Recommend Solo 401K Platform – Solo 401K

This guide compares how Sole Proprietorships (or Single-Member LLCs) and S Corporations (S-Corps) affect Solo 401(k) contribution potential, tax exposure, and administrative responsibilities.

Solo 401(k) Contribution Comparison (Based on $400,000 Profit)

Analysis: Sole Proprietor vs. S-Corp

Sole Proprietor or Single-Member LLC

Pros:

• Simple to operate, no payroll setup needed.

• Easier to max out retirement contributions under Solo 401(k) rules.

• All profits (after adjustment) are eligible for employer-side 401(k) contributions.

Cons:

• Entire net income is subject to self-employment tax.

• Limited tax planning flexibility compared to an S-Corp.

S Corporation

Pros:

• Split income between W-2 salary and distributions to reduce self-employment taxes.

• Distributions are not subject to FICA/SE tax.

• Better long-term tax planning as income scales.

Cons:

• Requires formal payroll and additional administrative work.

• 401(k) contributions based only on W-2 wages.

• A high salary may be required to reach the Solo 401(k) cap.

Which Option Is Right for You?

If you are located in the Bay Area and earning over $150,000, setting up an S-Corp in California may offer meaningful tax savings over time. However, if you prefer a leaner structure while still contributing aggressively to your retirement, a Sole Proprietorship or Single-Member LLC may serve you better.

Talk to a Bay Area Tax Advisor

At Flex Tax and Consulting Group, we specialize in Solo 401(k) planning, entity structuring, and tax reduction strategies for independent contractors, consultants, and small business owners across the San Francisco Bay Area, especially in Castro Valley and San Francisco.

We offer personalized consultations to evaluate whether an S-Corp is right for you, how to structure your compensation, and how to legally minimize your tax burden.

Schedule a consultation today:
https://flextcg.zohobookings.com/#/taxadvisory

About Flex Tax and Consulting Group

Flex Tax is a full-service tax advisory firm based in the Bay Area. We support professionals, founders, and investors throughout San Francisco, Castro Valley, and beyond with proactive, year-round planning beyond just filing returns.

Related Post:

Navigating Retirement Savings: Roth IRA vs. 401(k)

The post Solo 401(k): Sole Proprietor vs. S-Corp — Which Structure Maximizes Your Retirement and Tax Efficiency? appeared first on Flex Tax and Consulting Group (FTCG).

 

The following offers a general summary of the basic tax law requirements applicable to REITs. To qualify as a REIT, an entity must meet a number of organizational, operational, distribution, and compliance requirements.

• How must a real estate company be organized to qualify as a REIT?
• How do REITs operate?
• What are the dividend distribution requirements for a REIT?
• What are the compliance rules for becoming a REIT?

How must a real estate company be organized to qualify as a REIT?

A U.S. REIT must be formed in one of the 50 states or the District of Columbia as an entity taxable for federal purposes as a corporation. Directors or trustees must govern it, and its shares must be transferable. Beginning with its second taxable year, a REIT must meet two ownership tests: it must have at least 100 shareholders (the 100 Shareholder Test) and five or fewer individuals cannot own more than 50% of the value of the REIT’s stock during the last half of its taxable year (the 5/50 Test).

To ensure compliance with these tests, most REITs include percentage ownership limitations in their organizational documents. Due to the need to have 100 shareholders and the complexity of both tests, it is strongly recommended that tax and securities law counsel are consulted before forming a REIT.

How do REITs operate?

A REIT must satisfy two annual income tests and a number of quarterly asset tests to ensure the majority of the REIT’s income and assets are derived from real estate sources.

At least 75% of the REIT’s annual gross income must be from real estate-related income such as rents from real property and interest on obligations secured by mortgages on real property. An additional 20% of the REIT’s gross income must be from the above-listed sources or other forms of income such as dividends and interest from non-real estate sources (like bank deposit interest). No more than 5% of a REIT’s income can be from non-qualifying sources, such as service fees or a non-real estate business.

Quarterly, at least 75% of a REIT’s assets must consist of real estate assets such as real property or loans secured by real property. A REIT cannot own, directly or indirectly, more than 10% of the voting securities of any corporation other than another REIT, a taxable REIT subsidiary (TRS), or a qualified REIT subsidiary (QRS). Nor can a REIT own stock in a corporation (other than a REIT, TRS or QRS) in which the value of the stock comprises more than 5% of a REIT’s assets. Finally, the stock value of all of a REIT’s TRSs cannot comprise more than 20% of the value of the REIT’s assets.

What are the dividend distribution requirements for a REIT?

In order to qualify as a REIT, the REIT must distribute at least 90% of its taxable income. To the extent that the REIT retains income, it must pay taxes on such income just like any other corporation.

What are the compliance rules for becoming a REIT?

In order to qualify as a REIT, a company must make a REIT election by filing an income tax return on Form 1120-REIT. Since this form is not due until March, the REIT does not make its election until after the end of its first year (or part-year) as a REIT. Nevertheless, if it desires to qualify as a REIT for that year, it must meet the various REIT tests during that year (except for the 100 Shareholder Test and the 5/50 Test, both of which must be met beginning with the REIT’s second taxable year).

Additionally, the REIT must mail annual letters to its shareholders requesting details of beneficial ownership of shares. Significant penalties will apply if a REIT fails to mail these letters on time.

If you have questions about the REIT, please consult with Alex Kwan.
E-mail: alex.kwan@flextcg.com
Cell: 415-619-4305

The post How to Form a Real Estate Investment Trust (REIT) appeared first on Flex Tax and Consulting Group (FTCG).

The post How to Analyze Your Current Finances appeared first on Flex Tax and Consulting Group (FTCG).

The post How to Reduce Your Taxes on Salary Income appeared first on Flex Tax and Consulting Group (FTCG).

The post How to Prepare a Tax Return for a Nonprofit appeared first on Flex Tax and Consulting Group (FTCG).

You may have taken some extra rooms for your business use. Is that okay?

Section 280A(c) states that you may claim a home office based on the portion of the dwelling that you use exclusively and regularly for business. Thus, the law dictates no specific number of rooms or particulars regarding the size of the office.

The courts make this rule clear, as you can see in the Mills (less than one room) and Hefti (lots of rooms) cases described below.

The Mills Case

Albert Victor Mills maintained an office in his apartment from which he conducted his rental property management business. The apartment was small, totaling only 422 square feet. In the office area of the apartment where Mr. Mills had his desk, he also kept tools, equipment, paint supplies, and a filing cabinet.

The court agreed with Mr. Mills’s allocations and awarded the home-office deduction based on his claimed 23 percent business use of the 422-square-foot apartment.

Planning note. Mr. Mills did not have a single room dedicated to a home office. He had only an area of the apartment where he grouped his office furnishings, equipment, and supplies. If you have a similar situation, make sure your business assets are located in a group.

The Hefti Case

Charles R. Hefti lived in a big house, totaling 9,142 square feet. He claimed that more than 90 percent of his home was used regularly and exclusively for business.

Based on its review of the rooms, the court concluded that 13 rooms, totaling 19 percent of the home, were used exclusively and regularly for business.

Insights

The deductible portion of your home for an office includes the area used exclusively and regularly for business.

Let’s say you have an office in one room and your files in a second room, and you never use these rooms for personal purposes. Further, let’s say you use the office area on a daily basis and the file area in connection with that daily work.

Both rooms would meet the exclusive and regular use requirements, just as Mr. Mills’s and Mr. Hefti’s offices met these rules.

