Business Vehicle Trade-Ins? Rules have changed over the years…Posted on September 25th, 2020
Here’s an example of a trade-in and the rules associated with it. A three-year-old vehicle was traded in on a new SUV with a gross vehicle weight rating (GVWR) of 6,075 pounds.
The dealer granted a trade-in value of $13,000 and paid off the $16,000 remaining note on the old vehicle.
Under the tax law, after the Tax Cuts and Jobs Act, this is a sale of the old vehicle traded in and a purchase of the new SUV. So, we have two different transactions. In this story, We are going to deal with only the trade-in.
The seller used the vehicle that she traded in 70 percent for business, drove it 41,000 total miles, and used IRS mileage rates to calculate her business vehicle deductions. The seller paid $50,000 for the vehicle in 2018. Here’s how we calculated the tax-deductible loss:
|Net purchase price (basis)||$50,000|
|2018: 18,000 x 25 cents||4,500|
|2019: 16,000 x 26 cents||4,680|
|2020: 7,000 x 27 cents||1,890|
|Pay off the loan||16,000|
|Total trade amount||29,000|
|Net loss on sale||9,930|
|Deductible loss||$ 6,951|
Calculation. Because we believe it is easier, we use 100 percent for the calculations and then use the 70 percent business percentage to find the final amount—the deductible loss, in this case.
Depreciation. Within the IRS standard mileage rate is a component for depreciation. For example, the 2020 standard mileage rate is 57.5 cents a mile, with 27 cents for depreciation incorporated in that rate.
Trade-in. The dealer allowed $13,000 as the fair market value of the trade. This operates as cash when Joyce makes her purchase of the new SUV. In addition, the dealer paid off the existing note, so the total value of the trade for gain and loss purposes is $29,000 ($13,000 + $16,000).
Deductible loss. The $6,951 loss is an ordinary loss that Joyce reports on IRS Form 4797.
The important part of the seller’s story is that her trade-in, like all trade-ins of vehicles and other personal property, is a sale. And that means there’s a taxable gain or loss.
All about Limited Liability Companies (LLC’s)Posted on August 17th, 2020
Limited liability companies (LLCs) are a popular choice of entity for small businesses and investment activities.
LLC owners are called members.
- Single-member LLCs have one owner, although spouses who jointly own an LLC in a community property state can elect treatment as a single member LLC for federal income tax purposes.
- We will call LLCs with two or more members multimember LLCs.
Key point: LLCs are not corporations. But LLCs can offer similar legal protection to their members (owners).
Here are the most important things to know about LLCs.
LLCs Offer Legal Protection
Using an LLC to conduct a business or investment activity generally protects your personal assets from LLC-related liabilities—similar to the legal protection offered by a corporation.
As you know, liabilities can arise from simple things—like the Federal Express guy slipping on the banana peel someone left on your front steps—or in seemingly endless and complicated ways if you have employees.
Key point. As a general rule, no type of entity (including an LLC) will protect your personal assets from exposure to liabilities related to your own professional malpractice or your own tortious acts.
Tortious acts are wrongful deeds other than by breach of contract—such as negligent operation of a motor vehicle resulting in property damage or injuries. The issue of liability protection offered by an LLC is a matter of state law. Seek advice from a competent business attorney for details.
Single-Member LLC Tax Basics
Single-member LLC businesses owned by individuals are treated as sole proprietorships for federal income tax purposes unless you elect to treat the single-member LLC as a corporation.
In other words, the default federal income tax treatment for a single-member LLC business is sole proprietorship status. Under the default treatment, you simply report all the single-member LLC’s income and expenses on Schedule C of your Form 1040.
If the single-member LLC business activity generates net self-employment income, you will report that on Schedule SE of your Form 1040.
Rental. If the single-member LLC activity is a rental activity, you report the rental income and expenses on Schedule E of your Form 1040.
Farm or ranch. You report the numbers for a farming or ranching activity on Schedule F.
Simple. You don’t need to file a separate federal income tax return for the single-member LLC. And other things being equal, simple is good.
Three key points
- The big federal income tax advantage of operating as a single-member LLC is extreme simplicity.
- The big non-tax advantage is liability protection, under applicable state law.
- As mentioned, you can elect to treat a single-member LLC as a corporation for federal income tax purposes, but we don’t recommend that, for reasons we explain later.
