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Tax Resolution

Taxpayers Need to Take Advantage of the Temporary Gift Tax Break

The coronavirus disease 2019 or COVID-19 has gravely affected the majority of the population. If they didn’t get ill with the virus, they suffered financially from the effects of the disease. Quarantine orders were made, which forced people to work from home. Some companies had to shut down while others had to cut down employees.

The year has been a terrible one and there are no indications that the negative effects are about to end. This is why people have to be smart about their taxes.

There is one thing that people can take advantage of: federal give and estate tax exemption. Through the Tax Cuts and Jobs Act of 2017, this exemption has been doubled temporarily until 2025.

When calculated, the exemption permits a taxpayer to transfer up to $11.58 million that will be free of federal gift or estate tax. For married couples, the amount can be doubled. That’s $23.16 million that will not be taxed.

What taxpayers can do

For people who have properties, this is a great opportunity to present family members with some of their assets before the provision will be dropped to the previous level of $5 million by Jan. 1, 2026. For couples, the amount will be $10 million.

This was not a very popular strategy before because wealthy people fear possible clawback. The fear was not unfounded. There was indeed a risk that a part of the pre-2026 gifts will be under clawback and will be subjected to estate taxes if the exemption amount is lower at the time of the taxpayer’s death.

However, the Internal Revenue Service (IRS) clarified that this will not happen. A November 2019 set of regulations carried the clear interpretation.

Cost segregation study

Of course, there are other strategies to keep in mind aside. For taxpayers with real estate used for commercial purposes, the cost segregation study is always a practical system.

This will allow taxpayers to consider other assets as separate entities for taxing purposes. The purpose of this is to have segregated assets be depreciated much quicker than the real estate. This means that one’s tax due will be greatly reduced. As a result, cash flow will increase.

Coupled with bonus depreciation, the cost segregation study will really help people out during this economically difficult time. The bonus depreciation allows taxpayers to immediately deduct 100% of the cost of qualifying assets that were started to be accounted for between Sept. 28, 2017 and Dec. 31, 2022.

Bonus depreciation will be phased out over four years starting in 2023.

Taxpayers need to be meticulous about their filing to ensure that there will be no red flags raised from their tax return. The chance of being audited by the IRS isn’t that high. In 2019, for example, the figure was less than 0.50%.

Still, it’s better when a taxpayer is prepared for eventualities. Among those that can be considered red flags are the higher-than-normal deductions, claim for significant losses, and the claim of 100% business use of vehicle, among others.

Tax Tips: What Businesses Can Do to Alleviate COVID-19 Effects

Unless the business is Amazon, most businesses really had to suffer economically from COVID-19. The disease didn’t just hit the health of millions of people around the world, it also affected the majority of the businesses.

The worst part is, even if businesses took a financial hit this year, they still need to settle their taxes.

There are also various changes this year because of the coronavirus pandemic. Some businesses, for example, had to revise their work design so that employees can work from home.

Another change that businesses have to employ in their ledgers is the Paycheck Protection Program (PPP). This is a loans program under the CARES (Coronavirus Aid, Relief and Economic Security) Act to help small businesses pay their employees.

PPP covers payroll costs as well as benefits. Interests on rent, utilities and mortgage are also covered. There is also a provision under the CARES Act for loan forgiveness on a part of the PPP loans or all of it. But that would depend on how the loan was used.

The Internal Revenue Service has recently clarified that expenses from the forgivable loans are not tax deductible.

The best thing to do for businesses is to start reviewing their tax requirements so that they can make the best possible decision in order to optimize the benefits of the tax laws and reliefs.

Telecommuting effect

The work-from-home arrangement may seem like a good thing. It may be complicated at first, but as soon as the system is in place, it’s more convenient for the employees. It’s a different situation for management.

Business owners, on the other hand, have to keep track of where the employees are working from. If they are working from a separate state, this could prompt confusion.

It has to be noted that each state has a different set of tax regulations. If this is the case, businesses need to seek assistance immediately before it’s too late.

Cost segregation study

Businesses should really look at the benefits of cost segregation analysis. This is a strategy that allows owners to separate some of its assets from the real estate itself. This way, the assets that are normally part of the building, will be depreciated much quicker. The result is that this will become part of the deduction and cash flow will increase.

