Nonprofits: Now’s the Time to Muster Volunteer Resources

When the COVID-19 outbreak became a full-fledged pandemic earlier this year, many already stressed not-for-profit organizations panicked. After all, how could nonprofits meet their charitable goals if supporters were losing their jobs — or, worse, fighting for their own and their family members’ lives? Putting reduced donations aside, it seemed unlikely that even dedicated volunteers would want to risk their health and safety to perform unpaid work.

The good news is that many organizations have weathered the initial storm. Studies conducted by the Center for Responsive Politics and Points of Life, an Atlanta, GA-based organization that mobilizes volunteers, reveal that volunteerism has actually grown during 2020’s pandemic. But even if your volunteer ranks are healthy, your nonprofit must continue to make a concerted effort to engage them.

Evolving Trends

As the Points of Light study found, one of the major motivators for volunteers in 2020 has been the presidential election. Before the pandemic hit the United States, voting in elections topped a list of social engagement activities at 72%, followed by donating to charity (54%), signing petitions (34%) and weighing the social and political positions of companies before purchasing their products or services (41%). Yet only 36% at that time said they participated in volunteer activities.

After COVID-19 became an everyday reality, Americans seemed to have reexamined their social engagement priorities. Voting remains at the top of the list at 78%. But about 75% of respondents recently indicated they would be donating to charities and 73% said they would be volunteering. Also, 83% of respondents agreed that the country requires greater unity and that volunteering can help achieve that objective.

As for nonprofits, 85% of organizations report increased requests to volunteer — more than double the level before the pandemic. Younger people, in particular, are extending a helping hand to charities. So it’s a good time to seek new potential volunteers. This is particularly true if your charity has been directly affected by COVID-19 — for example, if your mission addresses general human welfare, food insecurity and health care issues.

How to Motivate Volunteers

For many organizations, especially those with small paid staffs, volunteers are the core of their operations. Indeed, your nonprofit may not be able to get much done without them. To ensure you’re doing everything possible to attract and retain loyal volunteers, consider these five suggestions:

Find inspiration.To motivate volunteers, you first must understand their reasons for volunteering. Do they volunteer to develop new skills, “make a difference” or meet new people — or all of these? Some may have very personal reasons for volunteering; for example, a volunteer who raises money for a cancer charity because a family member has been afflicted by the disease. Ask volunteers what motivates them and compile the information. This will help you develop a volunteer program that can meet the different needs of volunteers and foster long-term commitments.
Communicate effectively.Provide an orientation to new volunteers so they understand your nonprofit’s mission, goals and ethics. If a volunteer acts in way that’s contrary to these, gently discuss the issue. In most of these cases, the volunteer simply misunderstands your instructions. Also, regularly solicit suggestions and feedback from volunteers. When you show volunteers that their opinions matter, most will work harder to promote your mission.
Demonstrate appreciation.Even though volunteering comes from the heart, most people like to be recognized for what they do. If you don’t show appreciation often, they’re more likely to ditch your organization for another one. Appreciation can range from a verbal “thank you” or a thank-you note to giving volunteers greater responsibility or “promoting” them to positions such as volunteer coordinator.
Acknowledge stakeholders. Your volunteers want to be informed about how the organization is doing and how their contributions are making a difference. Provide periodic updates on programs and projects and highlight the contributions and achievements of volunteers so that they feel like the stakeholders they are.
Use social media. Appreciation and acknowledgement of volunteers’ work extends beyond your office walls. Post photos showing volunteers in action on Facebook, Instagram or other platforms. You might even want to hand temporary “control” of a social media account to a trusted volunteer.

A Return to Normal

When the pandemic ends and the economy begins to recover, you may be tempted to direct all of your nonprofit’s energy into fundraising. But volunteers will continue to be critical, so make sure you don’t neglect them. Now, in fact, is a great time to review and reorganize your volunteer program so you’re ready for American life and your organization’s activities to return to “normal.”

This has been a rough year for many businesses in a broad range of industries — perhaps including your company. As the New Year beckons, you might want to reward employees who rose to 2020’s considerable challenges and outperformed. One approach is to reward loyal workers with year-end bonuses.

Bonuses remind employees that you value their services and that your company’s success and survival are inextricably linked. According to staffing agency Robert Half, the benefits of bonuses are evident to most executives. A recent survey showed that more than three-quarters of managers intend to offer year-end bonuses this year. Almost half plan on keeping bonuses the same this year — or even boosting them.

But there’s more to giving out year-end bonuses than putting a little something extra in a pay envelope or adding to a direct deposit. Consider these four tips for rewarding employees, including one for employers that aren’t planning to pay bonuses this year:

1. Review the Tax Ramifications

Year-end bonuses are taxable to employees, just like any other form of compensation. But the amounts paid out are deductible by the employer. In this case, timing is everything. Generally, employees are taxed on bonuses in the year in which they’re received. Therefore, if you defer payment to January, the income isn’t taxable until 2021. Conversely, if you pay year-end bonuses to employees in December, you can deduct them on your 2020 return.

Note on special rule: An accrual-basis company can currently deduct bonuses paid as late as 2 1/2 months after the end of its tax year. In other words, a qualified calendar-year company has until March 15, 2021, to pay bonuses and still deduct them on its 2020 return.

2. Explain Your Rationale

There’s a lot of decision-making surrounding year-end bonuses. Employers must determine who gets how much and when. To prevent rumors and resentment from employees who don’t receive as much as they may think they’re due, explain the “whys” behind your bonus awards. For example, if bonuses are based on performance, provide the formula used to arrive at the actual amount and several hypothetical examples.

Alternatively, you might offer bonuses for meeting certain team goals or as rewards for completing special projects. In these cases, accentuate the metrics met by the entire team rather than single out one employee for his or her performance.

Finally, you could offer general year-end bonuses that aren’t based on meeting specific goals or metrics. Such bonuses typically are intended to reward loyalty and to foster a long-term commitment to a company.

3. Communicate the Good News

Traditionally, many employers paid bonuses without offering much rhyme or reason to who received them and why. These days, employers are more likely to trumpet their generosity.

However, you need to be careful, particularly if bonuses are going to just a select few or if several employees are being excluded. If, for example, you’re rewarding an entire team, gather the group (virtually, if necessary) to make your announcement. If you’re giving a year-end performance bonus to only a couple employees, inform them in one-on-one sessions.

In both types of meetings, explain how the bonus amount was determined. If recipients or employees who aren’t receiving bonuses have questions, address them promptly and candidly. Take constructive employee feedback into account and perhaps apply it to next year’s bonus program.

4. Weigh Alternatives

Despite your best intentions, your business may not be able to afford to pay year-end bonuses in 2020. This doesn’t mean you should throw up your hands and do nothing. Depending on your circumstances, you might be able to offer other incentives, such as extra vacation or sick days or more flexible hours. Workers frequently value these perks. A Robert Half survey indicates that most employees consider flexible work scheduling to be the best company fringe benefit.

