll stand a better chance of maximizing profitability during good times and maintaining it during more challenging periods. Contact David Mills, CPA, LLC, for help choosing the right KPIs and cost-effectively managing your business.
The COVID-19 pandemic and resulting economic impact have hurt many companies, especially small businesses. However, for others, the jarring challenges this year have created opportunities and accelerated changes that were probably going to occur all along.
One particular area of speedy transformation is technology. It’s never been more important for businesses to wield their internal IT effectively, enable customers and vendors to easily interact with those systems, and make the most of artificial intelligence and “big data” to spot trends.
Accomplishing all this is a tall order for even the most energetic business owner or CEO. That’s why many companies end up creating one or more tech-specific executive positions. Assuming you don’t already employ such an individual, should you consider adding an IT exec? Perhaps so.
There are three widely used position titles for technology executives:
1. Chief Information Officer (CIO). This person is typically responsible for managing a company’s internal IT infrastructure and operations. In fact, an easy way to remember the purpose of this position is to replace the word “Information” with “Internal.” A CIO’s job is to oversee the purchase, implementation and proper use of technological systems and products that will maximize the efficiency and productivity of the business.
2. Chief Technology Officer (CTO). In contrast to a CIO, a CTO focuses on external processes — specifically, with customers and vendors. This person usually oversees the development and eventual production of technological products or services that will meet customer needs and increase revenue. The position demands the ability to live on the cutting edge by doing constant research into tech trends while also being highly collaborative with employees and vendors.
3. Chief Digital Officer (CDO). For some companies, the CIO and/or CTO are so busy with their respective job duties that they’re unable to look very far ahead. This is where a CDO typically comes into play. His or her primary objective is to spot new markets, channels or even business models that the company can target, explore and perhaps eventually profit from. So, while a CIO looks internally and a CTO looks externally, a CDO’s gaze is set on a more distant horizon.
As mentioned, these are three of the most common IT executive positions. Their specific objectives and job duties may vary depending on the business in question. And they are by no means the only examples of such positions. There are many variations, including Chief Marketing Technologist and Chief Information Security Officer.
So, getting back to our original question: is this a good time to add one or more of these execs to your staff? The answer very much depends on the financial strength and projected direction of your company. These positions will call for major expenditures in hiring, payroll and benefits. Our firm can help you weigh the costs vs. benefits.
We’ve almost made it through 2020! It’s time to take a look at a few things for your personal tax return.
New charitable contribution option If you do not itemize deductions, you can claim up to $300 of cash or check contributions to a charity on the front page of your tax return. Non-cash donations such as clothing, furniture and other personal property, do not qualify for this deduction. These non-cash donations are still reported on Schedule A (Itemized Deductions).
Did you receive a stimulus payment in 2020? The 2020 tax return asks for any stimulus payment received. If you received too little or none at all this may be the way to receive your payment.
Did you take a distribution from your qualified retirement plan or IRA? If so, and it was for COVID-19 reasons, you will not incur the 10% early withdrawal penalty. Also, you have options on how much to report on your tax return. For example, if you withdrew $60,000 from your IRA, you can report the entire amount in 2020 or spread this out over three years. If you repay the loan within three years, amended returns can be filed to refund the tax paid on the distribution. Contact us for the COVID rules on this distribution.
Look at Roth IRA conversions this year. Did you have less income in 2020? Do you have a traditional IRA? Will your income increase in 2021 and possibly further? What do you think tax rates will be going forward? These are all considerations when looking at Roth IRA conversions. This year may be a good opportunity to pay a one-time lower tax on your conversion. Generally, Roth IRA withdrawals are non-taxable. There are many considerations so call us to discuss your individual situation.
Is your income too high to qualify for a Roth IRA? You can still contribute to a traditional IRA and then convert to a Roth IRA. If you have multiple existing traditional IRA’s the rules are a bit different. Call us and we can discuss the details.
New rules for 529 accounts You can use 529 accounts to pay for apprenticeship program expenses such as fees, books, supplies and equipment required for the program. Also, up to $10,000 (in total, not yearly) can be paid on qualified student loans. This can be for the designated beneficiary or their sibling.
How you can lower capital gains tax With record stock market values check with your financial adviser on estimated capital gains, interest, and dividends on your accounts. Several companies have announced extra year end dividends in anticipation of higher tax rates next year. If you have stock that’s declined in value it may be a good time to sell to offset other gains you may have.
We hope you and your family have a safe and happy holiday season. If you have any questions, please contact us at David Mills, CPA, LLC.
It’s been estimated that there are roughly 5 million family-owned businesses in the United States. Annually, these companies make substantial contributions to both employment figures and the gross domestic product. If you own a family business, one important issue to address is how to best weave together your succession plan with your estate plan.
