Author Archive: CCG

If you run a business from home, you could qualify for home office deductions

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During the COVID-19 pandemic, many people are working from home. If you’re self-employed and run your business from your home or perform certain functions there, you might be able to claim deductions for home office expenses against your business income. There are two methods for claiming this tax break: the actual expenses method and the simplified method.

Who qualifies?

In general, you qualify for home office deductions if part of your home is used “regularly and exclusively” as your principal place of business.

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if 1) you physically meet with patients, clients or customers on your premises, or 2) you use a storage area in your home (or a separate free-standing structure, such as a garage) exclusively and regularly for business.

What can you deduct?

Many eligible taxpayers deduct actual expenses when they claim home office deductions. Deductible home office expenses may include:

  • Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
  • A proportionate share of indirect expenses, including mortgage interest, rent, property taxes, utilities, repairs and insurance, and
  • Depreciation.

But keeping track of actual expenses can take time and require organization.

How does the simpler method work?

Fortunately, there’s a simplified method: You can deduct $5 for each square foot of home office space, up to a maximum total of $1,500.

The cap can make the simplified method less valuable for larger home office spaces. But even for small spaces, taxpayers may qualify for bigger deductions using the actual expense method. So, tracking your actual expenses can be worth it.

Can I switch? 

When claiming home office deductions, you’re not stuck with a particular method. For instance, you might choose the actual expense method on your 2020 return, use the simplified method when you file your 2021 return next year and then switch back to the actual expense method for 2022. The choice is yours.

What if I sell the home?

If you sell — at a profit — a home that contains (or contained) a home office, there may be tax implications. We can explain them to you.

Also be aware that the amount of your home office deductions is subject to limitations based on the income attributable to your use of the office. Other rules and limitations may apply. But any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.

Do employees qualify?

Unfortunately, the Tax Cuts and Jobs Act suspended the business use of home office deductions from 2018 through 2025 for employees. Those who receive a paycheck or a W-2 exclusively from their employers aren’t eligible for deductions, even if they’re currently working from home.

We can help you determine if you’re eligible for home office deductions and how to proceed in your situation.

© 2021 Covenant CPA

Building customers’ trust in your website

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The events of the past year have taught business owners many important lessons. One of them is that, when a crisis hits, customers turn on their computers and look to their phones. According to one analysis of U.S. Department of Commerce data, consumers spent $347.26 billion online with U.S. retailers in the first half of 2020 — that’s a 30.1% increase from the same period in 2019.

Although online spending moderated a bit as the year went on, the fact remains that people’s expectations of most companies’ websites have soared. In fact, a June 2020 report by software giant Adobe indicated that the pandemic has markedly accelerated the growth of e-commerce — quite possibly by years, not just months.

Whether you sell directly to the buying public or engage primarily in B2B transactions, building customers’ trust in your website is more important than ever.

Identify yourself

Among the simplest ways to establish trust with customers and prospects is to convey to them that you’re a bona fide business staffed by actual human beings.

Include an “About Us” page with the names, photos and short bios of the owner(s), executives and key staff members. Doing so will help make the site friendlier and more relatable. You don’t want to look anonymous — it makes customers suspicious and less likely to buy.

Beyond that, be sure to clearly provide contact info. This includes a phone number and email address, hours of operation (including time zone), and your mailing address. If you’re a small business, use a street address if possible. Some companies won’t deliver to a P.O. box, and some customers won’t buy if you use one.

Keep contact links easy to find. No one wants to search all over a site looking for a way to get in touch with someone at the business. Include at least one contact link on every page.

Add trust elements

Another increasingly critical feature of business websites is “trust elements.” Examples include:

  • Icons of widely used payment security providers such as PayPal, Verisign and Visa,
  • A variety of payment alternatives, as well as free shipping or lower shipping costs for certain orders, and
  • Professionally coded, aesthetically pleasing and up-to-date layout and graphics.

Check and double-check the spelling and grammar used on your site. Remember, one of the hallmarks of many Internet scams is sloppy or nonsensical use of language.

