5 key points about bonus depreciation

Posted on September 4, 2020September 4, 2020 by CCG

You’re probably aware of the 100% bonus depreciation tax break that’s available for a wide range of qualifying property. Here are five important points to be aware of when it comes to this powerful tax-saving tool.

1. Bonus depreciation is scheduled to phase out

Under current law, 100% bonus depreciation will be phased out in steps for property placed in service in calendar years 2023 through 2027. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years.

For certain aircraft (generally, company planes) and for the pre-January 1, 2027 costs of certain property with a long production period, the phaseout is scheduled to take place a year later, from 2024 to 2028.

Of course, Congress could pass legislation to extend or revise the above rules.

2. Bonus depreciation is available for new and most used property

In the past, used property didn’t qualify. It currently qualifies unless:

The taxpayer previously used the property and
The property was acquired in certain forbidden transactions (generally acquisitions that are tax free or from a related person or entity).

3. Taxpayers should sometimes make the election to turn down bonus depreciation

Taxpayers can elect to reject bonus depreciation for one or more classes of property. The election out may be useful for sole proprietorships, and business entities taxed under the rules for partnerships and S corporations, that want to prevent “wasting” depreciation deductions by applying them against lower-bracket income in the year property was placed in service — instead of against anticipated higher bracket income in later years.

Note that business entities taxed as “regular” corporations (in other words, non-S corporations) are taxed at a flat rate.

4. Bonus depreciation is available for certain building improvements

Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property:

Land improvements other than buildings, for example fencing and parking lots, and
“Qualified improvement property,” a broad category of internal improvements made to non-residential buildings after the buildings are placed in service.

The TCJA inadvertently eliminated bonus depreciation for qualified improvement property.

However, the 2020 Coronavirus Aid, Relief and Economic Security Act (CARES Act) made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.

5. 100% bonus depreciation has reduced the importance of “Section 179 expensing”

If you own a smaller business, you&rsqu;ve likely benefited from Sec. 179 expensing. This is an elective benefit that — subject to dollar limits — allows an immediate deduction of the cost of equipment, machinery, off-the-shelf computer software and some building improvements. Sec. 179 has been enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and has greatly reduced the cases in which Sec. 179 expensing is useful.

We can help

The above discussion touches only on some major aspects of bonus depreciation. This is a complex area with tax implications for transactions other than simple asset acquisitions. Contact us if you have any questions about how to proceed in your situation.

Some online sellers burnish their reputations at the expense of yours

Posted on September 3, 2020September 3, 2020 by CCG

Reports started trickling into state agricultural agencies in July: Consumers were worried about strange seed packets they had received in the mail. The unsolicited goods weren’t labeled and appeared to be sent from China. In a year already fraught with anxiety and paranoia, the story quickly made headlines.

Perhaps this was the first you’d heard of a scam known as “brushing,” in which some third-party e-commerce sellers set up fake buyer accounts and ship unordered goods (in this case, seeds) to “customers.” Why would they do this? Read on.

A growing fraud

Brushing scammers set up fake accounts with Amazon, eBay and other online platforms so that they can order their own merchandise, ship it to a real address and then post glowing reviews that bolster their ratings. The ultimate objective, of course, is to attract more buyers for their goods.

According to the U.S. Department of Agriculture (USDA), the seeds people received this summer seem to be part of a brushing scheme. (The USDA is continuing to investigate, but at this time, the seeds don’t appear to be dangerous or capable of producing invasive plants.) However, this isn’t the first time Americans have received unordered merchandise from unknown companies. Over the past couple of years, consumers have been surprised by gifts of everything from flashlights to hand warmers to Bluetooth speakers.

Considering that you aren’t obliged to pay for or send back merchandise you didn’t order, this may not seem like a big deal. However, it suggests that personal information has been disclosed or compromised. So if you receive one of their packages, brushers have — at the very least — your name and home address and may also have your phone number and email address. And, as the Federal Trade Commission (FTC) warns, these fraudsters may have set up fake accounts in your name on multiple websites — or even hacked your legitimate accounts.

