Author: RBT CPAs

SBA’s Disaster Declaration Makes Loans Available Due To The Coronavirus (COVID-19)

The U.S. Small Business Administration (SBA) is offering designated states and territories low-interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of the Coronavirus (COVID-19).

Eligible entities may qualify for loans up to $2 million.
The interest rates for this disaster are 3.75 percent for small businesses
and 2.75 percent for nonprofit organizations with terms up to 30 years.
SBA’s Economic Injury Disaster Loan (EIDLs) funds come directly from
the U.S. Treasury.

Please Call One Of Our Disaster Relief Specialists For More Information On How We Can Help

You Apply at (845) 567-9000 Ext. 209
or email DisasterReliefLoans@rbtcpas.com

Small Businesses Should Stay Clear of a Severe Payroll Tax Penalty

One of the most laborious tasks for small businesses is managing payroll. But it’s critical that you not only withhold the right amount of taxes from employees’ paychecks but also that you pay them over to the federal government on time.

If you willfully fail to do so, you could personally be hit with the Trust Fund Recovery Penalty, also known as the 100% penalty. The penalty applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages. Since the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over.

The reason the penalty is sometimes called the “100% penalty” is because the person liable for the taxes (called the “responsible person”) can be personally penalized 100% of the taxes due. Accordingly, the amounts the IRS seeks when the penalty is applied are usually substantial, and the IRS is aggressive in enforcing it.

Responsible persons

The penalty can be imposed on any person “responsible” for the collection and payment of the taxes. This has been broadly defined to include a corporation’s officers, directors, and shareholders under a duty to collect and pay the tax, as well as a partnership’s partners or any employee of the business under such a duty. Even voluntary board members of tax-exempt organizations, who are generally exempt from responsibility, can be subject to this penalty under certain circumstances. Responsibility has even been extended in some cases to professional advisors.

According to the IRS, being a responsible person is a matter of status, duty and authority. Anyone with the power to see that the taxes are paid may be responsible. There is often more than one responsible person in a business, but each is at risk for the entire penalty. Although taxpayers held liable may sue other responsible persons for their contributions, this is an action they must take entirely on their own after they pay the penalty. It isn’t part of the IRS collection process.

The net can be broadly cast. You may not be directly involved with the withholding process in your business. But let’s say you learn of a failure to pay over withheld taxes and you have the power to have them paid. Instead, you make payments to creditors and others. You have now become a responsible person.

How does the IRS define “willfulness”?

For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bowing to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes due to the government is willful behavior for these purposes. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook.

In addition, the corporate veil won’t shield corporate owners from the 100% penalty. The liability protections that owners of corporations — and limited liability companies — typically have don’t apply to payroll tax debts.

If the IRS assesses the penalty, it can file a lien or take levy or seizure action against the personal assets of a responsible person.

Payroll Services to Avoid the Penalties

You should never allow any failure to withhold taxes from employees, and no “borrowing” from withheld amounts should ever be allowed in your business — regardless of the circumstances. All funds withheld must be paid over on time.

If you aren’t already using a payroll service, consider hiring one. This can relieve you of the burden of withholding and paying the proper amounts, as well as handling the recordkeeping. Contact us for more information.

——————–

Frequently Asked Questions About Self-Employment Tax

US Tax Forms. The Concept Of Tax Settlement

Do you owe self-employment (SE) tax on non-wage income that you collect only occasionally or in a one-off circumstance? Some sources of income may not be subject to the dreaded SE tax. Here’s what you should know if you earn income from “irregular” sources.

Reality Check: Random Income Isn’t Tax-Free

Irregular income might be free from self-employment (SE) tax, because it’s not from a trade or business. But it’s not federal-income-tax-free. Under the tax law, it’s treated as miscellaneous income, which is fully taxable. State income tax may also be due.

What Is Self Eemloyment Tax?

SE tax is the way the U.S.Treasury Department collects Social Security and Medicare taxes on non-wage income from business-related activities. For 2019, the SE tax rate is 15.3% on the first $132,900 of net SE income. The rate has two components: 12.4% for the Social Security tax, and 2.9% for the Medicare tax.

Above the $132,900 threshold, the Social Security tax component goes away, but the 2.9% Medicare tax continues before rising to 3.8% at higher income levels. There’s no limit on the Medicare tax component.

Individuals who are regularly self-employed must include SE tax with their quarterly estimated federal income tax payments to avoid an interest charge penalty.

Important: The Social Security Administration recently announced that in 2020 the 15.3% maximum SE rate will apply to the first $137,700 of net SE income. That ceiling is up by 3.6% compared to 2019. Meanwhile, Social Security benefit payments will go up by only 1.6% next year.

Will You Owe It on Random Income?

SE tax applies only to individuals who engage in a trade or business. So, if you’re not regularly self-employed and you earn income from some random work, occurrence or one-off circumstance, you don’t owe SE tax — even if the income would be subject to SE tax if you were regularly self-employed in that activity.

You don’t owe SE tax unless the net income in question is from a trade or business. In the landmark Groetzinger case, the U.S. Supreme Court ruled that an activity must be conducted with “continuity and regularity” and with a “profit motive” to incur SE tax. Therefore, income earned from an isolated or sporadic activity isn’t generally subject to SE tax because the random activity doesn’t rise to the level of a trade or business.