But Not This

“Exclusive use” means that you must use a specific portion of the home only for business purposes. You must make no other use of the space.

Exception. One exception to the exclusive use rule is storage of inventory or product samples if the home is the sole fixed location of a trade or business selling products at retail or wholesale.

Example 1. Your home is the only fixed location of your business, which involves selling mechanics’ tools at retail. You regularly use half of your basement for storage of inventory and product samples. You sometimes use the area for personal purposes. The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business.

Example 2. In Pearson, Dr. Pearson practiced orthodontics in a downtown medical building but retained the dental records of more than 3,000 patients in 36 file drawers (each measuring 26 inches by 14 inches by 12 inches) and had 1,461 boxes containing orthodontic models (each box measuring 10 inches by 6 inches by 2 1/2 inches).

He stored the records in the attic and basement of his home. The areas used for such storage were not separate rooms, and the remaining portions of the attic and basement were used by Dr. Pearson and his family for personal purposes.

The court ruled that Dr. Pearson may not treat the storage areas as home-office expenses because the records were not inventory or samples and Dr. Pearson did not operate a wholesale or retail trade or business from his home.

To be better understand the home office allocation detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

The post How Many Whole or Partial Rooms Can You Use for Your Home Office? appeared first on Flex Tax and Consulting Group (FTCG).

If so, is your S corporation salary

• nonexistent?
• too low?
• too high?
• just right?

Getting the S corporation salary right is important. First, if it’s too low and you get caught by the IRS, you will pay not only income taxes and self-employment taxes on the too-low amount, but also both payroll and income tax penalties that can cost plenty.

Second, in most cases, the IRS is going to expand the audit to cover three years and then add the income and penalties for those three years.

Third, after being found out, you likely are now stuck with this higher salary, defeating your original purpose of saving on self-employment taxes.

Getting to the Number

The IRS did you a big favor when it released its “Reasonable Compensation Job Aid for IRS Valuation Professionals.”

The IRS states that the job aid is not an official IRS position and that it does not represent official authority. That said, the document is a huge help because it gives you some clearly defined valuation rules of the road to follow and takes away some of the gray areas.

Market Approach

The market approach to reasonable compensation compares the S corporation’s business with others and then looks at the compensation being paid by those businesses to employees who look like you, the shareholder-employee who is likely the CEO.

The question to be answered is, how much compensation would be paid for this same position, held by a nonowner in an arm’s-length employment relationship, at a similar company?

In its job aid, the IRS states that the courts favor the market approach, but because of challenges in matching employees at comparable companies, the IRS developed other approaches.

Cost Approach

The cost approach breaks your employee activities into their components, such as management, accounting, finance, marketing, advertising, engineering, purchasing, janitorial, bookkeeping, clerking, etc.

Here’s an example of how the cost approach works to support a $71,019 salary as reasonable compensation for this S corporation owner whose corporation had $3.5 million in revenue and 19 employees:

Health Insurance

The S corporation’s payment or reimbursement of health insurance for the shareholder-employee and his or her family goes on the shareholder-employee’s W-2 and counts as compensation, but it’s not subject to payroll taxes, so it fits nicely into the payroll tax savings strategy for the S corporation owner.

Pension

The S corporation’s employer contributions on behalf of the owner-employee to a defined benefit plan, simplified employee pension (SEP) plan, or 401(k) count as compensation but don’t trigger payroll taxes. Such contributions further enable the savings on payroll taxes while adding to the dollar amount that’s considered reasonable compensation.

Planning note. Your S corporation compensation determines the amount that your S corporation can contribute to your SEP or 401(k) retirement plan. The defined benefit plan likely allows the corporation to make a larger contribution on your behalf.

Section 199A Deduction

The S corporation’s net income that is passed through to you, the shareholder, can qualify for the 20 percent Section 199A tax deduction on your Form 1040.

To be better understand the S Corporation Salary’s detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

The post Avoid Trouble: Don’t Let the IRS Set Your S Corporation Salary appeared first on Flex Tax and Consulting Group (FTCG).

1. Tenants who can’t pay the rent.
2. Tax losses they can’t deduct.

We’ll start with the tenants and then move on to the rental property tax-loss issues.

For the first time in U.S. history, residential landlords are subject to a sweeping nationwide federal moratorium on evictions for nonpayment of rent through the end of 2020.

There is no moratorium on landlords’ responsibility to pay their bills. Thus, landlords need to prepare for some of the rockiest times in decades.

The Federal Moratorium on Residential Evictions

The Centers for Disease Control and Prevention (CDC) and the Department of Health & Human Services issued the latest federal moratorium on evictions. It is an emergency health measure intended to help prevent the spread of COVID-19.

The CDC order is effective September 4, 2020, through December 31, 2020. The order replaces an eviction moratorium put in place on March 27, 2020, by the Coronavirus Aid, Relief, and Economic Security (CARES) Act that expired July 24, 2020.

The CDC order generally bars residential landlords from evicting tenants for nonpayment of rent if a tenant’s estimated 2020 income is no more than $99,000 (single) or $198,000 (married, filing jointly).

Unlike the CARES Act moratorium, which applied only to multifamily rental properties with rental subsidies or federally backed mortgages, the CDC order applies to all types of residential rentals: houses, duplexes, apartment buildings, mobile homes, and mobile home spaces. There is no requirement that the rental be federally financed or rent subsidized.

The CDC order does not apply to commercial properties, including motels and hotels. Nor does it apply to guesthouses rented to temporary guests or seasonal tenants—this presumably excludes most Airbnb and similar short-term rentals.

To prevent an eviction, a tenant need only give the landlord a declaration signed under penalty of perjury providing that the tenant

• has used his or her best efforts to obtain all available government assistance for rent or housing;
• falls within the income restrictions ($99,000 or $198,000 in income for 2020);
• is unable to pay the full rent due to substantial loss of household income, loss of work or wages, or extraordinary out-of-pocket medical expenses;
• is using his or her best efforts to make partial payments that are as close to the full rental payments as the tenant’s circumstances permit; and
• would likely become homeless or forced to move into and live in close quarters or a shared living space.

Tenants need not provide their landlord with any proof that the statements in the declaration are true. The CDC has created a form declaration for tenants to use.

There is no time limit on when tenants must provide this declaration to their landlord—they can do so anytime before or after receiving a termination notice.

Individual landlords who violate the CDC order are subject to a fine of up to $100,000 and up to one year in jail, if the violation does not result in a death.

The fine goes up to $250,000 if the violation results in a death (it’s unclear how the government could prove an eviction caused a tenant’s death).

The fines are doubled for organizations such as LLCs, corporations, and REITs.

Help Tenants Get Help

The CDC order requires tenants to seek government aid to help pay their rent. But they need not seek help from nongovernment sources such as churches or private charities.

It is to your advantage to help your tenants obtain such aid. After all, you would like the rent to get paid. And you likely would want to keep the tenant—assuming this is a good tenant. Links to government programs providing financial assistance for renters are available at https://legalfaq.org.

Work Out a Payment Plan

Try to work out payment plans with struggling tenants. This is in their best interests as well as your own. Be sure to get the terms in writing.

For example, if a tenant’s income has declined by 20 percent, you could agree to accept a 20 percent rent reduction through the end of the year and require the tenant to pay the balance due over 2021. Make it clear that this is a partial rent payment and does not satisfy the tenant’s full rental obligation.

You are under no obligation to offer a tenant a permanent rent reduction or any form of rent forgiveness.

