Tax Regulations

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.

Are you or a loved one adversely impacted by Covid-19? The CARES Act 2020 provides some tax relief related to Covid-19 withdrawals and loans from IRA accounts and certain retirement accounts that you might consider.

Generally, IRA and retirement accounts allow you to take distributions which are to be included in your gross income in the year of withdrawal (with some exceptions) and subject to additional 10% tax if withdrawn before you attain the age of 59 1/2 years.

Covid-19 Withdrawals

The special treatment for Coronavirus related distributions, lets you withdraw up to $100,000 from your IRA, 401(k) or 403(b) plan before 12/31/2020 without being subject to the additional 10% penalty, irrespective of your age at the time of the withdrawal, and without being subject to mandatory tax withholding. In addition, these Covid-19 withdrawals are allowed to be included in your taxable income over a 3 years period, one third being included each year.

Covid-19 Loans

You may also consider taking a loan of up to $100,000 before 09/22/2020 from your workplace retirement plan, if your plan allows it. The plan administrators can suspend, for up to one year, loan repayments due on or after March 27, 2020, and before January 1, 2021.

How To Qualify

This special tax treatment for Covid-19 withdrawals or loans is available if you satisfy the below conditions:

• You, your spouse or dependent are diagnosed with Covid-19 by a test approved by CDC or
• You experience adverse financial consequences because of you, your spouse or any other member of your household being quarantined, furloughed, laid off, having reduced pay/hours or being unable to work due to lack of childcare, having a job offer rescinded or start date for a job delayed or
• Closing or reducing hours of a business owned or operated by  you, your spouse or a member of the household, due to Covid-19 and
• You certify to the Retirement Plan administrator that you are a qualified eligible individual for this special tax treatment.

To find out more information about this Covid-19 tax relief click here.

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

As it does every year, the IRS recently unveiled the list of current scams to be aware of especially considering the current crisis situation. You are encouraged to be on guard against these threats, especially schemes related to Corona virus tax relief, including Economic impact payments.

Look out for the following threats designed to steal not just your money, but your sensitive personal financial information as well.

Phishing

These schemes disguise as an official email from the IRS using keywords like Covid relief and Stimulus Pay in various ways to trick you to reveal confidential information. Be cautious about all such communication and do not click on any links or open any attachments contained in a suspicious email.

Fake Charities

Many fake charities have arisen to exploit the current pandemic situation and steal your money. Before donating to any charity, you can verify its legitimacy by asking for its Employer Identification Number (EIN) and using the search tool on IRS.gov to find qualified and legitimate charities.

Threatening Impersonator Phone Calls, Also Known As “Vishing” (Phone Phishing)

These bogus phone calls pose a major threat these days. Remember IRS will never threaten or ask for financial information over the phone or call about an unexpected refund or about economic impact payments. You should call the IRS to verify and see if there is any tax problem.

Social Media Scams

The social media scammers would impersonate as your family or friends and convince you to trust them. They may email you a link of something of your interest which could contain malware intended to infiltrate and steal sensitive personal information.

Senior Fraud

If you are a senior citizen you are more likely to be victimized with fake emails, text messages, websites and social media attempts. However, you can protect yourself against these threats by having a trusted family member or friend to take interest in your affairs.

Non-English Speakers

These scams mostly take form of robocalls, although they can also be phone calls made by real persons. They are often threatening in nature, targeted towards people with limited English proficiency. If you are a recent immigrant you are more vulnerable to such scams. Make sure you ignore such phone calls and do not engage the scammers.

Unscrupulous Return Preparers

Selecting the right return preparer is very important for your financial security, as you entrust them with sensitive personal data. Be sure to avoid preparers who ask you to sign a blank return or promise a big refund even before looking at your records.

Offer In Compromise Mills

You need to be aware of companies exaggerating your chances of settling your tax debt. Offers in compromise are available only if you meet specific criteria under the law. To safeguard yourself against this threat you can use a simple Pre-Qualifier tool available on IRS.gov.

Fake Payments with Repayment Demands

If you are a victim of this threat you will see a fake refund in your bank account as a result of a bogus tax return filed by the scammer, after stealing your personal information. The scammer, posing as an IRS employee, will then ask you to pay back the money. You might be told that the IRS made an error and that you should return the money immediately in a specific manner like buying gift cards of certain denominations for the amount of the refund.

Payroll & HR Scams

The common types of such scams are gift card and direct deposit scams, which are done through compromised email accounts.

For the gift card scams, the scammer impersonates to be your employer and asks you to purchase a gift card and mail it to a specific address, to be reimbursed later.

For the direct deposit scam, the scammer, poses as the employee and asks the employer to change  the employee’s direct deposit information to reroute their deposit to an account the scammer controls.

If you think you are targeted or are a victim of such threat you can file a complaint with the Federal Bureau of Investigation Internet Crime Center (IC3)

Ransomware

Last but not the least on the IRS list is invasive software that you might download. The malware is targeted to infect your computer, network or server and look for critical data that can be used to steal your personal information and money.

A few simple measures like using two step authentications for your accounts, getting an IRS Identity Protection PIN, using antivirus software, freezing your credit can help protect you from many of the above threats and misuse of your sensitive personal information.

 If you need more information on how to obtain an IRS IP PIN or need help with your taxes, give us a call.

Required Minimum Distribution Requirement

After a certain age, the beneficiaries of certain retirement accounts are required to withdraw  money from their retirement accounts. That is because the IRS wants to collect tax on the income accumulated tax-free in these accounts. Before 2020, the required minimum distribution (RMD) applied to anyone over 70^1/2. Starting with 2020 the RMD beginning age is 72. If in 2019 you turned 70^1/2  you had until April 1^st, 2020 to withdraw from your retirement account the 2019 distributions and normally you would have had until December 31^st, 2020 to take out the 2020 RMD.

CARES Act Relief – 2020 RMDs Suspended

As part of the COVID-19 relief, the CARES Act suspended the 2020 RMD requirement. Thus anyone required to take RMDs in 2020 can skip them. The waiver applies to defined-contribution retirement accounts, such as: IRAs, SEP IRAs, 401(k), 403(b). The waiver does not apply to defined benefit plans. Roth IRAs are not subject to RMD rules and are unaffected by the waiver.

RMD Rollover Relief

What if you already took RMDs in 2020, prior to the enactment of the CARES act?

On June 23^rd 2020 IRS announced rollover relief for RMDs from retirement accounts that were waived under the CARES Act.

Normally taxpayers are allowed to roll over only one distribution in a 12-month period and no later than 60^th day following the day of receipt. In addition, an RMD can not to be rolled over.

But Notice 2020-51 extends the 60-day rollover period for any RMD already taken this year to August 31, 2020.

Retirement account owners who have already received distributions in 2020 now get an extended period until August 31^st 2020 to repay such amounts back, without being subject to the one rollover per 12-month period limitation and the restriction on rollovers for inherited IRAs.

In addition, because the CARES Act allows you to skip RMDs for 2020, you might consider converting assets from a traditional IRA to a Roth IRA this year without first satisfying the typically required RMD.

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