The U.S. Tax Court reaffirmed this treatment in its 2016 Ryther decision. Here, the former owner of a steel company had income from sales of scrap metal that he had stockpiled over the years before his steel company was dissolved. The court opined that the income was excluded from net SE income. The scrap metal was neither inventory nor primarily held for sale to customers in the ordinary course of a trade or business. The taxpayer’s sales occurred only once or twice per month and only once per day. Therefore, the sales were too sporadic to constitute a trade or business, and the income wasn’t subject to SE tax.

Hypothetical Examples

Here are five examples to show how the trade or business standard might be applied.

Jim the self-employed construction supervisor. Jim regularly works for a few construction companies. He agrees to supervise the construction of a neighbor’s new home in his “spare time” and collects $30,000 for his efforts.

This is the first time Jim has done this kind of sideline work. The IRS might argue that it’s so closely related to his regular self-employed work that he owes SE tax on the $30,000. However, Jim could reasonably take the position that he does not owe SE tax on income from a one-off activity. This is a situation that would require input from a tax professional.

Tim the construction company employee. Tim is employed full-time by a construction company as a construction supervisor. Similar to the previous scenario, he agrees to supervise the construction of a neighbor’s new home in his “spare time” and collects $30,000 for his efforts.

This is the first time Tim has done this kind of sideline work. The IRS might argue that he owes SE tax on the $30,000 because the sideline work is so closely related to his regular job. In other words, the IRS might claim that Tim is in the business of being a construction supervisor — as an employee or otherwise.

But Tim has never before done such work on a self-employed basis. So, he could reasonably take the position that he does not owe SE tax on income from a one-off activity. This is another situation that would require input from a tax pro.

Abby the former active realtor. For years, Abby was an active realtor, but she took time off to be a stay-at-home mom. She has maintained her realtor license “just in case.” In 2019, she earns a $30,000 fee for referring an acquaintance to another realtor who sells the acquaintance’s home for a significant commission.

It’s clear that Abby isn’t currently in the realtor business. So, it’s highly unlikely that the IRS could successfully argue that she owes SE tax on the $30,000 referral fee.

Gabby the former part-time realtor. A few years ago, Gabby dabbled as a part-time realtor, but she lost interest. Even so, she maintained her realtor license “just in case.” In 2019, she earns a $30,000 fee for referring an acquaintance to another realtor who sells the acquaintance’s home for a significant commission.

It’s clear that Gabby isn’t currently in the realtor business. So, it’s highly unlikely that the IRS could successfully argue that she owes SE tax on the $30,000 referral fee.

Even if Gabby gets lucky several years in row, earning a referral fee now and again, it seems reasonable to take the position that she doesn’t owe SE tax on random referral fees that she collects just by answering the phone and making an occasional call to another realtor. This sporadic activity doesn’t constitute a trade or business, because Gabby doesn’t do it with continuity and regularity. But it’s another situation that should be discussed with a tax pro.

Important: If you take the position that irregular income is SE-tax-exempt because it’s not from a trade or business, you relinquish the right to claim deductions for any related expenses. For example, neither Abby nor Gabby would be able to write off their annual realtor license fees or the costs of continuing education classes to keep their licenses in force.

Jake the teenage entrepreneur. This summer, 16-year-old Jake mowed lawns, painted fences and took care of pools for some neighbors. He earned $3,000 from these activities. He doesn’t owe SE tax on this income. Why? As a full-time high school student, Jake’s not in the yard care and outdoor home maintenance business, even if he does such work several summers in a row.

Bottom Line

Random income is often SE-tax-exempt — and there are categories of non-random income that are also SE-tax-exempt, such as billboard rental income where your only real “work” is cashing checks. If you have questions or want more information on this issue, check with your tax advisor.

Commissioner v. Robert P. Groetzinger, 480 U.S. 23 (1987)

Thomas L. Ryther v. Commissioner, TC Memo 2016-56 (March 28, 2016)

——————–

How Does Your Company Measure Up With The Gender Pay Gap?

Teamwork In The Office. Group Of Business People Working Together

The gender pay gap persists, despite recent improvements. Census data over the past decade indicates that, on average, women earn roughly 80 to 85 cents for every dollar earned by men in comparable job positions.

This is a hot topic in political circles. But it can be a problem at your company — even if you’re not worried about facing discrimination charges. Here’s the story.

Discord in the Workplace

The perception that women are paid less than men is common. A recent Pew Research survey found that one-fourth of women believe that at some point they’ve earned less than men in their companies doing the same job.

When women believe they’re not paid or treated fairly at your company, it can cause several problems. They may become less motivated, which can impair productivity and quality. It might make female workers less likely to suggest innovative ideas — or even provide a rationalization for them to commit fraud. Alternatively, some women might simply quit.

If your organization develops a reputation as an employer where men do better than women, fewer women will apply for open positions. Nowadays, many candidates review online sites like Glassdoor and consider best-places-to-work rankings before submitting a job application. In today’s tight labor market, your company needs to attract as many qualified candidates as possible — and talented women offer fresh, diverse perspectives that you can’t afford to miss.

