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Monthly Newsletter for ncpeFellowship Members Vol. 11 No. 10 October 2020

Fellowship

Remarks from Beanna

October 15th - Fifteen More Days

The 2020 filing season is almost a thing of the past, but not soon to be forgotten.

First it was the usual, dealing with the newer March 15th deadline for S corps and Partnerships. Then the COVID-19, sending many of us from our places of business to our homes, continuing to work the best we could. The EIP payments had our telephones and emails busy trying to figure out if taxpayers would get a stimulus payment, how much it would be and what if a decedent received one. The PPP loans then took many away from their tax return preparation and put them in loan application mode, followed shortly by how to spend the money in order not to have to repay it.

April 15th came and went like any other day in the life as Congress gave a July 15th deadline date for 2019 tax returns as well as first and second quarter estimated tax payments.

July 15th, the 2019 filing deadline date for individual federal tax returns was also the extension deadline date for those individual returns giving them three more months, until October 15, to file along with C corporation returns. Of course, September 15th was the extended filing date for S corps and Partnerships.

All of this, while IRS continues to tout that "filing taxes is easy"!

I've listened to you and more importantly, I have heard you.If this is the "new norm" I am not too anxious to be normal.We need to interact with people. We need to sit across from taxpayers and read their faces when they answer our questions. We long for a time that the experience of tax preparation is an opportunity to focus on doing our best

work to make certain our taxpayers pay the "lowest legal amount of tax" and to hand the client our bill and have them pay and say "thank you".

The 2020 Filing Season was a lesson in appreciation! Appreciation for our gifts and abilities, for clients, for employees, for family and friends and certainly for health and well-being.

Hello 2021 Filing Season - a mere 77 days away!

Stay well and finish well,

BeannaBeanna@ncpefellowship.com or 877-403-1470

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Next Edition of Taxing Times:November 1st, 2020

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Remarks From Beanna (1)

Tax News (5)IRS Announcement 2020-12 and the PPP (5)USPS Won’t Implement Payroll Tax Deferral After Reviewing Impact on Employees (5)IRS Provides Tax Relief for Victims of Hurricane Sally; Oct. 15 Deadline, Other Dates Extended to Jan. 15 (5)Assessed Value Versus Market Value – What is the Difference? (6)IRS Releases Tax Guidance For Marijuana Industry (7)Key Factors About Taxes in Retirement (7)The Benefits of Establishing Reasonable Compensation (8)GAO Says IRS Should Utilize Better Service Performance Measures (9)IRS Updates Cryptocurrency Tax Guidance (9)Treasury Modifies Endowment Tax Rules (9)36 Small Business Deductions, From A to Z (10)The Seven Cases to do a Roth Conversion (13)

Practice Management (16)Tax Return Preparers Working Remotely May Be Security Risk (16)

Question of the Month (16)How Was Giving to Charity Affected by the CARES Act? (16)

Military News (17) Non-negotiable: All Military Members Will Be Subject to Trump’s Payroll Tax Deferral (17)

Estate and Trust News (18)IRS Provides Final Regulations on Deductions for Estates and Non-grantor Trusts, Including Excess Deductions on Termination (18)Frequently Asked Questions on Gift Taxes (18)

News from Capitol Hill (23)Election 2020: Comparing the Trump and Biden Tax Plans (23)House Bill Proposes $25,000 Tax Credit for Businesses Purchasing PPE (24)

People in the Tax News (25)The FTC is Investigating Intuit Over ‘Free File’ Tax Returns (25)Operators of Student Debt Relief Scheme Agree to Pay at Least $835,000 to Settle FTC Allegations (25)Tax Protester in 2007 Standoff Requests Time Served Sentence (26)Brother of Rabbi Yisroel Goldstein Admits to $700,000 Tax Evasion Conspiracy (26)Owner of Long Island Diner Pleads Guilty to Not Paying Employment Tax (27)IRS Selects 10 New Members for Electronic Tax (28)

IRS News (29)TIGTA Audit Cites Weaknesses in IRS Control of Paper Tax Records (29)IRS Submits FY 2021 Budget Justification to Congress (29)IRS Issues FAQs on Renewing ITINs (29)Final Regulations on Business Interest Expense Deduction Limitation Published in the Federal Register (31)IRS Releases State-by-state Breakdown of Nearly 9 million Non-filers Who Will Be Mailed Letters About Economic Impact Payments (31)Settlements Begin In Syndicated Conservation Easement Transaction Initiative (33)IRS Provides SECURE Act Guidance (33)Final Rehabilitation Credit Regulations Adopt Proposed Regulations Without Change (39)IRS Issues Eligible Terminated S Corporation Final Regulations (40)TIGTA Praises IRS for Its Work on Individual Tax Processing Engine (41)Final Regulations: Premium Tax Credit Not Affected By Suspended Personal Exemption (41)

Table Of Contents (page)

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IRS Finalizes Regulations for 100 Percent Bonus Depreciation (41)GAO Looks at IRS-related Federal Advisory Committee Act Panels (42)IRS Updates Requirements for Research Credit Safe Harbor (42)Final Regulations Clarify Definition of Qualifying Relative (43)2020-2021 Special Per Diem Rates (44)IRS Wage & Investment Division Announces Identity Protection PIN Voluntary Opt-In (46)IRS Launches BBA Centralized Partnership Audit Website (47)IRS Adds Audi, MINI, and Toyota Prius Models to Plug-in Electric Vehicles Credit List (47)Businesses Can File Cash Transaction Reports Electronically and In Batches (47)Business Identity Theft Affidavit Form Revised (48)IRS Issues Draft 2020 Form 1040 and Schedules 1, 2 and 3 (48)IRS: Drought-stricken Farmers, Ranchers Have More Time to Replace Livestock (49)TIGTA Says IRS Must Improve Issuance of Levies and Due Process Notices (49)