Nip it in the bud

How can you prevent dishonest businesses from burnishing their own reputations at the possible expense of yours?

Report a suspicious package to the online retailer or platform (if you know what it is).
Check your accounts for suspicious activity and change your passwords.
If it appears accounts have been compromised, review your bank and credit card statements and credit reports. Consider freezing them to prevent fraud perpetrators from opening new accounts in your name.
File a report with the FTC at ftc.gov/complaint.

Remember that it’s always possible a seller simply sent you something by mistake. Or a friend may have ordered a gift and forgotten to enclose a message to you. So do a little snooping before jumping to conclusions. But if it still seems your mystery package is part of a brushing scam, don’t just brush it off. Report the “gift” and make sure your accounts are secure.

Oh, no, your original will is missing!

Posted on September 2, 2020September 2, 2020 by CCG

In a world that’s increasingly paperless, you’re likely becoming accustomed to conducting a variety of transactions digitally. But when it comes to your last will and testament, only an original, signed document will do.

The original vs. a photocopy

Many people mistakenly believe that a photocopy of a signed will is sufficient. In fact, most states require that a deceased’s original will be filed with the county clerk and, if probate is necessary, presented to the probate court.

If your family or executor can’t find your original will, there’s a presumption in most states that you destroyed it with the intent to revoke it. That means the court will generally administer your estate as if you died without a will.

It’s possible to overcome this presumption. For example, if all interested parties agree that a signed copy reflects your wishes, they may be able to convince a court to admit it. But to avoid costly, time-consuming legal headaches, it’s best to ensure that your family can locate your original will when they need it.

Storage solutions

There isn’t one right place to keep your will — it depends on your circumstances and your comfort level with the storage arrangements. Wherever you decide to keep your will, it’s critical that 1) it be stored safely, and 2) your family knows how to find it.

Options include:

Having your accountant, attorney or another trusted advisor hold your will and making sure your family knows how to contact him or her.
Storing your will at your home or office in a fireproof lockbox or safe and ensuring that someone you trust knows where it is and how to retrieve it.

Storing your original will and other estate planning documents safely — and communicating their location to your loved ones — will help ensure that your wishes are carried out. Contact us if you have questions regarding your will or other estate planning documents.

Helping employees understand their health care accounts

Posted on September 1, 2020September 1, 2020 by CCG

Many businesses now offer, as part of their health care benefits, various types of accounts that reimburse employees for medical expenses on a tax-advantaged basis. These include health Flexible Spending Accounts (FSAs), Health Reimbursement Arrangement (HRAs) and Health Savings Account (HSAs, which are usually offered in conjunction with a high-deductible health plan).

For employees to get the full value out of such accounts, they need to educate themselves on what expenses are eligible for reimbursement by a health FSA or HRA, or for a tax-free distribution from an HSA. Although an employer shouldn’t provide tax advice to employees, you can give them a heads-up that the rules for reimbursements or distributions vary depending on the type of account.

Pub. 502

Unfortunately, no single publication provides an exhaustive list of official, government-approved expenses eligible for reimbursement by a health FSA or HRA, or for a tax-free distribution from an HSA. IRS Publication 502 — “Medical and Dental Expenses” (Pub. 502) comes the closest, but it should be used with caution.

Pub. 502 is written largely to help taxpayers determine what medical expenses can be deducted on their income tax returns; it’s not meant to address the tax-favored health care accounts in question. Although the rules for deductibility overlap in many respects with the rules governing health FSAs, HRAs and HSAs, there are some important differences. Thus, employees shouldn’t use Pub. 502 as the sole determinant for whether an expense is reimbursable by a health FSA or HRA, or eligible for tax-free distribution from an HSA.