In this current environment of social distancing, morale-building activities such as holiday parties and other in-person events may not be possible. Be innovative about the ways you can reward employees for a relatively low cost. One idea is to “host” a virtual holiday party where food and beverages are delivered to employee homes or to organize a Secret Santa exchange through the mail.

In any event, keep your employees in the loop. If you can’t pay out traditional bonuses this year, be upfront about it. And whether you pay bonuses or not, sincerely express your appreciation for your employee’s work this year. It’s not just about money.

Is it in Your Budget?

Year-end bonuses have long been a staple of employee benefit programs. We can help you determine whether your business’s budget allows you to reward employees with bonuses this year.

In the current COVID-19 environment, some governmental entities that have not historically been required to have a Single Audit are finding themselves in the situation where one is needed this year due to the many federal assistance programs that have been put in place to deal with the pandemic. Some of these governments may not have fully addressed the grant management changes required when the Uniform Guidance became effective for periods beginning after December 26, 2014. As a refresher, in 2013, the U.S. Office of Management and Budget (OMB) issued “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards,” also known as the Uniform Guidance (UG), published in the Federal Register as 2 CFR 200. UG is essentially a government-wide framework for grants management that superseded and synthesized the guidance from earlier OMB Circulars such as A-87 and A-133.

Uniform Guidance requires (generally, there are exceptions) non-federal entities with over $750,000 in federal award expenditures in a fiscal year to have a Single Audit done for the period in which those awards were expended. The term “Single Audit” refers to the federal program compliance audit, which is performed concurrently with the financial statement audit.

Most of the changes that UG required were centered around documentation, in the form of formally adopted policies and written procedures, for various areas of grant management. This article is intended to give an overview of what those policy and procedure requirements are so they can be addressed before audit time.

The list of policies and procedures that follows below is not a comprehensive checklist of what UG requires but is intended to highlight those most important. Citations to the specific UG sections are provided, but please reach out to your Yeo & Yeo Government Services Group member for more detailed information or examples.

Formally Adopted Policy Requirements:

Conflict of Interest (§200.138(c)) – maintaining written standards of conduct governing the actions of employees engaged in the selection, award, and administration of contracts.
Procurement (§200.318(c)) – defines five types of procurement: micro-purchases, small purchases, sealed bids, competitive proposals, and sole source.
Travel Reimbursement (§200.474(b)) – addresses reimbursement for costs incurred by employees or officials related to travel, lodging, subsistence while traveling, and incidental expenses.
Fringe Benefits and Leave (§200.431(a) and (b)) – determining the allowability of costs charged to a federal award in the form of fringe benefits and leave time.

Written Procedure Requirements:

Allowability of costs (§200.302(b)(7)) – determining the allowability of costs charged to a federal award. The procedures should be used to determine whether a cost is allowable under Subpart E (Cost Principles) of the Uniform Guidance.
Allocation of compensation (§200.430) – includes the documentation of time charged to federal awards.
Cash Management (§200.305) – minimizing the amount of time between the transfer of funds to the non-federal entity and the disbursement of funds. The procedure should also address how program income, if any, is handled before requesting federal funds.
Equipment (§200.313(d)) – defines how equipment is titled, used, managed, and disposed of.
Budget to Actual (§200.302(b)(5)) – documents the process for comparing actual expenditures to grant budget amounts.
Safeguarding of Personally Identifiable Information (§200.303(3))
Subrecipient Monitoring (§200.331) – pass-through entities should document their procedures for monitoring whether subrecipients performed in accordance with an award of federal funds.

Many people have Series EE savings bonds that were purchased many years ago. Perhaps they were given to your children as gifts or maybe you bought them yourself and put them away in a file cabinet or safe deposit box. You may wonder: How is the interest you earn on EE bonds taxed? And if they reach final maturity, what action do you need to take to ensure there’s no loss of interest or unanticipated tax consequences?

Fixed or variable interest

Series EE Bonds dated May 2005, and after, earn a fixed rate of interest. Bonds purchased between May 1997 and April 30, 2005, earn a variable market-based rate of return.

Paper Series EE bonds were sold at half their face value. For example, if you own a $50 bond, you paid $25 for it. The bond isn’t worth its face value until it matures. (The U.S. Treasury Department no longer issues EE bonds in paper form.) Electronic Series EE Bonds are sold at face value and are worth their full value when available for redemption.

The minimum term of ownership is one year, but a penalty is imposed if the bond is redeemed in the first five years. The bonds earn interest for 30 years.

Interest generally accrues until redemption

Series EE bonds don’t pay interest currently. Instead, the accrued interest is reflected in the redemption value of the bond. The U.S. Treasury issues tables showing the redemption values.

The interest on EE bonds isn’t taxed as it accrues unless the owner elects to have it taxed annually. If an election is made, all previously accrued but untaxed interest is also reported in the election year. In most cases, this election isn’t made so bond holders receive the benefits of tax deferral.

If the election to report the interest annually is made, it will apply to all bonds and for all future years. That is, the election cannot be made on a bond-by-bond or year-by-year basis. However, there’s a procedure under which the election can be canceled.

If the election isn’t made, all of the accrued interest is finally taxed when the bond is redeemed or otherwise disposed of (unless it was exchanged for a Series HH bond). The bond continues to accrue interest even after reaching its face value, but at “final maturity” (after 30 years) interest stops accruing and must be reported.

Note: Interest on EE bonds isn’t subject to state income tax. And using the money for higher education may keep you from paying federal income tax on your interest.

Reaching final maturity

One of the main reasons for buying EE bonds is the fact that interest can build up without having to currently report or pay tax on it. Unfortunately, the law doesn’t allow for this tax-free buildup to continue indefinitely. When the bonds reach final maturity, they stop earning interest.

Series EE bonds issued in January 1990 reached final maturity after 30 years, in January 2020. That means that not only have they stopped earning interest, but all of the accrued and as yet untaxed interest is taxable in 2020.

If you own EE bonds (paper or electronic), check the issue dates on your bonds. If they’re no longer earning interest, you probably want to redeem them and put the money into something more profitable. Contact us if you have any questions about savings bond taxation, including Series HH and Series I bonds.

Owners of closely held corporations are often interested in easily withdrawing money from their businesses at the lowest possible tax cost. The simplest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax-efficient, since it’s taxable to you to the extent of your corporation’s “earnings and profits.” And it’s not deductible by the corporation.

