Howard, Moore & McDuffie, PC

The QBI deduction basics and a year-end tax tip that might help you qualify Are you eligible to claim the qualified business income (QBI) deduction? Taxpayers other than corporations may be entitled to a deduction of up to 20% of their QBI. For 2020, if taxable income exceeds $163,300 for single taxpayers, or $326,600 for a married couple filing jointly, the QBI deduction may be limited in certain cases. Taxpayers may be able to save taxes with this deduction by deferring income or accelerating deductions at year end so that they come under the dollar thresholds (or be subject to a smaller phaseout of the deduction). You also may be able to increase the deduction by increasing W-2 wages before year end. The rules are complex so consult with us before taking steps.

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. Wages and self-employment income above this threshold aren’t subject to Social Security tax. For 2021, an employer must withhold: 6.2% Social Security tax on the first $142,800 of employee wages, plus 1.45% Medicare tax. In addition, there’s a 0.9% additional Medicare tax on all employee wages in excess of $200,000. Contact us with questions. We can keep you in compliance with payroll laws and regulations.

Small businesses: Cash in on depreciation tax savers The Section 179 deduction provides a tax benefit to businesses, enabling them to claim immediate deductions for qualified assets, instead of depreciating them over time. For 2020, the maximum deduction is $1.04 million, subject to a phaseout rule if more than $2.59 million of eligible property is placed in service during the tax year. Even better, the Sec. 179 deduction isn’t the only avenue for immediate tax write-offs for assets such as machinery and equipment. Under the 100% bonus depreciation tax break, the entire cost of eligible assets placed in service in 2020 can be written off this year. Contact us if you want more details about how your business can make the most of the deductions.

Can investors who manage their own portfolios deduct related expenses? In some cases, investors have related expenses, such as the cost of subscriptions to financial periodicals and clerical expenses. Are they tax deductible? Currently, they’re only deductible if you can show that your investment activities rise to the level of carrying on a trade or business. In that case, you may be considered a trader, rather than an investor. A trader is entitled to deduct investment-related expenses as business expenses. A trader is also entitled to deduct home-office expenses if the home office is used exclusively on a regular basis as the trader’s principal place of business. However, be aware that trader status is difficult to achieve. Contact us with questions.

Avoid these four estate planning deadly sins The seven deadly sins are lust, gluttony, greed, laziness, wrath, envy and pride. Although individuals may be guilty of these from time to time, other types of sins can be fatal to an estate plan if you’re not careful. One transgression to avoid is not properly titling assets. Both inside and outside of trusts, the manner in which you own assets can make a difference. For instance, if you own property as joint tenants with rights of survivorship, the assets will go directly to the other named person, such as your spouse, on your death. Not only is titling assets critical, you should periodically review these designations. Contact us to learn about other estate planning sins to avoid.

Buy-sell agreements: A smart business decision also makes estate planning sense A buy-sell agreement may be used for virtually every type of business entity, including C corporations, S corporations, partnerships and limited liability companies. Typically, it applies to the shares of stock and any business real estate held by respective owners. Although variations exist, the agreement essentially provides for the sale of a business interest to other owners or partners, the business entity itself, or a hybrid. The agreement, which is typically signed by all affected parties, imposes restrictions on the future sale of the business or property. Work with us to design a buy-sell agreement that helps preserve the value of your business for your family and your estate.

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Employers have questions and concerns about deferring employees’ Social Security taxes The IRS has issued guidance to employers about the presidential action to allow employers to defer certain payroll taxes. Notice 2020-65 was issued to implement President Trump’s executive memo signed Aug. 8. The deferral involves wages or compensation paid to an employee beginning Sept. 1, 2020, and ending Dec. 31, 2020, but only if the amount paid for a biweekly pay period is less than $4,000, or an equivalent amount in other pay periods. The guidance postpones the withholding and remittance of the employee share of Social Security tax until the period beginning Jan. 1, 2021, and ending April 30, 2021. Penalties, interest and additions to tax will begin to accrue on May 1, 2021.

Homebuyers: Can you deduct seller-paid points? Despite the pandemic, the National Association of Realtors reports that existing home sales and prices are up nationwide, compared with last year. If you’re a homebuyer, you may wonder if you can deduct mortgage points paid on your behalf by the seller. Yes, you can, subject to some important limitations. For example, the rule allowing a deduction for seller-paid points doesn’t apply to points that are allocated to the part of a mortgage above $750,000 ($375,000 for marrieds filing separately) for tax years 2018 through 2025 (above $1 million for tax years before 2018 and after 2025). It also doesn’t apply to points on a loan used to improve (rather than buy) a home and in other situations.