Various factors

You might warn health care account participants that various factors affect whether and when a medical expense is reimbursable or a distribution allowable. These include:

Timing rules. Pub. 502 notes that expenses may be deducted only for the year in which they were paid, but it doesn’t explain the different timing rules for the tax-favored accounts. For example, a health FSA can reimburse an expense only for the year in which it was incurred, regardless of when it was paid.

Insurance restrictions. Taxpayers may deduct health insurance premiums on their tax returns if certain requirements are met. However, reimbursement of such premiums by health FSAs, HRAs and HSAs is subject to restrictions that vary according to the type of tax-favored account.

Over-the-counter (OTC) drug documentation. OTC drugs other than insulin aren’t tax-deductible, but they may be reimbursed by health FSAs, HRAs and HSAs if substantiation and other requirements are met.

Greater appreciation

The pandemic has put a renewed emphasis on the importance of employer-provided health care benefits. The federal government has even passed COVID-19-related relief measures for some tax-favored accounts.

As mentioned, the more that employees understand these benefits, the more they’ll be able to effectively use them — and the greater appreciation they’ll have of your business for providing them. Our firm can help you fully understand the tax implications, for both you and employees, of any type of health care benefit.

Will You Have to Pay Tax on Your Social Security Benefits?

Posted on August 27, 2020August 27, 2020 by CCG

If you’re getting close to retirement, you may wonder: Are my Social Security benefits going to be taxed? And if so, how much will you have to pay?

It depends on your other income. If you’re taxed, between 50% and 85% of your benefits could be taxed. (This doesn’t mean you pay 85% of your benefits back to the government in taxes. It merely that you’d include 85% of them in your income subject to your regular tax rates.)

Crunch the numbers

To determine how much of your benefits are taxed, first determine your other income, including certain items otherwise excluded for tax purposes (for example, tax-exempt interest). Add to that the income of your spouse, if you file joint tax returns. To this, add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your total income plus half of your benefits. Now apply the following rules:

1. If your income plus half your benefits isn’t above $32,000 ($25,000 for single taxpayers), none of your benefits are taxed.

2. If your income plus half your benefits exceeds $32,000 but isn’t more than $44,000, you will be taxed on one half of the excess over $32,000, or one half of the benefits, whichever is lower.

Here’s an example

For example, let’s say you and your spouse have $20,000 in taxable dividends, $2,400 of tax-exempt interest and combined Social Security benefits of $21,000. So, your income plus half your benefits is $32,900 ($20,000 + $2,400 +1/2 of $21,000). You must include $450 of the benefits in gross income (1/2 ($32,900 − $32,000)). (If your combined Social Security benefits were $5,000, and your income plus half your benefits were $40,000, you would include $2,500 of the benefits in income: 1/2 ($40,000 − $32,000) equals $4,000, but 1/2 the $5,000 of benefits ($2,500) is lower, and the lower figure is used.)

Important: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a triple tax cost. You’ll have to pay tax on the additional income, you’ll have to pay tax on (or on more of ) your Social Security benefits (since the higher your income the more of your Social Security benefits that are taxed), and you may get pushed into a higher marginal tax bracket.

For example, this situation might arise if you receive a large distribution from an IRA during the year or you have large capital gains. Careful planning might be able to avoid this negative tax result. You might be able to spread the additional income over more than one year, or liquidate assets other than an IRA account, such as stock showing only a small gain or stock with gain that can be offset by a capital loss on other shares.

If you know your Social Security benefits will be taxed, you can voluntarily arrange to have the tax withheld from the payments by filing a Form W-4V. Otherwise, you may have to make estimated tax payments. Contact us for assistance or more information.

CARES Act made changes to excess business losses

Posted on August 27, 2020August 27, 2020 by CCG

The Coronavirus Aid, Relief and Economic Security (CARES) Act made changes to excess business losses. This includes some changes that are retroactive and there may be opportunities for some businesses to file amended tax returns.