Also, regularly check all links. Nothing sends a customer off to a competitor more quickly than the frustration of encountering nonfunctioning links. Such problems may also lead visitors to think they’ve been hacked.

Abide by the fundamentals

Of course, the cybersecurity of any business website begins (and some would say ends) with fundamental elements such as a responsible provider, firewalls, encryption software and proper password use. Nonetheless, how you design, maintain and update your site will likely have a substantial effect on your company’s profitability. Contact us for help measuring and assessing the impact of e-commerce on your business.

© 2021 Covenant CPA

What are the tax implications of buying or selling a business?

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Merger and acquisition activity in many industries slowed during 2020 due to COVID-19. But analysts expect it to improve in 2021 as the country comes out of the pandemic. If you are considering buying or selling another business, it’s important to understand the tax implications.

Two ways to arrange a deal

Under current tax law, a transaction can basically be structured in two ways:

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The current law’s reduced individual federal tax rates have also made ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also is taxed at lower rates on a buyer’s personal tax return. However, current individual rate cuts are scheduled to expire at the end of 2025, and, depending on actions taken in Washington, they could be eliminated earlier.

Keep in mind that President Biden has proposed increasing the tax rate on corporations to 28%. He has also proposed increasing the top individual income tax rate from 37% to 39.6%. With Democrats in control of the White House and Congress, business and individual tax changes are likely in the next year or two.

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

Preferences of buyers 

For several reasons, buyers usually prefer to buy assets rather than ownership interests. In general, a buyer’s primary goal is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after a transaction closes.

A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

Preferences of sellers

In general, sellers prefer stock sales for tax and nontax reasons. One of their objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling assets

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Obtain professional advice

Be aware that other issues, such as employee benefits, can also cause tax issues in M&A transactions. Buying or selling a business may be the largest transaction you’ll ever make, so it’s important to seek professional assistance. After a transaction is complete, it may be too late to get the best tax results. Contact us about how to proceed. 

© 2021 Covenant CPA

Did you make donations in 2020? There’s still time to get substantiation

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If you’re like many Americans, letters from your favorite charities may be appearing in your mailbox acknowledging your 2020 donations. But what happens if you haven’t received such a letter — can you still claim a deduction for the gift on your 2020 income tax return? It depends.

What is required

To support a charitable deduction, you need to comply with IRS substantiation requirements. This generally includes obtaining a contemporaneous written acknowledgment from the charity stating the amount of the donation, whether you received any goods or services in consideration for the donation and the value of any such goods or services.

“Contemporaneous” means the earlier of:

  • The date you file your tax return, or
  • The extended due date of your return.

So if you made a donation in 2020 but haven’t yet received substantiation from the charity, it’s not too late — as long as you haven’t filed your 2020 return. Contact the charity and request a written acknowledgment.

Keep in mind that, if you made a cash gift of under $250 with a check or credit card, generally a canceled check, bank statement or credit card statement is sufficient. However, if you received something in return for the donation, you generally must reduce your deduction by its value — and the charity is required to provide you a written acknowledgment as described earlier.

New deduction for non-itemizers

In general, taxpayers who don’t itemize their deductions (and instead claim the standard deduction) can’t claim a charitable deduction. Under the CARES Act, individuals who don’t itemize deductions can claim a federal income tax write-off for up to $300 of cash contributions to IRS-approved charities for the 2020 tax year. The same $300 limit applies to both unmarried taxpayers and married joint-filing couples.

Even better, this tax break was extended to cover $300 of cash contributions made in 2021 under the Consolidated Appropriations Act. The new law doubles the deduction limit to $600 for married joint-filing couples for cash contributions made in 2021.

2020 and 2021 deductions

Additional substantiation requirements apply to some types of donations. We can help you determine whether you have sufficient substantiation for the donations you hope to deduct on your 2020 income tax return — and guide you on the substantiation you’ll need for gifts you’re planning this year to ensure you can enjoy the desired deductions on your 2021 return.

© 2021 Covenant CPA

Now or later: When’s the right time to transfer your wealth?