Number Crunching

National averages are one thing. But what’s actually happening inside your organization? The answer can be found by studying the wages paid for various positions at your company. This analysis can help determine whether there’s any justification for a perception that women earn less than men for comparable jobs at your company.

Typically, when there’s gender pay disparity, the culprit isn’t intentional discrimination. Rather, it’s differences in work experience when people are hired, or the duration that some workers have had on the job. Although more fathers are taking breaks from their careers to raise children than in the past, the majority of parents who do so are mothers.

But, beware that performing a formal study could come back to haunt you. If your wage analysis reveals a substantial imbalance and you ignore it, the data could become a “smoking gun” if it’s discovered in any future pay discrimination lawsuits.

On the flip side, if your analysis reveals that you don’t have any potential “wage gap” issues, that’s good news — especially if you’ve been proactive about ensuring pay parity. Should you share the good news with your employees? The answer is unclear.

The data can provide solid evidence that you’re committed to pay equity. But, raising the topic of pay policies may also invite more curiosity and questions about your compensation practices than you bargained for.

Proactive Hiring Practices

You have several options if a wage analysis reveals a gender pay disparity. Before you decide what to do, however, investigate what’s behind the gap.

For example, suppose that men occupy most of the higher paying jobs at your company. Why? It’s possible that the hiring managers are making false assumptions about the ability of female applicants to do those jobs. Or maybe your company’s recruiting strategy inadvertently attracts more male applicants.

One way to try to overcome such a pattern is to ask someone who won’t be screening applicants to edit resumes and applications. The goal is to remove any information (including names) that would reveal the applicant’s gender. This could lead to more women getting through the first round of elimination.

Also consider having a second person review the job applications of women who weren’t selected. If the reasons for a female applicant’s rejection aren’t clear, the hiring manager needs to explain why the individual was rejected. If no valid reason is provided, the manager might decide to give the applicant a second chance.

Of course, bias or discrimination isn’t always the reason for a gender pay disparity. Sometimes it’s simply the result of male workers having more education or training than female workers. In these situations, your company can take proactive measures to help bridge the gap. For example, you might offer training or mentoring opportunities. This ensures that women willing and able to elevate their qualifications for higher paying jobs can do so.

Another possible step — that’s actually required in a few states — is to refrain from asking job applicants (male or female) for their salary history during the hiring process. Women who have been out of the workforce for a few years often haven’t been in positions long enough to reach higher salary levels. But that doesn’t necessarily make them less qualified for a job or unworthy of competitive pay. Make pay offers based on the value of the position to your company, regardless of the applicant’s pay history.

Be a Leader

Your company can’t single-handedly overturn historic patterns of gender-based pay inequity. But companies that take proactive measures to level the playing field to create a positive work environment for all workers. In turn, this can help achieve the company’s performance, hiring and social responsibility goals. For help evaluating your company’s current compensation practices, please contact us.

——————–

Six Keys to Successful Change in the Workplace

Key to Success is our accounting firm RBT CPA's

Employees generally hate change. Whether it’s a merger or restructuring, or a simple change in the color of the office, studies show both staff members and managers resist.

“I am convinced that if the rate of change inside an organization is less than the rate of change outside, the end is in sight.”

– Jack Welch, Retired CEO of General Electric

Whatever changes your company is planning, it is critical to gain the trust and cooperation of everyone affected.

The reactions may seem irrational but change can suggest an invasion of turf. Some employees feel it lowers their status or eliminates privileges. They might also worry that new procedures or equipment will make it more difficult to do the same tasks or increase their workloads.

And above all, staff members fret about job security. Changes in the organization or a new boss may suggest to some that they’ll lose their jobs.

Here are six keys to harmony and resilience during transitions:

1. Announce the plan. You must tell your employees about the general plan, either individually or in small groups. Explain why it’s necessary.

2. Accentuate the positive. To help win over your staff, minimize the negatives and emphasize the positive factors that make the change desirable and necessary. Answer all questions thoroughly.

3. Hold trial runs. Use tests and trial runs to help overcome doubts and suspicions.

4. Involve staff. Let as many employees as possible participate in planning and executing the changes. Ask them for opinions and to point out potential problems.

5. Monitor the change. The executive instituting the change should be on hand with as many assistants as necessary to ensure that the plan proceeds as expected and to deal with any unanticipated problems.

6. Review the results. Schedule a review to ensure that the changes went into effect as planned and that backsliding isn’t undercutting the effort. Compare results with expectations, and be prepared to make alterations.

In return for a little planning and discussion, you’ll gain focused, productive and healthy employees with fewer negative responses to the change

——————–

Year-End Tax Planning Moves for Small Businesses

It’s hard to believe 2019 is almost over! It’s been a busy year in many sectors, often forcing small business owners to put tax planning on the back burner while they’ve tended to daily business operations.

But procrastinate no longer. Consider the following moves to lower your 2019 business tax bill before ringing in the New Year.

