Section 1202 allows you to sell a qualified small business corporation (QSBC) on a tax-free basis.
Now, add to this no-tax-on-sale benefit to the 21 percent corporate tax rate from the Tax Cuts and Jobs Act, and you have a significant tax planning opportunity.
Imagine this: You sell your C corporation. The sale produces a $6 million capital gain to you.
Your federal income tax bite on the $6 million of gain is zero. Yes, you are awake. You are reading this correctly. The tax bite is zero.
Internal Revenue Code Section 1202 establishes the rules for the zero tax bite. To get to zero, you need to operate your business as a tax code-defined QSBC.
You may already have a tax code-defined small business corporation, or you may be thinking of starting a new business as a small business corporation. Paying zero taxes on the sale of your business stock is a big incentive.
100 Percent Gain Exclusion Break (Tax-Free Capital Gains)
To qualify for tax-free capital gains, you must acquire your QSBC stock after September 27, 2010.
More Than Five Years
Of course, there’s more than one rule. You must hold your QSBC stock for more than five years to qualify for the tax-free treatment.
Limitations on Excludable Gains
Your beloved lawmakers impose limits on your tax-free capital gains from the sale of a particular QSBC. In any taxable year, the tax limits on your eligible gain exclusion may not exceed the greater of
Example 1: $10 Million Limitation
You are a married joint filer. You invested $100,000 when you started your C corporation in 2012.
Now, in 2019 (more than five years after the start), you sell the stock in the C corporation for $6.1 million. You have tax-free capital gains equal to the greater of
You have $6 million of tax-free capital gains.
Example 2: 10-Times-the-Basis Limitation
You are an unmarried individual. You invest $2 million in a single QSBC stock this year.
In 2025, more than five years from now, you sell this stock for $24 million, resulting in a total gain of $22 million ($24 million - $2 million). The tax code limits your tax-free gain to the greater of
In 2025, you have $20 million in tax-free capital gains and $2 million in taxable capital gains. You have to be smiling.
Definition of QSBC Stock
To be eligible for the QSBC gain exclusion, the stock you acquire must meet the requirements set forth in Section 1202 of our beloved Internal Revenue Code. Those requirements include the following:
Next, you have to look at the rules that apply to the corporation. To qualify as a QSBC, the following rules apply.
Rules for the Corporation
The corporation must be a domestic C corporation.
The corporation must satisfy an active business requirement. That requirement is deemed satisfied if at least 80 percent (by value) of the corporation’s assets are used in the active conduct of a qualified business.
Beware. Qualified businesses do not include
The corporation’s gross assets cannot exceed $50 million before the stock is issued and immediately after the stock is issued (which considers amounts received for the stock).
I did not cover all the rules that apply. But I wanted to give you a good handle on how this planning opportunity can work to your benefit. If you would like to spend some time with me going over the possibilities for you, please call me on my cell 985-969-5360.
Sincerely, Joe Pizzolato
Unlike most tax provisions that involve a tax election, this one requires you to elect out if you don’t want it.
For example, you (or your corporation) buy two $50,000 trucks, each with a gross vehicle weight rating of 6,500 pounds and a bed length of 6.5 feet. You use the trucks 100 percent for business. Because of the weight and bed size, the trucks are exempt from the luxury passenger vehicle depreciation limits.
You have five choices on how to deduct the vehicles on your 2019 tax return (the one you are filing or about to file—we are in tax season):
Okay, you get the big picture. Two trucks, each with a cost of $50,000 and both exempt from the luxury vehicle limits. Five choices as to the deduction.
Because of their gross vehicle weight, the vehicles mentioned above were exempt from the luxury vehicle depreciation limits that apply to
· cars with curb weight of 6,000 pounds or less, and
· SUVs, pickups, and crossover vehicles with a gross vehicle weight rating of 6,000 pounds or less.
Had the vehicles failed the weight test, their bonus depreciation for 2019 would have been limited to $18,100.
As you can see, you have many deduction possibilities for your vehicles. If you want to discuss them, please call me on my direct line at 985-969-5360.