Other strategies

Fortunately, there are several alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five strategies to consider:

Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts that you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the “debt” repayment may be taxed as a dividend. If you make future cash contributions to the corporation, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.
Compensation. Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient(s). This same rule applies to any compensation (in the form of rent) that you receive from the corporation for the use of property. In both cases, the compensation amount must be reasonable in terms of the services rendered or the value of the property provided. If it’s considered excessive, the excess will be a nondeductible corporate distribution.
Loans. You can withdraw cash tax free from the corporation by borrowing money from it. However, to prevent having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or note. It should also be made on terms that are comparable to those in which an unrelated third party would lend money to you, including a provision for interest and principal. Also, consider what the corporation’s receipt of interest income will mean.
Fringe benefits. You may want to obtain the equivalent of a cash withdrawal in fringe benefits, which aren’t taxable to you and are deductible by the corporation. Examples include life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other corporation employees. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.
Property sales. You can withdraw cash from the corporation by selling property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50%-owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50%-owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those in which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.

Minimize taxes

If you’re interested in discussing any of these ideas, contact us. We can help you get the most out of your corporation at the lowest tax cost.

The coming audit season might be much different than seasons of yore. As many companies continue to operate remotely during the COVID-19 pandemic, audit procedures are being adjusted accordingly. Here’s what might change as auditors work on your company’s 2020 year-end financial statements.

Eye on technology

Fortunately, when the pandemic hit, many accounting firms already had invested in staff training and technology to work remotely. For example, they were using cloud computing, remote access, videoconferencing software and drones with cameras. These technologies were intended to reduce business disruptions and costs during normal operating conditions. But they’ve also helped firms adapt while businesses are limiting face-to-face contact to prevent the spread of COVID-19.

When social distancing measures went into effect in the United States around mid-March, many calendar-year audits for 2019 were already done. As we head into the next audit season, be prepared for the possibility that most procedures — from year-end inventory observations to management inquiries and audit testing — to be performed remotely. Before the start of next year’s audit, discuss which technologies your audit team will be using to conduct inquiries, access and verify data, and perform testing procedures.

Emphasis on high-risk areas

During a remote audit, expect your accountant to target three critical areas to help minimize the risk of material misstatement:

Internal controls. Historically, auditors have relied on the effectiveness of a client’s controls and testing of controls. Now, they must evaluate how transactions are being processed by employees who work remotely, rather than on-site as in prior periods. Specifically, your auditor will need to consider whether modified controls have been adequately designed and put into place and whether they’re operating effectively.
Fraud and financial misstatement. During fieldwork, auditors interview key managers and those charged with governance about fraud risks. These inquiries are most effective when done in person, because auditors can read body language and, if more than one person is present during an interview, judge the dynamics in a room. Auditors may request video conferences to help overcome the shortcomings of inquiries done over the phone or via email.
Physical inventory counts. Normally, auditors go where inventory is located and observe the counting process. They also perform independent test counts and check them against the inventory records. Depending on the COVID-19 situation at the time of an audit, auditors may be unable to travel to the company’s facilities, and employees might not be there physically to perform the counts. Drones, videoconferencing and live video feeds from a warehouse’s security cameras may be suitable alternatives to on-site observations.

Modified reports

In some cases, audit firms may be unable to perform certain procedures remotely, due to technology limitations or insufficient access to data needed to comply with all the requirements of the auditing standards. In those situations, your auditor might decide to issue a modified audit report with scope restrictions and limitations. Contact your CPA for more information about remote auditing and possible modifications to your company’s audit report.

Many Americans receive disability income. You may wonder if — and how — it’s taxed. As is often the case with tax questions, the answer is … it depends.

The key factor is who paid for the benefit. If the income is paid directly to you by your employer, it’s taxable to you as ordinary salary would be. (Taxable benefits are also subject to federal income tax withholding, although depending on the employer’s disability plan, in some cases aren’t subject to the Social Security tax.)

Frequently, the payments aren’t made by the employer but by an insurance company under a policy providing disability coverage or, under an arrangement having the effect of accident or health insurance. If this is the case, the tax treatment depends on who paid for the coverage. If your employer paid for it, then the income is taxed to you just as if paid directly to you by the employer. On the other hand, if it’s a policy you paid for, the payments you receive under it aren’t taxable.

Even if your employer arranges for the coverage, (in other words, it’s a policy made available to you at work), the benefits aren’t taxed to you if you pay the premiums. For these purposes, if the premiums are paid by the employer but the amount paid is included as part of your taxable income from work, the premiums are treated as paid by you.

A couple of examples

Let’s say your salary is $1,000 a week ($52,000 a year). Additionally, under a disability insurance arrangement made available to you by your employer, $10 a week ($520 for the year) is paid on your behalf by your employer to an insurance company. You include $52,520 in income as your wages for the year: the $52,000 paid to you plus the $520 in disability insurance premiums. In this case, the insurance is treated as paid for by you. If you become disabled and receive benefits, they aren’t taxable income to you.

Now, let’s look at an example with the same facts as above. Except in this case, you include only $52,000 in income as your wages for the year because the amount paid for the insurance coverage qualifies as excludable under the rules for employer-provided health and accident plans. In this case, the insurance is treated as paid for by your employer. If you become disabled and receive benefits, they are taxable income to you.

Note: There are special rules in the case of a permanent loss (or loss of the use) of a part or function of the body, or a permanent disfigurement.

Social Security benefits

This discussion doesn’t cover the tax treatment of Social Security disability benefits. These benefits may be taxed to you under different rules.

How much coverage is needed?

In deciding how much disability coverage you need to protect yourself and your family, take the tax treatment into consideration. If you’re buying the policy yourself, you only have to replace your after tax, “take-home” income because your benefits won’t be taxed. On the other hand, if your employer pays for the benefit, you’ll lose a percentage to taxes. If your current coverage is insufficient, you may wish to supplement an employer benefit with a policy you take out.

The IRS has announced its 2021 cost-of-living adjustments to tax amounts that might affect you. Many increased to account for inflation, but some remained at 2020 levels. As you implement 2020 year-end tax planning strategies, be sure to take these 2021 adjustments into account in your planning.

Also, keep in mind that, under the Tax Cuts and Jobs Act (TCJA), annual inflation adjustments are calculated using the chained consumer price index (also known as C-CPI-U). This increases tax bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than was the case with the consumer price index previously used, potentially pushing taxpayers into higher tax brackets and making various breaks worth less over time. The TCJA adopted the C-CPI-U on a permanent basis.

Individual income taxes

Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $75 to $150, depending on filing status, but the top of the 35% bracket increases by $3,125 to $6,250, again depending on filing status.