Time Income and Deductions from Pass-Through Entities

Most small businesses are set up as sole proprietorships or “pass-through” entities, such as partnerships, S corporations and limited liability companies (LLCs) that are treated as partnerships for tax purposes. Income and deductions from pass-through entities are allocated to the owners based on their ownership percentage in their businesses. Your pro rata share of a pass-through entity’s net income is taxed at your personal rates.

Under the Tax Cuts and Jobs Act (TCJA), individual federal income tax rate brackets will basically be the same for 2019 and 2020, with modest adjustments for inflation. (See “2019 and 2020 Individual Tax Brackets” below.)

So, the traditional strategy of deferring income from these entities into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or a lower tax bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2019 until 2020.

However, if you expect to be in a higher tax bracket in 2020, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2020. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.

Do You Have a Tax-Favored Retirement Plan?

If your business doesn’t already have a retirement plan, it might be time to take the plunge. Current rules allow for significant deductible contributions.

For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $56,000 for 2019. If you’re employed by your own corporation, you can contribute up to 25% of your salary to your account, with a maximum contribution of $56,000.

Other small business options include defined benefit pension plans, SIMPLE-IRAs, and 401(k) plans. You can even set up a solo 401(k) plan for just one person. Depending on your circumstances, these other types of plans may allow bigger deductible contributions.

Important note: If your business has employees, your plan may have to cover them, too.

The deadline for setting up a SEP-IRA for a sole proprietorship business and making the initial deductible contribution for the 2019 tax year is October 15, 2020, if you extend your 2019 return to that date. Other plans generally must be established by December 31, 2019, if you want to make a deductible contribution for the 2019 tax year. But the deadline for the contribution itself is the extended due date for your 2019 return.
There’s one exception: To make a SIMPLE-IRA contribution for 2019, you must have set up the plan by October 1, 2019. So, you might have to wait until next year if you prefer the SIMPLE-IRA option.

Maximize the Deduction for Income from a Pass-Through Entity

Under current tax law, owners of pass-through entities (including sole proprietorships) may be eligible for a deduction based on qualified business income (QBI) for tax years beginning in 2018 through 2025. The deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income.

The QBI deduction is available only to noncorporate taxpayers, meaning individuals, trusts and estates. It also can be claimed for up to 20% of income from qualified real estate investment trust (REIT) dividends and 20% of qualified income from publicly traded partnerships (PTPs).

Because of various limitations on the QBI deduction, tax planning can help increase your allowable QBI deduction. For example, before year end, you might be able to increase W-2 wages or purchase additional business assets to help boost your QBI deduction.

Also, be aware that moves designed to reduce this year’s taxable income (such as postponing revenue or accelerating expenses) can inadvertently reduce your QBI deduction. Work with your tax pro to anticipate any adverse side effects of other tax planning strategies and optimize your results on this year’s return.

Claim 100% Bonus Depreciation for Asset Additions

Under current law, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in calendar year 2019. That means your business might be able to write off the entire cost of some (or all) of your 2019 asset additions on this year’s return.

Bonus depreciation isn’t subject to any spending limits or income-based phaseout thresholds. But the program will be gradually phased out, starting in 2023, unless Congress extends it.

Consider buying some extra equipment, furniture, computers or other fixed assets before year end. Your tax advisor can explain what types of assets qualify for this break.

One type of asset that could deliver a big write-off on your 2019 tax return is a “heavy” vehicle. Heavy SUVs, pickups and vans that are used over 50% for business are treated for tax purposes as transportation equipment. So, they qualify for 100% bonus depreciation.

Specifically, bonus depreciation is available when the SUV, pickup or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door (where the door hinges meet the frame).

Cash in on More Generous Section 179 Deduction Rules

For qualifying property placed in service in tax years beginning in 2019, the TCJA increased the maximum Sec. 179 expensing amount to $1 million, adjusted annually for inflation. For 2019, the inflation-adjusted amount is $1.02 million. (Under prior law, the limit was $510,000 for tax years beginning in 2017.)

The TCJA provides other beneficial changes to the Sec. 179 expensing rules, including:

Property used for lodging. The TCJA repealed the prior-law provision that excluded from Sec. 179 expensing personal property used to furnish lodging. So now eligible property qualifies for a tax break. This change goes into effect for property placed in service in tax years beginning in 2018 and beyond. Examples of such property include:

Furniture,
Kitchen appliances,
Lawnmowers, and
Other equipment used in the living quarters of a lodging facility or in connection with a lodging facility, such as a hotel, motel, apartment house, rental condo or rental single-family home.

Qualifying real property. Sec. 179 expensing can be claimed for qualifying real property expenditures, up to the maximum annual allowance. There’s no separate limit for qualifying real property expenditures, so Sec. 179 deductions claimed for real property reduce the maximum annual allowance dollar for dollar.

Qualifying real property refers to any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is first placed in service. However, costs attributable to the enlargement of a building, any elevator or escalator, or the building’s internal structural framework don’t qualify.

For tax years beginning in 2018 and beyond, the TCJA expanded the definition of real property eligible for Sec. 179 expensing to include qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. These items must be placed in service in tax years beginning after 2017, and after the nonresidential building has been placed in service.

Important note: Various limitations apply to Sec. 179 expensing deductions, especially if you conduct your business as a pass-through entity.

