The 2017 tax overhaul limited the business deduction as a way of helping pay for the $1.5 trillion set of tax cuts, but the $2 trillion legislative package approved by Congress in March temporarily eliminated some of the restrictions as a way to help businesses cope with the impact of the pandemic.

Under the TCJA, for tax years starting after Dec. 31, 2017, business interest expense deductions are generally limited to the sum of:

• The taxpayer’s business interest income.
• Thirty percent (or 50%, as applicable) of the taxpayer’s adjusted taxable income.
• The taxpayer’s floor plan financing interest expense.

However, the business interest expense deduction limitation won’t apply to certain small businesses, electing farming businesses and certain regulated public utilities. The $26 million gross receipts threshold applies for the 2020 tax year and will be adjusted annually for inflation.

A real property trade or business or a farming business can elect to be exempted from the business interest expense limitation. However, taxpayers can’t claim the additional first-year depreciation deduction for certain types of property held by the electing trade or business.

Taxpayers must use Form 8990, Limitation on Business Interest Expense Under Section 163(j), to calculate and report their deductions and the amount of disallowed business interest expenses to carry forward to the next tax year.

Along with the final regulations, the IRS also issued extra guidance related to the business interest expense limitation. These proposed regulations spell out additional guidance on different business interest expense deduction limitation issues not addressed in the final regulations, including more complex issues pertaining to the amendments made by the CARES Act. Subject to some restrictions, taxpayers can rely on some of the rules in the proposed regulations until final regulations implementing the proposed regulations are published in the Federal Register.

The IRS has also provided an FAQ list regarding the aggregation rules under section 448(c)(2) that apply to the section 163(j) small-business exemption.

Both the final and proposed rules are complex, and companies should get professional advice on how the rules apply to them.

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To start with, trust beneficiaries typically need to pay tax on the interest income they get from a trust, but not on any distribution from the principal. The logic is that whoever placed the principal in the trust already paid taxes on it. However, trustees cannot decide on their own which part of the trust monies is principal, thus skipping the tax for the beneficiaries. Any funds distributed in a given year are assumed to be that year’s taxable interest income. Only then are distributions considered to be principal. (However, principal may still be subject to capital gains taxes.)

Each year, the trust must send the beneficiaries an annual IRS Form K-1, which breaks down principal from interest income. The trust itself has to file Form 1041, which is similar to the Form 1040 most individuals have submit, except it’s for estates and trusts. If the trust doesn’t distribute all the interest income, then the trust itself has to pay taxes.

Getting into the details

Those are the basics, but trust taxation can get as complex as individual taxes — in fact, there are some similarities. For example, trusts can:

• Take advantage of preferential capital gains rates.
• Earn tax-exempt income.
• Be subject to the alternative minimum tax.
• Deduct certain expenses to reduce taxable income.

However, the organization of each trust makes a difference in how the taxes are handled. For example, with revocable grantor trusts, the grantors pay any taxable income on their returns. It’s the same with an irrevocable grantor trust: The IRS considers trust income as earned by the grantor, even if it is distributed to a beneficiary. Such trusts may give a break on estate and gift taxes, however, which is a boon for the very wealthy. An irrevocable trust that is not a grantor trust, however, is considered a separate entity. In this situation, the beneficiary must pay the taxes.

Charitable remainder trusts are tax-exempt — for the most part. There’s no tax on any income the trust retains. However, any noncharitable beneficiary is still subject to tax.

This is just the beginning; other factors can affect the tax situation. For example, a trust can be the beneficiary of an IRA, but this technique can restrict management of the IRA and requires special trust language.

The bottom line? Families setting up trusts should work with professionals who understand the tax implications of each trust decision — when they’re first set up, and as they start paying out to beneficiaries.

© 2020

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Professional organizers are providing organizational advice and instructions based on photos of customers’ spaces. Real estate agents offer video tours of homes for clients who don’t want to visit in person.

A.J. Hastings, a 106-year-old college gear and office supply store in Amherst, Massachusetts, serves three area universities but saw foot traffic down by at least half as colleges restricted the number of students on campus and there was reluctance to shop in person.

So co-owners took action: For five months, they didn’t allow customers inside, using the time to reconfigure the store, widening aisles to make it more conducive to social distancing; ditching a card rack, a magazine display, a counter and a soft-drink refrigerator; and separating two checkout registers so customers waiting to pay wouldn’t come in contact.

Feedback? Customers say it’s a better, safer shopping experience. Among other business owners’ actions:

• A designer who didn’t head to New York Fashion Week noted that his collection would be heavy on sweatsuits and quarantine-friendly leisure wear. With no runway show, he created an online version, filming videos of looks and explaining each one.
• A designer shop for street wear in Los Angeles is also an art gallery. The modus operandi here is to produce a clothing line featuring muted colors to match the somber mood. Monthly art shows — festive events that used to draw crowds — have been canceled as owners put together shows held during the day without alcohol and with a limited number of people in the store. Gradually, the owners are moving to an online model, at least for now, focusing more on their video work, creating art tutorials and filming street artists.
• To eliminate crowded waiting rooms, some veterinarians offer curbside appointments, checking dogs or cats in the backseat without close contact with their humans.
• Ice cream and coffee shops similarly went curbside, allowing customers to text or call in orders for drive-up or walk-up service.

And when companies see that customers don’t need their regular products or services, they’ve pivoted operations to deliver things that are needed. A number of craft beer distilleries across the country produced hand sanitizer when it was in short supply globally. Clothing manufacturers and other textile companies produced face masks and other personal protective equipment for health care workers and the rest of us.

It’s been a good opportunity for firms to use this time to develop new products and service lines that they may have been postponing when they were busier.

Small businesses have been continuing to pay for masks, sanitizers and new HVAC filters, raising their costs at the same time that sales are down. Companies have been retrofitting their game plans, figuring out how to relax fixed costs using creativity and flexibility.

© 2020

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