2021 ordinary-income tax brackets
Tax rate	Single	Head of household	Married filing jointly or surviving spouse	Married filing separately
10%	$0 – $9,950	$0 – $14,200	$0 – $19,900	$0 – $9,950
12%	$9,951 – $40,525	$14,201 – $54,200	$19,901 – $81,050	$9,951 – $40,525
22%	$40,526 – $86,375	$54,201 – $86,350	$81,051 – $172,750	$40,526 – $86,375
24%	$86,376 – $164,925	$86,351 – $164,900	$172,751 – $329,850	$86,376 – $164,925
32%	$164,926 – $209,425	$164,901 – $209,400	$329,851 – $418,850	$164,926 – $209,425
35%	$209,426 – $523,600	$209,401 – $523,600	$418,851 – $628,300	$209,426 – $314,150
37%	Over $523,600	Over $523,600	Over $628,300	Over $314,150

The TCJA suspended personal exemptions through 2025. However, it nearly doubled the standard deduction, indexed annually for inflation through 2025. For 2021, the standard deduction is $25,100 (married couples filing jointly), $18,800 (heads of households), and $12,550 (singles and married couples filing separately). After 2025, standard deduction amounts are scheduled to drop back to the amounts under pre-TCJA law.

Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions. But it might not help taxpayers who typically itemize deductions.

AMT

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2021, the threshold for the 28% bracket increased by $2,000 for all filing statuses except married filing separately, which increased by half that amount.

2021 AMT brackets
Tax rate	Single	Head of household	Married filing jointly or surviving spouse	Married filing separately
26%	$0 – $199,900	$0 – $199,900	$0 – $199,900	$0 – $99,950
28%	Over $199,900	Over $199,900	Over $199,900	Over $99,950

The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2021 are $73,600 for singles and heads of households and $114,600 for joint filers, increasing by $700 and $1,200, respectively, over 2020 amounts. The inflation-adjusted phaseout ranges for 2021 are $523,600–$818,000 (singles and heads of households) and $1,047,200–$1,505,600 (joint filers). Amounts for separate filers are half of those for joint filers.

Education and child-related breaks

The maximum benefits of various education and child-related breaks generally remain the same for 2021. But most of these breaks are limited based on a taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within an applicable phaseout range are eligible for a partial break — and breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges generally remain the same or increase modestly for 2021, depending on the break. For example:

The American Opportunity credit. The phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2021: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.

The Lifetime Learning credit. The phaseout ranges for this education credit (maximum $2,000 per tax return) increase for 2021. They’re $119,000–$139,000 for joint filers and $59,000–$69,000 for other filers — up $1,000 for joint filers but the same as 2020 for others.

The adoption credit. The phaseout ranges for eligible taxpayers adopting a child will also increase for 2021 — by $2,140 to $216,660–$256,660 for joint, head-of-household and single filers. The maximum credit increases by $140, to $14,440 for 2021.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible to claim one on his or her tax return.

Gift and estate taxes

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2021, the amount is $11.7 million (up from $11.58 million for 2020).

The annual gift tax exclusion remains at $15,000 for 2021. It’s adjusted only in $1,000 increments, so it typically increases only every few years. (It increased to $15,000 in 2018.)

Retirement plans

Not all of the retirement-plan-related limits increase for 2021. Thus, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:

Type of limitation	2020 limit	2021 limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans	$19,500	$19,500
Annual benefit limit for defined benefit plans	$230,000	$230,000
Contributions to defined contribution plans	$57,000	$58,000
Contributions to SIMPLEs	$13,500	$13,500
Contributions to IRAs	$6,000	$6,000
“Catch-up” contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans for those age 50 and older	$6,500	$6,500
Catch-up contributions to SIMPLEs	$3,000	$3,000
Catch-up contributions to IRAs	$1,000	$1,000
Compensation for benefit purposes for qualified plans and SEPs	$285,000	$290,000
Minimum compensation for SEP coverage	$600	$650
Highly compensated employee threshold	$130,000	$130,000

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2021:

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if a taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
- For a spouse who participates, the 2021 phaseout range limits increase by $1,000, to $105,000–$125,000.
- For a spouse who doesn’t participate, the 2021 phaseout range limits increase by $2,000, to $198,000–$208,000.
- For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2021 phaseout range limits increase by $1,000, to $66,000–$76,000.

Taxpayers with MAGIs in the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $6,000 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

For married taxpayers filing jointly, the 2021 phaseout range limits increase by $2,000, to $198,000–$208,000.
For single and head-of-household taxpayers, the 2021 phaseout range limits increase by $1,000, to $125,000–$140,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Crunching the numbers

With the 2021 cost-of-living adjustment amounts inching slightly higher than 2020 amounts, it’s important to understand how they might affect your tax and financial situation. We’d be happy to help crunch the numbers and explain the best tax-saving strategies to implement based on the 2021 numbers.

Unfortunately, the COVID-19 pandemic has forced many businesses to shut down. If this is your situation, we’re here to assist you in any way we can, including taking care of the various tax obligations that must be met.

Of course, a business must file a final income tax return and some other related forms for the year it closes. The type of return to be filed depends on the type of business you have. Here’s a rundown of the basic requirements.

Sole Proprietorships. You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year you close the business. You may also need to report self-employment tax.

Partnerships. A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedules K-1, “Partner’s Share of Income, Deductions, Credits, Etc.”

All Corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.

C Corporations. File Form 1120, “U.S. Corporate Income Tax Return,” for the year you close. Report capital gains and losses on Schedule D. Indicate this is the final return.

S Corporations. File Form 1120-S, “U.S. Income Tax Return for an S Corporation” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.

All Businesses. Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.

Employees and contract workers

If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.

If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

Other tax issues

If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees.

We can assist you with many other complicated tax issues related to closing your business, including Paycheck Protection Plan (PPP) loans, the COVID-19 employee retention tax credit, employment tax deferral, debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.

We can advise you on the length of time you need to keep business records. You also must cancel your Employer Identification Number (EIN) and close your IRS business account.

If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these issues and get answers to any questions.

From natural disasters and government shutdowns to cyberattacks and fraud, risks abound in today’s volatile, uncertain marketplace. While some level of risk is inevitable when operating a business, proactive owners and executives apply an enterprise risk management (ERM) framework to manage it more effectively. How effectively does your business manage risk?

Evolving framework

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) was formed in July 1985 to combat fraudulent financial reporting. The panel is a joint initiative of the American Institute of Certified Public Accountants, Financial Executives International, Institute of Internal Auditors, American Accounting Association and Institute of Management Accountants.

COSO first published its Enterprise Risk Management — Integrated Framework in 2004. Companies aren’t generally required by law or regulations to apply an ERM framework. But they often choose to use COSO’s ERM framework to enhance their ability to manage uncertainty, consider how much risk to accept and improve understanding of opportunities as they strive to increase and preserve stakeholder value.