Sell Qualified Small Business Stock

A 100% federal gain exclusion break is potentially available when you sell qualified small business corporation (QSBC) stock that was acquired after September 27, 2010. That equates to a 0% federal income tax rate if the shares are sold for a gain.

However, you must hold the shares for more than five years to benefit from this break. Be aware that it’s not available to QSBC stock that’s owned by a C corporation. Plus, many companies won’t meet the definition of a QSBC in the first place. Your tax professional can help explain the details.

Meet with Your Tax Pro Before Year End

A positive side effect of congressional gridlock is that the tax law hasn’t changed much over the last year. Most TCJA provisions that affect small businesses went into effect in 2018, and the year-end tax planning strategies that worked for 2018 are generally valid for the current tax year.

However, your specific business situation might have changed. Don’t assume that last year’s strategies will minimize your 2019 tax bill. Work with your tax pro to identify the optimal year-end tax planning moves based on your current circumstances.

2019 and 2020 Individual Tax Brackets

2019 Individual Federal Income Tax Brackets
	Single	Married, Filing Jointly	Head of Household
10% tax bracket	$0 – $9,700	$0 – $19,400	$0 – $13,850
Beginning of 12% bracket	$9,701	$19,401	$13,851
Beginning of 22% bracket	$39,476	$78,951	$52,851
Beginning of 24% bracket	$84,201	$168,401	$84,201
Beginning of 32% bracket	$160,726	$321,451	$160,701
Beginning of 35% bracket	$204,101	$408,201	$204,101
Beginning of 37% bracket	$510,301	$612,351	$510,301

Projected 2020 Individual Federal Income Tax Brackets
	Single	Married, Filing Jointly	Head of Household
10% tax bracket	$0 – $9,875	$0 – $19,750	$0 – $14,100
Beginning of 12% bracket	$9,876	$19,751	$14,101
Beginning of 22% bracket	$40,126	$80,251	$53,701
Beginning of 24% bracket	$85,526	$171,051	$85,501
Beginning of 32% bracket	$163,301	$326,601	$163,301
Beginning of 35% bracket	$207,351	$414,701	$207,351
Beginning of 37% bracket	$518,401	$622,051	$518,401

——————–

New Bankruptcy Relief Coming Soon

Let RBt CPA's lend a helping hand to your Hudson Valley Business

Is your small business struggling to make ends meet?

Some relief may be on the way for distressed business owners. The Small Business Reorganization Act of 2019 will make it faster and less expensive to benefit from a Chapter 11 bankruptcy. The legislation was signed into law in August, and it goes into effect on February 19, 2020. Here’s what you need to know.

Basics of Bankruptcy Reorganization

Chapter 11 of the bankruptcy code allows a business to reorganize its debt. It may be advantageous to make a liquidation filing under Chapter 7, where assets are auctioned off or sold piecemeal, often leaving creditors with little or nothing. Or a business may not qualify under the threshold for Chapter 13.

Although technically available to both businesses and individuals, Chapter 11 is most often used by businesses. It currently applies to debts of less than $2,725,625. Typically, a Chapter 11 bankruptcy proceeding offers protection of business assets while restructuring the following types of debts:

Priority tax debts. Chapter 11 may be used to reorganize past due taxes that your company has incurred. This covers income taxes, payroll taxes and property taxes.

Under Chapter 11, your company may continue to operate the business as you meet your tax responsibilities. Although tax obligations are usually paid off during a five-year period, Chapter 11 allows you to renegotiate the repayment terms with the appropriate taxation authorities and reach a mutually beneficial agreement.

Secured debts. A business identifies secured debts and corresponding collateral contributing to the profitability of the business, similar to the way that secured debts are reorganized for individuals who file for Chapter 11 relief. Accordingly, the business then seeks to pay the current value of the property, as opposed to what’s owed on it. This treatment could apply to collateral such as real estate, business equipment and vehicles.

For example, suppose your business owns equipment that’s worth $250,000, but you still owe the bank $500,000 from the purchase of the equipment. You can ask the court to allow you to pay only the current value of $250,000. This enables your business to reduce its monthly operating expenses.

Unsecured debts. A business may incur significant credit card charges or other unsecured loans in the early years of operation or for ongoing operating costs. Chapter 11 allows a business to restructure this unsecured debt and pay it off in a lump sum or over a term of several years.

In the optimal situation, your business and unsecured creditors will agree on payment terms. If the parties can’t come to a reasonable agreement, the bankruptcy judge will decide the outcome in a binding determination.

Leases and contract debts. If Chapter 11 relief is available, a business can choose to accept or reject certain leases and contracts. For instance, suppose your business previously contracted with a janitorial service for a three-year period. Then you find a comparable service at a considerably lower price. If you can demonstrate that this contract would contribute to the profitability of the business, the judge may grant a replacement request.

The bankruptcy process starts with a petition to the bankruptcy court. A voluntary petition is filed by the debtor. Conversely, an involuntary petition is filed by creditors after certain conditions have been met.