If you hold an interest in a business, or may do so in the future, here is more information about the changes.

Deferral of the excess business loss limits

The Tax Cuts and Jobs Act (TCJA) provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year. The covered taxpayers are individuals, estates and trusts that own businesses directly or as partners in a partnership or shareholders in an S corporation.

The $500,000 and $250,000 limits, which are adjusted for inflation for tax years beginning after calendar year 2018, were scheduled under the TCJA to apply to tax years beginning in calendar years 2018 through 2025. But the CARES Act has retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025.

The postponement means that you may be able to amend:

Any filed 2018 tax returns that reflected a disallowed excess business loss (to allow the loss in 2018) and
Any filed 2019 tax returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).

Note that the excess business loss limits also don’t apply to tax years that begin in 2020. Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment (see below).

Changes to the excess business loss limits

The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 TCJA.

Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to employment aren’t taken into account in calculating an excess business loss. This means that excess business losses can’t shelter either net taxable investment income or net taxable employment income. Be aware of that if you’re planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021.

Another change provides that an excess business loss is taken into account in determining any NOL carryover but isn’t automatically carried forward to the next year. And a generally beneficial change states that excess business losses don’t include any deduction under the tax code provisions involving the NOL deduction or the qualified business income deduction that effectively reduces income taxes on many businesses.

And because capital losses of non-corporations can’t offset ordinary income under the NOL rules:

Capital loss deductions aren’t taken into account in computing the excess business loss and
The amount of capital gain taken into account in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.

3 steps experts follow when investigating fraud

Posted on August 25, 2020August 25, 2020 by CCG

When business owners suspect that an employee is stealing assets or manipulating financial results, it’s time to call a fraud expert to investigate. Although the complexity of the incident will determine the investigation’s scope, there are three basic steps forensic accountants generally follow to build a fraud case that can stand up in court.

1. Conducting interviews

Fraud interviewers know how to spot warning signs, detect deception and pin down suspicions when talking with suspects and their coworkers. But they usually start with management interviews, by asking owners, executives and audit committee members what they know about:

Possible fraud ploys,
The company’s fraud risks, and
Internal controls that have been implemented to mitigate specific fraud risks or to generally help prevent, deter and detect fraud.

An expert may interview not only your company’s management and audit committee, but also anyone who can provide information about financial fraud risks. These interviews might include employees involved in initiating, recording or processing complex or unusual transactions, as well as operating personnel not directly involved in the financial reporting process.

When interviewing suspects and potential witnesses, experts encourage interviewees to do most of the talking and use silence as a tool to elicit information. Before concluding the interview, they confirm the information they’ve gathered.

2. Gathering evidence

Fraud experts also collect physical and digital evidence of possible fraud from the company’s internal sources. Examples include personnel files, phone and email records, security camera recordings, and physical and IT system access records.

Locating this evidence may require computer forensic examinations. Expect your expert to ask to access your accounting system to search for suspicious journal entries, credits, reversals and overridden controls. Experts may also collect external sources of evidence, such as public records, customer and vendor information, media reports and private detective reports.

3. Analyzing facts

Fraud specialists have been trained to review and categorize internal and external evidence, conduct computer-assisted data analysis and test various hypotheses. Rather than rely on gut instinct, your expert will formally document every step in the investigation and follow formal procedures to ensure a comprehensive investigation.

When experts finish conducting interviews and gathering evidence, they report their findings. You and your attorney may determine the appropriate format for a report and how distribution will be affected by the need to protect legal privileges and avoid defamation.

Avoid a botched investigation

A proper investigation is essential to building a strong fraud case. Indeed, botched investigations could prevent your company from recouping losses and prosecuting the perpetrator. Contact us if you suspect fraud in your organization.