Multimember LLC Tax Basics
Multimember LLCs are treated as partnerships for federal income tax purposes unless you elect to treat the LLC as a corporation.
In other words, the default federal income tax treatment of a multimember LLC is partnership status. Under the default treatment, you must file an annual partnership federal income tax return on Form 1065.
From the Form 1065 partnership return, the LLC issues an annual Schedule K-1 to each member to report that member’s share of the LLC’s income and expenses. The member then takes those taxable and deductible amounts into account on the member’s own return (Form 1040 for a member who is an individual).
The LLC itself does not pay federal income tax. This arrangement is called pass-through taxation, because the income and expenses from the LLC’s operations are passed through to the members who then take them into account on their own returns. (The same pass-through taxation concept applies to entities set up as “regular” partnerships under applicable state law.)
Electing to Treat the LLC as a Corporation for Tax Purposes
You have the option of electing to treat a single-member LLC or multimember LLC as a corporation for federal income tax purposes. You do that by filing IRS Form 8832, Entity Classification Election, to change the default classification of the single-member LLC or multimember LLC to the new classification as a corporation.
If your desire is to have your LLC treated as an S corporation, it can elect S corporation status directly using IRS Form 2553, or it can elect C corporation treatment on Form 8832 and then S corporation treatment on IRS Form 2553.
While there may be valid non-tax reasons for electing to treat an LLC as a corporation, we think tax reasons generally dictate against taking that step.
If you conclude that there are tax advantages to electing corporate status, why not just actually incorporate your operation in the first place? That’s simpler. Keeping your tax matters simple is generally good policy.
Electing corporate status from the LLC could have unintended tax consequences. For example, you can potentially collect federal-income-tax-free gains from selling stock in a qualified small business corporation (QSBC). But you must own shares and hold them for over five years to cash in on this super-favorable deal. Can an LLC membership (ownership) interest count as QSBC stock for this purpose? Apparently not. It’s not stock.
If you are looking for the QSBC stock break, just set up as a corporation in the first place.
Here’s another example: a special federal income tax break allows you to annually deduct up to $50,000 of losses from selling eligible small business stock, or $100,000 if you’re a married joint filer, and treat the loss as a tax-favored ordinary loss instead of a tax-disfavored capital loss.
Can an LLC membership interest count as eligible stock for this purpose? Apparently not. It’s not stock. Avoid the problem—set up as a corporation in the first place.
Do You Qualify for the $100,000 IRS Grab and Repay?Posted on July 16th, 2020
What the CARES Act Says
A coronavirus-related distribution from your qualified retirement plan, Section 403(b) plan, or IRA gets two tax benefits:
- If you withdraw and keep the money, you pay no 10 percent early withdrawal penalty and you can spread the income equally over tax years 2020, 2021, and 2022. You also can elect to include it all in tax year 2020, if you want.
- You can repay the money within three years of the distribution date and pay no tax or penalty on the amount.
Under the CARES Act relief, you qualify for a coronavirus-related distribution if
- you, your spouse, or your dependent is diagnosed with COVID-19 with a CDC-approved test;
- you experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
- you experience adverse financial consequences as a result of being unable to work due to lack of childcare due to COVID-19; or
- you experience adverse financial consequences as a result of closing or reducing your business hours due to COVID-19.
And then there are two additional CARES Act rules for coronavirus-related distributions:
- You can’t treat more than $100,000 per person as a coronavirus-related distribution, and
- You must take the distribution on or after January 1, 2020, and before December 31, 2020.
IRS Expands Relief
With the new IRS relief, you now also qualify for coronavirus-related distributions if you experience adverse financial consequences because
- you, your spouse, or a member of your household has a reduction in pay or self-employment income due to COVID-19;
- you, your spouse, or a member of your household has a job offer rescinded or start date for a job delayed due to COVID-19;
- your spouse or a member of your household is quarantined, is furloughed or laid off, or has work hours reduced, due to COVID-19;
- your spouse or a member of your household is unable to work due to lack of childcare due to COVID-19; or
- your spouse or a member of your household owns or operates a business that closed or reduced hours due to COVID-19.
For purposes of applying the additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.
Merriam-Webster defines a household as
- those who dwell under the same roof and compose a family, and
- a social unit composed of those living together in the same dwelling.
You have to think roommates living together create a household, and if one of them is affected by COVID-19—say, lost his or her job and stopped contributing to the rent—the remaining roommates were adversely affected and should be entitled to the IRA grab and repay strategy.