In either event, the business typically has about four months to develop the reorganization plan. However, if “just cause” for a delay can be shown, the court may grant a business up to 18 months after the filing of the petition to develop its plan. Eventually, the goal is for the business to emerge from the bankruptcy in better financial shape.

Relief Coming Soon

Historically, it was difficult and expensive for small business owners to seek bankruptcy protection under Chapter 11. The Small Business Reorganization Act is designed to provide greater access to Chapter 11 for small businesses through a new subchapter devoted exclusively to this class of debtors.

Important: The debt threshold for qualifying for this new subchapter remains the same for small businesses as it previously was under Chapter 11 ($2,725,625).

The new subchapter of the bankruptcy law includes provisions for the following key improvements:

Streamlined reorganizations. The new law will facilitate small business reorganizations by eliminating certain procedural requirements and reducing costs. Significantly, no one except the business debtor will be able to propose a plan of reorganization. Plus, the debtor won’t be required to obtain approval or solicit votes for plan confirmation. Absent a court order, there will be no unsecured creditor committees under the new law. The new law also will require the court to hold a status conference within 60 days of the petition filing, giving the debtor 90 days to file its plan.

New value rule. The law will repeal the requirement that equity holders of the small business debtor must provide “new value” to retain their equity interest without fully paying off creditors. Instead, the plan must be nondiscriminatory and “fair and equitable.” In addition, similar to Chapter 13, the debtor’s entire projected disposable income must be applied to payments or the value of property to be distributed can’t amount to less than the debtor’s projected disposable income.

Trustee appointments. A standing trustee will be appointed to serve as the trustee for the bankruptcy estate. Similar to Chapter 12 bankruptcies for family-owned farms and fishing operations, the revised version of Chapter 11 allows the trustee to preside over the reorganization and monitor its progress.

Administrative expense claims. Currently, a debtor must pay, on the effective date of the plan, any administrative expense claims, including claims incurred by the debtor for goods and services after a petition has been filed. Under the new law, a small business debtor will be permitted to stretch payment of administrative expense claims over the term of the plan, giving this class of debtors a distinct advantage.

Residential mortgages. The new law eliminates the prohibition against a small business debtor modifying his or her residential mortgages. The debtor will have more leeway if the underlying loan wasn’t used to acquire the residence and was used primarily for the debtor’s small business. Otherwise, secured lenders will continue to have the same protections as in other Chapter 11 cases.

Discharges. The new law provides that the court must grant the debtor a discharge after completing payments within the first three years of the plan or a longer period of up to five years established by the judge. The discharge will relieve the debtor of personal liability for all debts under the plan except for amounts due after the last payment date and certain non-dischargeable debts.

Additionally, the exceptions to discharge contained in Section 523(a) of the bankruptcy code will apply to the small business debtor. Currently, a Chapter 11 bankruptcy features limited discharge exceptions.

Right for Your Business?

In the past, small businesses seeking Chapter 11 bankruptcy relief were often hampered by size and lack of resources. Beginning next year, the new law will provide more opportunity for successful small business reorganizations.

Could a reorganization put your small business on the road to recovery? Contact us with any questions regarding your bankruptcy rights and the application of the new law to your situation.

——————–

Tax Breaks for Becoming a Landlord

Have you always wanted to buy rental property and become a landlord?

As you can imagine, putting up with some tenants can be a pain in the neck. But the discomfort can be eased by the valuable tax breaks available to rental property owners. In fact, favorable tax laws are one big reason why so many fortunes have been made in real estate. Another big reason is that leveraging real estate investments with mortgages can multiply profits.

But for purposes of this article, let’s stick to taxes. Here are some important things landlords should know:

What Can You Write Off?

Of course, you can deduct mortgage interest and real estate taxes on rental properties. However, if you pay mortgage points, you must amortize them over the term of the loan (unlike points on a mortgage to purchase a principal residence, which can be deducted immediately).

In addition, you can write off all the other operating expenses — such as utilities, insurance, homeowner association fees, repairs, maintenance and yard care.

One of the best tax breaks is the fact that you can depreciate the cost of residential buildings over 27.5 years, even while they are (hopefully) increasing in value. Let’s say you purchased a rental property (not including the land) for $100,000. The annual depreciation deduction is $3,636, which means you can have that much in positive cash flow without owing any income taxes. That’s pretty valuable, especially if you own several properties. Commercial buildings must be depreciated over a much longer time (39 years), but the write-offs still shelter some cash flow from taxes.

Beware of the Passive Loss Rules

Rental property ownership gets complicated if your property throws off a tax loss — and most do at least during the early years. The so-called passive activity loss (PAL) rules will probably apply.

The fundamental concept: You can only deduct passive losses to the extent of passive income from other sources — such as positive operating income from other rental properties or gains from selling them.

Fortunately a special exception says you can generally deduct up to $25,000 in passive losses from rental real estate so long as:

Your adjusted gross income (AGI) before the real estate losses is under $100,000.
You “actively participate” in the rental activity. Active participation means owning a 10% or greater stake in the property and being energetic enough to at least make management decisions like approving tenants, signing leases, and authorizing repairs. In other words, you don’t have to mow the lawn and snake out the drains yourself to pass the test. But if you use a management company to handle all the details, you can forget about taking advantage of the $25,000 exception.