Tax Pros in Trouble (50)Federal Court Bars Florida Tax Preparation Businesses and Their Tax Return Preparers From Preparing Tax Returns (50)Announcement of Disciplinary Sanctions from the Office of Professional Responsibility (50)Tax Preparer Sent to Prison After Causing More Than $3 Million in Fraudulent Tax Returns (50)North Charleston Tax Preparer Arrested for Assisting with False Tax Returns (51)Owner of Tax Preparation Business Sentenced to Prison for Filing False Returns (51)

Ragin Cagin (52)Facts About the Qualified Business Income Deduction (52)

Taxpayer Advocacy (53)TIGTA Looks for Potential Fair Tax Collection Practices Violations (53)National Taxpayer Advocate Says IRS Must Bolster Its Digital Services (54)Expedited Letter Rulings Available When Compelling Need Related to COVID-19 (54)New Notice of Federal Tax Lien Requests Suspended Until October (54)

Foreign Tax (55)Applicability Date of Final Foreign Currency Regulations Deferred (55)

State News of Note (55)Pennsylvania Legislation Modifies Tax Code for Small Businesses (55)Some States May Tax Forgiven PPP Loan Proceeds (56)IRS Provides Tax Relief for Victims of Hurricane Laura; Oct. 15 Deadline, Other Dates Extended to Dec. 31 (55)Disaster Victims in Oregon Qualify for Tax Relief (57)

Wayne's World (60)S Corporations (60)

Letters to the Editor (61)

Tax History (62)Treasury Inspector General for Tax Administration - TIGTA (62)

Tax Quotes and Jokes (63)

Sponsors of the Month (63)

Table Of Contents (page)

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Tax News

IRS Announcement 2020-12 and the PPP

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows qualifying small business owners to receive Paycheck Protection Program (PPP) loans in order to stay in business and pay their employees during the Coronavirus epidemic.

Recipients of these loans are eligible for forgiveness of all or a portion of these loans if the loan proceeds are used in accordance with the CARES Act.

This Announcement provides that lenders who make PPP loans that are later forgiven under the CARES Act should not file information returns or furnish payee statements to report the forgiveness.

Announcement 2020-12 will be in IRB 2020-41, dated 10/13/20.

Editor's Note: Where tax professionals may have been able to rely upon a third-party document to determine debt forgiveness for the PPP, IRS is telling us that no forgiven debt under the CARES Act will have an information return furnished to report the forgiveness. This is another "due diligence" issue for us in the 2021 filing season.

USPS Won’t Implement Payroll Tax Deferral After Reviewing Impact on Employees

By Nicole Ogrysko

The U.S. Postal Service will not implement the president’s payroll tax deferral, which went into effect for much of the military and civilian federal workforce last week.

“USPS has reviewed guidance issued by the IRS and the Office of Management and Budget addressing this issue,” the agency said Tuesday in an announcement to employees. “After thoroughly considering the impact on both employees and the organization, the Postal Service has elected not to implement the optional deferral.”

USPS handles payroll for its own employees; it doesn’t use one of four major federal providers.

The major federal payroll providers began deferring Social Security taxes from employees’ and servicemembers’ paychecks last week. Employees and military members whose

basic, taxable income is $4,000 or less during a biweekly pay period are eligible for the deferral.

The deferral will continue through the end of the year, meaning employees and military members will see slightly larger paychecks for the rest of 2020.

Starting next January, federal employees and servicemembers will have to pay deferred taxes back, likely in installments through April. Employees’ paychecks will be smaller than usual during the first four months of the 2021, which USPS noted in its announcement to the workforce.

In guidance issued earlier this month, the Trump administration required executive branch agencies to implement the president’s payroll tax deferral “to the maximum extent possible.” Payroll providers and agencies have told employees and servicemembers they have no opportunity to opt out of the deferral.

USPS isn’t the only agency that had the choice of opting in or out of the president’s payroll tax deferral policy.

Judicial branch agencies can also decide whether or not to implement the tax deferral, the Interior Business Center, which processes payroll for some of those organizations, said earlier this month.

Unions that represent civilian federal employees have pushed the administration to provide more information and an opt-out option for the workforce, but their requests have largely gone unanswered.

The Defense Finance and Accounting Service (DFAS), which handles payroll for much of the military, Defense Department, Department of Veterans Affairs and others, has perhaps provided the most information to employees.

In recently updated frequently-asked questions for civilian employees, DFAS has clarified a few points. DFAS, for example, stated employees and servicemembers cannot increase their federal tax withholding in 2020 to avoid paying the amount of deferred Social Security taxes in 2021.

It’s still unclear how the payroll tax deferral will impact employee and servicemember W-2s for 2020 and 2021, DFAS said.And it’s unclear how exactly employees who retire or separate from federal service before the new year will be expected to pay back the deferred taxes from 2020, though they will be responsible for the sum.

