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Use In-Kind RMDs to Avoid Selling Retirement Account Assets
Written by Coach Janelle CPA on January 19, 2023
Are you 72 or older? If so, you must take a required minimum distribution (RMD) from your traditional IRA, SEP-IRA, or SIMPLE IRA by the end of the year. If you turn 72 this year, you can wait until April 1 of next year to take your first RMD—but you’ll also have to take your second RMD by the end of that year.
Section 1031 Exchanges vs. Qualified Opportunity Zone Funds
Written by Coach Janelle CPA on January 13, 2023
Have you sold, or are you planning to sell, commercial or rental property? To avoid immediately paying capital gains tax on your profit, you have options: 1. Defer the capital gains tax using a Section 1031 exchange; 2. Defer the capital gains tax using a qualified opportunity zone fund
All small-business owners with one to 49 employees should have a medical plan for their business. Sure, it’s true that with 49 or fewer employees, the tax law does not require you to have a plan, but you should. When you have 49 or fewer employees, most medical plan tax rules are straightforward. Here are six opportunities for you to consi...
Last-Minute Year-End Tax Strategies for Your Stock Portfolio
Written by Coach Janelle CPA on December 7, 2022
When you take advantage of the tax code’s offset game, your stock market portfolio can represent a little gold mine of opportunities to reduce your 2022 income taxes. The tax code contains the basic rules for this game, and once you know the rules, you can apply the correct strategies...
When Cancellation of Debt (COD) Income Can Be Tax-Free
Written by Coach Janelle CPA on January 26, 2023
Sometimes debts can pile up beyond a borrower’s ability to repay, especially if we are heading into a recession.
But lenders are sometimes willing to cancel (forgive) debts that are owed by financially challenged borrowers.
While a debt cancellation can help a beleaguered borrower survive, it can also trigger negative tax consequences. Or it can be a tax-free event.
General Rule: COD Income Is Taxable
When a lender forgives part or all of your debt, it results in so-called cancellation of debt (COD) income. The general federal income tax rule is that COD income counts as gross income that you must report on your federal income tax return for the year the debt cancellation occurs.
Fortunately, there are a number of exceptions to the general rule that COD income is taxable. You can find the exceptions in Section 108 of our beloved
Internal Revenue Code, and they are generally mandatory rather than elective. The two common exceptions are:
The cost of being allowed to exclude COD income from taxation under the bankruptcy or insolvency exception is a reduction of the borrower’s so-called tax attributes.
You generally reduce these tax attributes (future tax benefits) by one dollar for each dollar of excluded COD income. But you reduce tax credits by one dollar for every three dollars of excluded COD income. You reduce these attributes only after calculating your taxable income for the year the debt cancellation occurs, and you reduce them in the following order:
1. Net operating losses
2. General business credits
3. Minimum tax credits
4. Capital loss carryovers
5. Tax basis of property
6. Passive activity losses and credits
7. Foreign tax credits
As mentioned above, any tax attribute reductions are deemed to occur after calculating the borrower’s federal taxable income and federal income tax liability for the year of the debt cancellation.
This taxpayer-friendly rule allows the borrower to take full advantage of any tax attributes available for the year of the debt cancellation before those attributes are reduced.
Principal Residence Mortgage Debt Exception
A temporary exception created years ago and then repeatedly extended by Congress applies to COD income from qualifying cancellations of home mortgage debts that occur through 2025.
Under the current rules for this exception, the borrower can have up to $750,000 of federal-income-tax-free COD income—or $375,000 if the borrower uses married-filing-separately status—from the cancellation of qualified principal residence indebtedness. That means debt that was used to acquire, build, or improve the borrower’s principal residence and that is secured by that residence.
All good things must come to an end. On December 31, 2022, one of the best tax deductions ever for businesses will end: 100 PERCENT BONUS DEPRECIATION.
Since late 2017, businesses have used bonus depreciation to deduct 100 percent of the cost of most types of property other than real property. But starting in 2023, bonus depreciation is scheduled to decline 20 percent each year until it reaches zero in 2027.