5 good reasons to turn down an inheritance

Posted on August 20, 2020August 20, 2020 by CCG

You may use a qualified disclaimer to refuse a bequest from a loved one. Doing so will cause an asset to bypass your estate and go to the next beneficiary in line. What are the reasons you’d take this action? Here are five reasons:

1. Gift and estate tax savings. This is often cited as the main incentive for using a qualified disclaimer. For starters, the unlimited marital deduction shelters all transfers between spouses from gift and estate tax. In addition, transfers to nonspouse beneficiaries, such as your children and grandchildren, may be covered by the gift and estate tax exemption.

Currently, the exemption can shelter a generous $11.58 million in assets for 2020. By maximizing portability of any unused exemption amount, a married couple can effectively pass up to $23.16 million in 2020 to their heirs free of gift and estate taxes.

However, despite these lofty amounts, wealthier individuals, including those who aren’t married and can’t benefit from the unlimited marital deduction or portability, still might have estate tax liability concerns. By using a disclaimer, you ensure that the exemption won’t be further eroded by the inherited amount. Assuming you don’t need the money, shifting the funds to the younger generation without it ever touching your hands can save gift and estate tax for the family as a whole.

2. Generation-skipping transfer (GST) tax. Disclaimers may also be useful in planning for the GST tax. This tax applies to most transfers that skip a generation, such as bequests and gifts from a grandparent to a grandchild or comparable transfers through trusts. Like the gift and estate tax exemption, the GST tax exemption is $11.58 million for 2020.

If GST tax liability is a concern, you may wish to disclaim an inheritance. For instance, if you disclaim a parent’s assets, the parent’s exemption can shelter the transfer from the GST tax when the inheritance goes directly to your children. The GST tax exemption for your own assets won’t be affected.

3. Family businesses. A disclaimer may also be used as a means for passing a family-owned business to the younger generation. By disclaiming an interest in the business, you may be able to position stock ownership to your family’s benefit.

4. Creditor protection. Any inheritance you receive would immediately be subject to creditors’ claims. It might be possible to avoid dire results by using a disclaimer to protect these assets. However, state laws and federal bankruptcy laws may defeat or hinder this goal. Consult with your estate planning advisor about your specific situation.

5. Charitable deductions. In some cases, a charitable contribution may be structured to provide a life estate, with the remainder going to a charitable organization. Without the benefit of a charitable remainder trust, an estate won’t qualify for a charitable deduction in this instance, but using a disclaimer can provide a deduction because the assets will pass directly to the charity.

Before you make a final decision on whether to accept a bequest or use a qualified disclaimer to refuse it, contact us for guidance.

5 common accounting software mistakes to avoid

Posted on August 19, 2020August 19, 2020 by CCG

No company can afford to operate without the right accounting software. When considering whether to buy a new product or upgrade their current solutions, however, business owners often fall prey to some common mistakes. Here are five gaffes to avoid:

1. Relying on a generic solution. Some companies rush into buying an accounting system without stopping to consider all their options. Perhaps most important, they may be missing out on specific versions for their industries.

For instance, construction companies can choose from many applications with built-in features specific to how their businesses work. Nonprofit organizations also have industry-specific accounting software. If you haven’t already, check into whether a product addresses your company’s area of focus.

2. Spending too much or too little. When buying or upgrading something as important as an accounting system, it’s easy to overspend. Those bells and whistles can be enticing. Then again, frugal-minded business owners may underspend, picking up a low-end product and letting staff deal with the headaches.

The ideal approach generally lies somewhere in the middle. Perform a thorough review of your accounting needs, transaction volume and required reports, as well as your employees’ proficiency and the availability of tech support. Then calculate a reasonable budgeted amount to spend.

3. Getting stuck in a rut. Assuming you already have an accounting system, one of the keys to managing it is knowing precisely when to upgrade. You don’t want to spend money unnecessarily, but you also shouldn’t risk errors or outdated functionality by waiting too long.

There’s no one-size-fits-all answer. Your financial statements are a potentially helpful source of information. A general rule of thumb says that, when revenues hit certain benchmarks (perhaps $5 million, $10 million or $15 million), a business may want to start thinking “upgrade.” The right tipping point depends on various factors, however.

