While the COVID-19 crisis has devastated many existing businesses, the pandemic has also created opportunities for entrepreneurs to start-up new businesses.
For example, some businesses are being launched online to provide products and services to people staying at home.
Entrepreneurs often don’t know that many expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.
If you’re starting or planning a new enterprise, keep these key points in mind:
Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
Under the Internal Revenue Code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t get you very far today!
And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins.
Generally, that means the year when the business has all the pieces in place to begin earning revenue.
To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as:
Expenses that qualify In general, start-up expenses include all amounts you spend to:
Investigate the creation or acquisition of a business
To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began.
One example is money you spend analyzing potential markets for a new product or service.
To qualify as an “organization expense,” the expenditure must be related to creating a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.
Thinking ahead If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the elections described above. Recordkeeping is critical.
At David Mills, CPA, LLC we’re here to help answer your business start-up questions and to offer advice. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.
In light of the novel coronavirus (COVID-19) pandemic, many businesses are interested in donating to charity. In order to incentivize charitable giving, the Coronavirus Aid, Relief and Economic Security (CARES) Act made some liberalizations to the rules governing charitable deductions.
Before the CARES Act, the total charitable deduction that a corporation could generally claim for the year couldn’t exceed 10% of corporate taxable income (as determined with several modifications for these purposes).
Contributions in excess of the 10% limit are carried forward and may be used during the next five years (subject to the 10%-of-taxable-income limitation each year).
What changed? Under the CARES Act, the limitation on charitable deductions for corporations (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 taxable income (modified). No connection between the contributions and COVID-19 activities is required.
At a time when many people are unemployed, your business may want to contribute food inventory to qualified charities.
In general, a business is entitled to a charitable tax deduction for making a qualified contribution of “apparently wholesome food” to an organization that uses it for the care of the ill, the needy, or infants.
“Apparently wholesome food” is defined as food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations, even though it may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.
Before the CARES Act, the aggregate amount of such food contributions that could be taken into account for the tax year generally couldn’t exceed 15% of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which the contributions were made. This was computed without regard to the charitable deduction for food inventory contributions.
What changed? Under the CARES Act, for contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations.
For other business taxpayers, it increases from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
Be aware that in addition to these changes affecting businesses, the CARES Act also made changes to the charitable deduction rules for individuals.
Contact David Mills, CPA, LLC if you have questions about making charitable donations and securing a tax break for them. We can explain the rules and compute the maximum deduction for your generosity.
The IRS recently released the 2021 inflation-adjusted amounts for Health Savings Accounts (HSAs).
An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.”
An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.”
In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident, and specific disease insurance).
In general, a high deductible health plan (HDHP) is a plan that has an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage.
In addition, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) cannot exceed $5,000 for self-only coverage, and $10,000 for family coverage.
Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA.
This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.
In Revenue Procedure 2020-32, the IRS released the 2021 inflation-adjusted figures for contributions to HSAs.
For calendar year 2021, the annual contribution limitation for an individual with self-only coverage under an HDHP is $3,600. For an individual with family coverage, the amount is $7,200. This is up from $3,550 and $7,100, respectively, for 2020.
For calendar year 2021, an HDHP is a health plan with an annual deductible that isn’t less than $1,400 for self-only coverage or $2,800 for family coverage (these amounts are unchanged from 2020).
In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) can’t exceed $7,000 for self-only coverage or $14,000 for family coverage (up from $6,900 and $13,800, respectively, for 2020).
There are many advantages to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate year after year tax free and be withdrawn tax free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care, and premiums for long-term-care insurance.
In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce.
For more information about HSAs, contact your employee benefits representative or a tax advisor at David Mills, CPA, LLC.
Specifically, an expense isn’t deductible if both:
The CARES Act allows a recipient of a PPP loan to use the proceeds to pay payroll costs, certain employee healthcare benefits, mortgage interest, rent, utilities, and interest on other existing debt obligations.
A recipient of a covered loan can receive forgiveness of the loan in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the loan’s origination date:
The law provides that any forgiven loan amount “shall be excluded from gross income.”
So the question arises: If you pay for the above expenses with PPP funds, can you then deduct the expenses on your tax return?
The tax code generally provides for a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.
Covered rent obligations, covered utility payments, and payroll costs consisting of wages and benefits paid to employees comprise typical trade or business expenses for which a deduction generally is appropriate.
The tax code also provides a deduction for certain interest paid or accrued during the taxable year on indebtedness, including interest paid or incurred on a mortgage obligation of a trade or business.
In IRS Notice 2020-32, the IRS clarifies that no deduction is allowed for an expense that is otherwise deductible if payment of the expense results in forgiveness of a covered loan pursuant to the CARES Act and the income associated with the forgiveness is excluded from gross income under the law.
The Notice states that “this treatment prevents a double tax benefit.” Two members of Congress say they’re opposed to the IRS stand on this issue. Senate Finance Committee Chair Chuck Grassley (R-IA) and his counterpart in the House, Ways and Means Committee Chair Richard E. Neal (D-MA), oppose the tax treatment.
Neal said it doesn’t follow congressional intent and that he’ll seek legislation to make certain expenses deductible.