IRS Provides Tax Relief for Victims of Hurricane Sally; Oct. 15 Deadline, Other Dates Extended to Jan. 15

Victims of Hurricane Sally that began on Sept. 14 now have until Jan. 15, 2021 to file various individual and business tax returns and make tax payments, the Internal Revenue Service has announced.

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The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance. Currently this includes Baldwin, Escambia and Mobile counties in Alabama, but taxpayers in localities qualifying for individual assistance added later to the disaster area, elsewhere in the state and in neighboring states, will automatically receive the same filing and payment relief.

The tax relief postpones various tax filing and payment deadlines that occurred starting on Sept. 14, 2020. As a result, affected individuals and businesses will have until Jan. 15, 2021, to file returns and pay any taxes that were originally due during this period. This means individuals who had a valid extension to file their 2019 return due to run out on Oct. 15, 2020, will now have until Jan. 15, 2021, to file. The IRS noted, however, that because tax payments related to these 2019 returns were due on July 15, 2020, those payments are not eligible for this relief.

The Jan. 15, 2021, deadline also applies to quarterly estimated income tax payments due on Sept. 15, 2020, and the quarterly payroll and excise tax returns normally due on Nov. 2, 2020. It also applies to tax-exempt organizations, operating on a calendar-year basis, that had a valid extension due to run out on Nov. 16, 2020. Businesses with extensions also have the additional time including, among others, calendar-year corporations whose 2019 extensions run out on Oct. 15, 2020.

In addition, penalties on payroll and excise tax deposits due on or after Sept. 14 and before Sept. 29, will be abated as long as the deposits are made by Sept. 29, 2020.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Therefore, taxpayers do not need to contact the agency to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2020 return normally filed next year), or the return for the prior year (2019). Be sure to write the FEMA declaration number – 4563 − for Hurricane Sally in Alabama on any return claiming a loss.

The tax relief is part of a coordinated federal response to the

damage caused by Hurricane Sally and is based on local damage assessments by FEMA.

Assessed Value Versus Market Value – What is the Difference?

By Anna Granger

It’s common for both buyers and sellers to have misconceptions when it comes to the assessed value and market value of a home. These two terms are not the same, and in fact, they are quite different. Let’s look at the differences between assessed value and market value when it comes to real estate.

What is the Assessed Value?

In order to understand the assessed value of a property, you have to know who is doing the assessment and why. Often, this value comes from municipalities or counties placing a value on the property for tax reasons.

The assessor will look at similar properties in the area and what they sold for while making adjustments for differences, along with improvements. They may also look at any income you make from the property for renting out a room, along with a few other factors.

The value the assessor comes up with will be the assessed value of the property. This is used by the local government to figure out how much you will pay in taxes each year.

What is Market Value?

The market value of a home is figured out by an appraiser that is doing an appraisal after the home goes under contract. Your real estate agent will look at comparable properties and what they have sold for recently. The goal of the agent is to figure out the most probable price the home will sell for on the open market today and recommend a suggested list price or list price range to you.

Real estate agents will look at many factors other than just similar homes that have recently sold. They will also look at the external and internal characteristics of the home, the location, and the supply and demand of the market.

Often a comparative market analysis is used as the starting point for listing the home. It’s a suggested list price assigned by a real estate agent that has taken the emotion or attachment of the seller out of the equation to assign a possible market value to the home.

The Differences Between Market Value and Assessed ValueThe market value of a home may rise and fall depending on the conditions of the local market. However, the assessed value will remain more immune to market fluctuations. In fact, in some states, the assessed value can only rise or fall by a certain percentage per year.

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income,” IRS said, adding that “taxpayers who sell marijuana may reduce their gross receipts by the cost of acquiring or producing marijuana that they sell, and those costs will depend on the nature of the business.”

“Accordingly, a marijuana dispensary may not deduct, for example, advertising or selling expenses. It may, however, reduce its gross receipts by its cost of goods sold, as calculated pursuant to Internal Revenue Code section 471,” it said.

In other words, while cannabis businesses aren’t eligible for most traditional deductions, they are able to calculate the cost of goods and get some tax relief.

But pending a change in the federal legal status of marijuana, or statutory changes at the agency level, the cannabis industry will continue to be at a disadvantage. That would change if Congress passed a marijuana legalization bill..

Key Factors About Taxes in Retirement

By John L. Smallwood

Paying taxes isn’t a favorite pastime of most Americans. And in retirement, paying higher taxes can be an unwelcome surprise when the financial plan did not account for them.

A survey by Nationwide revealed that over one-third of current retirees didn’t consider how taxes could impact their income when they were planning for retirement. Less than half said they know how to leverage their financial accounts to minimize their tax burden.

“One of the greatest disruptors of wealth and its potential is taxation,” says John Smallwood (www.johnlsmallwood.com), president of Smallwood Wealth Management and author of It’s Your Wealth – Keep It: The Definitive Guide to Growing, Protecting, Enjoying, and Passing On Your Wealth. “Most financial strategies are missing the fundamentals, leaving you to pay much more in taxes than you should over your lifetime.

“There are some fundamental concepts of taxes that apply to the financial planning process. The goal is to have multiple sources of retirement income that balance out taxes and fees. That way, if one or more of the sources dries up, or if tax law changes a source or two, then the impact on your portfolio will be minimal.”

Smallwood says the following items related to taxes are important to know when creating a retirement plan:

• Tax deferrals. Tax deferral strategies are intended to defer paying taxes on certain assets, based on the concept of moving from a higher tax bracket to a lower tax bracket in the future. But Smallwood cautions, “The tax rate in the future may not be in your favor. If you defer and don’t end up in a lower tax bracket, you can lose. You might end up paying more than if you had not deferred.”

