NEWS


CARES Act

NET OPERATING LOSS

Summary by Kyle Lucke, EA

NET OPERATING LOSS (NOL) Rule Modifications:

 

  • Allows businesses and individuals to carryback NOLs arising in 2018, 2019, and 2020 to the five previous tax years.

 

  • Period is for tax years beginning after December 31, 2017 and before January 1, 2021. There is no change to the indefinite carryforward of NOLs

 

  • The act amends the limitation that NOLs could be used to offset not more than 80% of taxable income.

 

  • The amendment is applicable to tax years beginning before January 1, 2021.

 

  • The excess business loss limitation only applies to taxable years beginning after December 31, 2020.

 

  • Individuals, estates, and taxable trusts may offset their business losses for taxable years 2018, 2019 and 2020 against available non-business income for those years and any remaining business losses are treated as NOLs. NOLs from taxable years beginning after December 31, 2017 and before January 1, 2021, can be carried back to each of the five preceding taxable years, unless the taxpayer elects to forego the carryback.

There are now three categories of NOLs as displayed below:

NOL Generated in Tax Years

Eligible for Carryback

Eligible for Carryforward

Eligible to Offset % of Taxable Income

 

Beginning on or before December 31, 2017

 

Two Tax Years

 

20 Tax Years

 

100% of taxable income

 

Beginning after December 31, 2017 and beginning before January 1, 2021

 

Five Tax Years

 

Indefinite

 

100% of taxable income (before 2021)

80% of taxable income (after 2020)

 

Beginning on or after January 1, 2021

 

Generally, no carryback

 

Indefinite

 

80% of taxable income


Travel & Entertainment:  2019 Business Tax Deduction Highlights by Kyle Lucke, EA and Ingrid Arocho-Vega, MBA


When it comes to preparing taxes for your small business, writing off meals and entertainment can be somewhat complicated. This is because some items are 100 percent deductible, while others are 50 percent, and a few are nondeductible. The purpose of the event or meal, and who benefits from it must be clear.

100 % deductible expenses 

Some common examples of 100% deductible meals and entertainment expenses are: 

  • Food and drinks provided free of charge for the public 
  • A company-wide holiday party 
  • Food included as taxable compensation to employees and included on the W-2 

50% deductible expenses 

Some common examples of 50% deductible expenses are: 

  • Food for a board meeting 
  • A meal with a client (not lavish) where work is discussed 
  • Employee meals at a conference, above and beyond the ticket price 
  • Dinner provided for employees working late 
  • Treating a few employees to a meal (if it’s at least half of all employees, it would be 100% deductible 
  • Employee meals while traveling (see “Travel expenses” section below for what qualifies as a business trip 

Entertainment tax deduction 

The 2018 Tax Cuts and Jobs Act brought some changes to meals and entertainment deductions. The biggest change is that entertainment expenses are no longer deductible. Below is a summary of the most popular deductions and the changes that have occurred for the past two years.  

Type of Expense 

Old Rules 

New Rules 

Entertaining clients (golf games, concert tickets, etc.) 

50% deductible 

0% deductible 

Business meals with clients 

50% deductible 

50% deductible 

Office snacks and meals 

100% deductible 

50% deductible 

Company-wide party 

100% deductible 

100% deductible 

Meals & entertainment (included in compensation) 

100% deductible 

100% deductible 

Although there are few exceptions, most work-related meal purchases are either 100 or 50 percent deductible. For instance, if you are not present but are paying for your clients’ dinner, it is nondeductible. The same goes when friends and spouses are invited to a client meal, you can write off half of the client bill but the cost of your friends’ meal is nondeductible. 

Travel expenses 

To write off travel expenses, your trip must qualify as a business trip. Here is how you can ensure your travels are tax-deductible: 

  1. Your duties require you to be away from your “tax home”. This is defined as the place where your business is based. 
  2. You need to spend most of your trip doing business. The IRS measures your time away in days. For example, if you go away for a week and spend five days meeting with clients and two days lounging by the pool, that qualifies as a business trip. 
  3. The trip must be an “ordinary and necessary” expense. Both terms are used by the IRS to indicate expenses for your business. An “ordinary” expense is one common and accepted to your industry, a “necessary” expense is one that is appropriate and helpful for your business. 
  4. The trip must be planned. You should plan where you will be each day, when, and who you will spend it with before your trip. 