And keep in mind that your government is not going to reward your generosity. You get no tax deduction or other tax benefit for reducing or forgiving rent. This doesn’t mean you shouldn’t do it. Just don’t expect the tax code to reward your generosity.

Unpaid Rent Is Not Tax-Deductible

Bad news. Unpaid rent is not a tax-deductible rental expense. Rather, it is a debt owed to you by your tenant. You get no tax deduction for the unpaid rent even if tenants never pay the rent they owe.

Good news. On the plus side, unpaid rent is not taxable as income, is not reported on your tax return, and increases the chances that you will have a rental property tax loss (deductible, we hope). This assumes you are a cash-basis taxpayer, as virtually all residential landlords are.

Deducting Rental Property Tax Losses

You have a rental loss if the total annual expenses you incur for your rentals (mortgage interest, taxes, utilities, insurance, maintenance, depreciation, and other expenses) exceed your total rental income (which does not include unpaid rent).

It’s likely that many landlords who ordinarily have profitable rentals will suffer rental losses for 2020 because their tenants failed to pay all or part of their rent.

The dreaded passive activity loss rules prevent many landlords from deducting all or part of their rental losses from their non-rental income.

Rental losses are always classified as passive losses. Subject to two important exceptions, the general rules are as follows:

• Passive losses are deductible only from passive income—income from rental activities and from businesses in which you do not materially participate.
• Passive losses are not deductible either (a) from ordinary income such as salary and self-employment earnings, or (b) from investment income such as dividends or interest.

Exception 1. $25,000 Allowance for Rental Real Estate

The tax law takes pity on landlords with a relatively modest income and permits them to deduct a limited amount of rental losses from non-rental income.

If your modified adjusted gross income for the year is under $100,000, you may deduct up to $25,000 in total annual rental losses from your nonpassive income, provided that you actively participate in the management of your rentals (an easy standard to meet).

Exception 2. Real Estate Professional Exemption from Passive Loss Rules

There’s another way you may be able to deduct your rental losses from non-rental income no matter how high your income: the real estate professional exemption from the passive loss rules.

If you qualify as a tax law–defined real estate professional and materially participate in your rental activity, you may treat rental losses as nonpassive and deduct them from all other nonpassive income without limit for 2020.

Either you or your spouse will qualify as a real estate professional for the year if one of you spends

• more than half your personal service work time in real property trades or businesses in which you materially participate, and
• more than 750 hours of your personal service work and investment analysis time in real property trades or businesses in which you and/or your spouse materially participate.

In addition to the standard described above, you and/or your spouse must materially participate in a rental activity to enable the tax loss deduction against your other income. There are various methods for establishing material participation. The two most common are working more than 500 hours in a tax law–grouped multi-rental activity and working more than 100 hours more than anyone else on individual non-grouped properties.

People with a full-time job outside the tax law–defined real estate industry can rarely qualify as real estate professionals.

Non-deductible Rental Losses Become Suspended Passive Losses

You don’t lose rental losses you can’t deduct because of the passive loss rules. Instead, the losses become suspended passive losses. They are carried forward indefinitely and deducted from passive income each year until they are used up.

You may also deduct your suspended passive losses if you sell or otherwise dispose of substantially all your interest in your rental property in a taxable transaction.

To be better understand the Government to landlords’ detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

The post Government to Landlords: Drop Dead! appeared first on Flex Tax and Consulting Group (FTCG).

LLC owners are called members.

• Single-member LLCs have one owner, although spouses who jointly own an LLC in a community property state can elect treatment as a single member LLC for federal income tax purposes.
• We will call LLCs with two or more members multimember LLCs.

Key point: LLCs are not corporations. But LLCs can offer similar legal protection to their members (owners).

Here are the most important things to know about LLCs.

LLCs Offer Legal Protection

Using an LLC to conduct a business or investment activity generally protects your personal assets from LLC-related liabilities—similar to the legal protection offered by a corporation.

As you know, liabilities can arise from simple things—like the Federal Express guy slipping on the banana peel someone left on your front steps—or in seemingly endless and complicated ways if you have employees.

Key point. As a general rule, no type of entity (including an LLC) will protect your personal assets from exposure to liabilities related to your own professional malpractice or your own tortious acts.

Tortious acts are wrongful deeds other than by breach of contract—such as negligent operation of a motor vehicle resulting in property damage or injuries. The issue of liability protection offered by an LLC is a matter of state law. Seek advice from a competent business attorney for details.

Single-Member LLC Tax Basics

Single-member LLC businesses owned by individuals are treated as sole proprietorships for federal income tax purposes unless you elect to treat the single-member LLC as a corporation.

In other words, the default federal income tax treatment for a single-member LLC business is sole proprietorship status. Under the default treatment, you simply report all the single-member LLC’s income and expenses on Schedule C of your Form 1040.

If the single-member LLC business activity generates net self-employment income, you will report that on Schedule SE of your Form 1040.

Rental. If the single-member LLC activity is a rental activity, you report the rental income and expenses on Schedule E of your Form 1040.

Farm or ranch. You report the numbers for a farming or ranching activity on Schedule F.

Simple. You don’t need to file a separate federal income tax return for the single-member LLC. And other things being equal, simple is good.

Three key points

1. The big federal income tax advantage of operating as a single-member LLC is extreme simplicity.
2. The big non-tax advantage is liability protection, under applicable state law.
3. As mentioned, you can elect to treat a single-member LLC as a corporation for federal income tax purposes, but we don’t recommend that, for reasons we explain later.

Multimember LLC Tax Basics

Multimember LLCs are treated as partnerships for federal income tax purposes unless you elect to treat the LLC as a corporation.

In other words, the default federal income tax treatment of a multimember LLC is partnership status. Under the default treatment, you must file an annual partnership federal income tax return on Form 1065.

From the Form 1065 partnership return, the LLC issues an annual Schedule K-1 to each member to report that member’s share of the LLC’s income and expenses. The member then takes those taxable and deductible amounts into account on the member’s own return (Form 1040 for a member who is an individual).

The LLC itself does not pay federal income tax. This arrangement is called pass-through taxation, because the income and expenses from the LLC’s operations are passed through to the members who then take them into account on their own returns. (The same pass-through taxation concept applies to entities set up as “regular” partnerships under applicable state law.)

Electing to Treat the LLC as a Corporation for Tax Purposes

You have the option of electing to treat a single-member LLC or multimember LLC as a corporation for federal income tax purposes. You do that by filing IRS Form 8832, Entity Classification Election, to change the default classification of the single-member LLC or multimember LLC to the new classification as a corporation.

If your desire is to have your LLC treated as an S corporation, it can elect S corporation status directly using IRS Form 2553, or it can elect C corporation treatment on Form 8832 and then S corporation treatment on IRS Form 2553.

While there may be valid non-tax reasons for electing to treat an LLC as a corporation, we think tax reasons generally dictate against taking that step.

If you conclude that there are tax advantages to electing corporate status, why not just actually incorporate your operation in the first place? That’s simpler. Keeping your tax matters simple is generally good policy.

Electing corporate status from the LLC could have unintended tax consequences. For example, you can potentially collect federal-income-tax-free gains from selling stock in a qualified small business corporation (QSBC). But you must own shares and hold them for over five years to cash in on this super-favorable deal. Can an LLC membership (ownership) interest count as QSBC stock for this purpose? Apparently not. It’s not stock.

If you are looking for the QSBC stock break, just set up as a corporation in the first place.