At the moment, tax rates are at historic lows. We have record deficits and are looking to add more. Where do you think tax rates will be at in 1 year? 3 years? 5 years or more? Here are a few things to consider when thinking about taxes in 2020.
While everyone’s situation is different, we believe this is a serious consideration in tax planning for many individuals.
Most IRA fund balances are at a low point and many taxpayers may see lower income in 2020. This may be a good time to convert some or all your funds to a Roth IRA.
You can manage the tax brackets. For example, an estimate of income can be prepared to find out how much more income you can have to stay in the same tax bracket. This way you can effectively manage your tax burden.
If your modified adjusted gross income in 2020 for married filing jointly is $196,000 or less you can contribute directly to a Roth IRA. Income at $206,000 cannot make a Roth contribution.
You can contribute to a traditional IRA. You can then convert to a Roth IRA. There are other limitations so be sure to discuss this with your financial adviser or make an appointment with us to discuss how this works and if a conversion will help you in retirement.
The IRS has a $300 cash (not non-cash such as a Goodwill donation) charitable deduction for 2020 which can be used whether you itemize or not.
If you have not begun taking required minimum distributions (RMD’s) in 2020 you can wait until age 72 to start. The previous rules were at age 70 ½. Note that if you have already started your RMD’s you cannot skip them until age 72-you are bound by the previous rules.
There are other considerations for this so it is best to consult your financial adviser.
As a result of the coronavirus (COVID-19) crisis, your business may be using independent contractors to keep costs low. But you should be careful that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be an expensive mistake.
The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one.
If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax.
Often, a business must also provide the worker with the fringe benefits that it makes available to other employees. And there may be state tax obligations as well. These obligations don’t apply if a worker is an independent contractor.
In that case, the business simply sends the contractor a Form 1099-MISC for the year showing the amount paid (if the amount is $600 or more).
Who is an “employee?” Unfortunately, there’s no uniform definition of the term. The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing.
Otherwise, the individuals are generally independent contractors. But other factors are also taken into account. Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530.
In general, this protection applies only if an employer:
Note: Section 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.
Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee.
However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.
Businesses should consult with the staff at David Mills, CPA, LLC before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and inadvertently trigger an employment tax audit.
It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules. Be aware that workers who want an official determination of their status can also file Form SS-8.
Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities. If a worker files Form SS-8, the IRS will send a letter to the business. It identifies the worker and includes a blank Form SS-8.
The business is asked to complete and return the form to the IRS, which will render a classification decision.
Contact the small business experts at David Mills, CPA, LLC if you’d like to discuss how these complex rules apply to your business.
For businesses who are part of the Paycheck Protection Program, there are a few tips and guidelines to know and understand:
For more information, contact the experts at David Mills, CPA, LLC.
To help you wade through all the information about the COVID-19 stimulus payment, also known as the Economic Impact Payment, we’re offering tips to a few key things you should know:
For more information, contact the tax professionals at David Mills, CPA, LLC.
The IRS has issued guidance providing relief from failure to make employment tax deposits for employers that are entitled to the refundable tax credits provided under two laws passed in response to the coronavirus (COVID-19) pandemic.
The two laws are the Families First Coronavirus Response Act, which was signed on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, which was signed on March 27, 2020.
The tax code imposes a penalty for any failure to deposit amounts as required on the date prescribed, unless such failure is due to reasonable cause rather than willful neglect.
An employer’s failure to deposit certain federal employment taxes, including deposits of withheld income taxes and taxes under the Federal Insurance Contributions Act (FICA) is generally subject to a penalty.
Employers paying qualified sick leave wages and qualified family leave wages required by the Families First Act, as well as qualified health plan expenses allocable to qualified leave wages, are eligible for refundable tax credits under the Families First Act.
Specifically, provisions of the Families First Act provide a refundable tax credit against an employer’s share of the Social Security portion of FICA tax for each calendar quarter, in an amount equal to 100% of qualified leave wages paid by the employer (plus qualified health plan expenses with respect to that calendar quarter).
Additionally, under the CARES Act, certain employers are also allowed a refundable tax credit under the CARES Act of up to 50% of the qualified wages, including allocable qualified health expenses if they are experiencing:
This credit is limited to $10,000 per employee over all calendar quarters combined.
An employer paying qualified leave wages or qualified retention wages can seek an advance payment of the related tax credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
The Families First Act and the CARES Act waive the penalty for failure to deposit the employer share of Social Security tax in anticipation of the allowance of the refundable tax credits allowed under the two laws.
IRS Notice 2020-22 provides that an employer won’t be subject to a penalty for failing to deposit employment taxes related to qualified leave wages or qualified retention wages in a calendar quarter if certain requirements are met.
Contact David Mills, CPA, LLC for more information about whether you can take advantage of this relief.
During the COVID-19 health emergency, will your business receive a PPP payment?
The funds from the PPP (paycheck protection program) will hopefully be released soon. The best feature is that some or all of the loan can be forgiven.
However, please be aware, your banker will require strict documentation to have the loan forgiven.
While each bank may have slightly different paperwork requirements, we recommend the following: