Author Archive: CCG

Do you need to file a gift tax return?

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It’s tax-filing season and you’re likely focused on your income or business tax returns. But don’t forget about another type of return. In 2020, if you made substantial gifts of wealth to family members you may have to file a gift tax return.

Filing a gift tax return

Generally, a federal gift tax return (Form 709) is required if you make gifts to or for someone during the year (with certain exceptions, such as gifts to U.S. citizen spouses) that exceed the annual gift tax exclusion ($15,000 per person for 2020 and 2021). While an unlimited amount can be gifted to a U.S. citizen spouse, there’s a separate exclusion for gifts to a noncitizen spouse ($157,000 for 2020 and $159,000 for 2021).

Also, if you make gifts of future interests, even if they’re less than the annual exclusion amount, a gift tax return is required. Finally, if you split gifts with your spouse, regardless of amount, you must file a gift tax return.

The return is due by April 15 of the year after you make the gift, so the deadline for 2020 gifts is coming up soon. But you can extend the deadline to October 15 by filing for an extension. (The IRS announced that the federal income tax filing and payment due date has been extended from April 15, 2021, to May 17, 2021. However, the IRS didn’t specifically address the gift tax filing deadline. Additional IRS guidance is expected soon.)

Being required to file a form doesn’t necessarily mean you owe gift tax. You’ll owe tax only if you’ve already exhausted your lifetime gift and estate tax exemption ($11.58 million for 2020 and $11.7 million for 2021).

When a return isn’t required

No gift tax return is required if you:

  • Paid qualifying educational or medical expenses on behalf of someone else directly to an educational institution or health care provider,
  • Made gifts of present interests that fell within the annual exclusion amount,
  • Made outright gifts to a spouse who’s a U.S. citizen, in any amount, including gifts to marital trusts that meet certain requirements, or
  • Made charitable gifts and aren’t otherwise required to file Form 709 — if a return is otherwise required, charitable gifts should also be reported.

If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

In some cases, it’s even advisable to file Form 709 to report nongifts. For example, suppose you sold assets to a family member or a trust. Again, filing a return triggers the statute of limitations and prevents the IRS from claiming, more than three years after you file the return, that the assets were undervalued and, therefore, partially taxable.

Seek professional help

Estate tax rules and regulations can be complicated. If you need help determining whether a gift tax return needs to be filed, contact us.

© 2021 Covenant CPA

New law: Parents and other eligible Americans to receive direct payments

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The American Rescue Plan Act, signed into law on March 11, provides a variety of tax and financial relief to help mitigate the effects of the COVID-19 pandemic. Among the many initiatives are direct payments that will be made to eligible individuals. And parents under certain income thresholds will also receive additional payments in the coming months through a greatly revised Child Tax Credit.

Here are some answers to questions about these payments.

What are the two types of payments? 

Under the new law, eligible individuals will receive advance direct payments of a tax credit. The law calls these payments “recovery rebates.” The law also includes advance Child Tax Credit payments to eligible parents later this year.

How much are the recovery rebates?

An eligible individual is allowed a 2021 income tax credit, which will generally be paid in advance through direct bank deposit or a paper check. The full amount is $1,400 ($2,800 for eligible married joint filers) plus $1,400 for each dependent.

Who is eligible? 

There are several requirements but the most important is income on your most recently filed tax return. Full payments are available to those with adjusted gross incomes (AGIs) of less than $75,000 ($150,000 for married joint filers and $112,500 for heads of households). Your AGI can be found on page 1 of Form 1040.

The credit phases out and is no longer available to taxpayers with AGIs of more than $80,000 ($160,000 for married joint filers and $120,000 for heads of households).

Who isn’t eligible?

Among those who aren’t eligible are nonresident aliens, individuals who are the dependents of other taxpayers, estates and trusts.

How has the Child Tax Credit changed?