Here’s another example: a special federal income tax break allows you to annually deduct up to $50,000 of losses from selling eligible small business stock, or $100,000 if you’re a married joint filer, and treat the loss as a tax-favored ordinary loss instead of a tax-disfavored capital loss.

Can an LLC membership interest count as eligible stock for this purpose? Apparently not. It’s not stock. Avoid the problem—set up as a corporation in the first place.

To be better understand the Limited Liability Companies’ detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

The post All About Limited Liability Companies (LLCs) appeared first on Flex Tax and Consulting Group (FTCG).

A lot, a whole lot.

And how much is making things easier worth? Of course, it’s a lot, a whole lot, too.

We now have both the new (a) clarity and (b) easy road to Paycheck Protection Program (PPP) loan forgiveness for the self-employed with no employees. Get ready to smile.

New Easy Road to 100 Percent Forgiveness

Say thanks to the Paycheck Protection Program Flexibility Act of 2020. This new law creates a 24-week period for you to spend your PPP loan proceeds.

If you obtained your loan proceeds before June 5, you can elect to use the eight-week period to spend your PPP loan proceeds.

Here’s the big difference:

• If the 24-week covered period applies, your loan forgiveness for your deemed payroll is capped at 2.5 months of your 2019 Schedule C net profit, not to exceed $20,833.

• If you elect the eight-week covered period, your loan forgiveness for your deemed payroll is capped at eight weeks, not to exceed $15,385.

Why Is This Important?

When you file as a Schedule C taxpayer and have no employees, your PPP loan is based on 2.5 times your 2019 Schedule C, line 31, net profit, limited to $20,833.

Here’s how the loan amount works:

Okay, you have your loan proceeds either in hand or in play at this point.

Let’s keep our eyes on the “easy road” to forgiveness. Under the new 24-week rule, you achieve 100 percent forgiveness when you pay yourself the total loan amount within 10.8 weeks of the date you received your loan proceeds. Let’s round the 10.8 to 11 weeks.

Yes, you are reading this correctly. By simply using the loan proceeds on yourself during the first 11 weeks, you achieve total forgiveness.

Note this. By using the 11 weeks, you achieve total PPP loan forgiveness without having to spend any money on rent, utilities, or interest.

When Can I Apply for Forgiveness?

According to SBA guidance issued on June 22, 2020, you may submit your loan forgiveness application anytime on or before the maturity date of the loan—including before the end of the covered period—if you used all the loan proceeds for which you requested forgiveness.

Example. Ron receives his $20,833 PPP loan on May 15, 2020. He puts the money in his business checking account. During the 11 weeks beginning with May 15, 2020, Ron writes checks to himself that total $20,833. Ron can apply for $20,833 of loan forgiveness anytime after the 11th week.

Is It Really This Easy?

Yes.

What About Interest, Rent, and Utilities?

With the 11-week program described above, you don’t have to consider interest, rent, or utilities to achieve 100 percent forgiveness.

In fact, why bother? By simply using the 11 weeks, you have less paperwork and worry.

Of course, you might want to consider interest, rent, and utilities if this takes you to earlier forgiveness. To obtain full forgiveness, you could spend as little as 60 percent on payroll and the balance on interest, rent, and utilities.

Example. Jane files a Schedule C and has no employees, and on June 1, 2020, she obtains a PPP loan of $20,000. During the first eight weeks, Jane spends $12,000 on herself and $8,000 on qualified Schedule C deductible business interest, rent, and utilities. Jane can elect the eight-week period and qualify for 100 percent forgiveness.

Here are the basic PPP forgiveness requirements that apply to your 2020 Schedule C business deduction payments for interest, rent, and utilities:

• Interest payments on any business mortgage obligation on real or personal property where such obligation was in place before February 15, 2020 (but not any prepayment or payment of principal).

• Payments on business rent obligations on real or personal property under lease agreements in force before February 15, 2020.

• Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

Meet the Paid Rule

On page 2 of the 3508EZ instructions, you find this:

Enter any amounts paid to a self-employed individual. For a 24-week Covered Period, this amount is capped at $20,833 (the 2.5-month equivalent of $100,000 per year) for each individual or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower.

We may suffer from unfounded paranoia because we find the word “paid” a word to be reckoned with. But in our opinion, you should have your Schedule C business write you checks from its business account. If there’s no separate business account, make sure the business writes checks that pay your personal expenses in the amount of the deemed compensation.

Special allocations are tricky business. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston) and e-mail us at info@flextcg.com.

The post Government Clarifies PPP Loan Forgiveness for the Self-Employed appeared first on Flex Tax and Consulting Group (FTCG).

Nonprofits

The nonprofit organization is a charitable entity with specific social goals that uses its income and surplus to fund operations, rather than benefiting members, shareholders, employees, or leaders of the organization. The remaining profit is further used to achieve its goals. Nonprofit organizations accept donations from governments, foundations, institutions, and individuals, to name a few. These funds are then used for the charity work set. They can conduct activities in research, religious, educational, and even scientific environments and are tax-free.

Foundations

A foundation is an organization that does not qualify as a public charity. They are very similar to nonprofit organizations, except that the funds for foundations usually come from family or corporate entities. In contrast, the funds for nonprofit organizations generally come from their income.

Technically speaking, donations can be made to private foundations, but many foundations do not accept it. As an alternative, they use the funds initially used for investment and allocate the funds generated from these investments. The foundation will also donate these funds to other nonprofit organizations in the form of gifts or grants.

Private foundations have the following subsets: operational and non-operational. Private non-operating foundations donate to other charitable organizations, which is a more common form. The foundation also does not directly execute charitable programs or services. Privately operated foundations allocate funds to their own projects that exist for charitable purposes.

Summary of Nonprofit VS. Foundation

A nonprofit organization refers to a charitable organization with specific social goals that use its income and surplus to fund operations, rather than benefiting members, shareholders, employees, or leaders. They receive funds from governments, foundations, institutions, and individuals, and do not donate to other charities. On the other hand, a foundation refers to a charitable organization that raises funds from its founder. It can be a corporate entity or a family. They can get funds from private foundations, companies, governments, individuals, companies, or families. However, both of them play a significant charitable role in society.

To be better understand the difference between a non-profit organization and a private foundation. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

The post What is the difference between a nonprofit and foundation? appeared first on Flex Tax and Consulting Group (FTCG).

What Is a Special Tax Allocation?

A special tax allocation is an allocation of an item of partnership loss, deduction, income, or gain among the partners that’s disproportionate to the partners’ overall ownership interests.

The best measure of a partner’s overall ownership interest is the partner’s stated interest in partnership distributions and capital, as stated in the partnership agreement.

Example. An allocation of 80 percent of a partnership’s 2020 tax loss to Partner A, whose stated ownership is only 25 percent, is a special allocation of the tax loss.

Pass-Through Taxation

After the partnership allocates its tax items among the partners, the allocated amounts (including any special allocations) are passed through to the partners on their annual Schedules K-1 received from the partnership.

Each partner then takes the passed-through amounts reported on Schedule K-1 into account on the partner’s federal income tax return (Form 1040 for an individual partner).

The partnership itself does not pay federal income tax. You and the other partners pay tax at the owner level. This is called pass-through taxation, because the tax consequences of the partnership’s activities are passed through to you and the other partners.

Key point. If you run your business as an S corporation, the pass-through taxation principle applies there too. But you’re not allowed to make special allocations of S corporation tax items among the shareholders.

