Business Tax Provisions: The Year in Review (Source: Newsletter, Dec. 2020)
Here's what business owners need to know about tax changes for 2020.
Standard Mileage Rates
The standard mileage rate in 2020 is 57.5 cents per business mile driven.
Health Care Tax Credit for Small Businesses
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $50,000 (adjusted annually for inflation). This amount is $55,200 for 2020 returns.
In 2020 (as in 2014-2018), the tax credit is worth up to 50 percent of your contribution toward employees' premium costs (up to 35 percent for tax-exempt employers.
Section 179 Expensing and Depreciation
Under the Tax Cuts and Jobs Act of 2017, the Section 179 expense deduction increases to a maximum deduction of $1.04 million of the first $2.59 million of qualifying equipment placed in service during the current tax year. The deduction was indexed to inflation for tax years after 2018 and enhanced to include improvements to nonresidential qualified real property such as roofs, fire protection, and alarm systems and security systems, and heating, ventilation, and air-conditioning systems.
Businesses are allowed to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. The standard business depreciation amount is 27 cents per mile (up from 26 cents per mile in 2019).
Please call if you have any questions about Section 179 expensing and the bonus depreciation.
Work Opportunity Tax Credit (WOTC)
Extended through 2020 under the Further Consolidated Appropriations Act, 2020, the Work Opportunity Tax Credit can be used by employers who hire long-term unemployed individuals (unemployed for 27 weeks or more). It is generally equal to 40 percent of the first $6,000 of wages paid to a new hire. Please call if you have any questions about the Work Opportunity Tax Credit.
SIMPLE IRA Plan Contributions
Contribution limits for SIMPLE IRA plans increased to $13,500 for persons under age 50 and $16,500 for persons age 50 or older in 2020. The maximum compensation used to determine contributions is $285,000.
Please contact the office if you would like more information about these and other tax deductions and credits to which you are entitled.
Small Business: Deductions for Charitable Giving
Tax breaks for charitable giving aren't limited to individuals, your small business can benefit as well. If you own a small to medium-size business and are committed to giving back to the community through charitable giving, here's what you should know.
1. Verify that the Organization is a Qualified Charity
Once you've identified a charity, you'll need to make sure it is a qualified charitable organization under the IRS. Qualified organizations must meet specific requirements as well as IRS criteria and are often referred to as 501(c)(3) organizations. Note that not all tax-exempt organizations are 501(c)(3) status, however.
There are two ways to verify whether a charity is qualified:
Use the IRS online search tool; or
Ask the charity to send you a copy of their IRS determination letter confirming their exempt status.
2. Make Sure the Deduction is Eligible
Not all deductions are created equal. In order to take the deduction on a tax return, you need to make sure it qualifies. Charitable giving includes the following: cash donations, sponsorship of local charity events, in-kind contributions such as property such as inventory or equipment.
Lobbying. A 501(c)(3) organization may engage in some lobbying, but too much lobbying activity risks the loss of its tax-exempt status. As such, you cannot claim a charitable deduction (or business expense) for amounts paid to an organization if both of the following apply:
The organization conducts lobbying activities on matters of direct financial interest to your business.
A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses.
Further, if a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expenses, you cannot deduct that part of the dues.
3. Understand the Limitations
Sole proprietors, partners in a partnership, or shareholders in an S-corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). Corporations (other than S-corporations) can deduct charitable contributions on their income tax returns, subject to limitations.
Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts and are directly related to your business. Likewise, if the payments are charitable contributions or gifts, you cannot deduct them as business expenses.
Sole Proprietorships. As a sole proprietor (or single-member LLC), you file your business taxes using Schedule C of individual tax form 1040. Your business does not make charitable contributions separately. Charitable contributions are deducted using Schedule A, and you must itemize in order to take the deductions.
