By Steve King, MK CPAs & Advisors
The podcast currently has 6 episodes available.
Episode 5: Louisville CPA Steve King discusses what 2021 could bring in terms of tax and fiscal policies by a new administration. While none of this has been officially introduced, today’s discussion addresses what the Biden-Harris team proposed during its election campaign. Steve explains what the implementation of some or all of the proposals could mean for you and your business.
Tax Rates and Deductions
The top bracket will increase from 37% to 39.6%. During the campaign, candidate Biden has stated that no one making under $400,000 per year will see a tax increase. At the same time, there is discussion of bringing back some limitations regarding certain deductions.
Capital Gains Increase
If you realize an increase on the sale of certain assets, you could be exposed to a capital gains tax. This rate is typically lower than “ordinary” rates. Currently this rate is between 15% and 20%. The Biden proposal would eliminate the capital gains rate, if your income exceeds $1 million. The gain would be subjected to a 39.6% rate. Additionally, there are other taxes for Medicare and state, potentially yielding a combined tax rate of approximately 50%.
Limits to Itemized Deductions
If your income is over $400,000, and you’re itemizing, some of the deductions currently protected under the Pease limitation would be eliminated.
Estate Tax Changes
If your estate is more than $11.58 million, you could be subject to an estate tax (“death tax”). The Biden proposal is to lower that threshold to $3.5 million per spouse. This can be a significant factor for a family business or family farm.
One option for someone who’s concerned about the estate tax may be to consider setting up a Spousal Lifetime Access Trust (SLAT). The trust would own the assets, but it removes them from the estate, thus reducing tax exposure. Your spouse would still have access. There are many options and some may have income considerations. You should always consult your CPA when making this type of decision.
Elimination of the Step-Up in Basis
This is related to the estate tax. Assume you purchase stock and it appreciates in value. Upon your death, the asset becomes part of your Estate. Your Will or other arrangement passes ownership of that stock to an heir(s). Currently, they receive a step-up in the basis. The asset passes to them at the current level, not at the level it was when you originally purchased it. This can have a dramatic impact on any capital gains your heirs may incur, should they decide to sell some or all of the shares.
The Biden proposal is to eliminate the step-up protection. The step up applies to any capital gain asset, not just stock.
One income tax mistake people often make is gifting appreciated stock to your kids, while you are still alive. If you were to do so, they get your basis from a capital gains standpoint. It would be better to allow them to inherit the stock, assuming the step-up in basis rule were still valid.
Child Tax Credits
The Biden proposal is to expand and increase the child tax credit for a period of years and then reduce them to lower levels. Joe Biden also proposed a $5,000 tax credit for care-givers of individuals with specific needs (e.g. a special needs child who is older than 18 years of age).
Elimination of Carried Interest
It’s not a new proposal, but it’s back. This proposal would impact some people who work in private equity and hedge funds. This would impact how those individuals report income vs. capital gains.
Payroll Tax Increase
If your pay is above $400,000, the Biden campaign has proposed increase your payroll tax. It could actually double. This could also hit the employer’s side as well.
Corporate Tax Rate Increase
The Biden campaign is proposing raising the corporate tax rate from the current 21% to 28%. In previous years, the rate was 35%.
QBI Phase Out
To help small businesses (e.g. LLCs, S-Corps, Partnerships, etc.), the Tax Cut and Jobs Act of 2017 created a pass-through deduction (Qualified Business Income). Currently there is an elimination of 20% of net profit for tax purposes. It’s basically a deduction. If your income goes over $400,000, the QBI would phase out under the Biden proposal.
Certain service industries are already subject to phase-outs at lower levels. So far, it hasn’t been determined how this QBI phase out would impact these service industries (including financial service professionals, accountants, physicians and many other job types).
Advice to Business Owners and Individuals
This isn’t the first time we’ve gone into a new year with a lot of unknown variables. While it complicates your planning, there are steps you can take.
QuickBooks is a very good accounting software. Steve King and his business partner, Victor Meyerowitz, are both QuickBooks advisors. Having the ability to generated clear and efficient reports can help you to make better decisions and pivot more quickly. This might be the time for you to implement a good accounting software, if you haven’t already done so.