Your Repayment Options
You have many repayment options, as we explain below. To make this easy, let’s say you grab $30,000 from your IRA today and you want to know how you can repay the $30,000 with no taxes or penalties. Here are five scenarios:
Scenario 1. You repay the $30,000 before you timely file your 2020 tax return:
- You don’t include any of the $30,000 in income on your 2020 tax return. You pay no taxes or penalties.
Scenario 2. You elect to include all $30,000 as income on your timely filed 2020 tax return, but then repay the full $30,000 sometime between filing the 2020 return and July 15, 2023:
You amend your 2020 tax return to remove the $30,000 from income and claim a refund of tax paid on that amount.
Scenario 3. You include $10,000 as income on your timely filed 2020 tax return, but then repay the full $30,000 sometime between filing the 2020 return and July 15, 2023:
- You claim $10,000 of income on your original 2020 tax return, and
- You later amend your 2020 tax return to remove the $10,000 from income and claim a refund of tax paid on that amount.
Scenario 4. You include $10,000 as income on your timely filed 2020 tax return, but then decide to repay $10,000 of the total $30,000 distribution, which you do on March 1, 2022:
- You claim $10,000 of income on your 2020 tax return,
- You claim no income on your 2021 tax return (because you made the $10,000 repayment prior to filing the return), and
- You claim $10,000 of income on your 2022 tax return.
Scenario 5. You include $10,000 as income on your timely filed 2020 tax return, but then decide to repay $20,000 of the total $30,000 distribution, which you do on November 1, 2021. This one is tricky because you have two ways to do it:
- You claim no income from the distribution on either your 2021 or 2022 tax return, or
- You claim $10,000 of income on your 2022 tax return and amend your 2020 tax return to remove the $10,000 from income and claim a refund of tax paid on that amount.
New Tax Tips Affecting 2020Posted on June 16th, 2020
Haven’t Filed Past Returns? IRS May File One for You and It Won’t Be PrettyPosted on June 11th, 2020
There are millions of individuals who do not file a tax return each year, many of them simply because their income is below the filing threshold levels for the year based upon their filing status.
Still others simply procrastinate and risk forfeiting their rightful refunds, including earned income tax credits, child tax credits, tuition credits and excess withholding.
Then there are others who believe they owe, whether they actually do or not, and don’t file because they think they can’t pay what they owe. Not filing on time and owing money can result in a 5% per month (maximum 25%) failure-to-file penalty, plus failure-to-pay penalties and statutory interest in addition to what is owed. It does not make sense to incur unnecessary penalties, especially when the IRS has payment options and, in certain hardship situations, compromise options that may apply.
If you are in the situation just described and think the IRS is not aware of you, think again. The IRS information reporting system knows a lot more about you than you might imagine. Here is just a short list of items that get reported to the IRS’s computer and added to your file:
- W-2s for wages filed by employers.
- W-2Gs for wagering winnings from racetracks, casinos, poker parlors, etc.
- 1099-MISC forms from businesses you have contracted with.
- 1099-INT and 1099-DIV showing interest and dividends earned from financial accounts.
- 1099-B forms showing the gross proceeds from the sales of securities.
- 1099-K forms showing the credit card transactions for your business.
- 1099-S forms reporting the gross proceeds from sales of real estate.
- K-1s from businesses and trusts you are connected with.
- Form 8300 transaction forms from banks showing large transactions.
- The list goes on and on.
So what does the IRS do with all this information when you haven’t filed a return? Well, if the gross income is enough that they believe you have a filing requirement, the IRS will prepare a substitute return for you based upon the information they have.
This is when things can get really nasty, because the substitute return is based solely on the income reported to the IRS without the benefit of exemptions, itemized deductions, any of the many credits to which you may be entitled, or cost basis for any property or assets sold. In addition, the substitute return will treat you as married filing separate (the filing status for which the higher tax rates kick in quicker).
Along with the substitute return, you will generally receive a notice of statutory deficiency (commonly referred to as a 90-day letter), which will give you 90 days to file an appeal with the Tax Court. At this point things really get expensive because you will need a tax attorney to handle the appeal. If you ignore the 90-day letter or the 90 days run out, the tax assessment becomes final and the IRS can institute liens and levies. Then life really gets miserable. Your credit rating will take a nosedive, liens will be put on your property, and wages and refunds will be attached.