• Qualified plans. Specific rules and potential penalties

Since the assessed value of a property is mainly used for property taxes, it’s not necessary to worry so much about it, if you’re selling or buying a home. Instead, you want to pay attention to your agent’s comparative market analysis and later on in the process, the appraised value of the home.

IRS Releases Tax Guidance For Marijuana Industry

By Kyle Jasper

The Internal Revenue Service (IRS) has released updated guidance on tax policy for the marijuana industry, including instructions on how cannabis businesses that don’t have access to bank accounts can pay their tax bills using large amounts of cash.

Because marijuana remains federally illegal, the industry is largely deprived of tax benefits extended to operators in other markets—but it still has an obligation to pay taxes and properly report transactions, IRS said.

“A key component in promoting the highest degree of voluntary compliance on the part of taxpayers is helping them understand and meet their tax responsibilities while also enforcing the law with integrity and fairness to all,” the new memo states. “Businesses that traffic marijuana in contravention of federal or state law are subject to the limitations” in IRS code.

This update appears to be responsive to a Treasury Department internal watchdog report that was released in April. The department’s inspector general for tax administration had criticized IRS for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws. And it directed the agency to “develop and publicize guidance specific to the marijuana industry.”

The new guidance briefly covers the rules for income reporting, cash payment options, estimating tax payments and keeping financial records.

In an attached Frequently Asked Questions document, IRS explains how court rulings have clarified that businesses are required to pay taxes even if they’re selling products considered illegal under state or federal law. It also explains that marijuana companies are eligible for payment plans if they’re unable to pay their taxes in full. Further, it states that cannabis operations are subject to the same penalties as any other business that come about during an income audit.

A topic of particular interest for the marijuana market concerns tax benefits. An IRS code known as 280E “disallows all deductions or credits for any amount paid or incurred in carrying on any trade businesses that consist of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act.”

“Section 280E does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross

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apply when you withdraw from tax-deferred retirement accounts, Smallwood says. Withdrawing before age 59½ brings a 10% penalty. At 70½, there are required minimum distributions (RMDs). “With RMDs, there is a 50% penalty for not withdrawing the right amount of money.” he says. “Plus, depending on the account, you have to pay taxes according to your bracket.”

• Compound taxes. Tax strategy when you are saving for retirement is one of the most important parts of a wealth plan. “For example, a 45-year-old with a savings rate of 6% and putting away $51,000 per year could accumulate a healthy balance of $2.5 million by age 65,” Smallwood says. “But with compound taxation, money is eroding all the time. Each year that an account grows, the investor’s tax liability grows along with it. Interest earnings, along with dividends and capital gains, get larger over time as the investment gains in value. If the gains the first year include $30,000 worth of interest but at the 30% tax bracket, then you’ll have to pay $9,000 more in taxes.”

• Systematic withdrawals. Systematic withdrawals, if done properly, can significantly reduce the tax impact on an investment portfolio. “Let’s say, late in 1989, you placed a lump sum of $100,000 in an S&P 500 index fund with a good track record,” Smallwood says. “Instead of leaving the funds in the account, however, you took $6,000 from the account each year and repositioned those assets elsewhere. After 20 years, the fund balance would have reached $243,191, an annual gain of 7.92% that exceeds the return earned by leaving the funds in the account. Why? Because taking those withdrawals undercuts the impact of compounded taxes. Over time, the tax obligation would be $30,451, or $13,622 less than leaving the money in the account.”

“Good retirement planning includes all the possible tax implications and gives you options,” Smallwood says. “Organizing income sources so that they hit your tax return the right way should be a deliberate strategy every year.”

The Benefits of Establishing Reasonable Compensation

By Jack Salewski, CPA, CGMA & Paul S. Hamann

We find it perplexing how often S Corp. owners – who invest in their business with an eye on the future and carefully analyze the cost/benefit of every decision – take a short-term, simplistic approach to reasonable compensation: Just pick the lowest possible number to minimize payroll taxes.

A reasonable compensation calculation impacts far more than just this year’s payroll tax. Talking with your clients about the benefits of accurately establishing compensation can be a life saver in retirement, sale or transfer of the business, or in the event of disability.

Some issues to consider are:

1. Social Security income when in retirement2. Greater retirement plan contribution deductions3. Enhanced cash flow if there is a need for disability income4. A higher 199(A) deduction for some5. Business valuation6. Peace of mind

More Social Security when in retirement

We have all heard, “Social Security will not be around when we reach retirement age,” or “the system is going broke.” While the Social Security system will certainly evolve and change, it’s foolish to put all bets on its total demise. In some form it will be there when your clients retire.

Social Security benefits are based on the highest 35 years of earnings. The more Social Security compensation, up to the Social Security maximum, the greater the Social Security benefit in retirement. Once salary is at the Social Security ceiling there is no more benefit.

Greater retirement contribution deduction means a more comfortable retirement

If your client remains convinced Social Security is a goner, retirement plan savings become even more critical, and reasonable compensation impacts that, too. The size of the retirement contribution deduction depends on (1) type of plan, (2) the taxpayer’s age, and (3) compensation amount.