Keeping accurate records will help you understand cash flow and track deductible expenses. Your trusted tax advisor can help you navigate through the different deduction types and detect some you may have overlooked and maximize savings on your tax return. 


Estate Taxes:  An Updated List of States, Exemption Levels, and Tax Rates by Kyle Lucke, EA and Ingrid Arocho-Vega, MBA

The Federal Estate Tax Exemption increased in January 2019 from $11.18 million to $11.40 million per individual.  Unless Congress intervenes, these tax breaks will continue until 2026. This is great news for estate owners on the Federal tax level, however, some states still assess its own estate tax levels and rates. 

Estate taxes, also known as death taxes, are taxes on the transfer of property after someone’s death. Currently, thirteen states including Washington, DC have some form of estate taxes. Most of these states have a lower threshold than the federal government. These taxes are calculated by adding the total value of the assets of the deceased individual. If the total value of your estate does not exceed the exemption, your heirs should not expect to encounter an estate tax issue. 

Estate Tax vs. Inheritance Tax 

Estate taxes are different from Inheritance Taxes in that the former are paid out of the deceased person’s estate, the latter comes out of the beneficiary’s pocket. Upon someone’s death, one, both or neither could come into play. The states that currently tax people who receive an inheritance are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Inheritance taxes are paid by heirs, rather than by the deceased’s estate, and its tax rates often depend on the heir’s relationship to the deceased.    

Calculating the value of your estate 

To calculate the value of your estate, the IRS will consider the following: real estate, land/mineral rights, savings accounts, cars, jewelry, collectibles, life insurance, investment, stocks, business interests, etc. IRS’s Form 706 has more details on which assets should be included in the calculations, as well as how to find their value and figure the tax. 

Estate Tax Portability 

Another important factor in estate planning is portability on estate tax. This is a tax provision that allows the representative or executor of a deceased spouse to transfer the unused exclusion amount from the deceased spouse to the surviving spouse. As far as states that allow portability on estate tax, the state of Hawaii currently has this tax break, and Maryland will allow it under certain circumstances. 

States with Estate Tax 

The following is a list of the states that assess estate taxes along with their anticipated exemption amounts for 2019: 

STATE 

EXEMPTION LEVEL 

MAXIMUM ESTATE TAX RATES 

CONNECTICUT 

$3.6 MILLION 

12% 

DC 

$11.4 MILLION 

16% 

HAWAII 

$5.49 MILLION 

16% 

ILLINOIS 

$4 MILLION 

16% 

OREGON 

$1 MILLION 

16% 

MAINE 

$11.4 MILLION 

16% 

MARYLAND 

$11.4 MILLION 

16% 

MASSACHUSETTS 

$1 MILLION 

16% 

MINNESOTA 

$2.7 MILLION 

16% 

NEW YORK 

$11.4 MILLION 

16% 

RHODE ISLAND 

$1.56 MILLION 

16% 

VERMONT 

$2.75 MILLION 

16% 

WASHINGTON 

$2.2 MILLION 

20% 

Breakdown of the exemption amounts and estate tax rates by state: 

Connecticut:  This state recently increased its estate tax exemption from $2.6 million in 2018 to $3.6 million in 2019. It is expected that by 2020 it will match the amount of federal estate tax exemption.

DC, Hawaii, Maine, and Maryland: According to the IRS, if your assets exceed the value of the current federal exemption, your heirs will be facing a 16% tax rate on the value of your assets that exceed the current exemption of $11.4 million. DC, Hawaii, and Maine have been determining an estate tax liability the same way as federal estate taxes, and Maryland started to follow this year. The maximum estate tax rate for Maryland is scheduled to remain unchanged at 16%.  

Illinois: The state has no plans to adjust its current exemption for inflation and is not expected to increase its estate tax exemption in the coming years. Illinois’ estate tax exemption remained at $4,000,000 and its highest maximum estate tax is 16%. The state does offer spousal portability for married couples. 

Massachusetts: The estate tax rate varies from 5.6% to 16%, depending on the overall value of the estate. Along with Oregon, the state still offers its residents the lowest estate tax exemptions in the nation, set at $1 million. 