If your AGI is between $100,000 and $150,000, the exception is phased out pro-rata. So an AGI of $125,000 means you can deduct up to $12,500 in passive real estate losses (half of the $25,000 maximum) even if you have zero passive income.

Important Exceptions to the PAL Rules

First: If your property is in a resort area, the average rental period may be seven days or less. In this case, the IRS considers you to be running a business rather than a rental operation. Now, if you “materially participate” in running this “business,” you’re exempt from the PAL rules and can deduct your losses currently.

So what does it take to materially participate? In a nutshell, you must either spend:

More than 500 hours annually taking care of the property or
More than 100 hours with no one else spending more time than you do.

Remember, this material participation exception applies only if the average rental period is seven days or less. If you use a management company, you will probably fail to meet the participation guidelines.

Second: There’s yet another PAL exception that applies only to people who have become heavily involved in real estate. To take advantage, you must spend more than 750 hours annually in real estate activities that in which you materially participate. And those hours must involve more than 50% of the time you spend working for a living. There are some other hurdles, but if you clear them, you’ll be exempt from the PAL rules and therefore be able to currently deduct your rental losses.

Bottom line: Rental property owners have to watch their AGIs carefully. Every $2 over the $100,000 threshold costs a dollar in current passive loss deductions. For example, say your AGI is shaping up to be right around the $100,000 borderline. You might want to consider planning moves that will reduce your AGI this year, or at least not cause it to go up. Selling some loser stocks or mutual funds could be a really good idea, while selling some winners may only make Uncle Sam happy.

If your AGI is above $150,000 and you have no passive income, you generally cannot currently deduct a rental real estate loss. However, your loss carries over to future tax years. You will eventually be able deduct your carryover losses when you either sell the property or generate some passive income. All in all, this is not a bad outcome as long as you just have “paper losses” caused by your depreciation write-offs.

What If You Have Income?

Eventually, your rental properties should start throwing off positive taxable income instead of losses because rents surpass your deductible expenses. Of course, you must pay income taxes on those profits. But if you piled up some carryover passive losses in earlier years, you now get to use them to offset your profits. So you may not actually owe any extra taxes for a while.

Another benefit: Positive taxable income from rental real estate is not hit with self-employment (SE) tax, which applies to most other profit-making ventures other than working as an employee and investing. Depending on your situation, the SE tax can be either 15.3% or 2.9%. In either case, it’s beneficial when you don’t have to pay it.

As you can see, the tax rules for rental real estate are pretty favorable. Your tax advisor can provide more information about your situation

——————–

Age Has its Privileges … and Penalties

In an era filled with uncertainty, you can count on one thing: time marches on.

Here are some important age-related financial and tax milestones to keep in mind for you and your loved ones:

Age 0 to 23

Under the Kiddie Tax rules, part of young person’s investment income can be taxed at the parent’s federal rate which can be as high as 37% for 2019 (and 2018) rather than at the young person’s lower rate (usually only 10% or 12% depending on the type of income).

The Kiddie Tax can bite until the year when the young person turns 24. However, after the year the individual turns 18, it can only bite if he or she is a student with at least five months of full-time school attendance. For 2019 (and 2018), the Kiddie Tax can only hit investment income in excess of the threshold amount of $2,200. Investment income below the threshold is taxed at the young person’s lower rate.

Age 18 or 21

Did you set up a custodial account for your minor child to help pay for college or save on taxes? It will come under the child’s control when he or she reaches the local age of majority (generally, age 18 or 21 depending on your state of residence).

Age 30

If you set up a Coverdell Education Savings Account (CESA) for a child or grandchild, it must be liquidated within 30 days after he or she turns 30 years old. Earnings included in a distribution that are not used for qualified education expenses are subject to federal income tax, plus a 10% penalty. Alternatively, the Coverdell account balance can be rolled over tax-free into another CESA set up for a younger family member.

Age 50

At this age, you can begin saving more for retirement on a tax-favored basis. If you’re age 50 or older as of the end of the year, you can make an additional catch-up contribution to your 401(k) plan, 403(b) plan, Section 457 plan, or SIMPLE plan, assuming the plan permits catch-up contributions. You can also make an additional catch-up contribution to a traditional or Roth IRA.

Age 55

If you permanently leave your job for any reason, you can receive distributions from the former employer’s qualified retirement plans without being hit with the 10% premature withdrawal penalty tax. This is an exception to the general rule that a 10% penalty is due on distributions received before age 59 1/2.

Age 59 1/2

For any reason, you can receive distributions at age 59 1/2 from all types of tax-favored retirement plans and accounts without being hit with the 10% premature withdrawal penalty tax. This includes IRAs, 401(k) plans, pensions and tax-deferred annuities.

Age 62

At this age, you can elect to start receiving Social Security benefits. However, your benefits will be lower than if you wait until reaching full retirement age (see “Age 66” below). When considering this election, look at your health and your family’s history of longevity.

Also, if you continue working after starting to collect benefits but before reaching full retirement age, your Social Security benefits will be further reduced if your income from working exceeds $17,640 in 2019 (up from $17,040 in 2018).