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To gift or not to gift? It’s a deceptively complex question. The temporary doubling of the federal gift and estate tax exemption — to an inflation-adjusted $11.7 million in 2021 — is viewed by some people as a “use it or lose it” proposition. In other words, you should make gifts now to take advantage of the exemption before it sunsets at the end of 2025 (or sooner if lawmakers decide to reduce it earlier).

But giving away wealth now isn’t right for everyone. Depending on your circumstances, there may be tax advantages to keeping assets in your estate. Here are some of the factors to consider.

Lifetime gifts vs. bequests at death

The primary advantage of making lifetime gifts is that, by removing assets from your estate, you shield future appreciation from estate taxes. But there’s a tradeoff: The recipient receives a “carryover” tax basis — that is, he or she assumes your basis in the asset. If a gifted asset has a low basis relative to its fair market value (FMV), then a sale will trigger capital gains taxes on the difference.

An asset transferred at death, however, currently receives a “stepped-up basis” equal to its date-of-death FMV. That means the recipient can sell it with little or no capital gains tax liability. So, the question becomes, which strategy has the lower tax cost: transferring an asset by gift (now) or by bequest (later)?

The answer depends on several factors, including the asset’s basis-to-FMV ratio, the likelihood that its value will continue appreciating, your current or potential future exposure to gift and estate taxes, and the recipient’s time horizon — that is, how long you expect the recipient to hold the asset after receiving it.

Also, be aware that President Biden proposed eliminating the stepped-up basis benefit during his campaign.

Hedging your bets

Determining the right time to transfer wealth can be difficult, because so much depends on what happens to the gift and estate tax regime in the future. It may be possible to reduce the impact of this uncertainty with carefully designed trusts.

Let’s say you believe the gift and estate tax exemption will be reduced dramatically in the near future. To take advantage of the current exemption, you transfer appreciated assets to an irrevocable trust, avoiding gift tax and shielding future appreciation from estate tax. Your beneficiaries receive a carryover basis in the assets, so they’ll be subject to capital gains taxes when they sell them.

Now suppose that, when you die, the exemption amount hasn’t dropped, but instead has stayed the same or increased. To hedge against this possibility, the trust gives the trustee certain powers that, if exercised, cause the assets to be included in your estate. Your beneficiaries enjoy a stepped-up basis and the higher exemption shields all or most of the asset’s appreciation from estate taxes.

Work with us to monitor legislative developments and adjust your estate plan accordingly.

© 2021 Covenant CPA

The many uses of a SWOT analysis

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Using a strengths, weaknesses, opportunities and threats (SWOT) analysis to frame an important business decision is a long-standing recommended practice. But don’t overlook other, broader uses that could serve your company well.

Performance factors

A SWOT analysis starts by spotlighting internal strengths and weaknesses that affect business performance. Strengths are competitive advantages or core competencies that generate value (and revenue), such as a strong sales force or exceptional quality.

Conversely, weaknesses are factors that limit a company’s performance. These are often revealed in a comparison with competitors. Examples might include a negative brand image because of a recent controversy or an inferior reputation for customer service.

Generally, the strengths and weaknesses of a business relate directly to customers’ needs and expectations. Each identified characteristic affects cash flow — and, therefore, business success — if customers perceive it as either a strength or weakness. A characteristic doesn’t really affect the company if customers don’t care about it.

External conditions

The next SWOT step is identifying opportunities and threats. Opportunities are favorable external conditions that could generate a worthwhile return if the business acts on them. Threats are external factors that could inhibit business performance.

When differentiating strengths from opportunities, or weaknesses from threats, the question is whether the issue would exist without the business. If the answer is yes, the issue is external to the company and, therefore, an opportunity or a threat. Examples include changes in demographics or government regulations.

Various applications

As mentioned, business owners can use SWOT to do more than just make an important decision. Other applications include:

Valuation. A SWOT analysis is a logical way to frame a discussion of business operations in a written valuation report. The analysis can serve as a powerful appendix to the report or a courtroom exhibit, providing tangible support for seemingly ambiguous, subjective assessments regarding risk and return.