Minnesota: The estate tax exemption will increase from $2.4 million to $2.7 million in 2019. It is scheduled to continue to increase by an additional $300,000 in 2020 to $3 million. Minnesota uses a graduated scale to assess the tax liability; its current estate tax rates range from 12-16%. 

New York: New York’s estate tax exemption has remarkably increased within the last few years. As of 2019, it will match the federal exemption of $11.4 million.  

Oregon: The estate tax exemption is set at only $1 million, with an estate tax rate that starts at 10%, and if your estate is worth more than $9 million, your beneficiaries could see tax rates as high as 16%. 

Rhode Island: Since 2016, the state’s estate tax credit has been adjusted by the percentage increase in the Consumer Price Index for All Urban Consumers (CPI-U).  Its maximum estate tax rate is 16%, and the exemption was increased to $1,561,719 for 2019. The state does not offer portability for married couples, so spouses cannot combine their exemption amounts. 

Vermont: This state’s estate tax exemption has been set at $2.75 million per individual and is not scheduled to change in 2019. Also, their estate taxes are assessed on any property that was given away within two years of the estate owner’s death, to prevent owners from gifting property and assets and avoiding estate taxes. Vermont is another state that does not allow portability for married couples.  

WashingtonThe state has an estate tax exemption of $2.193 million per person (which could change with new legislation in 2025), and an estate tax rate of up to 20%, making it the highest in the nation. Like Rhode Island and Vermont, Washington does not offer spousal portability, which allows a surviving spouse to use their deceased spouse’s unused exemption.  

Planning Estate Taxes 

Proper estate planning can reduce your estate tax liability. At Fiorita Kornhaas and Company, PC we can help you navigate the orderly transfer of assets to your beneficiaries in order to provide security for your surviving spouse and reduce or eliminate the tax due on the transfer of your business and other assets. We can guide you through the complex process of getting your financial affairs in order. 

 


Net Operating Losses (NOLs) after the Tax Cuts and Jobs Act Summary by Kyle Lucke, EA

Net operating losses (NOLs) have traditionally been allowed as a deduction for businesses. The Tax Cuts and Jobs Act brought changes to the carryover and carryback rules, as well as a new limitation on NOL utilization.

Under prior law, NOLs were generally eligible for a two year carryback and twenty year carryforward. NOL carryovers and carrybacks could fully offset taxable income of the taxpayer if not otherwise limited under the Internal Revenue Code.

The amendments to the prior law disallow the carryback of NOLs but allow for the indefinite carryforward of those NOLs. The new rules apply to any NOL arising in a taxable year ending after December 31, 2017.

The Act also provides for a limitation on the amount of NOLs that a corporation may deduct in a single year equal to the lesser of the available NOL carryover or 80% of a taxpayer's pre-NOL deduction taxable income (the "80-percent limitation"). The historic rules appear applicable for taxpayers with prior NOLs.

For example, if calendar year corporation XYZ has $100 million in NOLs generated through December 31, 2017 and incurs a $20 million NOL in the tax year ending December 31, 2018, the applicable NOL rules would require XYZ to track the 2017 and prior NOLs separately from the 2018 NOL, which is subject to the limitation. If in 2019 XYZ generated $100 million in income, it would appear that the entire $100 million of 2017 and prior NOL would be available.


FKC Client Alert:  Big Changes for Sales Tax

August 26, 2019

To all our clients who pay sales tax and generate revenue across state lines:

With the recent U.S. Supreme Court ruling, if you generate revenue outside of your home state, you may be responsible for collecting and paying sales tax to the other state.

Historically, sales tax was only required to be paid in the state in which you had a physical presence.  The physical presence requirement has been eliminated.

If you have over $100,000 in annual revenue or 200 transactions to a state, you need to be aware of each state’s requirements regarding sales tax. 

Please review your sales by state and contact us for the specifics for collecting sales tax for each state. 

Let us help you navigate this change and avoid unnecessary penalties and interest.


IRA Withdrawal Planning Strategies & the Qualified Charitable Distribution (QCD) by Robert Kornhaas, CPA

Congress made the Qualified Charitable Distribution (QCD) permanent in the tax code in the "Protecting Americans from Tax Hikes Act of 2015."

