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On November 18, 2020, the Internal Revenue Service issued Revenue Ruling 2020-27 which provides needed clarity on a taxpayers’ ability to deduct eligible expenses for Paycheck Protection Program (PPP) loan forgiveness.

The Ruling notes that a taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.

What if forgiveness is denied, in whole or part, or not requested?

In conjunction with the Ruling, the IRS issued Revenue Procedure 2020-51 to outline the steps for when:

1.) The eligible expenses are paid or incurred during the taxpayer’s 2020 taxable year,

2.) The taxpayer receives a covered loan guaranteed under the PPP, which at the end of the taxpayer’s 2020 taxable year the taxpayer expects to be forgiven in a subsequent taxable year, and

3.) In a subsequent taxable year, the taxpayer’s request for forgiveness of the covered loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the covered loan.

The Rev Procedure provides for two safe harbors for taxpayers in the event forgiveness is denied, in whole or in part, or otherwise not requested that would allow for the deduction of expenses in either the 2020 or a subsequent tax year. 

Questions we still have

While the Ruling provides information on the deductibility of expenses and the tactical approach for borrowers whose forgiveness is denied or not requested, additional clarification is still needed. This guidance does not address the order in which the eligible expenses (payroll, rent, utilities and mortgage interest) lose the ability to be deducted.

Further, the guidance does not address other matters that could have significant tax implications including, but not limited to, the impact on the following:

Need Assistance in Choosing the Right PPP Loan Forgiveness Application?

We have put together a flowchart that can help: How to Select the Right Loan Forgiveness Application

This year has been unique and beyond comparison in many ways, and tax planning is just one of the implications of current events. Both individual and business taxes have the potential to be significantly impacted by the various legislation that has passed like the FFCRA and the CARES Act, the loan programs made available like the PPP and the EIDL, and the unemployment/stimulus programs that touched many Americans 

It’s imperative that we take into account all these potential factors when implementing your tax plan for 2020. In this article, we’ll take a look at the main areas to consider, both common and pandemic-related, when planning for 2020 year-end taxes.  

Common and pandemic-related tax planning items for businesses to consider in 2020 

 Common and pandemic-related tax planning items for individuals to consider in 2020 

As mentioned in our previous article – Tax planning considerations: Election results, sunset provisions – changes to the tax code in the next two to four years may still be imminent depending on the finalizations of certain Senate elections. If those changes become a likely scenario, some adjustments may still be possible in this year’s tax plan to account for those potential tax code changes. Work with your CPA to have a plan for all scenarios.  

According to news outlets, as of this writing, Joe Biden will be the president-elect of the U.S. following the Electoral College vote on Dec. 14. Vote counting is still ongoing and election results have not yet been certified, but this news may have some taxpayers wondering what changes, if any, they should make in their tax planning to close out an eventful tax year.   

The likelihood of a major tax overhaul in the next two years is up in the air as the Senate is not yet decided and may not be until two Georgia run-off elections in January 2021. If Republicans retain the majorityit’s likely there won’t be many changes, but that doesn’t completely lock out any potential adjustments that could come in the next two to four years. Items of agreement on tax policy exist between both parties such as increasing the child tax credit. However, with provisions of the Tax Cuts and Jobs Act (TCJA) set to sunset in 2026, updates to the tax code will be on the horizon by the next election.  

Additionally, if the Republican Party indeed holds onto a 51-vote majority in the Senate, it is not unreasonable to imagine a legislative vote in which 2 republican senators vote against the majority of the Republican party to push a tax legislation bill through to the President.  Accordingly, between the possibility of a loss of Republican control in 2 to 4 years, the possibility of 2 Republicans voting for a tax reform bill, and the 2026 TCJA sunset, it is highly unlikely tax laws will become more favorable to taxpayers in the in future; thus, we believe there is an urgency to plan carefully and diligently in the last weeks of 2020. 

In this article, we’ll examine the key points of the President-elect‘s tax plan, the sunsetting TCJA provisions, and what to keep in mind as you execute your tax plan to close out the year.  

High-level overview of the President-elect Biden’s tax plan 

President-elect Biden has laid out several of his tax plans the past year on the campaign trail. Here’s what we know based on what he’s shared. 

For individuals: 

For businesses: 

TCJA provisions to sunset in 2026 

In addition to the President-elect’s plans, the TCJA is still in the spotlight. The TCJA was the most significant tax overhaul in decades when it was passed in 2017. However, as is the nature when dealing with budgetary constraints, many of the provisions of the TJCA are scheduled to sunset by 2026. Below we’ve highlighted a few of the anticipated changes. 