For example, if the taxpayer’s plan allows a 55% contribution rate, and the shareholder is paid $140,000, the deduction will be $77,000. If the compensation is adjusted to $300,000, the deduction would be $165,000. Assuming a 37% Federal tax rate, this generates a tax savings of $32,560. There would be an additional Medicare tax of $3,344, giving the taxpayer a net tax savings of $29,216. Plus state tax savings. Even if all the wages are subject to Social Security there would be a net savings of $19,096.

With additional amounts paid into the retirement plan plus the deferred tax savings on earnings in the plan, the balance will be substantially higher than a regular investment account. The higher balance will enable the shareholder to take more money out of the plan to cover cash flow needs.

Enhanced cash flow if there is a need for disability

It does not matter if it is a private disability policy or SSI Disability, benefits are based on earned income. For SSI Disability this could include children.

For some a higher 199(A) deduction

There are circumstances when having higher compensation will increase the 199(A) deduction.

Business valuations will be cleaner

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Every business valuation specialist and potential buyer looks at compensation. “Explaining away” an unreasonable compensation figure is not what an S Corp. owner needs to be doing when selling the business. If the compensation figure is not reasonable, financial statements will need to be adjusted, which takes time and money. A proper calculation done as a matter of course will make eventual valuation work quicker and less expensive, and the seller will appear more professional and trustworthy. If it’s a divorce precipitating a valuation, the compensation level will be more credible than if it’s adjusted on the fly. If the valuation is needed for estate purposes, a valuator probably won’t have enough information to even calculate a proper amount, making probate even more stressful and contentious than it already is.

Peace of mind

In the recent past all our worlds have been turned upside down, why add an unnecessary worry about an IRS challenge? Or worry about cash flow in retirement or in case of disability? Or being able to sell the business for its true worth?

Each client situation and goals are different. Each situation needs to be evaluated objectively considering both short-term and long-term objectives and goals. The understatement of compensation is a short-term reward. Greater long-term rewards come from getting it right.

Editor's Note: ncpeFellowship members were treated to 3 hours of continuing professional education by Paul Hamann and the RC Reports group on Reasonable Compensation - September 21 and 22. An informative session that kept us interested and engaged in how to assist our clients and avoid unnecessary IRS adjustments. RC Reports has allowed the written material and powerpoint presentation to be posted under Resources - S Corporations. Thank you Paul and RC Reports..

GAO Says IRS Should Utilize Better Service Performance Measures

A Government Accountability Office (GAO) report released on Sept. 23 found that IRS and its divisions that manage programs serving the largest taxpayer groups—the Wage and Investment (W&I) and the Small Business/Self Employed (SB/SE) divisions—did not have customer service performance goals that specified the desired improvements. (GAO-20-656)

"Setting goals and objectives with related performance measures and targets are important tools to focus an agency's activities on achieving mission results," GAO said. According to the report, W&I aligned its service programs to IRS's strategic objectives for taxpayer services that state broad types of management activities. "However, it did not have performance goals that specify outcomes to improve the taxpayer experience, such as reducing taxpayer wait times for telephone assistance," the report said.

The agency does have many performance measures for assessing the services it provides, such as those related

to the timeliness and accuracy of information provides to taxpayers, GAO said. "However, these existing measures do not assess improvements to the taxpayer experience, such as whether tax processes were simpler or specific services met taxpayers' needs," it added.

Existing measures do not capture all of the key factors identified in related Office of Management and Budget guidance, GAO said, adding that "as a result, IRS does not have complete information about how well it is satisfying taxpayers and improving their experiences."

IRS Updates Cryptocurrency Tax Guidance

By Brittany De Lea/FOXBusiness

Virtual currency received for small tasks on a crowdsourcing platform is taxable.

The IRS issued new guidance clarifying how cryptocurrencies are treated for tax purposes when they are received in exchange for certain services.

The tax agency recently released a memorandum stating that an individual who receives digital currency through a crowdsourcing platform in exchange for providing a service should report the convertible virtual currency as ordinary income.

A question was brought to the agency’s attention regarding crowdsourcing for “microtasks” in particular, which refers to subdividing larger tasks into smaller jobs that are distributed via an online platform.

The IRS noted that convertible virtual currency received for these tasks, regardless of how small – noting that sometimes payment are for less than $1 – is taxable as ordinary income.The IRS has begun cracking down on taxpayers who owe on virtual currency transactions. Last year, it sent letters to 10,000 taxpayers who may have had tax liabilities.

Under current U.S. tax laws, cryptocurrencies are treated like property.

Taxpayers who fail to pay the taxes they owe on their virtual currency transactions can be subject to penalties and interest – in more serious cases even criminal prosecution. Treasury Modifies Endowment Tax Rules

By Kery Murakami Associations representing colleges and universities still objected to the endowment tax that Congress enacted in 2017 but said final rules published by the Internal Revenue Service and Treasury Department made some improvements to the interim rules the agencies announced last year.

Congress, as part of a sweeping tax reform bill, created a 1.4 percent excise tax on net investment income at private

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colleges and universities with at least 500 tuition-paying students and assets of at least $500,000 per student.

In a reversal from the interim guidance, the Treasury and IRS now say they will not count a student whose tuition is paid through federal grants, scholarships or institutional aid as a tuition-paying student, said Steven Bloom, the American Council on Education’s government relations director.

Associations were still studying the 156-page rule. But in another change in response to input from institutions, the agencies said they will not tax colleges on the interest they receive on student aid, or revenue from housing students, faculty or staff.