Before the new law, the Child Tax Credit was $2,000 per “qualifying child.” Under the new law, the credit is increased to $3,000 per child ($3,600 for children under age 6 as of the end of the year). But the increased 2021 credit amounts are phased out at modified AGIs of over $75,000 for singles ($150,000 for joint filers and $112,500 for heads of households).

A qualifying child before the new law was defined as an under-age-17 child, whom the taxpayer could claim as a dependent. The $2,000 Child Tax Credit was phased out for taxpayers with modified AGIs of over $400,000 for joint filers, and $200,000 for other filers.

Under the new law, for 2021, the definition of a qualifying child for purposes of the Child Tax Credit includes one who hasn’t turned 18 by the end of this year. So 17-year-olds qualify for the credit for 2021 only.

How are parents going to receive direct payments of the Child Tax Credit this year?

Unlike in the past, you don’t have to wait to file your tax return to fully benefit from the credit. The new law directs the IRS to establish a program to make monthly advance payments equal to 50% of eligible taxpayers’ 2021 Child Tax Credits. These payments will be made from July through December 2021.

What if my income is above the amounts listed above?

Taxpayers who aren’t eligible to claim an increased Child Tax Credit, because their incomes are too high, may be able to claim a regular credit of up to $2,000 on their 2021 tax returns, subject to the existing phaseout rules.

Much more

There are other rules and requirements involving these payments. This article only describes the basics. Stay tuned for additional details about other tax breaks in the new law.

© 2021 Covenant CPA

Business highlights in the new American Rescue Plan Act

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President Biden signed the $1.9 trillion American Rescue Plan Act (ARPA) on March 11. While the new law is best known for the provisions providing relief to individuals, there are also several tax breaks and financial benefits for businesses.

Here are some of the tax highlights of the ARPA.

The Employee Retention Credit (ERC). This valuable tax credit is extended from June 30 until December 31, 2021. The ARPA continues the ERC rate of credit at 70% for this extended period of time. It also continues to allow for up to $10,000 in qualified wages for any calendar quarter. Taking into account the Consolidated Appropriations Act extension and the ARPA extension, this means an employer can potentially have up to $40,000 in qualified wages per employee through 2021.

Employer-Provided Dependent Care Assistance. In general, an eligible employee’s gross income doesn’t include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program (DCAP).

Previously, the amount that could be excluded from an employee’s gross income under a DCAP during a tax year wasn’t more than $5,000 ($2,500 for married individuals filing separately), subject to certain limitations. However, any contribution made by an employer to a DCAP can’t exceed the employee’s earned income or, if married, the lesser of employee’s or spouse’s earned income.

Under the ARPA, for 2021 only, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 (from $2,500 to $5,250 for married individuals filing separately).

This provision is effective for tax years beginning after December 31, 2020.

Paid Sick and Family Leave Credits. Changes under the ARPA apply to amounts paid with respect to calendar quarters beginning after March 31, 2021. Among other changes, the law extends the paid sick time and paid family leave credits under the Families First Coronavirus Response Act from March 31, 2021, through September 30, 2021. It also provides that paid sick and paid family leave credits may each be increased by the employer’s share of Social Security tax (6.2%) and employer’s share of Medicare tax (1.45%) on qualified leave wages.

Grants to restaurants. Under the ARPA, eligible restaurants, food trucks, and similar businesses that provide food and drinks may receive restaurant revitalization grants from the Small Business Administration. For tax purposes, amounts received as restaurant revitalization grants aren’t included in the gross income of the person who receives the money.

Much more

These are only some of the provisions in the ARPA. There are many others that may be beneficial to your business. Contact us for more information about your situation.

© 2021 Covenant CPA

Need a new business vehicle? Consider a heavy SUV

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Are you considering buying or replacing a vehicle that you’ll use in your business? If you choose a heavy sport utility vehicle (SUV), you may be able to benefit from lucrative tax rules for those vehicles.