Thank you for taking the time to listen to this episode. For more information, contact Steve King, Partner at MK CPAs and Advisors, at 502-587-9833. They’re here to help you to Make the Numbers Work.
Episode 4: Louisville CPA Steve King discusses end of the year tax moves you may want to consider. This was a challenging year both for individuals and businesses. Today’s conversation is going to cover issues for both, so let’s jump in.
The PPP program injected a tremendous amount of money into the economy. There are ongoing discussions in Washington DC about additional stimulus, but let’s deal with what we already know (or don’t).
If you used PPP proceeds to pay for specified business expenses, you may not be able to also use those expenses as deductions. This could change, but for now the expenses you covered with the PPP money aren’t deductible.
The $1,200 stimulus checks ($2,400 for married couples) were dispersed, but some people may not have received them. The funds may be accounted for when you file your taxes. Based on your 2020 income, if you received funds but shouldn’t have, it looks as if you will not have to pay back the $1,200.
1099 NEC Form
There’s been a change for 1099 reporting. Businesses would normally check Box 7 for independent contractors or subcontractors. However, there have been multiple deadlines for Box 7 and the other options on the form. There's a new form 1099 NEC which will eliminate the confusion over multiple deadlines. The 1099 NEC will basically take the place of Box 7.
Donations
The standard deduction has been raised to approximately $24,000 (married filing jointly). However, this doesn’t mean they’ve eliminated the charitable giving deduction. If you itemized total is less than $24,000 you’ll simple take the standard deduction in lieu of your itemized deductions. If your itemized deductions exceed $24,000, then use the itemized deductions.
The CARES Act added a $300 deduction, over the $24,000 standard deduction.
Interestingly, in previous years there has been a 60% of your income limit on your charitable deductions. For 2020, that limit has been removed.
Net Operating Losses (NOLs)
If you’ve had a net operating loss at the bottom of your 1040, your taxes would be zero. There’s a new carry-back rule, as part of the CARES Act. You can go back 5 years, an apply those losses to previous years. This may result in a refund from prior years, which could quickly put money back into your operations. It may be more beneficial than carrying the loss forward as future offsets. You’ll use Form 1045.
Qualified Improvements
The 2017 Tax Cuts and Jobs Act (TCJA) had an oversight that’s now been corrected. The way the Act was written treated qualified improvements in a way that required you to spread the depreciation over 39 years. The error meant you couldn’t depreciate it over 15 years, or use the bonus depreciation option of taking it all in 1 year. This glitch has been fixed. You can now amend your previous returns.
NOTE: If you amend previous returns and it creates an NOL (see above), you may be able to recoup dollars you’ve already paid in previous years.
Required Minimum Distributions (RMDs)
At age 72, you’re required to begin taking minimum distributions. This has been suspended for 2020, so you can leave the money in place if you prefer.
Early IRA Distributions
If you make early distribution from your IRA, you would typically be subjected to taxes and a 10% penalty. In a move to help people who need to access these funds, Congress opened the door. You’ll need to make a case that you’ve been adversely impacted by COVID. There are 2 forms of relief. First, you’ll be able to that distribution without incurring the 10% penalty.
The second form of relief is that you have 3 years to pay the taxes you incurred. Related to this is the option to pay back the funds you withdrew within 3 years and you won’t have to pay taxes. It’s important that you have solid documentation of the transactions to avoid problems. The IRS may ask for the backup, so have your paperwork in order and make sure you haven’t missed your deadlines.
Kiddie Tax Rule
In the 2017 Tax Cuts and Jobs Act, unearned income for minors was negatively impacted. It eliminated the Kiddie Tax Rule and taxed that unearned income at Trust rates. This was unfair and has now been addressed. As of now, the option of using the Kiddie Tax Rule (taxing the unearned income at the parent’s rate vs. the Trust rate), is back. This applies mainly to dividends, capital gains and interest, not regular income.
General End of Year Planning
Opportunity Zones were part of the 2017 Tax Cuts and Jobs Act. If you had a capital gain, you were given the option to invest some of that gain into an Opportunity Zone, as defined by the government and receive a tax benefit for doing it. A 180-day window was established during which you were supposed to have invested the gains.
If you sold an asset in 2020, you have to reinvest in an Opportunity Zone within 180 days or by 12/31/20, whichever is later.