Instead, you must allocate all tax items strictly in proportion to stock ownership. So, the ability to make special tax allocations is often a key selling point of partnership status as opposed to S corporation status.

How Special Tax Allocations Work

A partnership special tax allocation arrangement might work like this.

During the first few years of operation, when tax losses are expected, a disproportionately large percentage of the losses are specially allocated to the partners who need tax losses the most.

These may be the partners who supplied most of the initial capital, and they may be passive limited partners who are really just investors.

The other partners may be the ones who actually run the partnership’s business or investment activities, and they may be the general partners of a limited partnership. These partners are allocated a disproportionately small amount of the losses during the start-up phase when losses are expected.

In later years, the partnership is expected to generate positive taxable income and/or gains. Otherwise, the partnership was a bad idea to begin with.

The partnership will allocate a disproportionately large percentage of these later-year income and gain items to the partners who received earlier special allocations of losses. After these later-year special allocations of income and gain have offset the earlier special allocations of losses, all partnership tax items are allocated in proportion to the partners’ stated ownership percentages.

The special allocation phase of the partnership is over, and life goes on.

On a cradle-to-grave basis, you expect that all partners will receive cumulative allocations of taxable losses, deductions, income, and gain in proportion to their stated ownership percentages. So, the special allocations simply affect the timing of when you and the other partners recognize losses, deductions, income, and gain.

While the preceding description of a special allocation arrangement is often accurate, you can also have special allocations of specific tax items, such as depreciation, rather than special allocations of overall partnership losses.

Special allocations are tricky business. I’m here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston) and e-mail us at info@flextcg.com.

The post Take Advantage of Partnership Special Allocation appeared first on Flex Tax and Consulting Group (FTCG).

1. Partner’s Self-Employment Income Creates Cash and Forgiveness

Just as sole proprietors failed originally to ask for their PPP cash assistance, so did many partners.

Three things to note here:

1. The partnership (not the individual partner) applies for the PPP loan.
2. The deemed payroll amount that the partnership uses for the partners is their 2019 self-employment income (both guaranteed payments and ordinary income).
3. If the partnership filed for the PPP loan based on its employees, but failed to include any dollar amount for the partners, the U.S. Small Business Administration (SBA) in an interim final rule authorizes the lender to increase the loan amount for the appropriate partners’ deemed payroll inclusion that was left out of the original application.

2. Paid and Capped

Line 9 of the SBA official forgiveness application reads as below:

Line 9: Enter any amounts paid to owners (owner-employees, a self-employed individual, or general partners). This amount is capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.

Note the word “paid.”

In general, payments to partners don’t occur in a pattern that would equal the amount needed during the eight-week covered period.

To protect the partnership’s forgiveness amount, make sure that payments to partners during the eight-week covered period equal the 8/52 of the partners’ deemed 2019 payroll. We have not seen a requirement on the “paid” part, but that word is there. So protect yourself.

3. Qualifying Non-Payroll Expenses

When explaining that the partnership had to file for the PPP loan and forgiveness, the SBA stated:

Rent, mortgage interest, utilities, and other debt service are generally incurred at the partnership level, not partner level, so it is most natural to provide the funds for these expenses to the partnership, not individual partners.

4. Apply

If your partnership has not applied for its PPP money, do it now. The SBA has plenty of money available for PPP loans at the moment, but you have to think it won’t last long.

5. Easier Forgiveness on the Way

On Thursday, May 28, the U.S. House of Representatives approved the Paycheck Protection Program Flexibility Act of 2020 by a vote of 417-1. This bill or something similar will be enacted in June to make it easier for all PPP borrowers to qualify for PPP loan forgiveness.

Here are some highlights from this bill:

• Extends the eight weeks to 24 weeks
• Changes the 75 percent rule to 60 percent
• Changes the two years to five years and retains the 1 percent interest rate
• Changes June 30 to December 31
• Adds exemptions that will increase full-time equivalents and that will increase forgiveness amounts

Will make it easier to obtain forgiveness when you have reductions in your employee

If you need our assistance with either the PPP loan or forgiveness, we are here to be of service. Our office e-mail is info@flextcg.com and the office number is 415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston).

The post Six Insights into the PPP for Partnerships appeared first on Flex Tax and Consulting Group (FTCG).

If your small businesses managed to secure a Paycheck Protection Program (PPP) loan before the well ran dry, your next task is figuring out how to use it. Here’s a list of the expenses that qualify for forgiveness (meaning you don’t have to pay the loan back).

Remember, your lender will perform an audit at the end of the 8-week forgiveness period to see how you spent the loan. Keep the relevant paperwork under each section so you can sail through the audit.

Salaries & Wages

A minimum of 75% of your PPP loan must go to compensating your employees, excluding those who earn more than $100,000 per year. We are still waiting for guidance from the Small Business Administration on salaries over $100,000 and business owner/family salaries.

For the audit: Payroll processing reports, tax reports, or other reports such as paid time off (vacation or sick leave).

Healthcare Benefits

This is for paying any company’s group health insurance plan premiums. Company owners and family are included if they’re on the group plan. However, payments to the owner’s policy or Health Savings Account contributions do not qualify for PPP loan forgiveness.

For the audit: Insurance invoice(s) and proof of payment.

Retirement Plan Contributions

If you offer your employees a Defined Benefit Plan, Defined Contribution Plan, or SEP IRA, you can use some of your PPP loans to continue funding that plan. There’s no specific guidance about benefits paid to the owner or owner’s family, but we doubt it would be forgiven.

For the audit: Retirement plan statements, funding schedules, and proof of remittances.

Non-Payroll Expenses

Operating expenses that don’t directly benefit employees — a few of which we’ll list below — can’t total more than 25% of the loan. You’ll have to pay back any excess amounts if you go over that percentage.

Rent

The expense must be incurred and paid during the 8-week loan period to be forgiven. Any rent that was already due before the date of the loan doesn’t qualify. Also, the lease must have been signed before February 15, 2020.

For the audit: Signed lease contract, proof of rent payment (canceled check, ACH, bank statement, or wire).

Utilities

Service contract agreements must have been in effect before February 15, 2020. This covers electricity, gas, water, phone, internet, etc. It’s not clear what the SBA means by “etc.”

For the audit: Proof of payment for each utility.

Interest in Business Loans

You may use some of your PPP loans to pay the interest on your business mortgage, practice acquisition loan, build-out loan, or any loan secured by business personal property. The mortgage/loan must have been in effect before February 15, 2020.

For the audit: Bank statement or loan invoice showing principal and interest, plus proof of payment. You may wish to pay principal and interest separately during the 8-week PPP loan period, so there’s no question in the auditor’s mind.

The pandemic has inflicted significant damage on many of America’s small businesses. And the financial relief red tape makes the situation even more difficult. Flex Tax can help make sense of it all and take some of the bookkeeping worries off your shoulders, so you can focus on returning to the “new normal.”

The post What Can You Spend Your PPP Forgivable Loan on? appeared first on Flex Tax and Consulting Group (FTCG).

Many small business owners who have been approved for Paycheck Protection Program loans (“PPP”) are realizing that the loan isn’t as forgivable as they’d hoped.

The amount a small business can qualify to have forgiven must primarily be payroll costs. The SBA’s rule-making has stated that at least 75% of the forgiveness request must be payroll costs but can also contain up to 25% of other approved expenses under the law such as rent, mortgage interest and utilities. That rule seems to be widely understood and so long as small business owners are spending 75% of their PPP funds on payroll this rule won’t frustrate small business owners when it comes time to forgiveness.

