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2020 Wrap Up: End-of-Year Tax Tips

We’ve reached the end of the year; the time of year where you’re working on closing out your books for the calendar year. You may have already started planning for the new year and have set goals for 2021, but before you do, it’s important to look back at 2020 and determine how you can best utilize 2020 deductions when reporting the activity in 2021. There has been a lot of change when it comes to tax requirements and guidelines, so in this month’s blog we break a few of these down, some related to business income and others related to personal income. Retroactive Bonus Depreciation for Business The federal coronavirus relief bill and the CARES Act were passed by Congress in order to help offset some of the financial burdens on individuals and businesses due to the current pandemic. With its passing, new opportunities for deductions have emerged. Thanks in large part to the CARES Act, a technical problem has been fixed that now allows a 100 percent bonus depreciation for qualified business improvements which are generally capital expenditures like remodeling the inside of buildings. It does not include improvements or remodeling for residential rentals or personal homes. It also does not include outside or structural remodels to your brick-and-mortar stores. However, the great news is that this is a retroactive fix, so businesses can fully deduct qualified improvements dating back to January 1st, 2018 by amending previously filed tax returns. Business Income Reduction If you are an accrual basis taxpayer, make sure that you accrue for 2020 expenses incurred prior to January 1, 2021.   If you incurred...

Small Business Guide to Income Taxation

When starting a small business, one of the most important decisions you will make up-front is how you’re going to structure and register it with the state and the federal government. How your business is structured will affect how you are categorized for income tax purposes, so having all the information and making an informed decision will save you any surprises when it comes to tax season, not to mention the cost of having to change the designation at a later date. So how do you know which structure is right for you? Your business structure is determined by the type of organization you select and the number of owners within the business. We will focus here on the income tax aspects of the entity choice for small start-up businesses reviewing three common structures – sole proprietorships, general partnerships, and Limited Liability Companies (LLCs). We will not consider the legal ramifications of the entity choice as you will want to consult with an attorney regarding the legal aspects of the different entities. We will also not consider other taxation issues such as sales, use or excise taxes, nor will we discuss the taxation rules of rental activities. Here’s a basic breakdown of the income tax characteristics of various small, non-corporate, business entities… Sole Proprietorship If you are the sole owner, registering as a sole proprietorship is one of the most simple and common ways to structure your business. In fact, you are automatically classified as being a sole proprietorship if you carry out business activities but are not registered as any other kind. This structure gives you complete control...

The 3 Tax Extenders that Could Save You Money

As part of the Appropriations Act of 2020 that was signed into effect at the end of 2019, several tax laws were extended (sometimes called the “extenders”) that had previously expired on December 31, 2017. Three of the more common tax items that were extended include the Nonbusiness Energy Property Tax Credit, the Mortgage Forgiveness Exclusion, and a Mortgage Insurance Premium Deduction. The applicability of these tax items was extended to the 2020 tax year and was made retroactive to December 31, 2017, meaning you can amend your 2018 and 2019 tax returns to include these items. Therefore, it could be in your best interest to see if they apply to you. The Energy Tax Credit – Nonbusiness Energy Property Tax Credit This credit applies to certain energy improvements to your principal residence. Qualified energy improvements include items such as installing new exterior windows or doors or home insulation. Residential energy improvement costs include installing certain water heaters, furnaces, and cooling systems. To qualify for the credit, the improvement must meet certain energy efficiency standards and be installed and ready to use prior to the end of the tax year. To document that the improvement qualifies for the credit, you can rely on a certification statement from the manufacturer of the product. For items such as windows, doors, and insulation, you can claim 10% of the cost of the improvement, with a $2,000 lifetime limit for windows. Note that only the actual cost of the product applies to the credit, not the installation cost. Furnaces and cooling systems have set amounts for the credit and the installed cost qualifies....

The Paycheck Protection Program Loan: What You Need to Know About the PPP Loan Forgiveness Application

It’s no secret that the coronavirus has substantially impacted our economy. If you’re a business owner, chances are you applied for one of the business relief programs that were made available as part of the CARES Act (Coronavirus Aid, Relief, and Economic Security Act), a $2 trillion stimulus package that went into effect on March 27, 2020. One of the temporary programs of the stimulus package was the Paycheck Protection Program (PPP) loan. Though the PPP loan application deadline has been extended to August 8, 2020, the businesses that applied for the loan in April and May are now turning their attention to the Loan Forgiveness application. So, what exactly is the PPP loan and what do you need to know about the forgiveness application process? What is the Paycheck Protection Program Loan? At its foundation, the PPP loan was created with one simple set of rules: businesses who qualified to receive the loan have 8 weeks to spend the loan proceeds on payroll and state payroll taxes and certain non-payroll expenses, which include rent, utilities, and mortgage interest (if applicable), with a maximum spend of 25% on the non-payroll items. However, as part of the PPP Flexibility Act, the SBA added in a 24-week option and gave businesses a little more flexibility by allowing them to spend up to 40% on the specified non-payroll expenses during that time. At the end of the 8 (or 24) week period, the business may have some or all of the loan forgiven depending on how the money was spent and whether the number of full-time equivalent employees changed as compared to...

I Can’t Afford My Tax Bill, What Now?

When tax time rolls around, you may be wondering, “what happens if I can’t afford my tax bill?” Perhaps you file on time but know you won’t be able to pay your bill in full. Or, maybe you weren’t expecting a tax bill at all and don’t have enough money saved to pay. If you can’t afford your tax bill, don’t panic. More than half of millennials don’t have $500 set aside for a tax bill, so you’re not alone. There’s a handful of options available to help you. The most important thing you can do if you can’t afford your bill is to be proactive. Avoid waiting for the IRS to call, as the penalties and limitations may be much harsher. The IRS may be more likely to accommodate if you create a record of honest, dedicated communication. How do I pay my tax bill off? The due date for paying your 2019 taxes is the due date of your return, April 15, 2020. Even if you file for an extension, the IRS expects you to estimate the amount of tax due and pay your tax bill by April 15. If you file on time but do not pay timely, the IRS will charge you interest, currently a 5% annual rate (subject to change each quarter) on unpaid tax bills. In addition, you may be charged a 0.5% per month “failure to pay tax” penalty (maximum of 25%). If you plan to pay the amount due in a few months, plan to file your return by the due date, figure out what you can afford to pay monthly...

A Guide to Tax Deductions & 3 Common Deductions to Take

When tax time rolls around and your bill starts adding up, tax deductions can be a big money saver. As long as you know what they are and how to take advantage of them. Here’s a quick guide to tax deductions and the three most common deductions to take. What is a Tax Deduction? Tax deductions lower a person’s tax liability by decreasing his or her taxable income. Deductions are typically expenses that the taxpayer incurs during the year that can be subtracted from his or her adjusted gross income to figure out how much tax is owed. The government uses tax deductions as a way to entice taxpayers to participate in community service programs for the betterment of society. This means taxpayers who are aware of state and federal deductions can benefit greatly from tax deductions while also supporting and giving back to their communities throughout the year. There are two ways to claim tax deductions: take the standard deduction or itemize deductions. Keep in mind that you cannot do both. Standard Deduction vs Itemized Deductions The standard deduction is a non-taxable portion of income that can be used to reduce your bill. As mentioned above, you can only take the standard deduction if you choose to not itemize your deductions. The standard deduction amount is calculated based on your filing status, age, whether you’re disabled, or are claimed as a dependent on someone else’s tax return. For 2019 taxes filed in April 2020, the standard deductions are: $12,200 for single taxpayers $12,200 for married taxpayers filing separately $18,350 for heads of households $24,400 for married taxpayers filing...