Age 66

After years of paying into the system, you can start receiving full Social Security benefits. However, the age to collect full benefits is creeping upward. For example, if you were born between 1943 and 1954, it’s 66. And if you were born in 1960 or later, you will have to wait until age 67 to collect full benefits. If you reach age 66 in 2019, your benefits will be reduced if you are still working and your earnings exceed $46,920 (up from $45,360 in 2018).

Want to keep working? You won’t lose any benefits if you work in years after the year you reach full retirement age, regardless of how much money you make.

Age 70

You can choose to postpone receiving Social Security benefits until after you reach age 70. If you make this choice, your benefit payments will be more than if you had started receiving them earlier. They will be increased by a certain percentage (depending on your date of birth).

Important: If you decide to delay retirement, be sure to sign up for Medicare at age 65. In some cases, medical insurance costs more if you delay applying for it.

Age 70 1/2

You generally must begin taking annual minimum required distributions from tax-favored retirement accounts (including traditional IRAs, SEP accounts and 401(k) accounts), and pay the resulting income taxes. However, you need not take any such mandatory distributions from your Roth IRA.

The initial minimum required distribution is for the year you turn 70 1/2, but you can postpone taking that payout until as late as April 1st of the following year. If you chose that option, however, you must take two minimum required distributions in that following year. One must be taken by April 1st, which is the one for the previous year, plus another by December 31st, which is the one for the current year. For each subsequent year, you must take your minimum required distribution by December 31st.

There’s one exception: if you’re still working after reaching age 70 1/2, and you don’t own over 5% of the company, you can postpone taking any minimum required distributions from the employer’s plan(s) until after you’ve retired.

——————–

Why Business Owners Don’t Plan for Succession … and Why it’s Critical

Many business owners procrastinate putting a well-conceived succession plan in place.

The reasons are understandable. It can be difficult to plan for your replacement and deal with your mortality.

Here are five of the top reasons why business owners don’t have an exit strategy, along with the reasons why it’s best to make a proactive plan.

Reason number 1: No time

Business owners are busy with the day-to-day tasks involved in running their companies. There are deadlines to meet and deals to be made. Succession planning can be done … later.

Why this thinking is wrong: Waiting too long can cause the outcome to be less beneficial to the owner and his family. If a rushed decision is made, the owner may get a low price or pay more in taxes than he or she would if adequate planning was done. And in a worst case scenario, “later” may never come. An unexpected death or disability might result in succession occurring sooner than expected and without a solid plan, the future of the business can be placed in jeopardy.

Reason number 2: Loss of control

In some cases, business owners may not want to stop working for the companies they spent years building. Giving up control is difficult. Owners may worry they will be bored in retirement or their companies will no longer flourish if they are not in charge. So they hang on.

Why letting go is a better approach: The most successful exit strategy takes months or even years to complete. With proper planning, you may be able to secure a position after the sale as a consultant. If you want to pass on the business to your children or grandchildren, you can be involved in training them to help them achieve success. In other words, a proactive approach brings more control over the end result.

Reason number 3: Ignoring tax issues because they’re complex

There are obviously a number of ways to structure a succession transaction. The most tax-efficient way depends on the company, the parties involved and when you sell (federal tax capital gains rates may increase in the future). The tax implications of a sale or transfer can be extremely complex.

Why it’s best to get professional tax advice: You have to make several decisions that will affect the tax bill, such as whether to sell assets or stock. Your company may wind up with unknown, costly liabilities if the transaction isn’t structured properly. Handling the sale in a tax-wise manner can save you a fortune in the long run — not only with income and capital gains taxes but also with estate and gift taxes. Consult with your tax advisor well in advance of the actual sale.

Reason number 4: Not sure who is going to take over

For many owners, there is not a clear-cut successor. Are there partners? Should you sell to employees via an Employee Stock Ownership Plan (ESOP)? Sell to a third party?

In the case of a family business, there are even more questions. What if some children are active in the company and others are not? Which child is going to run the company? Does the “heir to the throne” have the business skills to succeed? Will a formal succession plan cause family conflict?

Without all the answers, a business owner may do nothing.

Why this is a mistake: Without a solid plan, the company you spent years building could cease to exist. There are many options for ownership transfer. You can sell outright, sell to your children, gift interests to family members at a low tax cost — and more. But if you don’t explore the possibilities, you leave the outcome to chance.

Reason number 5: Not enough retirement savings

While building their businesses, many owners put off making adequate contributions to retirement plans. The result may be insufficient savings. Where is income going to come from during retirement — especially if the owner wants to pass the company onto family members? Often, there is a conflict between wanting comfortable golden years and wanting to transfer the company to heirs as part of an estate plan. So the owner just keeps working.

Why continuing to work without a succession plan is a mistake: By planning ahead, you can take care of your retirement and your heirs. With certain financial strategies, you may be able to retire comfortably and plan for the eventual sale or transfer of the company.

These are just some of the reasons business owners procrastinate and why they need to have proactive exit strategies. Start well in advance. Assemble an advisory team that includes your corporate attorney, accountant, estate advisor and other professionals.

And if transfer your business to your children, urge the next generation to start thinking about their succession plans.

——————–