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.

The post Business Interest Expense: The New Rules appeared first on The Accountancy.

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

The post How Are Trusts Taxed? appeared first on The Accountancy.

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

The post How To Retool: An Overview appeared first on The Accountancy.

Lowering the Family’s Effective Tax Rate

If you have children that can operate a computer (most of them do), make phone calls, photocopies, or have other skills pertinent to your business, making them your employees has the effect of reducing your tax liability. This is so because you are downloading taxes computed at your rate, effectively deducting money that you would likely give to the child anyway, but without a deduction. This deduction reduces your Federal, state and Self-employment tax.

Besides the benefits to you, the child benefits also since the tax rate could be as little as zero if the income is $12,000 or less, the amount of the Standard Deduction.

But wait, there’s more…

As they say in the infomercials: “but wait, there’s more!”. As if the above wasn’t enough, if you operate your business as a sole proprietor or a husband and wife LLC, you can hire your son or daughter that is younger than 18, and their wages will be exempt from Social Security, Medicare and Federal unemployment tax (FUTA). The FUTA exemption lasts until age 21.

If you are incorporated, then the child’s wages are still deductible, though no longer exempt from Social Security, Medicare and FUTA.

The gift that keeps on giving…

Now, for the pièce de résistance, what if we socked away $5500 a year of your child’s earnings into a ROTH IRA and they never paid tax on that money for the rest of their lives? Would that offend you? Is it legal? Yes, absolutely! The only rule pertinent here is that your child has to have earned income, their age doesn’t matter!

A word of caution

The above-mentioned rules work beautifully when sensibly constructed. But, we should warn against carelessness. For instance, you shouldn’t pay your 2-year-old a $50,000 salary and expect to get away with it. Teenagers can be very capable and as long as you document their hours and the work they do, you should be OK.

Summary

Hiring your kids can be profitable, tax-efficient and educational for the kids. If you also make it fun for them (the younger they are, the more important fun is as an ingredient), they will be productive and worthy employees and carry that experience into their other careers or they will be more receptive to working in the business, when and if the time comes to plan a succession.

How can we help you? Let’s talk about your goals — and what you, your family and your business need to thrive.

The post Hire Your Children appeared first on The Accountancy.

The Genesis of the 4% Rule 

Approximately 25 years ago, a planner named Bill Bengen penned an article called Determining Withdrawal Rates Using Historical Data. This was the first time that anyone had suggested a paradigm of withdrawals for a smooth glide path in retirement. The implication was made that 4% was a “safe” withdrawal that would ensure the retiree wouldn’t run out of money. Keep in mind this was the early 90’s, when academic papers of this kind were scarce, and there was a belief that the “stock market” could deliver an average of 7%. The theory was, if you make 7% and only withdraw 4%, your money kept growing. Around the same time, Peter Lynch (yes, that Peter Lynch) was suggesting 7% was a safe withdrawal rate.

What is the Desired Withdrawal Rate?

A comfortable withdrawal rate is one that is derived after taking into consideration the following factors:

• Life expectancy
• Living expenses in retirement, discretionary & non-discretionary
• Assets starting with and projected growth rates.
• Income& savings rates
• Inflation rate

As you can see, this is a much more complicated answer than a specific rate that can be thrown out as a rule of thumb, as if one size could fit all. In fact, it is a factual and more scientific answer, because everyone is different and one size does not fit all.

It has been said that some folks spend more time planning a 2-week vacation than they do their retirement, which could last over 3 decades. Do you have a roadmap for this long trip?

The only way to feel comfortable about your retirement is to test the numbers using a variety of assumptions, subjecting them to scientific methods and analyses that will flush out and expose risks, and identify opportunities along the way.

We would strongly encourage to abandon the use of rules of thumb. Your unique withdrawal rate is whatever makes you feel comfortable. We work to separate fact from fiction, probable from unlikely, emotion from science.

How can we help you? Let’s talk about your goals — and what you, your family and your business need to thrive.

The post The 4% Rule appeared first on The Accountancy.

We have seen many businesses go through this, some by design, and others by default. I promise not to preach but here are a few simple ideas to keep in mind. They may come in handy to keep things in perspective.

1. Have the right team – “Great things in business are not done by one person. They’re done by a team of people.” This is critical; talk to your CPA, Attorney, Banker. Have strategy meetings. Listen and take notes, give yourself enough time to process and have a focused plan of execution.
2. You don’t have to clone yourself – You did not start out knowing everything you know now. The new head honcho will get there. The important thing is to be philosophically aligned on the major elements.
3. Strengthen the numbers -scale means opportunity and everyone gets motivated by that. The financials will lead to better valuations and more options to grow.
4. It’s not about you, it’s the Market – Listen to logic – understand you may not know it all and your business may be worth more or less than what you think, and it may not matter what you think, it’s about the market.
5. Don’t let them kick you out – Don’t be that guy – you don’t want to stick around too long. It does present a number of problems.

Engage with your clients – if you run a service business, they are all thinking: ‘what happens to me if something happens to you?’ They will be encouraged, relieved and impressed that you have been so thoughtful.

How can we help you? Let’s talk about your goals — and what you, your family and your business need to thrive.

The post Succeeding at Succession appeared first on The Accountancy.