Through periodic updates, COSO aims to capture today’s best practices and help management attain better value from their ERM programs. The ERM framework was revamped in 2017 to address questions about how risk management should be incorporated with an organization’s management of its strategy. That update included five components: 1) governance and culture, 2) strategy and objective setting, 3) performance, 4) review and revision, and 5) information, communication and reporting.

The framework was modified again in 2018 to address sustainability issues. Specifically, COSO’s Guidance for Applying ERM to Environmental, Social and Governance (ESG)-related Risks highlights ESG risks, as well as opportunities to enhance resiliency as organizations confront new and developing risks, such as extreme weather events or product safety recalls.

In December 2019, COSO published Managing Cyber Risk in a Digital Age. This guidance addresses how companies can apply COSO’s framework to protect against cyberattacks. These attacks have been on the rise in 2020, in part, because people are increasingly reliant on the Internet for working, learning and interacting during the COVID-19 pandemic. And home networks tend to be more vulnerable to cyberattacks than in-office networks.

Broad scope

Many people are unclear what the term “ERM” means. ERM encompasses more than taking an inventory of risks — it’s an enterprise-wide process. Internal control is just one small part of ERM — it also may include, for example, strategy setting, governance, communicating with stakeholders and measuring performance. These principles apply at all business levels, across all functions and to organizations of any size.

The ERM framework is designed to help management anticipate risk so they can get ahead of it, with an understanding that change creates opportunities, not simply the potential for crises. In short, ERM helps increase positive outcomes and reduce negative surprises that come from risk-taking activities.

ERM in the new normal

Market conditions in 2020 have been unprecedented, and more uncertainty lies ahead. Our accounting professionals can help you identify and optimize risks. Contact us to discuss cost-effective ERM practices to make your business more resilient and responsive in the future.

The subject of payroll has been top-of-mind for business owners this year. The COVID-19 pandemic triggered economic changes that caused considerable fluctuations in the size of many companies’ workforces. Employees have been laid off, furloughed and, in some cases, rehired. There has also been crisis relief for eligible businesses in the form of the Paycheck Protection Program and the payroll tax credit.

Payroll recordkeeping was important in the “old normal,” but it’s even more important now as businesses continue to navigate their way through a slowly recovering economy and ongoing public health crisis.

Four years

Most employers must withhold federal income, Social Security and Medicare taxes from their employees’ paychecks. As such, you must keep records relating to these taxes for at least four years after the due date of an employee’s personal income tax return (generally, April 15) for the year in which the payment was made. This is often referred to as the “records-in-general rule.”

These records include your Employer Identification Number, as well as your employees’ names, addresses, occupations and Social Security numbers. You should also keep for four years the total amounts and dates of payments of compensation and amounts withheld for taxes or otherwise — including reported tips and the fair market value of noncash payments.

In addition, track and retain the compensation amounts subject to withholding for federal income, Social Security and Medicare taxes, as well as the corresponding amounts withheld for each tax (and the date withheld if withholding occurred on a day different from the payment date). Where applicable, note the reason(s) why total compensation and taxable amount for each tax rate are different.

So much more

A variety of other data and documents fall under the records-in-general rule. Examples include:

The pay period covered by each payment of compensation,
Forms W-4, “Employee’s Withholding Allowance Certificate,” and
Each employee’s beginning and ending dates of employment.

If your business involves customer tipping, you should retain statements provided by employees reporting tips received. Also carefully track fringe benefits provided to employees, including any required substantiation. Retain evidence of adjustments or settlements of taxes and amounts and dates of tax deposits.

Follow the records-in-general rule, too, for records relating to wage continuation payments made to employees by the employer or third party under an accident or health plan. Documentation should include the beginning and ending dates of the period of absence, and the amount and weekly rate of each payment (including payments made by third parties).

Last, keep copies of each employee’s Form W-4S, “Request for Federal Income Tax Withholding From Sick Pay,” and, where applicable, copies of Form 8922, “Third-Party Sick Pay Recap.”

Valuable information

Proper and comprehensive payroll recordkeeping has become even more critical — and potentially more complex — this year. Our firm can help review your processes in this area and identify improvements that will enable you to avoid compliance problems and make better use of this valuable information.

When a couple is going through a divorce, taxes are probably not foremost in their minds. But without proper planning and advice, some people find divorce to be an even more taxing experience. Several tax concerns need to be addressed to ensure that taxes are kept to a minimum and that important tax-related decisions are properly made. Here are four issues to understand if you’re in the midst of a divorce.

Issue 1: Alimony or support payments. For alimony under divorce or separation agreements that are executed after 2018, there’s no deduction for alimony and separation support payments for the spouse making them. And the alimony payments aren’t included in the gross income of the spouse receiving them. (The rules are different for divorce or separation agreements executed before 2019.)

Issue 2: Child support. No matter when a divorce or separation instrument is executed, child support payments aren’t deductible by the paying spouse (or taxable to the recipient).

Issue 3: Your residence. Generally, if a married couple sells their home in connection with a divorce or legal separation, they should be able to avoid tax on up to $500,000 of gain (as long as they’ve owned and used the residence as their principal residence for two of the previous five years). If one spouse continues to live in the home and the other moves out (but they both remain owners of the home), they may still be able to avoid gain on the future sale of the home (up to $250,000 each), but special language may have to be included in the divorce decree or separation agreement to protect the exclusion for the spouse who moves out.

If the couple doesn’t meet the two-year ownership and use tests, any gain from the sale may qualify for a reduced exclusion due to unforeseen circumstances.

Issue 4: Pension benefits. A spouse’s pension benefits are often part of a divorce property settlement. In these cases, the commonly preferred method to handle the benefits is to get a “qualified domestic relations order” (QDRO). This gives one spouse the right to share in the pension benefits of the other and taxes the spouse who receives the benefits. Without a QDRO the spouse who earned the benefits will still be taxed on them even though they’re paid out to the other spouse.

More to consider

These are just some of the issues you may have to deal with if you’re getting a divorce. In addition, you must decide how to file your tax return (single, married filing jointly, married filing separately or head of household). You may need to adjust your income tax withholding and you should notify the IRS of any new address or name change. If you own a business, you may have to pay your spouse a share. There are also estate planning considerations. Contact us to help you work through the financial issues involved in divorce.

Welcome to Everyday Business, Yeo & Yeo’s podcast. We’ve had the privilege of advising Michigan businesses for more than 95 years, and we want to share our knowledge with you.

Covering tax, accounting, technology, financial and advisory topics relevant to you and your business, Yeo & Yeo’s podcast is hosted by industry and subject matter professionals, where we go beyond the beans.

On episode six of Everyday Business, host David Jewell, tax partner in Kalamazoo, is joined by John Haag Sr., principal from Midland.

Listen in as David and John discuss individual and corporate/business tax topics surrounding the Presidential Election and the proposed tax changes from both sides.