Sincerely, Joe Pizzolato
Here’s good news: the properly used business vacation home or condo does not suffer from the vacation-home rules,
In these days of COVID-19, you may have solid reasons to use your vacation home or condo for two purposes only:
How Business Use Escapes the Dreaded Vacation-Home Rules
Do you use your business vacation home or condo solely for business lodging?
If so, you escape the vacation-home rules and may deduct your business-lodging costs. The law is very clear on this. The vacation-home section of the tax law, Section 280A(f)(4), states that nothing in the vacation-home rules shall disallow any business deduction for business travel.
Example 1. You use your beach home for overnight business lodging 37 times during the year. You have no personal or rental use of the beach home. Your beach home is a business asset and deductible as such.
One exception to this business-lodging rule. The law does not grant the business-lodging exception to landlords who rent dwelling units. If you have apartment buildings or other residential rentals, staying at your vacation home or condo to look after your rentals does not let you escape the unfavorable vacation-home rules.
Example 2. Fred uses his beach home for 70 nights of business lodging and 30 nights of personal lodging. He has a 70 percent business-use beach home and a 30 percent personal-use beach home.
Planning note. Fred has his tax home where he regularly works, in New Jersey. He travels to his South Carolina beach home location to conduct business in South Carolina. His business activity is what makes his overnight stays at the beach home business stays.
How Rental Use Changes the Landscape
If you rent the vacation home or condo, you really change the tax picture. For example, if you use the vacation home or condo for personal, business, and rental purposes, you could trigger
Looking at this list, you might ask, “How can I avoid all these additional considerations and still rent out the vacation home or condo?” Answer: rent for 14 days or less. Technically, that works.
In addition to keeping receipts for the business condo’s expenses and improvements, you need to prove how many nights you slept in the vacation home or condo for both business and personal purposes.
Notations on your business and personal calendars are helpful but not conclusive. For your business activities, you want proof of why you had to be at the beach home.
Example 3. Sara sells real estate at both her tax and beach home locations. She tracks her prospects and activities at each location.
Do as Sara does. Also, keep your eyes open for third-party and other corroborative evidence of use. Do you have emails, letters, and other proof of why you had to travel to the beach home? If so, print the emails and save them along with the written letters in your tax file.
Do you have evidence of being in the area, such as gas, grocery, and dining receipts?
Proving use of your business condo is easy and takes very little time. Documentation is essential. Don’t pass over this critical step.
Do you own the vacation home or condo in your personal name?
If so, and you operate as a
Why not use a rental arrangement with your corporation? Because you are an employee who likely uses the vacation home or condo for more than 14 days of personal use, you want to avoid a rental arrangement that could cost you your depreciation, repairs, and similar expenses.
The reimbursement method works and creates no complications. Use it.
If the corporation owns the vacation home or condo, you should reimburse the corporation for your personal use so as to avoid the monies showing on your W-2 and increasing your taxes.
If you would like to discuss your vacation home or condo possibilities, don’t hesitate to call me on my cell phone at 985-969-5360.
Sincerely, Joe Pizzolato
When you are self-employed with no employees, the payroll protection program (PPP) program is a COVID-19 gift designed to help you get through this pandemic.
If you now have your PPP funds, we identified nine insights for you.
1. Do I Have to Spend the Paycheck Protection Program (PPP) Loan Proceeds?
Yes, it appears so. The instructions for line 9 of Schedule A for the U.S. Small Business Administration’s (SBA) Form 3508 PPP forgiveness application state:
Line 9: Enter any amounts paid to owners (owner-employees, a self-employed individual, or general partners). This amount is capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.
Note the word “paid.”
Example. Sam shows 2019 Schedule C net profits of $100,000 and obtains a PPP loan of $20,833. By the SBA interim final rule, his payroll forgiveness amount is $15,385 based solely on his 2019 Schedule C.
Sam maintains both business and personal bank accounts. Sam deposits the $20,833 into his business account. During Sam’s eight-week covered period, he takes $15,385 out of his business account and puts it in his personal account. Presto, he has satisfied the “paid” requirement that you see on line 9 of the loan forgiveness application.
We don’t know that Sam had to satisfy the “paid” requirement of line 9, but we do know that Sam can sleep better now.
2. Should I Put the Loan Proceeds in a Separate Bank Account?
With a separate bank account from which you use the PPP loan proceeds, you can create a pretty perfect paper trail as to the use of the proceeds.