Transferring ownership of a family business is often difficult because of the distinction between ownership and management succession. From an estate planning perspective, transferring assets to the younger generation as early as possible allows you to remove future appreciation from your estate, minimizing any estate taxes. However, you may not be ready to hand over control of your business or you may feel that your children aren’t yet ready to run the company.
There are various ways to address this quandary. You could set up a family limited partnership, transfer nonvoting stock to heirs or establish an employee stock ownership plan.
Another reason to separate ownership and management succession is to deal with family members who aren’t involved in the business. Providing such heirs with nonvoting stock or other equity interests that don’t confer control can be an effective way to share the wealth with them while allowing those who work in the business to take over management.
An additional challenge to family businesses is that older and younger generations may have conflicting financial needs. Fortunately, strategies are available to generate cash flow for the owner while minimizing the burden on the next generation.
For example, consider an installment sale. These transactions provide liquidity for the owner while improving the chances that the younger generation’s purchase can be funded by cash flows from the business. Plus, so long as the price and terms are comparable to arm’s-length transactions between unrelated parties, the sale shouldn’t trigger gift or estate taxes.
Or, you might want to create a trust. By transferring business interests to a grantor retained annuity trust (GRAT), for instance, the owner obtains a variety of gift and estate tax benefits (provided he or she survives the trust term) while enjoying a fixed income stream for a period of years. At the end of the term, the business is transferred to the owner’s children or other beneficiaries. GRATs are typically designed to be gift-tax-free.
There are other options as well, such as an installment sale to an intentionally defective grantor trust (IDGT). Essentially a properly structured IDGT allows an owner to sell the business on a tax-advantaged basis while enjoying an income stream and retaining control during the trust term. Once the installment payments are complete, the business passes to the owner’s beneficiaries free of gift taxes.
Family-owned businesses play an important role in the U.S. economy. We can help you integrate your succession plan with your estate plan to protect both the company itself and your financial legacy. For more information, contact David Mills, CPA, LLC today.
The Coronavirus Aid, Relief and Economic Security (CARES) Act made changes to excess business losses. This includes some changes that are retroactive and there may be opportunities for some businesses to file amended tax returns.
If you hold an interest in a business, or may do so in the future, here is more information about the changes.
Deferral of the excess business loss limits The Tax Cuts and Jobs Act (TCJA) provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year.
The covered taxpayers are individuals, estates and trusts that own businesses directly or as partners in a partnership or shareholders in an S corporation. The $500,000 and $250,000 limits, which are adjusted for inflation for tax years beginning after calendar year 2018, were scheduled under the TCJA to apply to tax years beginning in calendar years 2018 through 2025.
But the CARES Act has retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025. The postponement means that you may be able to amend: Any filed 2018 tax returns that reflected a disallowed excess business loss (to allow the loss in 2018) and Any filed 2019 tax returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).
Note that the excess business loss limits also don’t apply to tax years that begin in 2020. Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment (see below).
Changes to the excess business loss limits The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 TCJA.
Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to employment aren’t taken into account in calculating an excess business loss.
This means that excess business losses can’t shelter either net taxable investment income or net taxable employment income. Be aware of that if you’re planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021.
Another change provides that an excess business loss is taken into account in determining any NOL carryover but isn’t automatically carried forward to the next year.
And a generally beneficial change states that excess business losses don’t include any deduction under the tax code provisions involving the NOL deduction or the qualified business income deduction that effectively reduces income taxes on many businesses.
Because capital losses of non-corporations can’t offset ordinary income under the NOL rules: Capital loss deductions aren’t taken into account in computing the excess business loss and the amount of capital gain taken into account in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.
Contact David Mills, CPA, LLC with any questions you have about this or other tax matters.
There’s a new IRS form for business taxpayers that pay or receive nonemployee compensation. Beginning with tax year 2020, payers must complete Form 1099-NEC, Nonemployee Compensation, to report any payment of $600 or more to a payee.
Prior to 2020, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee.
These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.
Form 1099-NEC was reintroduced to alleviate the confusion caused by separate deadlines for Form 1099-MISC that report NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers.
The IRS announced in July 2019 that, for 2020 and thereafter, it will reintroduce the previously retired Form 1099-NEC, which was last used in the 1980s.
Payers of nonemployee compensation will now use Form 1099-NEC to report those payments. Generally, payers must file Form 1099-NEC by January 31.
For 2020 tax returns, the due date will be February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.
Form 8809 is used to file for an extension for all types of Forms 1099, as well as for other forms. The IRS recently released a draft of Form 8809. The instructions note that there are no automatic extension requests for Form 1099-NEC. Instead, the IRS will grant only one 30-day extension, and only for certain reasons.
Line 7 lists reasons for requesting an extension. The reasons that an extension to file a Form 1099-NEC (and also a Form W-2, Wage and Tax Statement) will be granted are:
Need help? If you have questions about filing Form 1099-NEC or any tax forms, contact the tax experts at David Mills, CPA, LLC. We can assist you in staying in compliance with all rules.