Individual income tax rates (5:00)
Capital gains rates (10:16)
Payroll taxes (15:30)
Itemized deductions and tax credits for daycare, rent, and student loan forgiveness (23:34)
Inheritance and estate tax (38:35)
Corporate tax rate (46:36)
Additional business tax proposals and deductions (57:20)

Thank you for tuning in to Yeo & Yeo’s Everyday Business Podcast. Yeo & Yeo’s podcast can be heard on Apple Podcasts, PodBean and, of course, our website. Please subscribe, rate and review.

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DISCLAIMER
The information provided in this podcast is believed to be valid and accurate on the date it was first published. The views, information, or opinions expressed during the podcast reflect the views of the speakers. This podcast does not constitute tax, accounting, legal or other business advice, or an advisor-client relationship. Before making any decision or taking action, consult with a professional regarding your specific circumstances.

Election years often lead to uncertainty for businesses, but 2020 surely takes the cake when it comes to unpredictability. Amid the chaos of the COVID-19 pandemic, the resulting economic downturn and civil unrest, businesses are on their yearly search for ways to minimize their tax bills — and realizing that some of the typical approaches aren’t necessarily well-suited for this year. On the other hand, several new opportunities have arisen thanks to federal tax relief legislation.

Quick refunds

Businesses facing cash flow crunches can take advantage of a provision in the CARES Act that accelerates the timeline for recovering unused alternative minimum tax (AMT) credits. The Tax Cuts and Jobs Act (TCJA) eliminated the corporate AMT but allowed businesses with unused credits to claim them incrementally in taxable years beginning in 2018 and through 2020.

Under the TCJA, for tax years beginning in 2018, 2019 and 2020, if AMT credit carryovers exceed regular tax liability, 50% of the excess is refundable, with any remaining credits fully refundable in 2021. But the CARES Act lets businesses claim all remaining credits in 2018 or 2019, opening the door to immediate 100% refunds for excess credits. Instead of amending a 2018 tax return to claim the credits, a business owner can file Form 1139, “Corporate Application for Tentative Refund,” by December 31, 2020.

The CARES Act also temporarily loosened the rules for net operating losses (NOLs). The TCJA limits the NOL deduction to 80% of taxable income and NOLs can’t be carried back. Now, NOLs arising in 2018, 2019 or 2020 can be carried back five years to claim refunds in previous tax years. No taxable income limitation applies for years beginning before 2021, meaning NOLs can completely offset income in those years.

Businesses can obtain even larger refunds by accelerating deductions into years when higher pre-TCJA tax rates were in effect (for example, a 35% corporate tax rate vs. 21% under the TCJA). Bear in mind, though, that carrying back NOLs can trigger a recalculation of other tax attributes and deductions, such as AMT credits and the research credit, often referred to as the “research and development,” “R&D,” or “research and experimentation” credit.

Capital assets purchases

Capital investments have long been a useful way to reduce income taxes, and the TCJA further juiced this technique by expanding bonus depreciation. And the CARES Act finally remedies a drafting error in the TCJA that left qualified improvement property (QIP), generally interior improvements to nonresidential real property, ineligible for bonus deprecation.

For qualified property purchased after September 27, 2017, and before January 1, 2023, businesses can deduct 100% of the cost of new and used (subject to certain conditions) qualified property in the first year the property is placed into service. Special rules apply to property with a longer production period.

Qualified property includes computer systems, purchased software, vehicles, machinery, equipment and office furniture. Beginning in 2023, the amount of the bonus depreciation deduction will fall 20% each year. Absent congressional action, the deduction will be eliminated in 2027.

Congress clearly intended for QIP that was placed in service after 2017 to qualify for 100% first-year bonus depreciation, but a drafting error prevented that favorable treatment. The CARES Act includes a technical correction to fix the problem. As a result, businesses that made qualified improvements in 2018 or 2019 can claim an immediate tax refund for the missed bonus depreciation.

Under the TCJA, Sec. 179 expensing (that is, deducting the entire cost) is available for several improvements to nonresidential real property, including roofs, HVAC, fire protection systems, alarm systems and security systems. The law also increases the maximum deduction for qualifying property. The 2020 limit is $1.04 million (the maximum deduction is limited to the amount of income from business activity). The expensing deduction begins phasing out on a dollar-for-dollar basis when qualifying property placed in service this year exceeds $2.59 million.

Business interest management

The TCJA generally has limited the deduction for business interest expense to 30% of adjusted taxable income (ATI). The CARES Act allows C- and S-corporations to deduct up to 50% of their ATI for the 2019 and 2020 tax years (special partnership rules apply for 2019).

It also permits businesses to elect to use their 2019 ATI, rather than 2020 ATI, for the calculation, which should increase the amount of the deduction for many businesses. Businesses should consider using accounting method changes to shift their business interest deductions from 2019 to 2020 to boost their 2019 ATI.

Income and expense timing

Businesses that haven’t expected to be in a higher tax bracket the following tax year have long deferred income and accelerated expenses to minimize taxable income. If the Democrats win the White House and the Senate, and retain the House of Representatives, tax rates could increase as soon as 2021. In that case, it could be advantageous to accelerate income into 2020, when it would be taxed at the lower current rates.

Even if tax rates don’t climb next year, companies of all kinds have seen downturns in business this year due to the far-reaching effects of the COVID-19 pandemic. Those that expect to be more profitable in 2021 may want to push their expense deductions past year-end to help offset profits.

Payroll tax deductions

A similar analysis applies to payroll tax deductions. The CARES Act allows businesses and self-employed individuals to delay their payments of the employer share (6.2% of wages) of the Social Security payroll tax. Such taxpayers can pay the tax over the next two years, with the first half due by December 31, 2021, and the second half due by December 31, 2022.

Sticking with those dates, however, will affect 2020 taxes. Businesses generally can’t deduct their share of payroll taxes until they actually make the payments. Certain businesses might find it more worthwhile to pay those taxes in 2020. This could, for example, increase the amount of NOLs they can carry back to higher tax-rate years.

Avoid missteps

Many of these taxing planning opportunities come with filing requirements, whether for amended tax returns, applications for changes in accounting method (IRS Form 3115) or applications for tentative refunds. In addition, some of these strategies could have a negative impact on taxpayers who claim the qualified business income deduction. We can help determine your best course forward and ensure you don’t miss any critical deadlines.

Cash flow is a top concern for most businesses today. Cash flow forecasts can help you predict potential shortfalls and proactively address working capital gaps. They can also help avoid late payments, identify late-paying customers and find alternative sources of funding when cash is tight. To keep your company’s cash flow positive, consider applying these four best practices.

1. Identify peak needs

Many businesses are cyclical, and their cash flow needs may vary by month or season. Trouble can arise when an annual budget doesn’t reflect, for example, three months of peak production in the summer to fill holiday orders followed by a return to normal production in the fall.