Back-to-school tax breaks on the books Despite the COVID-19 pandemic, students are going back to school this fall, either remotely, in-person or a combination. In any event, parents may be eligible for certain tax breaks to help defray the cost of education. For example, with the American Opportunity Tax Credit (AOTC), you can save a maximum of $2,500 for each full-time college or grad school student. This applies to qualified expenses including tuition, room and board, books and computer equipment and other supplies. But the credit is phased out for moderate-to-upper income taxpayers. This is only one of the tax breaks available for education. Contact us for assistance in your situation.

Oh, no, your original will is missing! In a world that’s increasingly paperless, you’re likely becoming accustomed to conducting a variety of transactions digitally. But when it comes to your will, only an original, signed document will do. Many people mistakenly believe that a photocopy of a signed will is sufficient. In fact, most states require that a deceased’s original will be filed with the county clerk and, if probate is necessary, presented to the probate court. If your family or executor can’t find your original will, there’s a presumption in most states that you destroyed it with the intent to revoke it. That means the court will generally administer your estate as if you died without a will. Contact us with questions.

5 key points about bonus depreciation You’re probably aware of the 100% bonus depreciation tax break that’s available for a wide variety of qualifying property. There are some important points to be aware of when it comes to this powerful tax-saving tool. For example, bonus depreciation is available for new and most used property. And it’s scheduled to phase out. Under current law, 100% bonus depreciation will generally be phased out in steps. An 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years. Asset depreciation can be a complex area of tax law. Contact us with questions about your situation.

The President’s action to defer payroll taxes: What does it mean for your business? President Trump has signed a Presidential Memorandum to defer the employee portion of Social Security taxes for some people. The action only defers the taxes, which means they must be paid in the future. However, the action directs the U.S. Treasury Secretary to explore ways to eliminate the obligation to pay the taxes deferred. Employers have questions and concerns. For example, will employers have to withhold more taxes from employees’ paychecks in the future to pay the taxes back? Without a law to forgive the taxes, will employers be liable to pay them? What if employers can’t change their software by the Sept. 1 start of the deferral? Is the deferral required? Contact us with questions.

Should your nonprofit accept that new grant? Financial pressures mean that your not-for-profit probably can’t afford to blithely pass up offers of support. Yet you need to be careful about accepting grants blindly. Some grants could result in excessive administrative burdens, such as required reporting or new controls. Another risk is cost inefficiencies. For example, your nonprofit might run up expenses to complete a program that aren’t allowable or reimbursable under the grant. Finally, before accepting a grant, consider other ways your organization might spend unreimbursed costs associated with it. Contact us for help or more information.

The possible tax consequences of PPP loans If your business got a Paycheck Protection Program (PPP) loan taken out due to the COVID-19 crisis, there are potential tax implications. The PPP allows eligible businesses to receive loans that will be forgiven if they spend the proceeds on certain items within a certain period of time. In general, the reduction or cancellation of non-PPP debt results in cancellation of debt (COD) income to the debtor. However, forgiveness of PPP debt is excluded from gross income. The IRS has stated that expenses paid with PPP proceeds can’t be deducted, because the loans are forgiven without having taxable COD income and are tax-exempt income. Deducting the expenses would result in a double tax benefit.

Are scholarships tax-free or taxable? If your child has been awarded a scholarship, congratulations! But be aware that there may be tax implications. Scholarships and fellowships are generally tax-free for students at elementary, middle and high schools, as well as those attending college, graduate school or accredited vocational schools. It doesn’t matter if the scholarship makes a direct payment to the student or reduces tuition. However, certain conditions must be met. A scholarship is tax-free if it’s used to pay for: Tuition and fees required to attend the school, and fees, books, supplies and equipment required of students. Room and board, travel, research and clerical help don’t qualify. Contact us to learn more.

If you’re a partner in a business, you may wonder: Why in some years, were you taxed on more partnership income than was distributed to you from the partnership? The answer lies in the way partnerships and partners are taxed. Unlike regular corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to partners. (However, various rules may prevent a partner from currently using his share of a partnership’s loss to offset other income.) Contact us if you’d like to discuss how you’re taxed as a partner.