Bonus depreciation 

Under current law, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in a calendar year. New and pre-owned heavy SUVs, pickups and vans acquired and put to business use in 2021 are eligible for 100% first-year bonus depreciation. The only requirement is that you must use the vehicle more than 50% for business. If your business usage is between 51% and 99%, you can deduct that percentage of the cost in the first year the vehicle is placed in service. This generous tax break is available for qualifying vehicles that are acquired and placed in service through December 31, 2022.

The 100% first-year bonus depreciation write-off will reduce your federal income tax bill and self-employment tax bill, if applicable. You might get a state tax income deduction, too. 

Weight requirement

This option is available only if the manufacturer’s gross vehicle weight rating (GVWR) is above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, usually found on the inside edge of the driver’s side door where the door hinges meet the frame.

Note: These tax benefits are subject to adjustment for non-business use. And if business use of an SUV doesn’t exceed 50% of total use, the SUV won’t be eligible for the expensing election, and would have to be depreciated on a straight-line method over a six-tax-year period.

Detailed, contemporaneous expense records are essential — in case the IRS questions your heavy vehicle’s claimed business-use percentage.

That means you’ll need to keep track of the miles you’re driving for business purposes, compared to the vehicle’s total mileage for the year. Recordkeeping is much simpler today, now that there are apps and mobile technology you can use. Or simply keep a small calendar or mileage log in your car and record details as business trips occur.

If you’re considering buying an eligible vehicle, doing so and placing it in service before the end of this tax year could deliver a big write-off on your 2021 tax return. Before signing a sales contract, consult with us to help evaluate the right tax moves for your business.

© 2021 Covenant CPA

The interview before the fraud interview

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When Anna, the CEO of a small manufacturing company, received an anonymous report about fraud in the accounting department, she wasn’t sure how to act. After all, the complaint could be accurate, but there was also a chance that it wasn’t. She called her company’s attorney, who recommended a forensic accountant to investigate. He also suggested that she perform some preliminary interviews to gather facts — but to be careful not to interrogate employees.

If you’re in a position similar to Anna’s, here’s how to conduct interviews before a fraud expert comes on the case. 

Investigation prep

In advance of requesting any interviews, decide what information you’re looking for. Knowing what you want helps you get to the truth of the matter quickly and avoid getting sidetracked by extraneous information. Then, identify who’s best able to supply that information.

Say, for example, you suspect an accounts receivable employee of siphoning money. You may want to talk to that person’s supervisor and a member of your IT department to get information on work habits, unusual behavior or signs of file tampering. Remember, though, that people may be reluctant to share information if they feel it reflects poorly on them or if it might land someone else in hot water.

Restraint is critical

When you sit down for an interview, set the tone with some introductory questions and ask the interviewee to agree to cooperate. In most cases, you’ll be looking for information that helps prove or disprove your suspicions, and the interview will be fact-finding in nature. It should last long enough for you to obtain all the information the subject has to offer. But don’t prolong sessions unnecessarily.

Aim for an informal, relaxed conversation and be sure to remain professional, calm and nonthreatening. Don’t interrupt unnecessarily, suggest that you have preconceived ideas about who did what, or assert your authority unnecessarily. If you suspect someone is withholding information, try asking more detailed questions. And if someone says something you believe is untrue, ask for clarification. You might suggest that your question was misunderstood or that the employee didn’t give it enough thought before answering.

Finally, never make threats or promises to encourage an employee to change a statement or confess. If the case ends up in court, such tactics could make the evidence you collect inadmissible. If someone persists in lying, ask them to put their statement in writing and sign it. Then turn the statement — and your suspicions — over to fraud experts.  

Give it to the experts

If you decide there’s evidence that fraud has occurred, engage a forensic accountant to investigate further. This expert will interview potential suspects and witnesses to get to the bottom of the matter while gathering critical evidence of a crime. Contact us for help and more information.