In a valuation context, strengths and opportunities generate returns, which translate into increased cash flow projections. Strengths and opportunities can lower risk via higher pricing multiples or reduced cost of capital. Threats and weaknesses have the opposite effect.

Strategic planning. Businesses can repurpose the SWOT analysis section of a valuation report to spearhead strategic planning. They can build value by identifying ways to capitalize on opportunities with strengths or brainstorming ways to convert weaknesses into strengths or threats into opportunities. You can also conduct a SWOT analysis outside of a valuation context to accomplish these objectives.

Legal defense. Should you find yourself embroiled in a legal dispute, an attorney may want to frame trial or deposition questions in terms of a SWOT analysis. Attorneys sometimes use this approach to demonstrate that an expert witness truly understands the business — or, conversely, that the opposing expert doesn’t understand the subject company.

Tried and true

A SWOT analysis remains a useful way to break down and organize the many complexities surrounding a business. Our firm can help you with the tax, accounting and financial aspects of this approach.

© 2021 Covenant CPA

2021 individual taxes: Answers to your questions about limits

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Many people are more concerned about their 2020 tax bills right now than they are about their 2021 tax situations. That’s understandable because your 2020 individual tax return is due to be filed in less than three months (unless you file an extension).

However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2021. Below are some Q&As about tax amounts for this year.

Be aware that not all tax figures are adjusted annually for inflation and even if they are, they may be unchanged or change only slightly due to low inflation. In addition, some amounts only change with new legislation.

How much can I contribute to an IRA for 2021?

If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, up to 100% of your earned income. If you’re 50 or older, you can make another $1,000 “catch up” contribution. (These amounts were the same for 2020.)

I have a 401(k) plan through my job. How much can I contribute to it?

For 2021, you can contribute up to $19,500 (unchanged from 2020) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.

I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2021, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,300 (up from $2,200 in 2020).

How much do I have to earn in 2021 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $142,800 for this year (up from $137,700 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2021?

A 2017 tax law eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800). For single filers, the amount is $12,550 (up from $12,400) and for heads of households, it’s $18,800 (up from $18,650). If the amount of your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2021.

If I don’t itemize, can I claim charitable deductions on my 2021 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to the CARES Act that was enacted last year, single and married joint filing taxpayers can deduct up to $300 in donations to qualified charities on their 2020 federal returns, even if they claim the standard deduction. The Consolidated Appropriations Act extended this tax break into 2021 and increased the amount that married couples filing jointly can claim to $600.

How much can I give to one person without triggering a gift tax return in 2021?

The annual gift exclusion for 2021 is $15,000 (unchanged from 2020). This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

Your tax situation

These are only some of the tax amounts that may apply to you. Contact us for more information about your tax situation, or if you have questions

© 2021 Covenant CPA

The power of the tax credit for buying an electric vehicle

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Although electric vehicles (or EVs) are a small percentage of the cars on the road today, they’re increasing in popularity all the time. And if you buy one, you may be eligible for a federal tax break.

The tax code provides a credit to purchasers of qualifying plug-in electric drive motor vehicles including passenger vehicles and light trucks. The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500.

The EV definition

For purposes of the tax credit, a qualifying vehicle is defined as one with four wheels that’s propelled to a significant extent by an electric motor, which draws electricity from a battery. The battery must have a capacity of not less than four kilowatt hours and be capable of being recharged from an external source of electricity.

The credit may not be available because of a per-manufacturer cumulative sales limitation. Specifically, it phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For example, Tesla and General Motors vehicles are no longer eligible for the tax credit.

The IRS provides a list of qualifying vehicles on its website and it recently added a number of models that are eligible. You can access the list here: https://bit.ly/2Yrhg5Z.

Here are some additional points about the plug-in electric vehicle tax credit:

  • It’s allowed in the year you place the vehicle in service.
  • The vehicle must be new.
  • An eligible vehicle must be used predominantly in the U.S. and have a gross weight of less than 14,000 pounds.