A QCD is a direct transfer from your IRA to a qualified charity (501(c)(3)). The QCD can be counted toward satisfying your required minimum distribution (RMD) for the year. By making a QCD in lieu of receiving a required minimum distribution you will lower your adjusted gross income which may impact certain tax credits and deductions, including lower taxable Social Security and lower Medicare premiums. Fewer taxpayers qualify for itemized deductions because of the changes to the standard deduction, reducing the tax impact of charitable deductions. A QCD is a way for you to benefit from the charitable deduction indirectly.

Traditional, Rollover and Inherited IRAs along with an inactive SEP and inactive Simple Plan are eligible for a QCD. A qualified employer plan that allows employees to make contributions to a "deemed IRA" also qualifies.

You must meet the following requirements for a charitable deduction to qualify:
• You must be 70 1/2 or older to be eligible to make a QCD.
• QCDs are limited to the amount that would otherwise be taxed as ordinary
income. This excludes non-deductible contributions.
• The maximum annual amount that can qualify for a QCD is $100,000. This
applies to the sum of QCDs made to one or more charities in a calendar year.
(If, however, you file taxes jointly, your spouse can also make a QCD from his or her own IRA within the same tax year for up to $100,000.)
• For a QCD to count towards your current year's RMD, the funds must come out of your IRA by your RMD deadline, generally by December 31.

Taxpayers may not take a deduction for any amount paid as a QCD. However, QCDs must satisfy the substantiation requirements. Contributions of $250 or more must be substantiated with a written acknowledgment from the donee organization.

Any amount donated above your RMD does not count toward satisfying a future year's RMD. There is no carryover provision for any amount not used in a given year.

Funds distributed and payable directly to you, the IRA owner, and which you then give to charity do not qualify as a QCD. A check payable to the charity and delivered by the IRA owner is considered a direct trustee payment.


Contribution and Out-of-Pocket Limits for Health Savings Accounts and High-Deductible Health Plans


529 College Savings Plans  by Robert Kornhaas, CPA

A 529 College Savings Plan is a great way to save for the cost of qualified college education costs. Under prior tax law, qualified expenses were limited to the cost of post-secondary schools such as college or universities. 

Since 2017, tax reform has allowed the use of funds to include elementary and secondary expenses up to $10,000 per year. 

One of the benefits of saving for a child or grandchild's future education is that contributions are considered gifts for tax purposes. In 2019 the annual gift exclusion is $15,000 per individual. This means that you and your spouse can gift up to $15,000 each to each of your children or grandchildren per year. 

There is a 5-year election to "front loan" the plan. You may contribute up to $75,000 to a 529 plan in the current year and treat it as if it were paid over 5 years. The 5-year election must be reported on federal form 709 annual gift return. 

Under federal law, there are maximum aggregate limits which vary by plan. The plan balances cannot exceed the expected cost of the beneficiary's qualified education costs. This amount ranges from $235,000 - $529,000 depending on the state. 

If the balance is close to the limit you are precluded from contributing any more to the plan. Future earnings allow for the balances to exceed the limit. 

Although there is no federal income tax deduction for contributions to a 529 plan, certain states allow for income tax credit or deduction. 

The withdrawal of funds from a 529 plan and its accumulated earnings are tax-free as long as the proceeds are used for qualified education expenses. 

Another benefit of 529 plans is that you are allowed to change the beneficiary to another qualifying family member. When deciding on a beneficiary be sure to avoid skipping generations, which could trigger a tax penalty. 


Journal of Accountancy - Quick Guide for Tax Year 2018

Journal of Accountancy's Filing season quick guide for tax year 2018

Journal of Accountancy's Filing season quick guide for tax year 2018

Required Minimum Distributions (RMD) by Robert Kornhaas, CPA

The Internal Revenue Service (IRS) requires taxpayers to withdraw minimum amounts from traditional IRAs & 401(k)s by age 70 ½. If you fail to withdraw at least the minimum requirement you may be subject to penalties.

Many taxpayers determine their withdrawals based on need and start prior to age 70 ½. We have seen many taxpayers continue to work past “normal” retirement age. This allows for the delay in the use of retirement funds.

Your required minimum distribution is calculated by taking your account balance at December 31st of the previous year and dividing it by your life expectancy.