For businesses, approximately $4 trillion is expected in new taxes over the next 10 years as provisions begin to sunset including changes to: 

 For individuals, changes are coming for: 

Considerations for 2020 year-end tax planning 

It’s important to note that the above considerations are not an exhaustive list of tax items to review as we close 2020. Work with us to have a proactive plan in place that takes into account various potential scenarios that could manifest in the coming weeks and monthsIn our follow-up article – 2020 tax planning considerations for businesses, individuals – we’ve laid out some of the key provisions to take into account as you work with us on your endofyear tax planning.

With all of the curveballs 2020 has thrown at the nation, the economy, and businesses, there’s never been a better time to get an early jump on year-end planning for your business. While all the usual year-end tasks are still on the docket, you’ll want to consider implications related to the Paycheck Protection Program (PPP), any disaster loan assistance you received, and changes made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act 

We’ve put together a checklist of what you need to do now to prepare for a great year-end that includes annual tasks as well as 2020-specific tasks. Keep reading for assistance getting your financials organized, reviewing your tax strategy, and preparing for next year. 

Get organized 

1. Bring order to your books – Now is the time to collect, organize, and file all of your receipts for the year if you haven’t been staying on top of it. Get with your CPA to ensure everything is clean and in order before the end of the year to help avoid surprises come tax time.  

2. Examine your finances – This includes having your balance sheet, income statement, and cash-flow statements prepared and up to date. Reviewing this information allows you to see where your money went for the year so you can properly prepare for next year. 

3. Work with your CPA on your PPP loan forgiveness application – We are currently awaiting further guidance on the PPP’s impact to taxes, but it’s important to work with your CPA on your PPP loan forgiveness application. Knowing where your PPP loan lies can help determine how to spread out your cash flow for the remainder of the year. 

4. Organize all disaster loan assistance documentation – This includes your Economic Injury Disaster Loan (EIDL) documentation if you received an advance grantEIDL advances must be added to your taxable income (unless different guidance is released), but you’ll be able to deduct any expenses paid with this grant  

Review your tax strategy 

5. Review your taxes with your CPA – Do not put off your tax planning meeting with your CPA. Especially after the year you’ve had and any potential federal state aid your business received, your tax plan needs a review. Getting a jump on this earlywell before the new year, can help you plan for what’s to come on Tax Day. It’s even more imperative to plan early for any tax obligations you may have at tax time as it’s likely the COVID-19 pandemic will continue to create a volatile environment for many industries’ revenue projections.  

6. Execute on year-end tax strategy adjustments such as: 

7. Prepare your tax documents – Once you’ve met with your CPA, it’s time to line up all the info you need to prepare your final tax documents or have your CPA take care of it. Be sure not to put this off to the last minute as it will be a complicated year for everyone. 

8. Automate your tax function – Instead of spending valuable time and energy on manual tasks and repetitive processes this year, consider investing in data analytics and automation tools to optimize and streamline your in-house accounting and tax functions. There’s never been a better time to invest in technology that will help you become more efficient and accurate. 

Plan for the future  

9. Evaluate your goals – There’s no doubt that 2020 likely threw a wrench in many of your goals for the year. However, you should still review the goals you set last year and see if you’ve met or made progress on any of them. This will help with 2021 business planning. 

10. Set goals for the new year – No one knows how 2021 will play out, and it’s unlikely the market or business will return to normal in the first part of the year. Take into consideration the challenges you’ve faced so far in the pandemic as you plan for 2021. Work with your trusted advisor to determine several back-up plans for what if scenarios in case of any state or national lockdowns.  

In a year like no other, it’s crucial to prepare like no other so you’re not met with any surprises or devastating fees. Contact us today to set up your tax and business planning appointment.  

The Tax Cuts & Jobs Act (TCJA) of 2017 made many significant changes for business tax deductions including the disallowing of the business deductions for most entertainment expenses. After a period of comments and proposed regulations, the IRS has released long-awaited final regulations for the treatment of meals and entertainment deductions, and businesses should apprise themselves of these changes.  

The main change with the TCJA was the removal of certain entertainment expenses as tax deductible for a business. Prior to the TCJA, entertainment expenses were eligible for an up to 50% deduction in expenses directly related to the active conduct of a trade or business or for expenses incurred before or after a bona fide business discussion. The TCJA eliminated this deduction for activities considered to be entertainment, amusement, or recreation as well as removed the reference to entertainment as part of the 50% limitation of deductibility for food or beverages.  