Extenders
Congress often passes laws including sunset provisions. These have to be renewed if they are to continue. We refer to these as “extenders.” Let’s discuss a few that are in-play.
Debt Forgiveness on a Principal Home
If you are unable to pay your mortgage and the back forgives a portion of the loan, that portion is considered income. If you do this by the end of 2020, it will not be considered income. Congress may extend it for 2021, but we don’t know if they will
PMI
This is another extender expiring. For 2020, you get to deduct your PMI on a home loan. This may not be a big deal, if you’re not going to itemized.
Tuition and Fees Deduction
This deduction also may expire. If you have a child in college and you don’t have a 529 plan. If you think you aren’t going to qualify for the credit, you may want to make a tuition payment by 12/31/20 to enable you to take the deduction.
Energy Credits
There’s a small, lifetime $500 credit for installing Energy Star appliances. If you haven’t already taken the credit, you may be able to purchase a qualifying appliance by 12/31/20 to take advantage of the credit.
Final Thoughts for 2020
As the year comes to the end, you may want to defer income and speed up deductions, where it makes sense. Again, do it where it makes sense. The big unknown comes back to the PPP. It’s difficult to know your income because of the issue related to the other expenses covered by the PPP proceeds.
It may also be time to begin harvesting to reduce your net capital gains on investments. The stock market has recovered. If you incurred gains in 2020, you might consider trimming your portfolio by tax-loss harvesting. This can offset some of your capital gains. Note: You need to be mindful of the Wash-Sale Rule.
The Wash-Sale Rule basically prohibits you from selling a stock and then buying it back within 30 days and still take the loss for tax purposes. You’ll need to buy it back on the 31st day or later.
Thank you for taking the time to listen to this episode. For more information, contact Steve King, Partner at MK CPAs and Advisors, at 502-587-9833. They’re here to help you to Make the Numbers Work.
Episode 3: Louisville CPA Steve King addresses the need for a mid-year business assessment, as we begin to come out of the COVID-19 lockdown and look toward the second half of 2020. Steve is a partner in MK CPAs and Advisors.
This year, a mid-year review is critically important for your business. If you’ve made it this far, there’s a good chance the worst if behind you. The adjustments you made worked. Now, let’s discuss how to maximize your upcoming performance.
You may have changes in 3 primary areas: Internal (including staff), Vendor or Supply Chain and your Market. There are a lot of unknowns you need to be analyzing.
There are going to be opportunities to add staff. You might have a stronger negotiating position with your vendors. Some companies may not have survived, but have assets they’d like to liquidate. You may be able to make some capital purchases at really attractive levels.
Core Areas to Review
Cash-on-hand and your accounts receivables (A/R) balance. If your A/R balance is higher, you should reach out to your clients to see if alternate payment plans can be negotiated. Some cash flow is always better than none.
This is a good time to begin reviewing expenses to see if additional reductions can be made. Assess every line on your P&L statement.
Also, review your banking relationships. Do you have access to additional financing to make important purchases or to take advantages of reduced pricing for specific items.
If you received funds via PPP or EIDL, remember that this was a 1 time infusion. It won’t repeat. How are your revenues looking in the upcoming months? Do you have the cash you’ll need to cover current expense and move forward?
Did the lockdown force you to develop new products or services (i.e. distilleries and hand sanitizer)? Develop a plan for growing these new lines. Consider a SWOT analysis to look for new opportunities for your business to secure incremental growth and expansion.
Emerging from Survival Mode
Now is the time to begin working on your business, instead of in your business. As we emerge, there are still threats, but you need to reorient your thinking and your balance sheet.
Engage in local business organizations. Make sure you and your team is reading information from various sources. This allows you to synthesize the information and use it to your competitive advantage.
Be Visible in the Market
Make sure your sales team and managers are reaching out to key customers to see how they are doing, if their needs have changed and are there new opportunities for you to provide more or additional products/services.
Many of your competitors may have pulled back on their marketing/advertising expenditures. Now is the time to amp up your exposure. There’s less competitive noise, so you may be able to break through even faster. There are always clients looking for your particular capabilities.