© 2021 Covenant CPA

When divorcing business owners minimize profits

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Dividing a marital estate is rarely easy. But it’s made much harder if a divorcing spouse owns a private business and attempts to artificially deflate its profits or hide assets. If you or your attorney suspects this type of deception, engage a forensic accountant to investigate.

Key questions

When working on divorce cases, fraud experts ask several questions about private business interests. For example, does a spouse own a cash business that may have unreported income? Does the owner receive special (or excessive) perks or tax write-offs that affect the business’s profitability? Are numbers intentionally reported incorrectly to affect the business’s value?

n addition, experts investigate whether the company has any subsidiaries or is part of any other business ventures. Sometimes, a business owner may be a silent partner in an entity where ownership isn’t obvious.

Readily transferable.

Anomalies in a business’s income statements may reveal possible deception, particularly:

  • Excessive write-offs,
  • Withheld revenue deposits,
  • A large one-time expense, or
  • A decrease in revenue with no related decrease in variable expenses.

Sudden changes that occur when a spouse is contemplating divorce may suggest unreported income or overstated expenses. However, these changes could also be due to external forces, such as the loss of a major salesperson or adverse market conditions.

When evaluating expenses, experts often focus on the amounts paid to owners and other related parties. These may include payments for compensation, benefits, rent, management fees, and company vehicles and other perks. The owner-spouse also might try to flush personal expenses through the business.  

Balance sheet secrets

Balance sheets may reveal whether an owner is trying to hide assets (for example, in an offshore account) or transfer them to a related party for less than market value. Inventory is particularly susceptible to manipulation. Although notes payable to shareholders can be legitimate transactions, they also may be used to conceal income being distributed to an owner.

Experts review the equity section for any changes in the business’s ownership after the parties filed for divorce. They also search for suspicious withdrawals or distributions from capital accounts. Controlling owners may sometimes attempt to transfer ownership of business interests to close friends or associates to deprive their spouses of portions of the assets or portions of the business income.

Distorted value

Although divorce can give rise to angry actions, most business owners would never stoop to falsifying financial records simply to deprive their ex-spouses of a fair division of marital assets. But if the value of a business seems distorted, contact us for help identifying the causes and to suggest reasonable adjustments.

© 2021 Covenant CPA

The latest on COVID-related deadline extensions for health care benefits

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The U.S. Department of Labor (DOL) recently issued EBSA Disaster Relief Notice 2021-01, which is of interest to employers. It clarifies the duration of certain COVID-19-related deadline extensions that apply to health care benefits plans.

Extensions to continue

The DOL and IRS issued guidance last year specifying that the COVID-19 outbreak period — defined as beginning March 1, 2020, and ending 60 days after the announced end of the COVID-19 national emergency — should be disregarded when calculating various deadlines under COBRA, ERISA and HIPAA’s special enrollment provisions.

The original emergency declaration would have expired on March 1, 2021, but it was recently extended. Although the agencies defined the outbreak period solely by reference to the COVID-19 national emergency, they relied on statutes allowing them to specify disregarded periods for a maximum of one year. Therefore, questions arose as to whether the outbreak period was required to end on February 28, 2021, one year after it began.

Notice 2021-01answers those questions by providing that the extensions have continued past February 28 and will be measured on a case-by-case basis. Specifically, applicable deadlines for individuals and plans that fall within the outbreak period will be extended (that is, the disregarded period will last) until the earlier of:

  • One year from the date the plan or individual was first eligible for outbreak period relief, or
  • The end of the outbreak period.

Once the disregarded period has ended, the timeframes that were previously disregarded will resume. Thus, the outbreak period will continue until 60 days after the end of the COVID-19 national emergency, but the maximum disregarded period for calculating relevant deadlines for any individual or plan cannot exceed one year.