For seasonal operations — such as homebuilders, farms, landscaping companies, recreational facilities and many nonprofits — using a one-size-fits-all approach can throw budgets off, sometimes dramatically. It’s critical to identify peak sales and production times, forecast your cash flow needs and plan accordingly.

2. Account for everything

Effective cash flow management requires anticipating and capturing every expense and incoming payment, as well as — to the greatest extent possible — the exact timing of each payable and receivable. But pinpointing exact costs and expenditures for every day of the week can be challenging.

Companies can face an array of additional costs, overruns and payment delays. Although inventorying all possible expenses can be a tedious and time-consuming exercise, it can help avoid problems down the road.

3. Seek sources of contingency funding

As your business expands or contracts, a dedicated line of credit with a bank can help meet your cash flow needs, including any periodic cash shortages. Interest rates on these credit lines can be comparatively high compared to other types of loans. So, lines of credit typically are used to cover only short-term operational costs, such as payroll and supplies. They also may require significant collateral and personal guarantees from the company’s owners.

4. Identify potential obstacles

For most companies, the biggest cash flow obstacle is slow collections from customers. Your business should invoice customers in a timely manner and offer easy, convenient ways for customers to pay (such as online bill pay). For new customers, it’s important to perform a thorough credit check to avoid delayed payments and write-offs.

Another common obstacle is poor resource management. Redundant machinery, misguided investments and oversize offices are just a few examples of poorly managed expenses and overhead that can negatively affect cash flow.

Adjusting as you grow and adapt

Your company’s cash flow needs today likely aren’t what they were three years ago — or even six months ago. And they’ll probably change as you continue to adjust to the new normal. That’s why it’s important to make cash flow forecasting an integral part of your overall business planning. We can help.

Like so many things this year, the recommended practices for your annual end-of-the-year tax planning reflect the COVID-19 pandemic and its far-flung effects. The economic impact, as well as federal relief packages like the CARES Act, may render some tried-and-true strategies for reducing your income tax liability less advisable for 2020.

Adding to the uncertainty is the outcome of the presidential election. It could result in new federal tax legislation that trims or even repeals the Tax Cuts and Jobs Act (TCJA). Regardless of the election results, here are some year-end tax planning issues and actions to consider.

Income acceleration

One common tactic to reduce taxable income has been to defer income into the next year. But this practice is advisable only when you don’t expect to land in a higher income tax bracket in the following year. Current tax rates are at their lowest in some time, but they may not stay there for high-income individuals.

It might be wise to accelerate income to take advantage of the current low rates while they remain applicable. That’s especially the case if you’re among the millions of Americans who expect to have less income this year — for example, because of a job loss or because the CARES Act excused you from taking required minimum distributions (RMDs) from retirement accounts for 2020.

Several routes to accelerate income may be available. You can, for example, realize deferred compensation, exercise stock options, recognize capital gains or convert a traditional IRA into a Roth IRA (see below for more information on conversions).

This approach also could help taxpayers who are eligible for the qualified business income (QBI) deduction to maximize their deductions. The QBI deduction is scheduled to end after 2025 and may not survive that long depending on the results of the election, so eligible taxpayers may want to enjoy it while they can.

Roth IRA conversions

If you’ve been thinking about converting a pre-tax traditional IRA to an after-tax Roth IRA, this may be the time to do so. Roth IRAs don’t have RMDs, which translates to longer tax-free growth and distributions generally will be tax-free.

The drawback for most people is that you have to pay income tax on the fair market value of the converted assets. But if your IRA contains securities that have declined in value or you’re in a lower tax bracket this year, your tax bill on the conversion probably will be smaller than it would otherwise. And, if the stocks bounce back, the increase in value would be tax-free.

Charitable giving

The CARES Act temporarily raises the limit on charitable deductions for cash contributions to public charities from 60% of your adjusted gross income (AGI) to 100%. If you’re charitably inclined, you could leverage this provision to cut or completely offset your taxable income for 2020.

Note, too, that you can reap the full benefit by “stacking” cash contributions with gifts that are subject to unchanged limits. For example, donations of appreciated securities are subject to limits of 20% or 30% of AGI, depending on various factors. You could donate securities you’ve held for more than one year (that is, long-term capital gain assets) in an amount equal to 30% of your AGI to avoid any capital gains tax on the securities. And then, you could donate 70% of your AGI in cash to public charities.

Bear in mind, though, that accelerating charitable donations to take advantage of this opportunity could be less lucrative if you’re in a lower tax bracket than normal this year. The resulting deductions would be worth more in future years when you’re in a higher tax bracket (or if you’re in the same bracket, but the rates have gone up under a new tax law).

If you’re just looking to maximize the value of your usual charitable deductions, and you itemize deductions on your tax return, think about “bunching” your contributions, especially if your income is lower. If you normally make your donations in December, you can push the contributions into January to bunch them with your donations next December and ensure you exceed the standard deduction for 2021. This will allow you to claim the full amount as a charitable deduction. The deduction will be worth more if you’re subject to higher tax rates for 2021.

Taxpayers age 70½ or older can make tax-free qualified charitable distributions (QCDs) of up to $100,000 per year from their IRAs to public charities (donor-advised funds are excluded). While QCDs aren’t deductible like other charitable contributions, they nonetheless have the potential to reduce your tax liability. The QCD amount is excluded from AGI, which may, in turn, increase the benefit of certain itemized deductions and, consequently, lower your tax.

There’s a “but,” though, due to the CARES Act’s waiver of annual RMDs for 2020. If you opt to skip your 2020 RMD, it may make more sense to hold off on a QCD until 2021, when it can reduce your taxable RMD and, in turn, your 2021 taxable income.

Loss harvesting

Loss harvesting gives you a way to offset any taxable gains. Selling poorly performing investments before year-end lets you reduce realized gains on a dollar-for-dollar basis. Should you end up with excess losses, you generally can apply up to $3,000 against your ordinary income and carry forward the balance to future tax years.

You could benefit even more if you donate the proceeds from your sale of a depreciated investment to charity. Not only can you offset realized gains, you also can claim a charitable contribution deduction for the cash donation (assuming you itemize). Take care, though, to avoid triggering the “wash sale” rule, which disallows a capital loss if you purchase the same or “substantially identical” security 30 days before or after the sale.

Tread carefully

Each of these strategies comes with both pros and cons that require careful analysis and balancing. We can help you determine which approaches will work best to minimize your income tax liability for the short and long term.

The due date to file a 2019 Report of Foreign Bank & Account Report (FBAR) has been extended from October 15, 2020, to October 31, 2020.