Still, Bloom said the tax is extremely complicated, and the money would go into the federal government’s general coffers and not go toward helping students go to college.

Liz Clark, vice president for policy and research for the National Association of College and University Business Officers, praised the changes from the interim guidance, saying they “recognized some of the unique operating challenges colleges and universities contend with.” But she said, “NACUBO remains staunchly opposed to the legislative policy driving the creation of the tax, which diminishes the charitable resources the affected colleges have for students.”

36 Small Business Deductions, From A to Z

By Julie Ritzer Ross

What are small business tax deductions?

Small business tax deductions are allowable expenses that can reduce your business's taxable income. These deductible business expenses are also referred to as tax write-offs.

The IRS taxes businesses on their net income, which is calculated by subtracting business expenses from gross income. Many operating expenses are tax deductible, but some are not or are deductible only under certain conditions.

According to the IRS, no expense can be deductible unless it's both ordinary and necessary. An ordinary expense is one that's common and accepted in your business. For example, if you own a bakery, the cost of flour and sugar is an ordinary expense. A necessary expense is one that's helpful and appropriate for your trade and business, such as travel expenses to attend an annual industry convention.

It's also a good idea to be aware of which tax deductions come with restrictions or prerequisites. This is especially true because of the many tax changes that have occurred as a result of recent tax reform and because improperly trying to claim a deduction can trigger an audit by the Internal Revenue Service, said Joshua Zimmelman, president of tax advisory firm Westwood Tax & Consulting.

Key takeaway: You can use business tax deductions to reduce

your business's taxable income and, in turn, its tax liability. All expenses deducted must be both ordinary and necessary.

Business tax deduction checklist

Here's our list of 36 small business deductions, from A to Z. Discuss these options with your tax professional to find out which ones your business qualifies for.

1. Advertising and marketing

There's good news when it comes to advertising and marketing expenses. Not only are these expenses 100% deductible, but the list of allowable deductions is long.

That list includes (but isn't limited to) the cost of a business logo design, printing (e.g., business cards or brochures), online and print ad space, website design/creation, social media marketing campaigns, event sponsorship and promotional mailings for existing and potential customers.

However, you can't deduct any expenditures you incurred to sponsor a political campaign or event in your business's name.

2. Bank fees

It's fine to deduct service charges, funds transfer fees and overdraft fees associated with your business bank or credit card account. The same holds true of merchant or transaction fees paid to a third-party payment processor.

3. Bonus depreciation

Through 2022, you can deduct 100% of the cost of qualified property. This means tangible property with a recovery period of 20% or less. Examples include off-the-shelf computer software; certain film, television and theatrical production costs; and some plants that bear fruit and nuts.

4. Business gifts

Holiday gifts for clients, customers and other business associates are considered deductible business expenses. However, you can deduct only $25 annually for business gifts given to any one individual. Promotional items, like pens and calendars, don't count toward the limit if each one costs $4 or less, has your business's name clearly and permanently imprinted on it and is one of a number of identical widely distributed items.

5. Business income

Business owners who report their operations on Schedule C of their personal income tax return qualify for a 20% deduction on their business income. The deduction phases out for high-income earners (over $160,000 for single filers, $160,725 for married filing separately and $321,400 for joint filers).

6. Business insurance premiums

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Premiums paid on business interruption, business vehicle, liability, professional liability/malpractice and workers' compensation insurance policies fall into this category. So do employee health, dental, vision and life insurance premiums. One caveat: Life insurance premiums aren't deductible if you or your business is the beneficiary on the policy.

7. Business meals

You can deduct 50% of "qualifying" food and beverage costs. "Qualifying" means the meal must be an ordinary and necessary part of conducting your business – for example, to discuss your services with a prospective client or show your company's new merchandise to an existing or potential customer. It can't be lavish or extravagant, and you or one of your employees must be present at the restaurant or other venue when the food and beverages are consumed.

The cost of meals for employees is also deductible. You can deduct 100% of the cost of food and beverages served at office social events, such as parties and picnics. Meals provided to employees for other reasons – for example, dinner when they're working late – are 50% deductible.

8. Business use of your vehicle

The entire cost of operating your vehicle qualifies as deductible if it's driven only for business purposes, rather than for both business and personal purposes. Otherwise, you can deduct just the costs related to business use – for example, gas and tolls paid while driving to appointments with clients but not while transporting your family to the beach.

The IRS allows two methods to calculate deductions in cases where a vehicle is used for business and personal reasons:

• Standard mileage rate: Start with the number of miles you drove the vehicle during the tax year. Then, multiply that number by the standard mileage deduction (currently $0.58 per mile).

• Actual expense method: Add up your expenditures to operate the vehicle during the tax year, including those for gas, oil, repairs, tires, insurance, registration fees and lease payments. Multiply this figure by the number of miles you drove the vehicle for business during the tax year.

9. Charitable contributions

Sole proprietors, limited liability companies (LLCs) and partnerships can't deduct contributions as a business expense, but you, as the business owner, may be able to claim the deduction on your Schedule A. The donation must be to a qualified organization. Corporations can deduct charitable contributions of up to 25% of their taxable income.

10. Child and dependent care

To qualify for this deduction, the person receiving the care you're paying for must be a child under 13 or a spouse or

other dependent who's physically or mentally unable to care for himself or herself. The credit is worth 25% to 30% of your allowable expenses, depending on your income.