From a practical standpoint, you should be able to use your existing accounting methods to prove the use of the PPP loan proceeds. But the idea of a separate PPP account and the creation of a “pretty perfect paper trail” has much to say for itself.
3. When Do My Eight Weeks Begin?
According to the latest interim guidance and consistent with SBA Form 3508, with no employees, your eight weeks begin on the date the lender disburses the funds to you.
You would have an alternate date possibility if you had employees on a W-2 payroll.
4. Can I Claim Forgiveness for the Business Interest and Utilities Percentage I Pay for My Home Office?
Yes. When you claim the home-office deduction on your Schedule C, it reduces the net profits from your business. In other words, the home-office deduction is a business deduction.
Under the current loan forgiveness rules, your non-payroll PPP loan forgiveness amount (limited to a maximum of 25 percent of total forgiveness) may include the following during your eight-week covered period:
To put this in perspective, you need both the home (rented or owned) and the home office in place before February 15, 2020.
5. What Is a Transportation Utility?
We have not seen from the SBA or the Department of the Treasury an official definition of a “transportation utility” with respect to the PPP loan process.
The Federal Highway Administration’s Center for Innovative Finance Support says:
Transportation utility fees are a financing mechanism that treats the transportation system like a utility in which residents and businesses pay fees based on their use of the transportation system rather than taxes based on the value of property they occupy.
The definition above is what we think the SBA and the Department of the Treasury are thinking of.
6. How Does the 75 Percent Work?
When you file Schedule C and have no employees, your minimum loan forgiveness amount under the 75 percent rule is straightforward. Take your Payroll amount and divide by 0.75.
Example 4. Your PPP loan is $20,833. Your deemed Schedule C payroll to yourself is $15,385.
Say you meet the paid rule and spend $4,000 on interest and utilities; your loan forgiveness amount is $19,385 ($15,385 + $4,000). You can let the unforgiven $1,448 ($20,833 - $19,385) continue as a 1 percent interest loan for two years from the date of the loan or you can pay it off during this time frame with no prepayment penalties.
7. What If I Have Employees?
With employees, the calculation of how you qualify for your personal portion of loan forgiveness is unchanged.
But you have to make a number of calculations to figure the forgiveness you receive because of your employees.
8. New, Easier PPP Forgiveness Coming Your Way
On Thursday, May 28, the U.S. House of Representatives approved the Paycheck Protection Program Flexibility Act of 2020 by a vote of 417-1. This bill or something similar will be enacted in June to make it easier for all PPP borrowers to qualify for PPP loan forgiveness.
Here are some highlights from this bill:
9. PPP Money Still Available; Apply Now
As of 5:00 p.m. Eastern Time on Friday, May 29, the SBA had approved 4.3 million PPP loans totaling $510.2 billion.
The Journal of Accountancy reports that a total of $138 billion remained available in PPP funding as of May 23.
That means that there is money available today. If you have not applied, do it now.
If you need our assistance with either the PPP loan or forgiveness, we are here to be of service. My direct line is 504-272-2310.
As you may remember from my last post, when you operate a husband-wife partnership, you likely are paying far more than you need to pay in self-employment taxes.
Here are three strategies that can reduce your self-employment taxes.
Strategy No. 1: Use IRS-Approved Drill to Minimize Self-Employment Tax Hit on Husband-Wife Business in Community Property State
IRS Revenue Procedure 2002-69 stipulates that the IRS will respect your treatment of an unincorporated husband-wife business in a community property state as either
Put another way, in a community property state, you and your spouse can choose to treat your unincorporated husband-wife business as a sole proprietorship operated by one spouse for federal tax purposes.
The IRS will never object, even when both you and your spouse are very active in the business. As you will see, this sole proprietorship treatment could save you serious money on your self-employment tax bill.
Example. Self-employment tax savings from converting a husband-wife partnership to a sole proprietorship.
Pursuant to Revenue Procedure 2002-69, you and your spouse (married residents of a community property state) change the federal tax treatment of a qualified entity that you’ve been treating as a 50/50 husband-wife partnership.