For example, if you purchase $100,000 in equipment for your business and place it in service in 2022, you can deduct $100,000 using 100 percent bonus depreciation. If you wait until 2023, you’ll be able to deduct only $80,000 (80 percent).
Does this mean you should rush out and purchase business property before 2022 ends to take advantage of the 100 percent bonus depreciation? Not necessarily. For many businesses, an alternative is not going away: IRC Section 179 expensing. Both IRC SECTION 179 EXPENSING and BONUS DEPRECIATION allow business owners to deduct in one year the cost of most types of tangible personal property, plus off-the-shelf computer software.
Both can be used for new and used property acquired by purchase from an unrelated party. Both also can be used to deduct various non-structural improvements to non-residential buildings after they are placed in service. Moreover, the two deductions aren’t mutually exclusive. You can apply Section 179 expensing to qualifying property up to the annual limit and then claim bonus depreciation for any remaining basis. Starting in 2023, when bonus depreciation will be less than 100 percent, any basis left after applying Section 179 and bonus depreciation will be deducted with regular depreciation over several years.
Generally, there is no great need to purchase and place the property in service by the end of 2022 to take advantage of 100 percent bonus depreciation. But there can be exceptions.
For example, if you own a rental property and want to make substantial landscaping or other land improvements, you’ll get a larger one-year depreciation deduction using 100 percent bonus depreciation in 2022 than if you wait until 2023, when the bonus will be only 80 percent.
If you had W-2 employees in 2020 and/or 2021, you need to look at the Employee Retention Credit (ERC). As you likely know, it’s not too late to file for the ERC. And now is a good time to get this done. You can qualify for 2020 credits of up to $5,000 per employee and 2021 credits of up to $7,000 per employee for each of the first three quarters. That’s a possibility of $26,000 per employee.
One of our clients—let’s call him John—had 10 employees during 2020 and 2021. He qualified for $260,000 of tax credits (think cash). You could be like John.
You claim and adjust the ERC using IRS Form 941-X, which you can file anytime on or before March 15, 2024, if you file your taxes as a partnership or an S corporation, or April 15, 2024, if you file on Schedule C of your Form 1040 or as a C corporation.
You have three ways to qualify for the ERC:
Significant Decline In Gross Receipts
Here, you compare the gross receipts quarter by quarter to those in 2019. To trigger any ERC under this test, you need a drop of more than 50 percent in 2020 and a drop of more than 20 percent in 2021.
Government Order That Causes More Than A Nominal Effect
Here, your best bet is to use the safe harbor for nominal effect. This requires looking at either your 2019 quarterly receipts or your 2019 quarterly hours worked by employees and seeing that the 2020 or 2021 shutdown order would have affected the 2019 figures by more than 10 percent.
Government Order That Causes Modification To Your Business
Here, you also have a safe harbor. The IRS deems that the federal, state, or local COVID-19 government order had a more-than-nominal effect on your business if it reduced your ability to provide goods or services in the normal course of your business by not less than 10 percent.
The ERC can help all businesses that qualify, even those businesses that did not suffer during the COVID-19 pandemic.
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Buying an Electric Vehicle? Know These Tax Law Changes
Written by Coach Janelle CPA on November 21, 2022
There’s good and bad news if you’re in the market for an electric or plug-in hybrid electric vehicle. The good news is that the newly enacted Inflation Reduction Act includes a wholly revamped tax credit for electric vehicles that starts in 2023 and continues through 2032.
The IRS noticed that average gas prices across the United States exceeded $5.00 a gallon and took action. Small businesses that qualify to use and do use the standard mileage rate can deduct 62.5 cents per business mile from July 1 through Decem...
Self-Employment Taxes for Partners and LLC Members
Written by Coach Janelle CPA on August 20, 2022
Does a member of a limited liability company (LLC) or a partner in a partnership have to pay self-employment taxes on the member’s or partner’s share of the entity’s income? Incredibly, the answer is not alw...
Here’s a question I received from one of my clients: “I will hire my 15-year-old daughter to work in my single-member LLC business, and I expect to pay her about $12,000 this year. Do I pay her through payroll checks and file a...