Unfortunately, there is an additional restriction on loan forgiveness requests which penalizes a small business if they do not bring back the same number of workers they had before the pandemic. For example, if you were a small business who had 10 employees prior to the pandemic, and now, after receiving your PPP loan funds you only have 6 employees, then your loan forgiveness request will be reduced to 60% of the total amount of eligible expenses. If the small business brought back 10 or more employees, then there is no reduction in the forgivable loan amount. In other words, small businesses who have kept or who re-hire their entire workforce are rewarded while those who can’t are punished. The fact of the matter is, that many who can’t bring back their workforce are those who have been hurt the most.

The pre-pandemic time period used to determine the number of full-time equivalent employees is either January 1, 2020 to February 29, 2020, or February 15, 2019 to June 30, 2019. The business owner can choose either time period and a smart one will choose the period when they had a lower number of full-time equivalent employees.

Using the example of a small business that received a PPP loan of $60,000 that prior to the pandemic had 10 full-time equivalent employees but has only retained or brought back 6 employees over the eight weeks following their loan funding, let’s go through both the 75% Payroll Cost Rule and the Full-time Equivalent Employee Rule to see what amounts a small business borrower would be eligible to have forgiven.

Total PPP Loan = $60,000

75% Payroll Cost Rule (applies from PPP loan funding for 8 weeks)

Amount spent on payroll costs = $30,000

Amount spent on rent = $4,000

Amount spent on utilities = $2,000

Total Amount Spent = $36,000

Payroll costs of $30,000 represent 83% of the total qualifying expenses ($36,000) to be requested and as a result, there is no need to reduce the forgiveness request based on the 75% payroll cost rule.

Side note: If non-payroll costs exceeded 25%, then the forgiveness request is reduced until no more than 25% of the amount to be forgiven is qualifying non-payroll costs. The payroll costs are always 100% eligible for forgiveness but the non-payroll costs will need to be reduced until they are no more than 25% of the total amount requested to be forgiven.

Full-time Equivalent Employee Rule

Even though the small business had a PPP loan of $60,000, they only spent $36,000 on qualifying expenses. They met the 75% payroll cost rule and the entire $36,000 is eligible for forgiveness but only after applying the full-time equivalent employee rule.

Full-time equivalent employees after PPP funding (8-week period) = 6

Full-time equivalent employees pre-pandemic = 10

Ratio of Employees Retained (amount eligible for forgiveness) = 60%

The amount eligible for forgiveness of $36,000 is then multiplied by 60% to get the final amount eligible for forgiveness of $21,600.

In the end, the small business who received a $60,000 PPP loan, spent $36,000 on payroll and other qualifying expenses (within the 75% rule), but then had their forgivable amount reduced down to $21,600 as they were only able to bring back 60% of their pre-pandemic workforce. At the end of the 8 weeks, they will be eligible for loan forgiveness of $21,600 and will need to re-pay the remaining $38,400 to the bank where they received the PPP loan. This amount is subject to 1% interest and must be repaid within two years from the date they obtained the loan.

Side note: There is an additional reduction calculation if you bring back workers but reduce their pay from the pre-pandemic time-period by more than 25%.

The reality is that small business owners are penalized harshly if they can’t bring back employees. In advising business owners in my law firm, we’ve already seen this to be a major concern and have heard of small business owners who are unable to bring back their workers as those workers’ unemployment benefits are more generous than the pay they received when working in the small business. Other business owners are struggling with shelter in place orders being extended, are still unable to open, and are reluctant to simply re-hire workers when there’s uncertainty about whether the PPP loan will just be more debt or whether it will actually function like true stimulus for the small business owner and be forgiven.

The post How to get your PPP Loans Forgivable? appeared first on Flex Tax and Consulting Group (FTCG).

You can use the actual expenses method to calculate your mileage deduction, which requires adding up all of the money spent operating your vehicle and multiplying it by the percentage that you used it for business. Or, you can use the standard mileage method, which requires adding up all of the miles you drove for business during the year and multiplying it by the standard mileage rate set by the IRS for that year.

Here’s a closer look at how to calculate your business mileage deduction using each of these two methods.

Using the Actual Expenses Method

To calculate your business mileage deduction using this method, you must keep careful track of all the money you spend related to the operation of your vehicle during the year. You should check with your accountant to find out what’s covered in your state, but in general, these expenses can include:

• Lease payments
• Insurance payments
• Regular maintenance (oil changes, tire rotation, etc.)
• Repairs
• New parts (tires, windshield wipers, lights, etc.)
• Fees (registration, inspection, etc.)
• Depreciation

Once you add these expenses together, you multiply the total by the percentage you use your vehicle for business. For example, if you spent $10,000 related to the operation of your vehicle during the year, and you used it 30% of the time for business and 70% for personal use, you’d deduct $3,000 (10,000 x .30 = 3,000).

You should be able to produce receipts or proof of payment for each of these expenses, as well as a mileage log for business use. Otherwise, the IRS can more easily disallow your claim.

Using the Standard Mileage Method

This is considered the more simple of the two methods because it does not take into account the operating costs for your vehicle. It only requires you to track your mileage for business use. You can do this by creating a log that includes the dates and times you drove, descriptions of your business activity, and odometer readings for each trip. You can do it by hand, on a spreadsheet, or with a mobile app.

Once you add up the miles you’ve driven for business over the year, you multiply the total by the standard mileage rate determined by the IRS for the year. For example, if you drove 5,000 miles for work during 2019 when the standard mileage rate was 58 cents per mile, then your deduction would be $2,900 (5,000 x .58 = 2,900).

Deciding Which Calculation to Use

If your employer doesn’t reimburse you for business miles driven in your vehicle, or if you’re self-employed, then you’re entitled to a business mileage deduction on your taxes.

Each method of calculating your mileage deduction offers advantages and disadvantages, and those can change depending on your situation. For example, the actual expense method may end up being best for you if you had a lot of vehicle costs, such as repairs, during the year.

You may want to try calculating your deduction using both methods to find out which one will give you the larger payoff. However, it’s best to consult with a tax professional to determine the type of mileage deduction calculation that’s right for you each year.

The post How to Calculate Mileage Deductions on Your Tax Return appeared first on Flex Tax and Consulting Group (FTCG).

After they access the website, taxpayers can use the “Help Me” tool, which asks for information such as their age, income, and state of residence. The tool then matches the taxpayer with one of the 12 software products that are available through the program. The IRS says each taxpayer will usually have several options to choose from. Taxpayers can review all the offers made by the 12 providers if they do not want to use the tool.

Once taxpayers select a product, they will be directed away from IRS.gov to the provider’s website to prepare their return. Taxpayers can also access Free File from their phone or tablet using the IRS2Go app. All active-duty military personnel who made $66,000 or less last year are eligible to use any of the 12 products.

The IRS also announced that it recently entered into new agreements with the 12 providers through Oct. 31, 2021, and that these agreements provide greater consumer protection to taxpayers using the products. Among the new protections is a prohibition on provider companies having any button or link on their Free File landing pages that would take taxpayers to non-Free File programs.

The post IRS announces Free File launch appeared first on Flex Tax and Consulting Group (FTCG).

For 2019, partnerships and other persons must report partner capital accounts consistent with the reporting requirements in the 2018 forms and instructions, including the requirement to report negative tax basis capital accounts on a partner-by-partner basis. This means that for 2019 taxpayers may continue to report capital accounts under any method available in 2018, which includes the tax basis, Sec. 704(b), GAAP, or any other reasonable method.