The CARES Act also has its own provision that makes the cost segregation study even more beneficial to real estate owners. Qualified improvement property also took in a new meaning. There is now any improvement to an interior section of a building characterized as non-residential property as long as said improvement is placed in service at a later date than was first placed into service.

The accelerated depreciation could mean a deduction of the entire amount of the property the year it has been acquired.

Profit-sharing benefit

With or without the CARES Act, profit sharing is always a sound advice. This is the process of using retirement plans to cut down taxable income at the end of the year.

All these could really help out businesses, which has since been suffering since the start of the pandemic.

Should Business Expenses Paid by PPP Be Deductible?

Everyone suffered when the coronavirus pandemic hit the entire world. In fact, some are still suffering.

In the U.S., President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law to alleviate the economic burden brought on by the pandemic. One of its provisions is the Paycheck Protection Plan (PPP) addition to the Small Business Act.

What is a PPP?

It is a form of forgivable loan for small businesses. This is necessary so that these businesses could continue paying for the salaries of their employees including health benefits. The PPP could also be used for rent, utilities, mortgage, and interest on other debt.

So, should this loan be subjected to federal income tax? Also, should it be subjected to the Pennsylvania Personal Income Tax and Pennsylvania Corporate Net Income Tax.

CARES Act is silent

The coronavirus-related law doesn’t really explain whether the forgivable loan is taxable. As a rule, payments made are always deductible. Of course, there is always an exception or two to the rules.

On a regular situation, salaries or rent would be tax deductible. These are considered income after all. However, it can be argued that the PPP used to pay salary, rent, etc. is a grant.

To understand the situation, it’s important to go back to 1982. In Monaccio vs. Commissioner, a taxpayer wanted to deduct expenses spent for a course that was actually a grant. The Veterans’ Administration gave the tax-exempt grant through educational assistance.

In that case, the Court ruled that the grant was not deductible based on the Internal Revenue Code (IRC).

To answer the current issue regarding the PPP, the Internal Revenue Service (IRS) issued Notice 2020-32 last May 2. The notice cited Section 265(a) of the IRC, which states: “Where tax-exempt income is used for a specific purpose and expenses are incurred for that purpose, no deduction from adjusted gross income is allowed.”

In essence, the expense payments are not deductible since the taxpayer is actually receiving reimbursement for the costs.

Income tax

The Personal Income Tax doesn’t follow the same route. The last guideline on the matter was the Personal Income Tax Bulletin 2009-04 called the Cancellation of Business Indebtedness. Deductibility and taxability are similar in this matter.

The PIT is essentially different from the taxable income. However, when Notice 2020-32 is put into the equation, the result for the PIT and federal income tax becomes similar.

It has to be noted, though, that this is not similar to how the economic impact payments are treated. The stimulus checks released by the federal government are rebates. Therefore, they are not taxable in Pennsylvania.

The PPP loans under the Corporate Net Income Tax will have the same treatment as noted in the Notice 2020-32. Such is limited to federal income tax purposes.

The COVID-19 effect

Interpretation is necessary to avoid the double-dip effect. The federal and Pennsylvania interpretations are meant to be fair for all persons concerned.

The entire world was affected by the COVID-19 pandemic. Aside from the obvious health problems, the economic difficulty was more pronounced.

This is why Congress passed the CARES Act to aid American taxpayers. However, with every fiscal matter raised, the tax subject follows.

Tax Deductions for Donations: 2020 Just Made it Easier

This year is tough for everybody. As the world deals with the COVID-19 pandemic, economies shut down and thousands of people lost their jobs. Almost everything made a turn for the worse. The only thing that got better is the tax deduction for donations.

On average, people are worse off this year compared to the last few years. It’s quite evident when one sees the long lines in food banks. This is really the best time to give to charity. For those who are better off, it’s really fulfilling to be able to share their good fortune with other people.

Tax-wise, it’s also beneficial.

The government enacted into the law the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March to help people grapple with the financial effects of COVID-19. A provision in the law states that taxpayers can have a deduction of up to $300 for cash donations. For now, the provision is only limited to donations made in 2020.