You “convert” the qualified entity into a sole proprietorship operated by you for federal tax purposes (or into a single-member LLC treated as a sole proprietorship for federal tax purposes). You do that by filing an initial Schedule C (or E or F, if appropriate) for the conversion year. Easy!
Naturally, you must consider all the other federal tax consequences of converting. You usually find no negative federal tax consequences from this conversion.
Say your husband-wife business produces 2020 net self-employment income of $250,000 (after applying the 0.9235 factor). You and your spouse have no self-employment income from other sources.
The conversion from 50/50 husband-wife partnership status into sole proprietorship status reduces your 2020 self-employment tax bill by a cool $13,925 [($125,000 × 0.153 × 2) = $38,250 before the conversion, compared with ($137,700 × 0.153) + ($112,300 × 0.029) = $24,325 after the conversion].
This is not a one-time tax-saving benefit. Similar annual self-employment tax savings (or better) can be reaped in future years if your business maintains or exceeds its current profitability.
You accomplish the conversion by liquidating the assets, if any, of your former husband-wife partnership (LLC) into the “new” post-conversion sole proprietorship (single-member LLC) considered to be operated by you.
Key point. Not having to file any more of those complicated Form 1065 partnership returns and related Schedules K-1 is the cherry on top. Just file Schedule C (or E or F, if appropriate) for your “new” proprietorship from now on.
Strategy No. 2: Convert Husband-Wife Partnership into S Corporation, and Pay Modest Salaries to Yourselves
If you and your unincorporated husband-wife business are not in a community property state, consider converting the business into S corporation status to reduce the Social Security and Medicare tax hits.
Example 3. Husband-wife partnership converts to S corporation and pays modest salaries.
Pursuant to sage advice, you and your spouse convert your 50/50 husband-wife partnership into an S corporation. If you had left your business in husband-wife partnership status, it would have produced 2020 net self-employment income of $250,000 (after applying the 0.9235 factor), and you would have had a self-employment tax bill of $38,250 [($125,000 × 0.153 × 2) = $38,250]. Ouch!
But now you run your husband-wife business as an S corporation and pay yourself and your spouse salaries of $60,000 each. Now the FICA tax bill will be only $18,360 ($60,000 x 15.3 percent x 2 = $18,360). So, you save $19,890 in Social Security and Medicare taxes by operating as an S corporation ($18,360 versus $38,250). Nice!
Again, this is not a one-time tax-saving benefit. Similar annual Social Security and Medicare tax savings (or better) can be reaped in future years if your business maintains or exceeds its current profitability (assuming the FICA tax rules for S corporations stay the same as they are today).
Potential Negative Side Effect on Retirement Plan Contributions
Beware of the potentially unfavorable side effect of paying modest salaries to yourself and your spouse as S corporation shareholder-employees. It can result in reduced allowable deductible contributions to your tax-favored retirement plan.
Strategy No. 3: Disband Husband-Wife Partnership and Hire Spouse as Employee
Consider this strategy for your existing husband-wife partnership if you are not in a community property state and you don’t love the S corporation idea.
Step 1. Disband the existing husband-wife partnership or husband-wife LLC treated as a partnership for federal tax purposes, and start running the operation as a sole proprietorship operated by one spouse (or a single-member LLC treated as a sole proprietorship for federal tax purposes).
Step 2. Hire the other spouse as an employee of the new proprietorship. Pay that spouse a modest cash salary out of the business checking account, and withhold 7.65 percent from the salary checks to cover the employee-spouse’s share of the FICA tax. As the employer, the proprietorship must pay another 7.65 percent directly to the government to cover the employer’s half of the FICA tax. However, since the employee-spouse’s salary is modest, the FICA tax hit is also modest.
Step 3. Consider setting up a medical expense reimbursement plan as a fringe benefit for the employee-spouse. Use the plan to cover the family’s out-of-pocket medical expenses, including health insurance premiums, by making reimbursement payments to the employee-spouse out of the proprietorship’s business checking account.
Deduct the plan reimbursements as a business expense on the sole proprietorship Schedule C filed with your joint Form 1040. On the employee-spouse’s side of the deal, the reimbursements are free of federal income, Social Security, and Medicare taxes because the plan is considered a tax-free employee fringe benefit.