Partnerships. Partnerships do not pay income taxes. Rather, the income and expenses (including deductions for charitable contributions) are passed on to the partners on each partner's individual Schedule K-1. If the partnership makes a charitable contribution, then each partner takes a percentage share of the deduction on his or her personal tax return. For example, if the partnership has four equal partners and donates a total of $2,000 to a qualified charitable organization in 2020, each partner can claim a $500 charitable deduction on their 2020 tax return.
A donation of cash or property reduces the value of the partnership. For example, if a partnership donates office equipment to a qualified charity, the office equipment is no longer owned by the partnership, and the total value of the partnership is reduced. Therefore, each partner's share of the total value of the partnership is reduced accordingly.
S-Corporations. S-Corporations are similar to Partnerships, with each shareholder receiving a Schedule K-1 showing the amount of charitable contribution.
C-Corporations. Unlike sole proprietors, partnerships, and S-corporations, C-Corporations are separate entities from their owners. As such, a corporation can make charitable contributions and take deductions for those contributions.
4. Categorize Donations
Each category of donation has its own criteria with regard to whether it's deductible and to what extent. For example, mileage and travel expenses related to services performed for the charitable organization are deductible but the time spent on volunteering your services is not.
Here's another example: As a board member, your duties may include hosting fundraising events. While the time you spend as a board member is not deductible, expenses related to hosting the fundraiser such as stationery for invitations and telephone costs related to the event are deductible.
Generally, you can deduct up to 50 percent of adjusted gross income. Non-cash donations of more than $500 require completion of Form 8283, which is attached to your tax return. In addition, contributions are only deductible in the tax year in which they're made.
5. Keep Good Records
The types of records you must keep vary according to the type of donation (cash, non-cash, out of pocket expenses when donating your services) and the importance of keeping good records cannot be overstated.
Ask for - and make sure you receive - a letter from any organizations stating that said organization received a contribution from your business. You should also keep canceled checks, bank and credit card statements, and payroll deduction records as proof or your donation. Furthermore, the IRS requires proof of payment and an acknowledgment letter for donations of $250 or more.
Questions about charitable donations? Help is just a phone call away.
Individual Taxpayers: Recap for 2020
(Source: Newsletter, Dec. 2020)
As we close out the year and get ready for tax season, here's what individuals and families need to know about tax provisions for 2020.
Personal exemptions are eliminated for tax years 2018 through 2025.
The standard deduction for married couples filing a joint return in 2020 is $24,800. For singles and married individuals filing separately, it is $12,400, and for heads of household, the deduction is $18,650.
The additional standard deduction for blind people and senior citizens in 2020 is $1,300 for married individuals and $1,650 for singles and heads of household.
Income Tax Rates
In 2020 the top tax rate of 37 percent affects individuals whose income exceeds $523,600 ($628,300 for married taxpayers filing a joint return). Marginal tax rates for 2020 are as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. As a reminder, while the tax rate structure remained similar to prior years under tax reform (i.e., with seven tax brackets), the tax-bracket thresholds increased significantly for each filing status.
Estate and Gift Taxes
In 2020 there is an exemption of $11.58 million per individual for estate, gift, and generation-skipping taxes, with a top tax rate of 40 percent. The annual exclusion for gifts is $15,000.
Alternative Minimum Tax (AMT)
For 2020, exemption amounts increased to $72,900 for single and head of household filers, $113,400 for married people filing jointly and for qualifying widows or widowers, and $56,700 for married taxpayers filing separately.
Pease and PEP (Personal Exemption Phaseout)
Both Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) have been eliminated under TCJA.
Flexible Spending Account (FSA)
A Flexible Spending Account (FSA) is limited to $2,750 per year in 2020 (up from $2,700 in 2019) and applies only to salary reduction contributions under a health FSA. The term "taxable year" as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.
Long-Term Capital Gains
In 2020 tax rates on capital gains and dividends remain the same as 2019 rates (0%, 15%, and a top rate of 20%); however, taxpayers should be reminded that threshold amounts don't correspond to the tax bracket rate structure as they have in the past. For example, taxpayers whose income is below $40,000 for single filers and $80,000 for married filing jointly pay 0% capital gains tax. For individuals whose income is at or above $441,450 ($496,600 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.