The final rules clarify that taxpayers may continue to deduct 50% of business meals if the taxpayer or an employee of the taxpayer is present, as long as the meal is not considered extravagant. Meals for current or potential business customers, clients, consultants, or similar business contacts are eligible. Food and beverages provided during entertainment events must be purchased separately from the event to qualify, otherwise they are considered part of the entertainment.   

Note that the TCJA did not repeal the exception for certain recreational activities that benefit employees, reimbursed expenses, entertainment treated as employee compensation, or includable gross income of a nonemployee as compensation or as a prize or award, which must be properly reported by the taxpayer. 

Separating meals and entertainment and aligning them in the right buckets for deduction can be tricky. Contact us for assistance in determining what qualifies.   

If a relative needs financial help, offering an intrafamily loan might seem like a good idea because they allow you to take advantage of low interest rates for wealth transfer purposes. But if not properly executed, such loans can carry negative tax consequences — such as unexpected taxable income, gift tax or both. Here are five tips to help avoid any unwelcome tax surprises:

1. Create a paper trail. In general, to avoid undesirable tax consequences, you need to be able to show that the loan was bona fide. To do so, document evidence of:

Be sure to make your intentions clear — and help avoid loan-related misunderstandings — by also documenting the loan payments received.

2. Demonstrate an intention to collect. Even if you think you may eventually forgive the loan, ensure the borrower makes at least a few payments. By having some repayment history, you’ll make it harder for the IRS to argue that the loan was really an outright gift. And if a would-be borrower has no realistic chance of repaying a loan, don’t make it. If you’re audited, the IRS is sure to treat such a loan as a gift.

3. Charge interest if the loan exceeds $10,000. If you lend more than $10,000 to a relative, charge at least the applicable federal interest rate (AFR). Be aware that interest on the loan will be taxable income to you. If no or below-AFR interest is charged, taxable interest is calculated under the complicated below-market-rate loan rules. In addition, all of the forgone interest over the term of the loan may have to be treated as a gift in the year the loan is made. This will increase your chances of having to use some of your lifetime exemption.

4. Use the annual gift tax exclusion. If you want to, say, help your daughter buy a house but don’t want to use up any of your lifetime gift and estate tax exemption, you can make the loan and charge interest and then forgive the interest, the principal payments or both each year under the annual gift tax exclusion. For 2020, you can forgive up to $15,000 per borrower ($30,000 if your spouse joins in the gift) without paying gift taxes or using any of your lifetime exemption. But you will still have interest income in the year of forgiveness.

Here is an example of how an intrafamily loan can save on taxes:

A $2 million interest-only loan is made from parent to child at an interest rate of 0.38%. If the loan proceeds are invested and grow at a rate of 5%, after repayment of interest and principal in year 5, the child is left with approximately $510,000 estate and gift tax-free. This arrangement also offers the flexibility to utilize the gift tax exemption at any time.

5. Forgive or file suit. If an intrafamily loan that you intended to collect is in default, don’t let it sit too long. To prove this was a legitimate loan that soured, you’ll need to take appropriate legal steps toward collection. If you know you’ll never collect and don’t want to file suit, begin forgiving the loan using the annual gift tax exclusion, if possible.

© 2020

The unprecedented global pandemic and record unemployment has resulted in a dramatic drop in interest rates. Many people focus on the Fed rate and mortgage rates, and rightfully so, but for some, the focal point should be on the historically low IRS interest rates.

The IRS posts various interest rates, generally on a monthly basis. The Applicable Federal Rate (“AFR”) and the Internal Revenue Code Section 7520 Rate (“7520 Rate”) are among the most important. Many tax strategies are a function of calculations driven by the AFR and 7520 rates. Some strategies work best in high rate environments while other work best in low rate environments. Accordingly, any time the IRS rates dramatically rise or fall, we should take notice and consider tax planning.

The May 2020 IRS Rates include:

Short-Term AFR: 0.25%

Mid-Term AFR: 0.58%

Long-Term AFR: 1.15%

7520 Rate: 0.80%

These rates are exceptionally low. To provide some context for comparison, the May 2019 Rates were: Short-Term AFR 2.39%, Mid-Term AFR 2.37%, and Long Term AFR 2.74%. Viewing this from a historical perspective, the May 2019 rates were low in their own right, but clearly the rates today, just one year later, are materially lower.

The remainder of this paper outlines three strategies that work particularly well in low interest rate environments. Although we have elected to highlight three strategies specifically, low interest rate tax strategies are not limited to just these three. Accordingly, we encourage you to contact our office to discuss your specific set of circumstances.