Step 4. On the proprietorship’s Schedule C (or E or F, if applicable), deduct the medical expense reimbursements made under the plan, the employee-spouse’s cash salary, and the employer’s share of the FICA tax. These deductions also reduce the proprietor’s net self-employment income and thus the self-employment tax bill.
Step 5. Include only one Schedule SE—for the spouse who is treated as the proprietor—with your joint Form 1040. This minimizes the self-employment tax hit, because the maximum 15.3 percent self-employment tax rate applies to no more than $137,700 of net self-employment income (for 2020), versus up to $275,400 if your business is operated as a 50/50 husband-wife partnership.
Warning. The employee-spouse’s modest cash salary plus the reimbursements from the medical expense plan must together amount to reasonable compensation for his or her work in the business.
Following this strategy should substantially reduce the total amount you pay for Social Security and Medicare taxes (via self-employment tax for the proprietor-spouse and FICA tax for the employee-spouse). Deducting the medical expense plan reimbursements on the proprietorship’s Schedule C (or E or F) will reduce your federal income tax bill too.
Having your profitable unincorporated husband-wife business classified as a partnership for federal tax purposes can lead to alarmingly big bills for Social Security and Medicare taxes.
The good news is that you don’t have to sit still for that. Choosing one of the three following three strategies, as discussed in this letter, will save you some serious self-employment tax money:
I am here to assist you in your implementation of any of the three strategies. Simply call me on my direct line at 504-272-2310, and I will help put your plan in place.
Take care and be safe.
When both members of a married couple participate in an unincorporated business venture, must it be treated as a husband-wife partnership for federal tax purposes? Answer: maybe, or maybe not.
Figuring out the answer is important because it can have a huge impact on the couple’s self-employment tax situation.
Husband-wife partnerships must also file annual federal returns on Form 1065 along with the related Schedules K-1. As you know, partnership returns can be a pain.
For these reasons, you generally want to avoid husband-wife partnership status when possible.
Example: Self-employment Tax Hit on Profitable Husband-Wife Partnership
Your husband-wife partnership will produce $250,000 of net self-employment income in 2020 (after applying the 0.9235 factor that reduces net income to taxable self-employment income on Schedule SE).
Assume the $250,000 is properly split 50/50 between you and your spouse ($125,000 for each). You owe $19,125 of self-employment tax (15.3 percent x $125,000), and so does your spouse, for a combined total of $38,250. Oof!
The problem with husband-wife partnership status in your situation is that the maximum 15.3 percent self-employment tax rate hits $125,000 of net self-employment income not once but twice (first on your Schedule SE and again on your spouse’s separate Schedule SE).
In contrast, if you could say that your business is a sole proprietorship run only by you, only you would be on the hook for the self-employment tax.
You would pay the maximum 15.3 percent self-employment tax rate on the first $137,700 of your 2020 net self-employment income, but the self-employment tax hit would be “only” $24,325 [(15.3 percent x $137,700) + (2.9 percent x $112,300) = $24,325]. That’s a lot better than the $38,250 self-employment tax hit if your business is classified as a 50/50 husband-wife partnership.
When Does the Husband-Wife Partnership Actually Exist for Tax Purposes?
Good question. As you can see from the preceding example, the self-employment tax can make the husband-wife partnership an expensive proposition. Of course, the IRS would love it if you have to treat it that way.
Not surprisingly, several IRS publications attempt to create the impression that involvement by both spouses in an unincorporated business activity usually creates a partnership for federal tax purposes.
IRS Publication 334 (Tax Guide for Small Business) says the following:
If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement.
In other words, you don’t have to believe that you have a husband-wife partnership to have a husband-wife partnership for tax purposes.
Similarly, IRS Publication 541 (Partnerships) says:
If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. If so, they should report income or loss from the business on Form 1065.
But in many (if not most) cases, the IRS will have a tough time prevailing on the husband-wife partnership issue. Consider the following direct quote from IRS Private Letter Ruling 8742007:
Whether parties have formed a joint venture is a question of fact to be determined by reference to the same principles that govern the question of whether persons have formed a partnership which is to be accorded recognition for tax purposes. Therefore, while all circumstances are to be considered, the essential question is whether the parties intended to, and did in fact, join together for the present conduct of an undertaking or enterprise.