11. Cleaning supplies and janitorial services

You're allowed this business deduction for any expenses related to keeping your business sanitized. That means cleaning supplies, trash removal, recycling and sanitation.

All properties cleaned are eligible. For example, if you own a retail store and an office, you can deduct all expenses related to keeping both facilities clean and sanitized.

If you have a home office, you can also deduct a portion of your payment to an individual or cleaning service you've hired to clean your house. The deduction is calculated based on the square footage of the office.

12. Contract labor

Payments to freelancers and independent contractors are deductible. Supply a 1099-MISC form to any individual who delivers $600 or more worth of services to your company in any tax year.

13. Cost of goods sold

This isn't a standard deduction; instead, it's factored into reporting revenue from the sale of inventory. You don't deduct the cost of your inventory items (i.e., the cost of goods sold); rather, you reduce your gross receipts from the sale of inventory items so your income is modified accordingly.

14. Depreciation

Thanks to tax reform, business owners no longer need to depreciate the cost of assets over a period of years. Instead, they can write off the entire cost of new purchases of items such as computers, furniture and equipment. The cost of these items used is now 100% deductible, too.

15. Education Costs

The IRS allows you to fully deduct education costs if incurring these expenses adds value to your business by helping to maintain or enhance the expertise and skills needed to operate it. Examples of valid business education expenses include classes, workshops, seminars and webinars that pertain to your field; subscriptions to trade or professional publications; and books tailored to your industry.

Transportation to classes or other educational sessions also qualify for the full deduction, but education expenditures that would qualify you for a new career or that are unrelated to your business do not.

16. Family and medical leave (paid)

Under the Tax Cuts and Jobs Act, business owners can claim

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your business. ]

22. Local transportation

Local transportation costs, like Uber fare to visit a vendor or prospective customer or client, are deductible.

23. Maintenance and repairs

Maintenance and repairs to your business premises are fully deductible, but expenditures for capital improvements, such as a new roof, may not be immediately deductible. If you have a home office, you can deduct a percentage of what you spend on maintenance and repairs to your home, based on its square footage.

24. Moving expenses

Any costs to move business equipment, supplies and inventory from one business location to another qualifies as a deduction.

25. Organizational costs

This is a deduction you can leverage during your first year in business, and it's up to $5,000. Organizational costs include expenses you incur in forming your business structure, such as fees for forming a legal entity.

26. Real estate losses

"You can deduct up to a certain amount of losses against your income if you actively participate in renting your property, depending on your adjusted gross income," Zimmelman said. "A real estate loss would be when expenses pertaining to a rental property exceed the rental income. If you are a real estate professional, i.e., you spend more than half your working hours – a minimum of 751 hours in a year – in the real estate business, you can deduct real estate losses without a cap."

27. Rent

Rent paid for any location used to conduct business, as well as equipment rental costs, can be deducted as a business expense. But if you rent your home, you can't take a deduction for payments to the landlord, even if you have a home office. These payments can be deducted as a part of home office expenses.

28. Research and development

You can claim this credit for expenses you incur in seeking information that's technological in nature and will help you develop a new or improved business component. For example, if you owned a catering business, you'd qualify for the research and development credit if you invested in developing equipment that automates a food preparation process.

29. Retirement plans

a credit for wages paid to employees on family and medical leave. The credit starts at 12.5% for payments of 50% of a person's salary and increases to up to 25% if the leave payment rate is 100% of the normal rate.

17. Health insurance

If you are self-employed, you can deduct the costs of your personal health insurance premiums. However, you need to meet certain criteria:

• Your business must be claiming a profit, not a loss, for the tax year.

• You must be ineligible for an employer's health plan, including your spouse's plan. If you were eligible to enroll in such a plan but didn't, you can't claim this deduction.

• You can claim premiums only for the months when you were not eligible for an employer's health plan.

18. Healthcare out-of-pocket expenses

In addition to healthcare premiums, self-employed business owners can deduct other out-of-pocket medical expenses, like office co-pays and prescriptions. These costs are classified as itemized deductions on Schedule A.

19. Home office

Regularly and exclusively designating part of your home to perform administrative or managerial activities for your business gives you the right to claim a home office deduction for utilities, rent, mortgage interest, real estate taxes, depreciation and cleaning/repair fees. The deduction is calculated based on the area of your home multiplied by $5 and has a cap of $1,500.

20. Interest

If you take out a loan or use a credit card to cover business expenses, you're entitled to deduct interest paid to the lender or credit card company. There are a few caveats, though. You must be legally liable for the debt; if someone else gets a loan or mortgage to help you out, you're not legally liable for the debt even if you make payments on it. You and the lender must intend for the debt to be repaid; you can't take a gift of funds from a relative or friend and call it a loan.

You and the lender also must have a true "debtor/creditor" relationship, with a schedule of regular payments. If a loan is part business and part personal, you can deduct only the portion of the loan that's for business.

21. Legal and professional fees

You can take a deduction for legal and professional fees charged by accountants, attorneys, bookkeepers, online bookkeeping service providers and tax preparers. Their services must be necessary for and directly related to running

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expenses are fully deductible.

Examples of miscellaneous expenses include the use of your car or other transportation services while in the business destination, parking, tolls, dry cleaning, tips, business calls and shipping of materials or samples to the city where you're doing business. However, the cost of commuting to and from work daily is not deductible.

36. Work opportunity credit

You can take advantage of the work opportunity credit if your business pays first- and second-year wages to targeted employees, like veterans, long-term recipients of family assistance funds from the government and youths hired for summer jobs.