4. Neglecting the importance of integration and mobile access. Once upon a time, a company’s accounting software was a standalone application, and data from across the company had to be manually entered into the system. But integration is the name of the game these days. You should be able to integrate your accounting system with all (or most) of your other software so that data can be shared seamlessly and securely.

Also consider the availability and functionality of mobile access to your accounting system. Many solutions now include apps that users can use on their smartphones or tablets.

5. Going it alone. Which accounting package you choose may seem an entirely internal decision. After all, you and your staff will be the ones using it, right? But you may be forgetting one rather obvious person who could help: your accountant.

We can help you assess and determine your accounting needs, set a feasible budget, choose the right solution (or upgrade) and implement it properly. Going forward, we can even periodically test your system to ensure it’s providing accurate data and generating the proper reports.

More parents may owe “nanny tax” this year, due to COVID-19

Posted on August 18, 2020August 18, 2020 by CCG

In the COVID-19 era, many parents are hiring nannies and babysitters because their daycare centers and summer camps have closed. This may result in federal “nanny tax” obligations.

Keep in mind that the nanny tax may apply to all household workers, including housekeepers, babysitters, gardeners or others who aren’t independent contractors.

If you employ someone who’s subject to the nanny tax, you aren’t required to withhold federal income taxes from the individual’s pay. You only must withhold if the worker asks you to and you agree. (In that case, ask the nanny to fill out a Form W-4.) However, you may have other withholding and payment obligations.

Withholding FICA and FUTA

You must withhold and pay Social Security and Medicare taxes (FICA) if your nanny earns cash wages of $2,200 or more (excluding food and lodging) during 2020. If you reach the threshold, all of the wages (not just the excess) are subject to FICA.

However, if your nanny is under 18 and childcare isn’t his or her principal occupation, you don’t have to withhold FICA taxes. Therefore, if your nanny is really a student/part-time babysitter, there’s no FICA tax liability.

Both employers and household workers have an obligation to pay FICA taxes. Employers are responsible for withholding the worker’s share of FICA and must pay a matching employer amount. FICA tax is divided between Social Security and Medicare. Social Security tax is 6.2% for the both the employer and the worker (12.4% total). Medicare tax is 1.45% each for both the employer and the worker (2.9% total).

If you prefer, you can pay your nanny’s share of Social Security and Medicare taxes, instead of withholding it from pay.

Note: It’s unclear how these taxes will be affected by the executive order that President Trump signed on August 8, which allows payroll taxes to be deferred from September 1 through December 31, 2020.

You also must pay federal unemployment (FUTA) tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter of this year or last year. FUTA tax applies to the first $7,000 of wages. The maximum FUTA tax rate is 6%, but credits reduce it to 0.6% in most cases. FUTA tax is paid only by the employer.

Reporting and paying

You pay nanny tax by increasing your quarterly estimated tax payments or increasing withholding from your wages — rather than making an annual lump-sum payment.

You don’t have to file any employment tax returns, even if you’re required to withhold or pay tax (unless you own a business, see below). Instead, you report employment taxes on Schedule H of your tax return.

On your return, you include your employer identification number (EIN) when reporting employment taxes. The EIN isn’t the same as your Social Security number. If you need an EIN, you must file Form SS-4.

However, if you own a business as a sole proprietor, you must include the taxes for your nanny on the FICA and FUTA forms (940 and 941) that you file for your business. And you use the EIN from your sole proprietorship to report the taxes. You also must provide your nanny with a Form W-2.

Recordkeeping

Maintain careful tax records for each household employee. Keep them for at least four years from the later of the due date of the return or the date the tax was paid. Records include: employee name, address, Social Security number; employment dates; wages paid; withheld FICA or income taxes; FICA taxes paid by you for your worker; and copies of forms filed.