The following factors, none of which is conclusive, are evidence of this intent:
In many (if not most) real-life situations where both spouses have some involvement in an activity that has been treated as a sole proprietorship, or in an activity that has been operated using a disregarded single-member LLC that has been treated as a sole proprietorship for tax purposes, only some of the five factors listed in Private Letter Ruling 8742007 will be present. Therefore, in many such cases, the IRS may not succeed in making the husband-wife partnership argument.
Regardless of the presence or absence of the other factors listed above, the husband-wife partnership (LLC) argument is especially weak when (1) the spouses have no discernible partnership agreement and (2) the business has not been represented as a partnership to third parties (for example, banks and customers).
If you would like my help to avoid spouse partnership status, please don’t hesitate to call me on my direct line at 504-272-2310.
To help your small business, Congress created a lot of new tax-saving provisions due to the COVID-19 pandemic.
Many of my clients own and operate S corporations and expect the tax law to treat them differently, as it does with their health insurance deduction.
Perhaps you, too, would like us to help clarify which of the COVID-19 tax benefits the S corporation owner can use to put cash in his or her pocket. Here’s a list as of today.
Payroll Tax Deferral
You can defer payment of your S corporation’s employer share of Social Security tax on federal tax deposits you would otherwise have to make during the period beginning on March 27, 2020, and ending December 31, 2020.
Your S corporation’s deferred Social Security taxes are due in two installments. You must pay 50 percent by December 31, 2021, and the other 50 percent by December 31, 2022.
If you are an S corporation owner, the S corporation can defer the employer portion of Social Security tax on your salary just as it can on any other employee.
If your S corporation receives a Paycheck Protection Program (PPP) loan, and it obtains loan forgiveness, it does not qualify for the payroll tax deferral provision.
PPP exception loophole. The PPP loan forgiveness prohibition doesn’t apply until your S corporation receives a decision from your lender on PPP loan forgiveness. Before that date, you can defer payroll taxes even if you apply for and receive a PPP loan.
Example 1. You operate as an S corporation and have three employees, including yourself. Your S corporation’s April payroll is $10,000, including your W-2 salary or wages.
The employer Social Security tax on this payroll is $620. Your S corporation doesn’t have to pay it with its federal tax deposit. Instead, it will pay $310 by December 31, 2021, and the other $310 by December 31, 2022.
Employee Retention Credit
Your S corporation gets a refundable payroll tax credit against the employer share of employment taxes equal to 50 percent of its wages paid to employees after March 12, 2020, and before January 1, 2021.
But the law also states that “rules similar to the rules of sections 51(i)(1) and 280C(a) . . . shall apply.”
Code Section 280C(a) states you can’t deduct wage expenses equal to the employee retention credit you receive—no double dipping.
Code Section 51(i)(1) affects the S corporation shareholder by denying the employee retention credit for wages paid to the following family members of a 50-percent-or-more shareholder:
The provision does not prevent the S corporation owner from taking the employee retention credit on his or her wages, provided that the S corporation otherwise meets one of the following requirements:
PPP Exception. If you receive a PPP loan, then you don’t qualify for the employee retention credit.
Example 2. ABC Corporation is an S corporation with four equal owners who each own 25 percent. It has eight employees: the four owners and four children of the owners. A government order partially suspended the business operations. Because no shareholder has 50 percent or more ownership, the wages of all eight employees qualify for the employee retention credit.
Example 3. DEF Corporation is an S corporation that is 100 percent owned by a married couple. It has four employees: the two owners and two children of the owners. A government order partially suspended the business operations. Only the wages of the two owners qualify for the employee retention credit.
Tax-Free Disaster Payments
Congress allows your S corporation to make tax-deductible disaster-related payments to its employees, and those payments are tax-free to its employees.
But as you likely know, S corporation owners usually can’t take advantage of tax-free fringe benefits, and usually have to include their value as taxable income on their W-2.
We have good news about disaster-related payments: none of the guidance issued about these payments denies their favorable tax treatment to the S corporation shareholder. In addition, the IRS doesn’t mention such payments in Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
But we have some bad news, too—there is no guidance explicitly allowing the S corporation owner to take advantage of the tax-free disaster-related payments.