Communication is necessary

The DOL advises plan sponsors to consider sending notices to participants regarding the end of the relief period, which may include reissuing or amending previous disclosures that are no longer accurate. Sponsors are also advised to notify participants who are losing coverage of other coverage options, such as through the recently announced COVID-19 special enrollment period in Health Insurance Marketplaces (commonly known as “Exchanges”).

Notice 2021-01 acknowledges that the COVID-19 pandemic and other circumstances may disrupt normal plan operations. The DOL reassures fiduciaries acting in good faith and with reasonable diligence that enforcement will emphasize compliance assistance and other relief. The notice further states that the IRS and U.S. Department of Health and Human Services concur with the guidance and its application to laws under their jurisdiction.

Challenges ahead

Plan sponsors and administrators will likely welcome this clarification but may be disappointed in its timing and in how it interprets the one-year limitation. Determinations of the disregarded period that depend on individual circumstances could create significant administrative challenges.

In addition to making case-by-case determinations, plan sponsors and administrators must quickly develop a strategy for communicating these complex rules to participants. Contact us for further information and updates.

© 2021 Covenant CPA

Dissecting the contents of a will

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For many people, the first thing they think of when they hear the words “estate plan” is a will. And for good reason, as it’s the cornerstone of any estate plan. But do you know what provisions should be included in a will and what are best to leave out? The answers to those questions may not be obvious.

Understanding the basics

Typically, a will begins with an introductory clause, identifying yourself along with where you reside (city, state, county, etc.). It should also state that this is your official will and replaces any previous wills.

After the introductory clause, a will generally explains how your debts and funeral expenses are to be paid. Years ago, funeral expenses were often paid out of the share of assets going to an individual’s children, instead of the amount passing to his or her spouse under the unlimited marital deduction. However, now that the inflation-adjusted federal gift and estate tax exemption has increased to $11.7 million for 2021, this may not be as critical as before.

A will may also be used to name a guardian for minor children. To be on the safe side, name a backup in case your initial choice is unable or unwilling to serve as guardian or predeceases you. 

Making specific bequests

One of the major sections of your will — and the one that usually requires the most introspection — divides up your remaining assets. Outside of your residuary estate, you’ll likely want to make specific bequests of tangible personal property to designated beneficiaries.

If you’re using a trust to transfer property, make sure you identify the property that remains outside the trust, such as furniture and electronic devices. Typically, these items aren’t suitable for inclusion in a trust. If your estate includes real estate, include detailed information about each property and identify the specific beneficiaries.

Finally, most wills contain a residuary clause. As a result, assets that aren’t otherwise accounted for go to the named beneficiaries.

Addressing estate taxes

The next section of the will may address estate taxes. Remember that this isn’t necessarily limited to federal estate tax; it can also apply to state death taxes. You might arrange to have any estate taxes paid out of the residuary estate that remains after assets have been allocated to your spouse.

Naming an executor

Toward the end of the will, the executor is named. This is usually a relative or professional who’s responsible for administering the will. Of course, the executor should be a reputable person whom you trust. Also, include a successor executor if the first choice is unable to perform these duties. Frequently, a professional is used in this backup capacity.

Turn to the professionals

Regardless of your age, health and net worth, if you want to have a say in what happens to your children and your wealth after you’re gone, you need a will. Contact us for assistance with tax-saving estate strategies and contact your attorney to help you draft your will.

© 2021 Covenant CPA

5 ways to streamline and energize your sales process

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The U.S. economy is still a far cry from where it was before the COVID-19 pandemic hit about a year ago. Nonetheless, as vaccination efforts continue to ramp up, many experts expect stronger jobs growth and more robust economic activity in the months ahead.

No matter what your business does, you don’t want your sales staff hamstrung by overly complicated procedures as they strive to seize opportunities in the presumably brighter near-future. Here are five ways to streamline and energize your sales process:

1. Reassess territories. Business travel isn’t what it used to be, so you may not need to revise the geographic routes that your sale staff used to physically traverse. Nonetheless, you may see real efficiency gains by creating a strategic sales territory plan that aligns salespeople with regions or markets containing the prospects they’re most likely to win.