Charitable Lead Trusts

A Charitable Lead Trust (“CLT”) is a split interest trust, meaning there are two categories of beneficiaries: (1) a current beneficiary and (2) a remainder beneficiary. The current beneficiary receives distributions from the CLT for a period of time (the “Term”) and must be a charitable organization, such as a public charity, a church, most schools and universities, and even a private foundation operated by the donor. The remainder beneficiary receives all the assets remaining in the CLT after the Term expires and is generally the donor or the donor’s children. Depending on the design of the CLT, the donor may receive an income tax deduction in the tax year the CLT is established in an amount equal to the present value of all payments that will go to charity during the CLT’s term. Accordingly, it can generate a substantial income tax deduction for gifts that have not yet gone to the charity. This gives the donor the ability to continue investing and growing the CLT assets, thereby ultimately benefiting the donor who will receive the assets back upon expiration of the CLT term.

Why CLTs during low interest rates?

The donor’s income tax deduction is a present-value calculation. We take the sum of all scheduled future charitable distributions and discount that number to present value using a calculation based on the 7520 Rate. The lower the 7520 Rate, the lower the discount. The lower the discount, the greater the deduction. Accordingly, in today’s environment, all other factors being exactly the same (i.e. same growth rate, same amount to charity, etc.), a CLT today will generate a significantly higher income tax deduction, than the same CLT when interest rates are higher.

Grantor Retained Annuity Trusts

Grantor Retained Annuity Trusts (“GRATs”) are estate planning trusts that provide a tremendous opportunity to transfer wealth from one generation (“Generation 1”) to the next (“Generation 2”), often without incurring gift or estate taxes. GRATs are established with Generation 1 assets for a period of time (the “Term”). During the Term, the GRAT makes distributions to Generation 1. At the end of the Term, if designed properly, the assets remaining in the GRAT transfer to Generation 2 free of gift, estate, or transfer taxes. Many individuals will establish a series of GRATs in order to provide necessary lifetime cash flow to Generation 1.

Why GRATs during low interest rates?

Payments made from the GRAT to Generation 1 are based on the IRS rates. The donor makes the “bet” that the assets inside the GRAT will grow at a rate higher than the IRS rates. Lower rates mean a lower hurdle, a lower hurdle means more wealth can transfer to Generation 2 tax-free.

Sales to Intentionally Defective Grantor Trusts

Intentionally Defective Grantor Trusts (“IDGTs”), are irrevocable estate planning trusts that are generally utilized by high net worth business owners and those with assets likely to significantly increase in value (such as stock and real estate). The IDGT will purchase the asset from the individual primarily in exchange for a promissory note (there are no income taxes due on the sale because the IDGT is disregarded for income tax purposes). The IDGT will make installment payments to the individual for the term of the promissory note. The assets in the IDGT are outside of the individual’s estate, therefore any growth in the asset from the time it is sold remains outside of the individual’s estate for estate tax purposes.

Why IDGTs during low interest rates?

Similar to any traditional lending arrangement, the IDGT promissory note must yield interest. Because this is a related-party transaction, the IRS mandates a certain minimum interest rate, which is based on the AFR. The lower the AFR, the lower the required monthly payments, and thus more taxable wealth remains outside of the Grantor’s estate.

Next Steps?

Don’t let this exceptionally low interest rate environment get away. Please contact your Heritage financial advisor, CPA, or attorney to schedule a planning session.

This article has been edited by Hamilton Tharp LLP. This article originally appeared on the HWM newsletter.

As consumers become more conscious of their environmental footprint, and look for ways to save money, more and more electric vehicles can be seen on the roads today stretching from coast to coast. At this point, most taxpayers know or have heard of an electric vehicle tax credit program, but what they may not know is that there are specific conditions and limitations that must be met, and that some vehicles have actually phased out of the program. So, before you consider an electric vehicle for your next purchase, make sure it qualifies.

Here’s a rundown of what you need to know about the electric vehicle tax credit, how it works, and what qualifies.

What vehicles qualify for the electric vehicle tax credit?

The new car or truck must:

· Have at least four wheels and gross vehicle weight of less than 14,000 pounds

· Draw energy from a battery with at least 4 kWh hours and recharged from an external source

· Purchased after 2010 and begun driving in the year claiming the credit

· Be primarily used in the U.S.

Two or three-wheeled vehicles purchased in 2012 or 2013 and used within that year may qualify under section 30D(g) if they draw from a battery with at least 25 kWh and charged from an external source.

How much is the electric vehicle tax credit?

The tax credit for an electric vehicle can range from $2,500 to $7,500 depending on the vehicle with higher credit amounts for specific battery capacities and vehicle sizes. For two or three-wheeled vehicles, the credit is 10% of the purchase price up to $2,500.

