Tax Regulations

Autumn is not just for pumpkin spiced everything, but also a perfect time to review your tax withholdings and tax payments for the year to avoid any surprises when filing next year.

With a few adjustments in your estimated tax payments and/or withholdings you can avoid surprise tax bills. Here are a few things you may consider that will affect your 2020 taxes before you make any adjustments:

Life Changes Such As Marriage

As a married couple you are now required to file a joint return. Filing a joint return usually turns out to be beneficial for a married couple. However, if you and your spouse are both working, it might put you into a higher tax bracket and would require you to make changes to your tax withholdings.

Working in the Gig Economy

Do you make any money working in the Gig economy? To name a few: drive a car for booked rides, run errands, sell goods online, rent out property or part of it. You must consider any income earned from the gig economy even if it is from part time, temporary or side work not reported on an informational return form like 1099 miscellaneous, W2 or other income statement.

Disasters Such As Wildfires and Hurricanes

If you have suffered any loss attributable to a federally declared disaster, you can be eligible to claim a casualty loss. You may want to consider the impact of this loss on your income and thereby on your taxes before paying your estimated taxes for the last quarter of 2020.

Job Loss

With the COVID-19 pandemic a lot of people lost their jobs. It can be frustrating and stressful. The last thing you want to think about, is taxes. But if you received severance pay and/or payment for accumulated sick time or vacation time, it might result in a high tax bill.

Unemployment Compensation

If you filed for unemployment benefits and received unemployment compensation, remember, it is taxable. You can either have tax withheld from the benefits or choose not to and make enough estimated tax payments.

COVID-19 Deferral of Employment Tax

There is some relief available for 2020, due to the COVID-19 pandemic. The CARES Act allows deferrals of some of the payroll tax payments. These are available to both employers and to self-employed individuals, including partners in a partnership. Click here to see more information about the employment tax deferral options.

If you need help navigating all these changes, give us a call.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Starting with the 2021 tax filing season, if you have a business taxed as a partnership, you will have to report the partners’ capital accounts on a tax basis of accounting.

Form 1065 Instructions Early Draft Released

About a week ago, IRS released an early draft of the 2020 form 1065 instructions. This draft provides information about the new reporting requirement.

Under the tax basis method, partnerships report partners’ contributions, distributions, their share of partnership net income or loss, and other increases or decreases using tax basis principles. Until now, other methods were allowed, such as: generally accepted accounting principles, contractual method, regulatory method and others.

If your business already used the tax basis of accounting to report the partners’ capital accounts on schedule K1, you will continue to report them in the same manner as before.

However, businesses taxed as partnerships, that in 2019 did not prepare Schedules K1 under the tax capital method, will need to recalculate the 2019 ending capital account balances. You can use several methods to do this:

• The Modified Outside Basis Method,
• The Modified Previously Taxed Capital Method,
• The Section 704(b) Method.

Because this might be difficult to implement, IRS announced it intends to provide penalty relief, but only for tax year 2020, for any errors in reporting the beginning capital account balances on Schedules K1. The relief applies if the business takes ordinary and prudent business care in following the 1065 form instructions to calculate and report the beginning partners’ capital account balances. IRS will issue a notice soon with details about this penalty relief for the 2020 tax year.

IRS Will Release the Final Version in December

A final version of the 1065 instructions will be released in December. In the mean time IRS is accepting comments to this draft. You have 30 days from the date of the draft release, which was October 22, 2020 to submit your comments.
The rules of tax basis of accounting can be difficult. And transitioning from a different basis of accounting can be confusing. If you need help with the preparation of your business’ tax return, give us a call.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Crowdfunding — or funding a project through the online contributions of many different backers — is becoming increasingly popular. If you are considering raising crowdfunding revenue or contributing to a crowdfunding campaign, you will need to address the many tax issues that can arise.

Background

Crowdfunding was initially an instrument that some used in order to raise money for projects that were unlikely to turn a profit. But others have begun to see crowdfunding as an alternative to venture capital. Depending on the project, those who contribute may receive nothing of value, a reward of nominal value (such as a T-shirt or tickets to an event), or perhaps even an ownership/equity interest in the enterprise.

Is It Income?