If you choose to have your S corporation provide tax-free disaster-related payments to you, we recommend you implement a formal, written plan and keep excellent documentation—even though such steps are not required by the law.
Example 4. Your S corporation sets up a plan to give every employee a $500 payment to cover telework supplies and ongoing expenses during the COVID-19 pandemic. Your business is subject to a shutdown order, and all 12 of your employees, including you, must work remotely from home.
The $6,000 in payments your S corporation provides is tax-deductible to the corporation and tax-free to the employees, including the S corporation shareholder.
Many small-business owners, like you, operate out of an S corporation. And as you know, the tax law sometimes isn’t kind to S corporation owners, because the law limits or eliminates tax breaks other business owners can take.
Luckily for you, S corporation owners get to benefit from most of the big COVID-19 tax benefits, including:
If you need help with any of the COVID-19 tax laws, please call me on my direct line at 504-272-2310.
The IRS recently issued new cryptocurrency guidance and is hot on your trail if you bought and sold cryptocurrency and didn’t report it on your tax return.
Here are the tax basics. You’ll treat cryptocurrency as property for tax purposes:
Cryptocurrency is a capital asset (provided you aren’t a trader). Therefore,
In the cryptocurrency world, a fork occurs when the digital register that logs transactions of a particular cryptocurrency diverges into a new digital register. There are two types of forks:
The IRS ruled that
Example. You own J, a cryptocurrency. A fork occurs and you receive three units of K, a new cryptocurrency. At the time of the fork, K has a value of $20 per unit. You’ll recognize $60 of ordinary income due to the fork.
When selling property, you generally sell it on a first-in, first-out (FIFO) basis, unless you are eligible to use the specific identification method. You want to use the specific identification method if you can because you can select the amount of gain or loss your sale will create. With FIFO, you have no choice.
To use the specific identification method, you’ll have to either
This information must show
If you would like my help with your cryptocurrency, please don’t hesitate to call me on my direct line at 504-272-2310.
After the terrorist attacks on September 11, 2001, Congress added a little-known tax provision to the tax law.
This little-known tax code provision exempts certain payments from taxation during a disaster or terrorist attack.
President Donald Trump’s national emergency declaration triggered the disaster provisions of the tax law, including this one—where both you and your employees can reap benefits during this COVID-19 pandemic. |STOP|
How This Works
Because of the pandemic, the tax code makes the following tax-free to your employees:
The qualified COVID-19 disaster relief payments are free of income tax, payroll taxes, and self-employment tax.
Not only are the payments tax-free to your employee, but they are deductible to you as a business expense, regardless of whether or not the payment ends up being tax-free to the employee.
Payments That Do Not Work
The exclusion from income does not apply to payments in the nature of income replacement, such as payments to individuals for lost wages, unemployment compensation, or payments in the nature of business income replacement.
Payments to business entities don’t qualify, either.
Qualified disaster relief payments do not include payments for any expenses compensated for by insurance or otherwise.
Payments You Can Make
Here’s an example: the IRS ruled that grants received by employees under an employer program to pay or reimburse reasonable and necessary medical, temporary housing, or transportation expenses incurred as a result of a flood qualify for this benefit.
With respect to the COVID-19 pandemic, you could reimburse or pay for the following employee expenses under this guidance:
Planning note. Because of the Tax Cuts and Jobs Act, employees may not deduct employee business expenses during tax years 2018-2025, so your reimbursement of such expenses under the disaster rules is extra valuable.
Here’s a surprise: Congress doesn’t think taxpayers can account for their actual expenses because they are going through a disaster, so taxpayers are in the clear provided the payments received and treated as tax-free are reasonably expected to be commensurate with the expenses they incurred.
Even if the IRS is generous with documentation requirements, we recommend you implement a formal, written plan with
You should also track the names and amounts provided to each employee under the program terms.
During the COVID-19 pandemic, you establish a plan to help employees with telework expenses, allowing each employee to get a $1,500 grant for equipment, supplies, and use of home utilities.
Your employees Sam and Helen each apply, and each estimate they will spend $1,500 on a form you provide.
Sam and Helen each spend approximately $1,500 on telework equipment and supplies.
The tax results are as follows:
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