2. Focus on top-tier customers. If purchases from your most valued customers have slowed recently, find out why and reverse the trend. For your sales staff, this may mean shifting focus from winning new business to tending to these important accounts. See whether you can craft a customized plan aimed at meeting a legacy customer’s long-term needs. It might include discounts, premiums and extended warranties.

3. Cut down on “paperwork.” More than likely, “paperwork” is a figurative term these days, as most businesses have implemented electronic means to track leads, document sales efforts and record closings. Nevertheless, outdated or overly complicated software can slow a salesperson’s momentum.

You might conduct a survey to gather feedback on whether your current customer relationship management or sales management software is helping or hindering their efforts. Based on the data, you can then make sensible choices about whether to upgrade or change your system.

4. Issue a carefully chosen challenge. What allows a business to grow is not only retaining top customers, but also creating organic sales growth from new products or services. Consider creating a sales challenge that will motivate staff to push your company’s latest offerings. One facet of such a challenge may be to replace across-the-board commission rates with higher commissions on new products or “tough sells.”

5. Align commissions with financial objectives. Along with considering commissions tied to new products or difficult-to-sell products, investigate other ways you might revise commissions to incentivize your team. Examples include commissions based on:

  • Actual customer payments rather than billable orders,
  • More sales to current customers,
  • Increased order sizes,
  • Delivery of items when customers prepay, or
  • Number of new customers.

Again, these are just ideas to consider. Ultimately, you want to set up a sales compensation plan based on measurable financial goals that allow your sales staff to clearly understand how their efforts contribute to the profitability of your business. Contact us for help evaluating your sales process and targeting helpful changes.

© 2021 Covenant CPA

Estimated tax payments: The deadline for the first 2021 installment is coming ups

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April 15 is not only the deadline for filing your 2020 tax return, it’s also the deadline for the first quarterly estimated tax payment for 2021, if you’re required to make one.

You may have to make estimated tax payments if you receive interest, dividends, alimony, self-employment income, capital gains, prize money or other income. If you don’t pay enough tax during the year through withholding and estimated payments, you may be liable for a tax penalty on top of the tax that’s ultimately due.

Four due dates

Individuals must pay 25% of their “required annual payment” by April 15, June 15, September 15, and January 15 of the following year, to avoid an underpayment penalty. If one of those dates falls on a weekend or holiday, the payment is due on the next business day.

The required annual payment for most individuals is the lower of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. However, if the adjusted gross income on your previous year’s return was more than $150,000 (more than $75,000 if you’re married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.

Most people who receive the bulk of their income in the form of wages satisfy these payment requirements through the tax withheld by their employers from their paychecks. Those who make estimated tax payments generally do so in four installments. After determining the required annual payment, they divide that number by four and make four equal payments by the due dates.

The annualized method

But you may be able to use the annualized income method to make smaller payments. This method is useful to people whose income flow isn’t uniform over the year, perhaps because they’re involved in a seasonal business.

If you fail to make the required payments, you may be subject to a penalty. However, the underpayment penalty doesn’t apply to you:

  • If the total tax shown on your return is less than $1,000 after subtracting withholding tax paid;
  • If you had no tax liability for the preceding year, you were a U.S. citizen or resident for that entire year, and that year was 12 months;
  • For the fourth (Jan. 15) installment, if you file your return by that January 31 and pay your tax in full; or
  • If you’re a farmer or fisherman and pay your entire estimated tax by January 15, or pay your entire estimated tax and file your tax return by March 1

In addition, the IRS may waive the penalty if the failure was due to casualty, disaster, or other unusual circumstances and it would be inequitable to impose it. The penalty may also be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.

Stay on track

Contact us if you have questions about how to calculate estimated tax payments. We can help you stay on track so you aren’t liable for underpayment penalties.

© 2021 Covenant CPA