Standard deductions

The norm was that a taxpayer can deduct donations if personal deductions are itemized. This, as opposed to the standard deductions. The Tax Cuts and Jobs Act of 2017, though, created adjustments in the tax code.

The changes prompted majority of the tax payers to just take a standard deduction. Many taxpayers no longer itemized their deductions, which resulted in the doubling of standard deductions.

Of all taxpayers in 2018, only 11 percent itemized their deductions.

But this is not just about the process of filing taxes. There was also the implication that financial incentive for people who donate was removed.

Without that incentive, grassroots charity organizations greatly suffered.

With changes in tax credits, hopefully more will donate even if the intention was for the tax benefit.

How to qualify

The universal deduction allows taxpayers to enjoy a benefit as a result of donating. The result is a maximum of $300 deduction to the adjusted gross income.

However, there is also a set of guidelines to follow when donating. These are important in order to enjoy the tax benefit.

For one, the donation must be in cash. Although, credit card and check are also acceptable. The recipient of the donation should also be a qualified public charity based on the provision of the U.S. Internal Revenue Code.

The official website of the Internal Revenue Service has a search tool for taxpayers to use in order to confirm that an organization is a qualified charity group.

The law is silent on whether a couple can be allowed a total of $600 deduction. However, some experts are saying that it is a reasonable conclusion and should be honored.

Temporary

It is important to note that this deduction is temporary in nature. Although, charitable organizations are hoping that this tax benefit can be extended or even made permanent.

For those who are still figuring out where to donate, check out community organizations. The bigger foundations already have big pockets. It’s the smaller ones that really need more resources.

Offer In Compromise & COVID-19

The novel coronavirus (COVID-19) has resulted in a serious plunge in America’s economy. According to the advance estimate of the Bureau of Economic Analysis, the real Gross Domestic Product (GDP) dropped at an annual rate of 32.9 percent in the second quarter of 2020 the worst ever recorded in history.

The Labor Department reported that unemployment insurance claims totaled 17 million ending July 18, 2020.

In response to the alarming effects of the COVID-19, the Internal Revenue Service (IRS) had made some adjustments in Offer in Compromise (OIC) which took effect until July 15, 2020.

The IRS provided below Frequently Asked Questions on the OICs: 

Q. What about taxpayers trying to apply for an Offer in Compromise (OIC)?

Taxpayers may still submit an Offer in Compromise if paying the full amount will trigger a financial hardship on their end. The OIC Pre-Qualifier tool must be considered before submitting an offer. 

There are other payment options that can be explored: Installment Agreement and a temporary delay in the collection process. Taxpayers who are amenable to using the payment plans can do it via the IRS online application.

Sending mails to the IRS is being discouraged. However, if a taxpayer receives a returned mail from the US Postal Service, he or she should keep a copy of the returned offer and resubmit it once the IRS is back to accepting OICs.

Q. What is the status of Offer in Compromise payments? 

Taxpayers with pending or accepted offers are encouraged to continue making the required payments. Temporary relief is available for those affected by COVID-19.

Offers Under Investigation: 

If a taxpayer skipped payments between March 25 through July 15, 2020, while his or her application is still under investigation, the taxpayer must resume the payments after July 15, 2020. Once the offer has been accepted, the taxpayer’s offer will be amended, which will allow him or her to settle the missed payments.

Already Accepted Offers: 

If the taxpayer is still incapable of paying the skipped payments and also the agreed amount in their accepted offer because of COVID-19 hardship, he or she must contact the IRS through its phone number.

Q: What should I do if my OIC is under consideration and I received a request for documents, payments, or non-filed tax returns prior to the end of the suspension period (July 15, 2020)?

Taxpayers must provide the requested information to have their OICs approved even if the suspension period is over. Those who are unable to submit the documents or returns must contact the IRS employee found on the correspondence

The Offer in Compromise is an agreement between the IRS and the taxpayer that allows the latter to pay the tax debt for less than the amount owed. The OIC is usually offered to those taxpayers who are unlikely to pay the full amount and will experience more serious financial burden.

The goal of the OIC is to collect the amount at the earliest possible time. Those months of lockdowns and quarantines have obviously crippled a lot of businesses in all sectors and also the workforce, making it more difficult for some taxpayers to settle their tax debts.

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