The IRS also further explained the 2019 requirement for partnerships and other persons to report a partner’s share of net unrecognized Sec.

704(c) gain or loss by defining this term in the notice. Solely to complete the 2019 Forms 1065, U.S. Return of Partnership Income; Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., Item N; and Form 8865, Return of U.S. Persons Concerning Certain Foreign Partnerships, Schedule K-1, Item G, the notice defines a partner’s share of “net unrecognized Section 704(c) gain or loss” as the partner’s share of the net (i.e., aggregate or sum) of all unrecognized gains or losses under Sec. 704(c) in partnership property, including Sec. 704(c) gains and losses arising from revaluations of partnership property.

Additionally, publicly traded partnerships are exempt from the requirement to report their partners’ shares of net unrecognized Sec. 704(c) gain or loss until further notice.

This notice also explains that the requirement in the 2019 draft instructions requiring partnerships to report to partners information about separate Sec. 465 at-risk activities will not be effective until 2020.

Finally, partnerships that comply with the reporting requirements in the notice will not be subject to any penalties. Including a Sec. 6722 penalty for failure to furnish correct payee statements, a Sec. 6698 penalty for failure to file a partnership return that shows required information, or a Sec. 6038 penalty for failure to furnish information required on a Schedule K-1 (Form 8865).

The post Partnership capital reporting requirements postponed until 2020 appeared first on Flex Tax and Consulting Group (FTCG).

Sec. 110(a) allows a lessee to exclude from income the amount of a qualified construction allowance received from a landlord to the extent the allowance does not exceed the actual costs incurred to improve the leased space.

For tenant allowance payments from a landlord to a lessee to be considered a qualified lessee construction allowance, the lease must be short-term and for retail space. Regs. Sec. 1.110-1(b)(2)(ii) defines a short-term lease as to any agreement for the occupancy or use of retail space for a term of 15 years or less. The lease term determined by taking the initial lease term in the lease agreement and including any lease extension options unless the rent is to renewed at a fair market value determined at the time of the renewal (Sec. 168(i)(3)).

Regs. Sec. 1.110-1(b)(2)(iii) defines retail space as space “that leased, occupied, or otherwise used by the lessee in its trade or business of selling tangible personal property or services to the general public, [and includes] space where activities supporting the retail activity performed.” Regs. Sec. 1.110-1(b)(3) also contains a purpose requirement, which requires that the tenant allowance be expressly provided for in the lease agreement (or an ancillary agreement) and be to construct or improve the qualified long-term real property for use in the lessee’s trade or business at the retail space. Personal property, even if it used in the retail space, will not qualify under the safe harbor.

Sec. 110 provides that improvements related to a qualified leasehold improvement allowance are determined to be owned by the landlord. For purposes of retail space, qualified property generally meets the following requirements:

It has a recovery period of 20 years or less, acquired before Jan. 1, 2020, and deemed qualified improvement property (Sec. 168(k)(2)(A)(i)). Once these guidelines are met, the improvements are then eligible to be treated as 15-year recovery qualified leasehold improvement property eligible for special depreciation, which includes 50% bonus depreciation for the tax year 2016.

When developing language within the lease agreement concerning the tenant allowance. The landlord should consider including a restriction on the use of funds to ensure the allowance is eligible to treated as qualified leasehold improvement property and for special depreciation allowance treatment under Sec. 168(k). Qualified leasehold improvement property carved out of the general definition for qualified property. As it applies specifically to improvements made to the interior of nonresidential real property. The property must be placed in service more than three years after the building was first placed in service, and space must be occupied solely by the lessee (Sec. 168(e)(6)(A)).

The post Tax treatment of tenant allowances appeared first on Flex Tax and Consulting Group (FTCG).

“hard forks”and “airdrops”

A “hard fork” of a cryptocurrency owned by a taxpayer does not result in gross income for a taxpayer. If the taxpayer receives no units of the new cryptocurrency. However, taxpayers receiving an “airdrop” of units of a new cryptocurrency after a hard fork have ordinary gross income from the airdrop. The IRS ruled in Rev. Rul. 2019-24, issued Wednesday. The IRS also updated its Virtual Currency Transactions frequently asked questions on its website to reflect the ruling.

Rev. Rul. 2019-24 supplements basic guidance on the tax treatment of cryptocurrency or virtual currency that the Service issued in 2014 (Notice 2014-21).

Cryptocurrency, the IRS explains, is a type of virtual currency that uses cryptography to secure transactions that digitally recorded on a distributed ledger. Such as a blockchain. Distributed ledger records, shares, and synchronizes transactions as data on digital systems without any centralized storage or administration. The new revenue ruling addresses a specific type of cryptocurrency transaction known as a hard fork that is often, but not always, followed by an airdrop.

A hard fork is unique to distributed ledger technology and occurs when a cryptocurrency on a distributed ledger. Undergoes a protocol change resulting in a permanent diversion from the legacy or existing distributed ledger. A hard fork may create from one cryptocurrency a new cryptocurrency on a new distributed ledger in addition to the original cryptocurrency on the original distributed ledger.

The IRS explained that receipt of cryptocurrency from an airdrop generally occurs when it recorded on the new distributed ledger. But a receipt for tax purposes may occur later or, constructively, earlier, depending on when the taxpayer can exercise dominion and control over the new cryptocurrency. For example, an airdropped cryptocurrency might not be immediately credit to a taxpayer’s account at a cryptocurrency exchange. That does not yet support that cryptocurrency. In that case, the taxpayer treated as receiving the cryptocurrency later, once it credited to the taxpayer’s account and the taxpayer can transfer, sell, exchange, or otherwise dispose of it.

Examples:

The revenue ruling gives two examples: one of a taxpayer whose cryptocurrency undergoes a hard fork. Creating a new cryptocurrency, but units of the new cryptocurrency are not airdropped or otherwise transferred into an account. It is the taxpayer owns or controls. Because the taxpayer receives no units of the new cryptocurrency, that taxpayer does not at that point have a gross income for federal tax purposes.

The second example is similar to the first, except that in addition to the hard fork, units of the new cryptocurrency airdropped into the taxpayer’s distributed ledger address. The taxpayer can immediately dispose of the new units. In this case, because the taxpayer receives units of the new cryptocurrency. The taxpayer has accession to wealth and ordinary income in the tax year in which the new cryptocurrency units received. The amount of the ordinary income is the fair market value of the new units when the airdrop is recorded on the distributed ledger.

The post IRS clarifies the tax treatment of cryptocurrency appeared first on Flex Tax and Consulting Group (FTCG).

Under Secs. 41(h) and 3111(f), enacted by the Protecting Americans From Tax Hikes (PATH) Act of 2015, P.L. 114-113, a qualified small business can elect to apply a portion of its Sec. 41 research credit against the employer portion of Federal Insurance Contributions Act (FICA) payroll taxes, effective for tax years beginning after Dec. 31, 2015. To be a qualified small business for a tax year, a business must have gross receipts of less than $5 million for the year and must not have had gross receipts for any tax year before the five-tax-year period ending with the year.

An eligible small business with qualifying research expenses can elect to apply up to $250,000 of its research credit against its payroll tax liability by filing Form 6765, Credit for Increasing Research Activities, with its timely filed business income tax return. Under a special rule for the tax year 2016, a small business that has already filed its 2016 return and failed to choose this option can still make the election by filing an amended return by Dec. 31, 2017.

A small business then claims the payroll tax credit by filing Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. This form must be attached to the business’s payroll tax return.