In an “information letter” released in 2016, the IRS stated that crowdfunding revenues will generally represent income unless they are:

• Loans that you must repay
• Capital contributed to an entity in exchange for an equity interest in the entity
• Gifts made out of detached generosity without any “quid pro quo”

The IRS noted that the facts and circumstances of each case will determine how the revenue is to be characterized. The IRS added that “crowdfunding revenues must generally be included in income to the extent they are for services rendered or are gains from the sale of property.” In addition, the IRS warns that a voluntary transfer without a “quid pro quo” is not necessarily a gift for federal income tax purposes.

Frequently, the IRS learns of the activity because crowdfunding entrepreneurs have used a third-party payment network to process the contributions. Where transactions during the year exceed a specific threshold — gross payments in excess of $20,000 and more than 200 transactions — that third part will send Form 1099-K (Payment Card and Third-Party Network Transactions) to the recipient and the IRS. Payments that do not meet the threshold are still potentially taxable.

If It’s Business Income

You can deduct “ordinary and necessary” business expenses. But you might have limitations in how much you can deduct if the IRS deems the activity a hobby rather than a trade or business. Generally, the IRS applies a “facts and circumstances” test to determine if you have a profit-making motive, which is necessary for a trade or business.

New Businesses

You can use favorable deduction rules for certain types of expenses you incurred in starting a new business. If eligible, the business may elect to expense up to $5,000 of those costs (subject to phaseout) in the year the business becomes active. The remainder of the start-up expenditures are deducted ratably over a 180-month period.

For Contributors

Campaign contributors should not assume that their gifts qualify as tax-deductible charitable contributions. Tax-deductible contributions must meet certain requirements. The contributors must make their contributions to a qualified charitable organization. If you make a gift to an individual or nonqualified organization, you might need to file a gift tax return. You have this reporting for gifts to any one recipient that exceed the gift tax annual exclusion ($15,000 for 2020).

There is no definite guidance specific to crowdfunding in the tax regulations. One must analyze each case on an individual basis in order to determine the potential tax implications. You might also consider requesting a private letter ruling from the Internal Revenue Service.

If you need help with your taxes, give us a call.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Obtaining financing to start or expand small businesses and buy homes can sometimes be difficult. Your family member might have a hard time getting a loan from a commercial lender. You may want to help out with a family loan.

Have a Written Agreement

Start by putting the family loan agreement in writing. This may seem like an unnecessary formality. But without a written loan document, the IRS could argue that the transaction was a gift instead of a loan. This can create potential gift tax issues. Having written documentation is also important in case the borrower fails to repay all or part of the loan.

Charge Adequate Interest For a Family Loan

The second step is setting an interest rate. While there’s no rule against interest-free loans or loans that have below-market interest rates, in a family context they can lead to tax complications. If you don’t charge sufficient interest, the difference between the amount of interest you actually receive (if any) and the amount you should have received — referred to as “imputed” interest — is taxable to you.

You can avoid the imputed interest rules by charging interest at the appropriate “applicable federal rate” (AFR) for the loan term that applies to you. Short-term AFR applies to three or fewer years loan terms, mid-term AFR applies to loan terms of more than three years, but no more than nine years and long-term AFR applies to loans of over nine years. The IRS publishes AFRs monthly for loans of different maturities. These rates have been relatively low recently, reflecting the current market interest rate environment. To see the IRS AFRs, click here.

For a term loan, the rate can remain fixed for the life of the loan. A demand loan has different requirements. A demand loan is one that gives you the right to demand full repayment at any time. For such a loan, you have to charge a floating AFR to avoid imputed interest issues.

Exceptions

When you lend a family member no more than $100,000, the amount that can be added to your taxable interest income under the below-market interest rate rules generally can’t exceed the borrower’s net investment income. Even better, you won’t have to report any imputed interest if the borrower’s net investment income amounts to $1,000 or less. You can also sidestep imputed interest on small loans of no more than $10,000 (all outstanding principal) provided the borrowed funds aren’t used to buy or carry income-producing assets.

You can find out more information about the treatment of loans with below-market interest rates here.

If you need help with your small business, give us a call.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.

In general, income from rental real property held for investment purposes and reported on Schedule E (Form 1040) is not eligible for the QBI deduction. However, an investor may be eligible for the QBI deduction if he or she is operating the activity as a real estate business.