Although there are further remedies, they are increasingly expensive in terms of legal costs. Don’t let things escalate to this point; give this office a call so we can get your past returns filed before you start receiving notices from the IRS. If you’ve already received notices and have been ignoring them, gather them up in chronological order and bring them to the office so we can figure out the next steps required. If you have lost or misplaced past years’ records, we can order a transcript from the IRS that includes the information reported from various sources for each unfiled year. There are even ways to get penalties waived.
Small Business Research Tax Credit, Do you Qualify?Posted on June 9th, 2020
Jack’s Journal: Issue 1Posted on June 2nd, 2020
Self Employed with No Employees? Get your Paycheck Protection Program Cash Now!Posted on May 26th, 2020
Get ready for this: “I’m from the government, and I’m here to help.”
Here’s the deal: “I’m going to give you $20,833 today. I want you to give me $5,448 no later than two years from now. You can keep the $15,385 difference, tax-free—no strings.”
It’s true. The lucky recipient could be you. To obtain the full $15,385 tax-free cash result in this deal (one of many COVID-19-related assistance programs), you must
- be self-employed,
- have no employees, and
- have self-employment net profits of $100,000 or more.
If you are self-employed, you have no employees, and your net profits are
- $75,000, you pocket $11,538, tax-free.
- $50,000, you pocket $7,692, tax-free.
- $25,000, you pocket $3,846, tax-free.
The results above come from the COVID-19 Payroll Protection Program (PPP). When you are a self-employed taxpayer with no employees, the PPP treats you as the one and only employee, and treats your net profits as your payroll.
Under the PPP, you go to your bank or another Small Business Association (SBA) bank or lender and obtain the PPP loan based on your 2019 net profits. It’s a no-doc loan—super easy. No credit report, no nothing.
Do This Now
- Read this letter.
- Get your bank (or another bank) to accept your application.
The SBA runs out of PPP money in a hurry. The second round of funding started a few days ago.
If you snooze, you lose. And then you’ll have to wait until round 3 of funding, should it take place. (We think it will.)
If you are self-employed, with no employees, you absolutely need to qualify for this loan and its forgiveness. Think free money. Think cash help during this crisis.
Here are three questions and answers that will help you understand this program during these COVID-19 times. Read on.
Question 1. I have income from self-employment, have no W-2 employees, and file a Form 1040, Schedule C. Am I eligible for a PPP loan?
Answer 1. You are eligible for a PPP loan if
- you were in operation on February 15, 2020;
- you are an individual with self-employment income (such as an independent contractor or a sole proprietor);
- your principal place of residence is in the United States; and
- you have filed or will file a Form 1040 Schedule C for 2019.
Question 2. Since I have no employees, how do I calculate the maximum amount I can borrow, and what documentation is required?
Answer 2. Follow the three steps listed below:
- Find your 2019 IRS Form 1040 Schedule C line 31 net profit. (If you have not yet filed your 2019 tax return, don’t fret. Fill out the Schedule C now. You need it for the loan.) If the net profit amount is over $100,000, reduce it to $100,000.
- Calculate the average monthly net profit amount (divide the net profit by 12).
- Multiply the average monthly net profit amount by 2.5.
Question 3. What amount of the loan qualifies for forgiveness (remember, I don’t have any employees)?
Answer 3. You are going to like this. With no employees, your loan forgiveness is
- eight weeks’ worth (8/52) of your 2019 net profit (yes, last year, from that Schedule C you used for the loan amount—you don’t have to consider your 2020 profits);
- mortgage interest paid during the covered period (eight weeks from loan receipt) on real or personal business property (the interest you will deduct on Schedule C);
- rent payments during the covered period on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments); and
- utility payments under service agreements dated before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business utility payments).
The SBA will reduce your loan forgiveness by any COVID-19 qualified sick or family leave tax credit you claimed. Your loan is for two years, but you don’t have to wait much longer than the eight weeks to apply for forgiveness. There are no prepayment penalties.
Loan amount. Say your Schedule C shows $120,000 of net profit. Your limit is $100,000. Divide that by 12, and your monthly amount is $8,333. Multiply that by 2.5, and your loan amount is $20,833.
Loan forgiveness. Your loan forgiveness is $15,385 (8/52 of $100,000) plus qualifying interest, rent, and utilities, not to exceed total loan forgiveness of more than $20,513.