Flex Tax and Consulting Group has served and managed all types of tax and revenue collection for the U.S. for more than eight years. Our value-added services and solutions are based on innovative thinking that fits our valuable clients’ needs.

The post How small businesses can apply the research credit to payroll taxes appeared first on Flex Tax and Consulting Group (FTCG).

The relief applies to individuals who relinquished or will relinquish their U.S. citizenship after March 18, 2010, and meet several other criteria listed below. Native-born or naturalized U.S. citizens generally may voluntarily relinquish their citizenship for reasons and under procedures listed at 8 U.S.C. Section 1481(a).

Under the Code, expatriates must comply with all federal tax requirements for the year of expatriation and the five immediately prior tax years. Also, Sec. 877A imposes a tax on “covered expatriates” that deems most property as sold for its fair market value on the day before the day of expatriation. The resulting net gain over $725,000 (for 2019) is includible in their income. A covered expatriate is one who, under Sec. 877(a):

• Has an average annual net income tax liability in the five tax years ending before the date of expatriation of more than a specified amount ($168,000 for 2019);
• Has a net worth of $2 million or more; or
• Cannot certify under penalty of perjury that he or she has met all applicable tax requirements for the five preceding tax years or fails to submit evidence of compliance the IRS may require. This certification can be made with Form 8854, Initial and Annual Expatriation Statement.

In other words, even expatriates with income tax liabilities and net worths below these thresholds may still be covered expatriates if they cannot make the certification.

Under the relief procedures announced Friday, individuals who meet specified requirements will not be considered covered expatriates for purposes of Sec. 877A and will not be liable for any unpaid taxes and penalties for the year of expatriation and previously, the IRS stated. As noted above, the expatriation must have occurred after March 18, 2010.

Also, for the six tax years at issue (the year of expatriation and the five immediately prior years), any failure to file required tax returns and pay taxes and penalties for the years at issue must have been due to the taxpayer’s nonwillful conduct. Required tax returns include income, gift, and information returns (the latter including Form 8938, Statement of Specified Foreign Financial Assets), and FinCEN Form 114, Report of Foreign Bank and Financial Accounts, commonly known as FBAR. Nonwillful conduct is that which is due to negligence, inadvertence, mistake, or a good-faith misunderstanding of legal requirements.

Besides, to be eligible for relief, the individual must:

• Have no filing history as a U.S. citizen or resident (not including Form 1040NR, U.S. Nonresident Alien Income Tax Return, under a good-faith but mistaken belief that the individual was not a U.S. citizen);
• Meet the above income tax liability limits for covered expatriates for five tax years ending before the date of expatriation and meet the $2 million-net-worth limit at the time of expatriation and when applying for the relief;
• Have an aggregate tax liability of no more than $25,000 for the six tax years at issue (after application of all applicable deductions, exclusions, exemptions, and credits, including foreign tax credits, but excluding penalties, interest, and the exit tax of Sec. 877A); and
• Agree to complete and submit all required federal tax returns for the six tax years at issue, including all required schedules and information returns.

The post IRS offers expatriate tax relief appeared first on Flex Tax and Consulting Group (FTCG).

The final regulations also provide definitions of “federally declared disaster,” “federally declared disaster area,” “disaster loss,” “disaster year,” and “preceding year,” for these purposes.

Under the prior rules before 2016 (Regs. Sec. 1.165-11(e)), a taxpayer had to make the election to take a loss in an earlier tax year by the unextended due date for the taxpayer’s return, generally April 15. This short period to decide whether to elect relief put undue pressure on taxpayers and required the IRS to issue several extensions of time to make the election after large natural disasters.

Under the final rules, the deadline for the election to claim the loss on the prior year’s tax return is six months after the due date for filing the taxpayer’s federal income tax return for the disaster year (determined without regard to any extension of time to file). The regulations also extend the period for revoking the election to 90 days after the due date for making the election.

The procedures for making or revoking the election are described in both the final regulations and in Rev. Proc. 2016-53, which contains additional rules to ensure consistent return positions by taxpayers so they take a loss in only one tax year, and are not affect by the final regulations.

The final regulations, which are effective for elections and revocations made on or after the date they are published as final in the Federal Register, also remove Temp. Regs. Sec. 1.165-11T.

The post Taxpayers may deduct casualty losses in prior years appeared first on Flex Tax and Consulting Group (FTCG).

Many amounts will increase in inflation in 2020. The standard deduction will increase to $24,800 for married individuals filing joint returns or surviving spouses. The $18,650 for heads of household, and $12,400 for unmarried individuals (other than surviving spouses). And the married individuals filing separate returns.

The maximum amount of the earned income tax credit (for taxpayers with three or more children) will increase in 2019.

The maximum amount of the adoption credit will increase to $14,300 up from $14,080 in 2019. That is also the maximum amount that will be excludable from an employee’s gross income for qualified amounts paid. Or expenses incurred by an employer under an adoption assistance program.

The 2020 exemption amounts for the alternative minimum tax will be $113,400 for married individuals filing joint returns and surviving spouses, $72,900 for unmarried individuals (other than surviving spouses), $56,700 for married individuals filing separate returns, and $25,400 for estates and trusts, all increased from 2019.

The Sec. 179 amount for tax years beginning in 2020 will be $1,040,000 with a phaseout threshold of $2,590,000, slight increases from 2019.

The qualified business income threshold under Sec. 199A(e)(2) will increase to $326,600 for married individuals filing joint returns. And $163,300 for married individuals filing separate returns, single individuals, and heads of household, all increased from 2019.

The Sec. 911 foreign earned income exclusion amount will increase to $107,600 from $105,900 in 2019.

The basic exclusion amount for determining the unified credit against the estate tax will be $11,580,000 for decedents dying in the calendar year 2020, up from $11,400,000 in 2019. The annual gift tax exclusion amount remains at $15,000. But the gift tax annual exclusion for gifts of a present interest to a spouse who is not a U.S. citizen will increase to $157,000 in 2020 from $155,000 in 2019.

Various penalty amounts for failure to file tax and information returns or furnish payee statements are also being adjusted for inflation for 2020.

The post IRS posts 2020 inflation adjustments and tax tables appeared first on Flex Tax and Consulting Group (FTCG).

The new revenue procedure does not contain the per-diem rates for the current fiscal year.

Those published in Notice 2019-55, which contains the rates that are in effect from Oct. 1, 2019, to Sept. 30, 2020.

The TCJA suspended the miscellaneous itemized deduction that employees could take for unreimbursed business expenses. However, self-employed individuals and certain employees, such as armed forces reservists, fee-basis state or local government officials, eligible educators, and qualified performing artists, who deduct unreimbursed expenses for travel away from home may still use per-diem rates for meals and incidental expenses, or incidental expenses only.

The IRS explains in the revenue procedure that the TCJA amended prior rules to disallow a deduction for expenses for entertainment, amusement, or recreation paid or incurred after Dec. 31, 2017. Otherwise, allowable meal expenses remain deductible if the food and beverages purchased separately from the entertainment. The cost of the food and beverages is stated separately from the cost of the entertainment in the invoice or bill.

The new revenue procedure is effective for per-diem allowances for lodging, meal, and incidental expenses, or for a meal and incidental expenses only. That are paid to an employee on or after Nov. 26, 2019, for travel away from home on or after Nov. 26, 2019.

The post Per-diem method clarified in light of TCJA changes appeared first on Flex Tax and Consulting Group (FTCG).