Safe Harbor Rule

IRS issued on September 24, 2019 Revenue Procedure 2019-38 that has a safe harbor rule for real estate activities. Before laying out the safe harbor requirements, we need to understand what is a “real estate enterprise”.

Real Estate Enterprise

Solely for purposes of this safe harbor, IRS defines a rental real estate enterprise as an interest in real property held for the production of rents and may consist of an interest in a single property or interests in multiple properties.

Excluded real estate properties. The following properties do not qualify for the safe harbor:

• If you use the real estate as a residence under section 280A(d) and you have personal use days in the taxable year of more than the greater of 14 days, or 10% of the number of days you rented the property);
• You rented or leased the property under a triple net lease (when you require the tenant/lessee to pay taxes, fees, insurance, maintenance, in addition to rent and utilities).
• You rent the property to a trade or business which is commonly controlled under § 1.199A-4(b)(1)(i). 8
• The entire rental real estate interest if any portion of the interest is treated as an SSTB under § 1.199A-5(c)(2) (which provides special rules where property or services are provided to an SSTB).

Safe Harbor Rule Requirements For QBI Deduction

In order to qualify for the the safe harbor, you need to satisfy the following requirements:

• You need to keep separate books and records that reflect income and expenses for each rental real estate enterprise.
• If your rental real estate enterprise has been in existence less than four years, you need to have 250 or more hours of rental services performed per year. If the real estate enterprise was in existance for 4 or more years, you need to have 250 or more hours of rental services performed in at least three of the past five years.
• You maintain contemporaneous records, including time reports, logs, or similar documents, regarding the following: hours of all services performed; description of all services performed; dates for such services; and who performed the services.
• You attach a statement to the return filed for the tax year(s) in which you rely on the safe harbor rule.

What Represents Rental Services

For purposes of the safe harbor, IRS includes in rental services the followings:

• advertising to rent or lease the real estate;
• negotiating and executing leases;
• verifying information contained in prospective tenant applications;
• collection of rent;
• daily operation, maintenance, and repair of the property, including the purchase of materials and supplies;
• management of the real estate;
• supervision of employees and independent contractors.

What is not included:

• financial or investment management activities, such as arranging financing;
• procuring property;
• studying and reviewing financial statements or reports on operations;
• improving property under § 1.263(a)-3(d);
• hours spent traveling to and from the real estate.

Who can perform the rental services:

• owner(s),
• employees,
• agents of the owner(s),
• independent contractors of the owner(s).

What If You Don’t Meet the Safe Harbor Requirements

If you fail to satisfy the requirements of the safe harbor you can still qualify for the QBI deduction if you can establish that the interest in the rental real estate is a trade or business for purposes of section 199A.

These are just the highlights of the safe harbor rules for real estate rental activities. Click here if you’d like more information.

If you need help with your tax situation, give us a call or schedule an online appointment.

Our blogs are for informational purposes only and they do not represent tax advise.

It’s never too early to organize your tax records. Though it may seem so, it is sure to pay off when it comes to filing time again. Good record keeping is essential not only to stay in compliance, but also to make sure you take advantage of all your deductions and credits that you might miss otherwise.

Here are some tips to help you have a good record keeping in place:

• Records that you should keep: your W2, 1099 forms, form 1098 mortgage interest statement, property settlement statements, receipts for charitable contributions, education expenses, medical expenses, business expenses and any other documentation that supports your income and deductions.
• Develop a system to keep all your important information together. You can do so with the help of software programs available on the market. If you aren’t comfortable using them, you can still label your folders and store them in a safe place. You also have the option to scan the documentation and keep it in electronic format.
• Don’t forget to add new files to these tax records as you receive them. For year 2020 remember to include your economic impact payment documentation and unemployment compensation, if you received any. If you started a new business, make sure to keep all your receipts.
• Generally you have to keep your records for 3 years from the date you filed the return.
• If you have employees keep your employment tax records for at least 4 years after the tax is due or paid whichever is later.
• If you or a family member had a legal name change, you should notify the social security administration to avoid a delay in processing your tax return.

A little organization now, can go a long way later.

If you need help with your taxes, give us a call or send us an email.