Other Areas to Assess
Are you meeting your objectives and key performance metrics? How are same store performance indicators looking? Have unexpected expenses increased pressure on your operating funds?
Challenge your traditional baseline assumptions about important areas of your business. You may find additional opportunities. Do your comp plans need to be updated to address the current environment?
How is your messaging to your team? As we emerge, the focus of your communications needs to adapt to a forward-looking objective. Begin looking 3 months, 6 months and toward 2021. Your internal discussions need to reinforce your updated perspective.
Use this crisis to make your business better. You’ve probably learned a lot over the previous several months. Put that knowledge to good use as you begin to move forward.
For more information, contact Steve King, Partner at MK CPAs and Advisors, at 502-587-9833. They’re here to help you to Make the Numbers Work.
Louisville CPA Steve King discusses many of the ways his firm works with individuals and small businesses. MK CPAs & Advisors services clients across the company, including California, New York and Florida. The firm offers much more than the standard accounting services.
The focus is always on adding value for MK clients. When it comes to bookkeeping and payroll, those activities can often either be trained (so the client handles it internally) or outsourced. Steve and the team are happy to provided vetted referrals. One of the goals of MK CPAs & Advisors is to work with business owners on the high-level issues impacting his/her company.
QuickBooks Integration
QuickBooks is an accounting software program. Steve and his partner Victor Meyerowitz (a QuickBooks Pro Advisor) can help to set up the software and train clients to use it effectively. This information enables the business owners to manage key metrics and run important financial reports. The more accurate the financial records are, the easier it is for managers to make the proper business decisions.
Advisory Services
Business and tax consulting is an integral part of the MK services. This includes a range of services from cash flow management, acquisitions to helping client manage the various stages of the business lifecycle (e.g. Pre-Start-up, Post Launch & Growth, Exit Strategy and Crisis Mitigation).
Pre-Start-Up Services
If you’re considering starting a business, there are many considerations. Estimating growth and expenses is a critical activity. Understanding if you’re adequately capitalized is something on which MK CPAs can offer advice and counseling. The firm was also once a start-up, so the empathy the team brings to the situation is a much appreciated by its clients.
Selecting the proper entity type for your new company is important. There are tax implications, financial implications and even legal implications, depending on the type of entity you register. MK CPAs can help you to better understand how you should approach the business formation (i.e. Sole Proprietor, LLC, PLLC, S-Corp, C-Corp, etc.).
Tax planning, even before launch, is a critical consideration. New businesses have start-up costs, many acquire equipment and inventory, as well as other necessary items. How these transactions are classified and booked is extremely important, especially in the early years.
Post Launch and Growth
The types of advisory services may change as the business begins to grow. Financial analysis and cash flow analysis are key ways to make sure you’re performing to plan.
Tax consulting is a process business owners and managers should engage in well before the end of each year. Doing so will provide ample time to ensure transactions are made strategically as well as tactically. Once the year ends, most of the ability to take advantage of certain tax rules are done. This is particularly important with purchases of capital equipment and depreciation or other major financial transactions.
Exit Strategy
There are a variety of ways an owner may evaluate an exit strategy. It may be a sale of business, a merger or even retiring and simply closing the doors. Ensuring the small business has properly planned for an exit strategy requires specific steps. The objectives will change in terms of how the numbers look to a prospective buyer. MK CPAs can help with due diligence (either for the seller or buyer).
At the same time, if the owner wants to retire, how cash is properly taken out of the business and assets liquidated, is a something that takes time to properly plan and execute to minimize the tax consequences.
Audit Representation
From time to time businesses or individuals are subjected to an IRS audit. MK CPAs will help the client work through the audit. They can provide the documentation the auditor needs to complete the process.
Crisis Mitigation
In times of crisis, ensuring business owners and managers have a solid understanding of financial matters may make the difference in its survival or failure. MK CPAs & Advisors is ready to step in and provide both advice and perspective to help the client make mission-critical decisions.
Steve recently launched a video series called the COVID-19 Small Business Survival Update. This easy to understand series of brief videos can be found on YouTube (MK CPAs), the firm’s Facebook page (MK CPAsLouisville) and on the Meyerowitz & King LinkedIn page.