In the SBA loan application, the amounts from this example show as follows:
- Average monthly payroll: $8,333
- x 2.5 = $20,833
- Number of employees: self
The paperwork is easy:
- Your 2019 1040 Schedule C (if you have not filed yet, complete Schedule C now)
- Proof that you were self-employed during 2019, such as a 2019 Form 1099-MISC, invoice, bank statement, or other book of record
- Proof that you were operating as a Schedule C business on or around February 15, 2020 (a 2020 invoice, bank statement, or book of record)
- Completed application with an SBA lender
Should You Really Wait to File your Taxes Even Though They moved the Tax Filing Deadline?Posted on May 7th, 2020
The IRS decided to use its authority in a national emergency to postpone certain tax return filings and payments. This change affects every one of you, and the rules are tricky—after all, this is tax law.
We’ll explain who gets relief; what the IRS postponed; and perhaps more important, what wasn’t postponed. We’ll also tell you whether you should file regardless of the postponement.
First, to qualify for postponement, you must have a tax return that is due on April 15, 2020. In general, the returns due on April 15 include the following:
- An individual filing a Form 1040 series return
- A trust or estate filing Form 1041
- A partnership filing Form 1065
- A corporation filing a Form 1120 series return
In its FAQ, the IRS did not include the Form 1065 for partnerships or the Form 1120S for S corporations when it listed the forms available for relief.
That’s because most partnerships and S corporations have calendar-year returns, making the 2019 tax return due March 15, 2020. But if you have a fiscal-year partnership or S corporation with a due date of April 15, 2020, it should qualify for relief under the official guidance.
Second, you must have one of the following due on April 15, 2020:
- Tax year 2019 federal income tax return
- Tax year 2019 federal income tax payment
- Tax year 2020 federal estimated income tax payment
This grant of relief does not apply to
- federal payroll taxes, including federal tax deposits, and
- federal information returns.
Federal Tax Return Filing Deadline
If you qualify for relief, your 2019 federal income tax return is now due July 15, 2020.
You do not have to file an extension on Form 4868 or Form 7004 or contact the IRS to get the automatic postponement to July 15, 2020.
If you need additional time beyond July 15, 2020, to file your tax return, you can file Form 4868 or Form 7004 on or before July 15, 2020, and get an automatic extension to your normal extension due date:
- September 30 for Form 1041
- October 15 for Forms 1040 and 1120
IRA, HSA, and Retirement Plan Payments
The COVID-19 grant of relief also postpones the following payment deadlines until July 15, 2020:
- 2019 individual retirement account (IRA) contribution
- 2019 health savings account (HSA) contribution
- 2019 employer qualified retirement plan contributions
Should You Wait?
If your tax return shows a refund, file it as soon as possible—get your cash as quickly as you can.
If you have the cash and liquidity to make your tax payments on April 15, 2020, but keeping those payments in your bank account earns extra interest income, we see no reason you shouldn’t delay until July 15, 2020.
If you have problems with making timely estimated tax payments, we recommend you keep the normal schedule as long as you have the liquidity and cash to make the payments. We don’t want you to fall into bad habits and possibly create an unpayable balance due on your 2020 tax return.
Rent from your Spouse to Save on Self-Employment TaxesPosted on March 25th, 2020
As a sole proprietor, you know that the 15.3 percent self-employment tax can eat up your profits in a hurry.
You may be able to use a simple strategy to ease this tax burden.
If you own an office building or other assets, you can set up a rental arrangement with your spouse that could significantly cut your self-employment taxes.
Here’s an example of how this strategy works:
Wendy operates a sole proprietorship and earns $100,000 of net income. This income creates a self-employment tax liability of $14,129.55.
Wendy gives the office building to Jim, her spouse, who then rents the office space back to Wendy. Wendy pays Jim $2,000 rent each month (the fair rental value of the building), which moves $24,000 off Schedule C and onto Schedule E. Schedule E, unlike Schedule C, does not give rise to self-employment taxes.
The rent-from-my-spouse strategy cuts Wendy’s self-employment income by $24,000, which puts an extra $3,391.09 of cash in her pocket at the end of the year. And she plans on doing this for at least 10 years, which means she’ll pocket $33,910.90 before considering her investment earnings on this money.
Think that this may be an option for you? Give us a call today at 480-355-1398 for a free consult