We are providing you with a withdrawal schedule based on age and how much you need to take in order to meet the RMD. And please don’t forget, your RMD is subject to federal income taxes and in some cases state income taxes as well. 

We would be happy to assist you in determining the appropriate income taxes to be withheld.  

Table: Withdrawal percentages under the IRS required minimum distribution (RMD)

Age        Payout rate

70           3.65%

71           3.77%

72           3.91%

73           4.05%

74           4.20%

75           4.37%

76           4.55%

77           4.72%

78           4.93%

79           5.13%

80           5.35%

81           5.59%

82           5.85%

83           6.13%

84           6.45%

85           6.76%

86           7.09%

87           7.46%

88           7.87%

89           8.33%

90           8.77%


Scam Alert for Connecticut LLCs

FYI: Scam Alert! Clients organized as Limited Liability Companies (LLCs) should beware of a form requiring a payment of a $110 annual report fee". No payments should be made to Workplace Compliance Services, please refer to link above.


Tax Alerts
Tax Briefing(s)

On July 4, President Donald Trump signed into law a Paycheck Protection Program (PPP) application extension bill that Congress had quickly passed just before the Independence Day holiday. According to several senators, the measure was "surprisingly" introduced and approved by unanimous consent in the Senate late on June 30. It cleared the House the evening of July 1.


"If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me." — William Shakespeare


The U.S. Supreme Court upheld the Trump Administration’s rule under the Affordable Care Act (P.L. 111-148) that any nongovernment, nonpublicly traded employer can refuse to offer contraceptive coverage for moral or religious reasons, and that publicly traded employers can refuse to do so for religious reasons. Application of this rule had been halted by litigation, but the Administration is now free to apply it.


The IRS has issued guidance to employers on the requirement to report the amount of qualified sick and family leave wages paid to employees under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127). This reporting provides employees who are also self-employed with information necessary for properly claiming qualified sick leave equivalent or qualified family leave equivalent credits under the Families First Act.


The IRS has issued guidance and temporary relief for required minimum distribution (RMD) changes in 2020. Distributions that would have been RMDs under old law are treated as eligible rollover distributions. The 60-day rollover period deadline for any 2020 RMDs already taken has been extended to August 31, 2020. Notice 2007-7, I.R.B. 2007-5, 395 is modified.


The IRS has clarified and provided relief for mid-year amendments reducing safe harbor contributions. An updated safe harbor notice and an election opportunity must be provided even if the change is only for highly compensated employees. Coronavirus (COVID-19) relief applies if a plan amendment is adopted between March 13, 2020, and August 31, 2020. For nonelective contribution plans, the supplemental notice requirement is satisfied if provided no later than August 31, 2020, and the amendment that reduces or suspends contributions is adopted no later than the effective date of the reduction or suspension. Notice 2016-16, I.R.B., 2016-7, 318, is clarified.


The IRS amended final regulations with guidance on the Code Sec. 199A deduction for suspended losses and shareholders of regulated investment companies (RICs). The amendments address the treatment of suspended losses included in qualified business income (QBI), the deduction allowed to a shareholder in a regulated investment company (RIC), and additional rules related to trusts and estates. The IRS had previously issued final and proposed regulations addressing these issues (NPRM REG-134652-18)


The Treasury Department and the IRS have released drafts of proposed partnership forms for tax year 2021 (the 2022 filing season). The proposed forms are intended to provide greater clarity for partners on how to compute their U.S. income tax liability for relevant international tax items, including claiming deductions and credits. The redesigned forms and instructions will also give useful guidance to partnerships on how to provide international tax information to their partners in a standardized format.


The Treasury and IRS have issued final regulations covering the Code Sec. 250 deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). Proposed regulations were issued on March 6, 2019 (NPRM REG-104464-18). The final regulations maintain the basic approach and structure of the proposed regulations and provide guidance on computation of the deduction and the determination of FDII, including in the consolidated return context. Additionally, rules requiring the filing of Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income, are finalized.


The IRS is calling on any taxpayers involved in syndicated conservation easement transactions who receives a settlement offer from the agency to accept it soon. The Service made this request in the wake of the Tax Court’s recent strike down of four additional abusive syndicated conservation easement transactions.