Especially in the online environment, personal and business relationships are vital. This is especially true during crisis events. Steve and his team are well connected and can recommend additional resources, if the need is beyond the scope of their services. They’re always happy to help. At the end of the day, the want to ensure you understand how to make the numbers work. If you’d like to contact Steve King call the MK CPAs & Advisors office at (502) 587-9833.
Episode 1: CPA Steve King, a partner with MK CPAs & Advisors, launches his new podcast. Today, he’ll focus on helping small business owners to understand the various COVID-19 programs, what they’re specifically for and how they work.
Guidance is the interpretation of tax laws and other programs. Congress has passed funding laws to help small businesses during the COVID-19 crisis. Unfortunately, from an accounting standpoint, the US Treasury still hasn’t thoroughly provided its guidance on the specific rules related to what Congress passed and how business owners need to properly handle any funds received. This is especially important considering any potential forgiveness. Improperly handling them can result in penalties and unanticipated consequences.
The Payroll Protection Program has an 8-week limit. The business must disperse the funds within this window. If the staff hasn’t fully returned, and the business hasn’t fully restarted, the business may not be able to use the funds within the guidelines.
Video Resources from MK CPAs & Advisors
Steve launched a video series called the COVID-19 Business Survival Update, available on his firm’s Facebook page (MKCPAsLouisville), YouTube channel (MK CPAs) and on LinkedIn (Meyerowitz & King). Today’s information will bring all of those programs together and provide additional background.
SBA Loan Funding – Current Loans
The Small Business Administration has ongoing loan programs available. If you have a current loan, it’s possible to get the SBA to pay 6 months of the payments. The interest will continue to accrue. You may have already received information about this. If not, contact your program lender and/or the SBA.
SBA Employee Retention Tax Credit (ERTC)
Employers can get a tax credit of up to 50% of wages if your business is shut down or partially shut down. Revenues also must be down 50% of same period last year. This second limitation may make it difficult for some companies to meet.
Payroll Protection Program (PPP)
This is calculated as 2.5 times your average monthly payroll. It’s forgivable, but has specific requirements for how the funds are used (i.e. payroll, rent and utilities). The funds must be spent in 8 weeks. The interest rate is 1% on this loan. You apply directly through your bank for this program. The payback period is 2 years.
SBA Economic Injury Disaster Loan (EIDL)
There are 2 parts to the EIDL. The loan and a potential grant. This is an established program and you apply for it directly through the SBA. It’s a 3.75% loan. The EIDL may qualify for the 6-month payment by the SBA. It will take longer to get the funds than the PPP. The EIDL loan proceeds can be used for whatever the business needs. The funds are restricted, as they are with the PPP.
SBA EIDL Grant
This is part of the Economic Injury Disaster Loan. The first $10,000 can be treated as a grant, depending upon your loan qualifications. The objective is to provide a quicker, interim source of funds. The grant is forgivable.
Payroll Tax Deferment Option
Businesses are currently able to defer the company-matching portion of the payroll tax (social security and Medicare) for up to 2 years. One half is due at the end of 2021 and the other half is due at the end of 2020. You should speak with your CPA to fully understand the process and requirements. This is designed to assist with cash flow for the business, but the risks are significant and will required planning to ensure you’re able to make the future payments.
Due Diligence
As a business owner, you need to evaluate each of these options to determine what’s best for your specific situation. Each of the above sources of funding and cash flow during COVID-19 are designed to help, but there’s not one particular program designed to help everyone.
The goal is to make sure you get through this economic crisis. Many small businesses are in survival mode. Steve King and the team at MK CPAs & Advisors is here to help by producing podcast episodes, concise videos and obviously, they are also available to speak with you, directly, about your company’s specific situation.
We’ll launch the next episode in 2 weeks. Please consider following the firm on Facebook and/or LinkedIn. Until then, remember that MK CPAs is here to help you to Make the Numbers Work.
The team at MK CPAs & Advisors is launching the Make the Numbers Work podcast. CPA Steve King will talk about topics related to the firm's CPA and Advisory services. He'll break down important issues for small business owners and individuals. You'll listen to Steve as he discusses important tactics and strategies you can use to maximize profitability.
Join us for Make the Numbers Work. A new podcast from your trusted partners at MK CPAs & Advisors. Coming soon!
The podcast currently has 6 episodes available.