Electric motorcycles

There’s a separate 10% federal income tax credit for the purchase of qualifying electric two-wheeled vehicles manufactured primarily for use on public thoroughfares and capable of at least 45 miles per hour (in other words, electric-powered motorcycles). It can be worth up to $2,500. This electric motorcycle credit was recently extended to cover qualifying 2021 purchases.

These are only the basic rules. There may be additional incentives provided by your state. Contact us if you’d like to receive more information about the federal plug-in electric vehicle tax break.

© 2021 Covenant CPA

The cents-per-mile rate for business miles decreases again for 2021

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This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business decreased by one-and-one-half cents, to 56 cents per mile. As a result, you might claim a lower deduction for vehicle-related expenses for 2021 than you could for 2020 or 2019. This is the second year in a row that the cents-per-mile rate has decreased.

Deducting actual expenses vs. cents-per-mile

In general, businesses can deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.

The cents-per-mile rate is useful if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.

Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles extensively for business purposes. Why? Under current law, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.

If you do use the cents-per-mile rate, be aware that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.

The 2021 rate

Beginning on January 1, 2021, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 56 cents per mile. It was 57.5 cents for 2020 and 58 cents for 2019.

The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. The rate partly reflects the current price of gas, which is down from a year ago. According to AAA Gas Prices, the average nationwide price of a gallon of unleaded regular gas was $2.42 recently, compared with $2.49 a year ago. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear.

When this method can’t be used

There are some situations when you can’t use the cents-per-mile rate. In some cases, it partly depends on how you’ve claimed deductions for the same vehicle in the past. In other cases, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.

As you can see, there are many factors to consider in deciding whether to use the mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2021 — or claiming them on your 2020 income tax return.

© 2021 Covenant CPA

Making an estate plan? How to avoid fraudulent transfers

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If you have an estate plan and also have creditors, you could be a fraud perpetrator — without knowing it or intending to defraud anyone. In some circumstances, creditors can challenge gifts, trusts and other strategies for leaving assets to heirs as fraudulent transfers. Here’s how to keep your estate plan from running into trouble.

2 types

Most states have adopted the Uniform Fraudulent Transfer Act (UFTA). The law allows creditors to challenge transfers involving two types of fraud:

  1. Actual fraud. This means making a transfer or incurring an obligation “with actual intent to hinder, delay or defraud any creditor,” including current creditors and probable future creditors.
  2. Constructive fraud. This is a more significant threat for most people because it doesn’t involve intent to defraud. Under UFTA, a transfer or obligation is constructively fraudulent if you made it without receiving a reasonably equivalent value in exchange for the transfer or obligation and you either were insolvent at the time or became insolvent as a result of the transfer or obligation.

“Insolvent” means that the sum of your debts is greater than all of your assets, at a fair valuation. You’re presumed to be insolvent if you’re not paying debts as they become due. Generally, constructive fraud rules protect only present creditors or those whose claims arose before the transfer was made or obligation incurred.

Know your net worth

When it comes to actual fraud, you may not be safe just because you weren’t purposefully trying to defraud creditors. A court can’t read your mind, and it will consider the surrounding facts and circumstances to determine whether a transfer involves fraudulent intent. So before you make gifts or place assets in a trust, consider how a court might view the transfer.

Constructive fraud is a greater risk because of how insolvency is defined and gifts are made. When you make a gift, either outright or in trust, you don’t receive reasonably equivalent value in exchange. If you’re insolvent at the time, or the gift you make renders you insolvent, you’ve made a constructively fraudulent transfer. This means a creditor could potentially undo the transfer.

To avoid this risk, calculate your net worth carefully before making substantial gifts. Even if you’re not having trouble paying your debts, it’s possible you might meet the technical definition of insolvency. Also keep in mind that fraudulent transfer laws vary from state to state. Therefore, you should consult an attorney about the law where you live.

Build a better plan

Besides knowing the law, you can protect your estate plan in several ways. Work with a professional estate planner and be sure to reveal everything about your financial situation that might be relevant to building a creditor-resistant plan. Also manage any debts by working with creditors to negotiate reasonable repayment plans. We can help if you’re still having trouble balancing your budget or managing your assets.

© 2021 Covenant CPA