How is the tax credit applied to me?

The non-refundable tax credit is filed on your federal tax return (for individuals on your 1040), and your liability determines how much credit you qualify for. The non-refundable caveat means that in order to receive the full $7,500 credit, your tax liability must be at least that much. If your liability is only $3,000, you’ll only receive $3,000. You won’t receive the difference in a refund check.

Can I get a tax credit on a used or leased vehicle?

Unfortunately, the answer is no to both of those circumstances. The credit only applies to the new purchase and the person who actually owns it. Used vehicle purchases, even transfers to family members don’t qualify, and if you lease, the credit actually goes to the manufacturer

offering the lease. Some manufacturer dealers offer lower prices on leased electric vehicles as a result of the incentive, but are not forced to do so.

Does the tax credit run out?

As sales of electric vehicles increase, the tax credit will phase out. Once a manufacturer reaches 200,000 qualified vehicles, the credit begins to phase out with a step-down process over the course of a year. No tax credits are available for Tesla vehicles sold after Dec. 31, 2019, as they hit their mark in July 2018, and no credits are available for GM vehicles after March 31, 2020, as they hit their mark as well. You can see a list of the vehicles available for credits at fueleconomy.gov.

Are there state tax credits available?

Some states and regions do offer tax credits for electric vehicles and alternative-fuel vehicles, but these often apply to businesses. Individuals may receive incentives such as carpool lane access or free parking. Some states offer rebates for retail buyers. The U.S. Department of Energy offers a chart of state incentives.

For Californians, a $2,000 or $1,000 rebate is available depending on which type of electric car you purchase. Fully electric cards usually receive the higher rebate with hybrids on the lower end. Hydrogen fuel vehicles are eligible for a $4,500 rebate in California. These rebates are in addition to the federal tax credit and can reduce the out of pocket cost for a car by close to $10,000. You can learn more about California’s Clean Vehicle Rebate Project on their website.

For assistance with the electric vehicle tax credit and determining any extra state or local incentives, reach out to us.

Employers can now defer payroll tax withholding on employee compensation for the last four months of 2020 and then withhold the deferred amounts in the first four months of 2021, confirms a recent update from the IRS. President Trump’memorandum on Aug. 8 gave employers the ability to defer payroll taxes for employees affected by the COVID-19 pandemic in an effort to provide financial relief  

The guidance directs that employers can defer the withholding, deposit, and payment of the employee portion of the old-age, survivors, and disability insurance (OASDI) tax under Sec. 3102(a) and Railroad Retirement Act Tier 1 under Sec. 3201 from employee wages from Sept. 1 to Dec. 31, 2020.  

Employers must then withhold and pay the deferred taxes from wages and compensation during the period from Jan. 1, 2021, and April 30, 2021, with interest, penalties, and additions to tax to begin accruing starting May 1, 2021. Included in the notice is a line that indicates, if necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee,” such as if an employee leaves the company before the end of April 2021, but does not provide details on what that entails.  

Employees with pretax wages or compensation during any biweekly pay period totally less than $4,000 qualify for the deferral. Amounts normally excluded from wages or compensation under Secs. 3121(a) or 3231(e) are not included in calculating the applicable wages. The determination of applicable wages should be made on a period-by-period basis.  

Companies may choose whether or not to enact the payroll tax deferral. We are closely monitoring updates related this and other presidential executive orders and will communicate if more information becomes available. For questions or assistance with this payroll tax deferral, contact us.  

In an effort to help businesses cope with the impact of COVID-19, the CARES Act passed by Congress in March of this year eliminated some of the restrictions on the business interest deduction set in place in 2017 by the Tax Cuts and Jobs Act (TCJA). Now, the IRS has released much-needed guidance and final regulations for business interest expense deductions.

Limiting the business interest deduction was originally a way of helping pay for the TCJA and began with tax years starting after Dec. 31, 2017. The deduction was limited to the sum of:

The final regulations state that the deduction does not apply to:

Taxpayers must use Form 8990 to calculate and report their deduction and the carry-forward amount of disallowed business interest expense.

Additional regulations released by the IRS cleared up some of the remaining questions including issues related to the CARES Act. These additional regulations can be used with limitations until the final regulations are published in the Federal Register.

Additionally, a safe harbor was created in Notice 2020-59 that allows taxpayers engaged in a trade or a business managing or operating qualified residential living facilities to treat that as a real property trade or businesses in order to qualify as an electing real property trade or business.

Reach out for assistance with understanding and reporting your business interest expense.