Miscellaneous deductions that exceed 2 percent of AGI (adjusted gross income) are eliminated for tax years 2018 through 2025. As such, you can no longer deduct on Schedule A expenses related to tax preparation, moving (except for members of the Armed Forces on active duty who move because of a military order), job hunting, or unreimbursed employee expenses such as tools, supplies, required uniforms, travel, and mileage.
Business owners are not affected and can still deduct business-related expenses on Schedule C.
Individuals - Tax Credits (Source: Newsletter, Dec. 2020)
In 2020 a nonrefundable (i.e., only those with tax liability will benefit) credit of up to $14,300 is available for qualified adoption expenses for each eligible child.
Child and Dependent Care Credit
The Child and Dependent Care Tax Credit was permanently extended for taxable years starting in 2013 and remained under tax reform. As such, if you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher-income earners, the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit and Credit for Other Dependents
For tax years 2018 through 2025, the Child Tax Credit increases to $2,000 per child. The refundable portion of the credit increases from $1,000 to $1,400 - 15 percent of earned income above $2,500, up to a maximum of $1,400 - so that even if taxpayers do not owe any tax, they can still claim the credit. Please note, however, that the refundable portion of the credit (also known as the additional child tax credit) applies higher-income when the taxpayer isn't able to fully use the $2,000 nonrefundable credit to offset their tax liability.
Under TCJA, a new tax credit - Credit for Other Dependents - is also available for dependents who do not qualify for the Child Tax Credit. The $500 credit is nonrefundable and covers children older than age 17 as well as parents or other qualifying relatives supported by a taxpayer.
Earned Income Tax Credit (EITC)
For tax year 2020, the maximum earned income tax credit (EITC) for low and moderate-income workers and working families increased to $6,660 (up from $6,557 in 2019). The maximum income limit for the EITC increased to $56,844 (up from $55,952 in 2019) for married filing jointly. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Individuals - Education Expenses (Source: Newsletter, Dec. 2020)
Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell savings accounts in 2020. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.
American Opportunity Tax Credit
For 2020, the maximum American Opportunity Tax Credit that can be used to offset certain higher education expenses is $2,500 per student, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.
Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2020, the modified adjusted gross income (MAGI) threshold at which the Lifetime Learning Credit begins to phase out is $114,000 for joint filers and $57,000 for singles and heads of household. The credit cannot be claimed if your MAGI is $67,000 or more ($134,000 for joint returns)
Employer-Provided Educational Assistance
As an employee in 2020, you can exclude up to $5,250 of qualifying postsecondary and graduate education expenses that are reimbursed by your employer.
Student Loan Interest
In 2020, you can deduct up to $2,500 in student-loan interest as long as your modified adjusted gross income is less than $65,000 (single) or $135,000 (married filing jointly). The deduction is phased out at higher income levels.
Individuals - Retirement (Source: Newsletter, Dec. 2020)
For 2020, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is $19,500 ($19,000 in 2019). For persons age 50 or older in 2020, the limit is $26,000 ($6,500 catch-up contribution).
Retirement Savings Contributions Credit (Saver's Credit)
In 2020, the adjusted gross income limit for the saver's credit for low and moderate-income workers is $65,000 for married couples filing jointly, $48,750 for heads of household, and $32,500 for married individuals filing separately and for singles. The maximum credit amount is $2,000 ($4,000 if married filing jointly). As a reminder, starting in 2018, the Saver's Credit can be taken for your contributions to an ABLE (Achieving a Better Life Experience) account if you're the designated beneficiary. However, keep in mind that your eligible contributions may be reduced by any recent distributions you received from your ABLE account.
If you have any questions about these and other tax provisions that could affect your tax situation, don't hesitate to call.