On October 14, the Financial Crimes Enforcement Network (FinCEN) issued a notice advising taxpayers that the FBAR deadline was extended to December 31, 2020, for filers affected by recent natural disasters (the California and Oregon wildfires, Hurricanes Laura and Sally, and the Iowa Derecho). The agency then posted a message on its Bank Secrecy Act e-filing website that incorrectly stated the December 31 deadline was for all filers.

Because some FBAR filers may have missed the October 15 deadline by relying on this message, the agency extended the deadline.

Please contact Yeo & Yeo if you need assistance with your FBAR filing.

As year-end draws near, many businesses will be not only be generating their fourth quarter financial statements, but also looking back on the entire year’s financials. And what a year it’s been. The COVID-19 pandemic and resulting economic fallout have likely affected your sales and expenses, and you’ve probably noticed the impact on both. However, don’t overlook the importance of inventory management and its impact on your financial statements.

Cut back as necessary

Carrying too much inventory can reflect poorly on a business as the value of surplus items drops throughout the year. In turn, your financial statements won’t look as good as they could if they report a substantial amount of unsold goods.

Taking stock and perhaps cutting back on excess inventory reduces interest and storage costs. Doing so also improves your ability to detect fraud and theft. Yet another benefit is that, if you conduct inventory checks regularly, your processes should evolve over time — increasing your capacity to track what’s in stock, what’s selling and what’s not.

One improvement to perhaps budget for here: upgraded inventory tracking and ordering software. Newer applications can help you better forecast demand, minimize overstocking, and share data with suppliers to improve accuracy and efficiency.

Make tough decisions

If yours is a more service-oriented business, you can apply a similar approach. Check into whether you’re “overstocking” on services that just aren’t adding enough revenue to the bottom line anymore. Keeping infrastructure and, yes, even employees in place that aren’t contributing to profitability is much like leaving items on the shelves that aren’t selling.

Making improvements may require some tough calls. Sadly, this probably wouldn’t be the first time you’ve had to make difficult decisions in recent months. Many business owners have had to lay off or furlough employees and substantively alter how they deliver their products or services during the COVID-19 crisis.

You might have long-time customers to whom you provide certain services that just aren’t profitable anymore. If your company might start losing money on these customers, you may have to discontinue the services and sacrifice their business.

You can ease difficult transitions like this by referring customers to another, reputable service provider. Meanwhile, your business should be looking to either find new service areas to generate revenue or expand existing services to more robust market segments.

Take a hard look

As of this writing, the economy appears to be slowly recovering for most (though not all) industries. An environment like this means every dollar is precious and any type of waste or redundancy is even more dangerous.

Take a hard look at your approach to inventory management, or how you’re managing the services you provide, to ensure you’re in step with the times. We can help your business implement cost-effective inventory tracking processes, as well as assist you in gaining key insights from your financial statements.

If you invest in mutual funds, be aware of some potential pitfalls involved in buying and selling shares.

Surprise sales

You may already have made taxable “sales” of part of your mutual fund investment without knowing it.

One way this can happen is if your mutual fund allows you to write checks against your fund investment. Every time you write a check against your mutual fund account, you’ve made a partial sale of your interest in the fund. Thus, except for funds such as money market funds, for which share value remains constant, you may have taxable gain (or a deductible loss) when you write a check. And each such sale is a separate transaction that must be reported on your tax return.

Here’s another way you may unexpectedly make a taxable sale. If your mutual fund sponsor allows you to make changes in the way your money is invested — for instance, lets you switch from one fund to another fund — making that switch is treated as a taxable sale of your shares in the first fund.

Recordkeeping

Carefully save all the statements that the fund sends you — not only official tax statements, such as Forms 1099-DIV, but the confirmations the fund sends you when you buy or sell shares or when dividends are reinvested in new shares. Unless you keep these records, it may be difficult to prove how much you paid for the shares, and thus, you won’t be able to establish the amount of gain that’s subject to tax (or the amount of loss you can deduct) when you sell.

You also need to keep these records to prove how long you’ve held your shares if you want to take advantage of favorable long-term capital gain tax rates. (If you get a year-end statement that lists all your transactions for the year, you can just keep that and discard quarterly or other interim statements. But save anything that specifically says it contains tax information.)

Recordkeeping is simplified by rules that require funds to report the customer’s basis in shares sold and whether any gain or loss is short-term or long-term. This is mandatory for mutual fund shares acquired after 2011, and some funds will provide this to shareholders for shares they acquired earlier, if the fund has the information.

Timing purchases and sales

If you’re planning to invest in a mutual fund, there are some important tax consequences to take into account in timing the investment. For instance, an investment shortly before payment of a dividend is something you should generally try to avoid. Your receipt of the dividend (even if reinvested in additional shares) will be treated as income and increase your tax liability. If you’re planning a sale of any of your mutual fund shares near year-end, you should weigh the tax and the non-tax consequences in the current year versus a sale in the next year.

Identify shares you sell

If you sell fewer than all of the shares that you hold in the same mutual fund, there are complicated rules for identifying which shares you’ve sold. The proper application of these rules can reduce the amount of your taxable gain or qualify the gain for favorable long-term capital gain treatment.

If your small business is planning for payroll next year, be aware that the “Social Security wage base” is increasing.

The Social Security Administration recently announced that the maximum earnings subject to Social Security tax will increase from $137,700 in 2020 to $142,800 in 2021.

For 2021, the FICA tax rate for both employers and employees is 7.65% (6.2% for Social Security and 1.45% for Medicare).

For 2021, the Social Security tax rate is 6.2% each for the employer and employee (12.4% total) on the first $142,800 of employee wages. The tax rate for Medicare is 1.45% each for the employee and employer (2.9% total). There’s no wage base limit for Medicare tax so all covered wages are subject to Medicare tax.

In addition to withholding Medicare tax at 1.45%, an employer must withhold a 0.9% additional Medicare tax from wages paid to an employee in excess of $200,000 in a calendar year.

Employees working more than one job

You may have employees who work for your business and who also have a second job. They may ask if you can stop withholding Social Security taxes at a certain point in the year because they’ve already reached the Social Security wage base amount. Unfortunately, you generally can’t stop the withholding, but the employees will get a credit on their tax returns for any excess withheld.

Older employees

If your business has older employees, they may have to deal with the “retirement earnings test.” It remains in effect for individuals below normal retirement age (age 65 to 67 depending on the year of birth) who continue to work while collecting Social Security benefits. For affected individuals, $1 in benefits will be withheld for every $2 in earnings above $18,960 in 2021 (up from $18,240 in 2020).

For working individuals collecting benefits who reach normal retirement age in 2021, $1 in benefits will be withheld for every $3 in earnings above $46,920 (up from $48,600 in 2020), until the month that the individual reaches normal retirement age. After that month, there’s no limit on earnings.

Contact us if you have questions. We can assist you with the details of payroll taxes and keep you in compliance with payroll laws and regulations.

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