The credit is calculated as a percentage of the employees' wages and ranges from $2,400 to $9,600 per employee, depending on the type of targeted employee.

Key takeaway: Deductible expenses vary. Use this list as a jumping-off point, with the understanding that not all options will apply to your business and that you should seek the advice of a tax professional.

The Seven Cases to do a Roth Conversion

By Allan Roth

Should your clients convert some of their traditional tax-deferred money (e.g. IRA or 401K) to an after-tax Roth account? Though I’m not related to the late, eponymous Senator William Roth, I spend a significant amount of time with my clients looking at this issue. There are some myths that are just plain wrong. Here is how to think about and frame the conversation with your clients.

I’ll conclude with the seven situations to consider for each client when advising on this issue.

Warning: I’ll start simple, but get to more complex situations – nothing about taxes is ever simple.

Roth versus traditional IRAs

The difference between a traditional and a Roth is as follows:

• Traditional – get a tax deduction when you contribute but pay taxes when you take it out.

• Roth – get no tax-deduction when contributed but it grows tax-free. You owe no additional taxes upon

You can take deductions on contributions to your own retirement plan and to retirement plans you've set up for employees. You're also entitled to a tax credit equal to 50% of the first $1,000 you invest in starting a retirement plan.

30. Salaries, wages and benefits

Payments to employees – including salaries, wages, bonuses, commissions and taxable fringe benefits – are deductible business expenses. If you own a C corporation or an S corporation and perform more than minor services there, you can be considered a salaried employee, and your salary is also deductible. But sole proprietors, partners and members of an LLC aren't employees, and any monies paid to them can't be written off.

31. Startup costs

Startup costs include expenditures to start a business or to investigate opening or acquiring a business. Travel and other expenditures related to finding suppliers, customers and distributors, along with the cost of advertisements announcing a new business, also fall into this bucket. There is a $5,000 deduction for startup costs.

32. Supplies

Go ahead and deduct the cost of items your small business uses in its day-to-day operations, like ingredients for a catering company or cleaning supplies for a janitorial service.

33. Taxes and licenses

Here is a list of taxes and licensing fees that qualify as deductible business expenses:

• State income taxes• Payroll taxes• Real estate taxes paid on business property• Sales tax• Excise taxes• Fuel taxes• Business licenses

34. Telephone and internet

Telephone and internet services that are integral to conducting your company's business are considered deductible business expenses. If you use a landline at home, you can't deduct the cost of your first line, even if it's used only for work. However, you can deduct the cost of a second line devoted to business

If your cell phone and internet connection are used for personal and business reasons, the entire cost can't be deducted – just the percentage of the cost that's allocable to your business.

35. Travel

Whether incurred by you or your employees, the costs of airfare, meals, lodging and miscellaneous business travel

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withdrawal.

It’s a decision of paying taxes now or later. And, of course, my analysis is based on current tax law and rates.

The three-bucket approach for tax-diversification

I’m not talking about three buckets of money for spend down, such as a “safe” bucket of cash to live on if stocks tank. I’m referring to three buckets of tax-wrappers to lower the risk of tax-law changes. These three buckets and their advantages are:

• Taxable money. Capital gains taxes are typically lower than ordinary income and there is a step-up basis upon death.

• Tax-deferred money. You get a tax-deduction immediately.

• Tax-free Roth money. It grows tax-free and no RMD must be taken from this pot of money.

Let’s face it; none of us knows future tax law changes. Sure, I think tax rates will go up because of our huge debt and deficit (I’m not a believer in modern monetary theory), but logic doesn’t usually prevail when it comes to politics. I don’t know future ordinary income or capital gains tax rates, the future of the step-up basis upon death or even future estate tax exemptions. And all of those play a role in whether to contribute or do Roth conversions.

Because I know I don’t know the future, when a client asks whether they should save in taxable, tax-deferred, or tax-free, my answer is, “yes – all three.”

The math behind the contribution

I’ve heard it said that the Roth conversion makes sense if you can leave in that account for more than a decade before tapping into the assets.

I couldn’t disagree more.

We all learned something in elementary school called the “commutative” property of multiplication: Changing the order of the numbers we are multiplying does not change the product.The simple translation is that if the client’s marginal tax rate today is the same as in the future, the outcome is the same. To illustrate, let’s say the client is in the 30% marginal tax rate today and our best guess is it will be the same in retirement, when the money is needed. Let’s look at both a five- and 30-year period before the money is needed and use a$10,000.00 with a 7% annual growth rate example. Here is the math between contributing to a traditional versus Roth account:

Five-year

Traditional: ($10,000 x (1.07)^5) x (1-.3) = $9,817.86

Roth: ($10,000*(1-.3) x (1.07)^5) = $9,817.86

30-year

Traditional: ($10,000 x (1.07)^30) x (1-.3) = $53,285.79

Roth: ($10,000*(1-.3) x (1.07)^30) = $53,285.79

The math between the traditional versus the Roth is merely making a few changes in the order of the multiplication so the answer is the same. The client would be indifferent between a traditional or a Roth account.

If one’s marginal tax rate is lower upon retirement when the funds are withdrawn, the traditional is superior. If higher, the Roth wins out. But even if tax rates go up, it doesn’t necessary translate into a higher marginal tax rate for your client since they may have little or no earned income in retirement.

The two ways the Roth contribution (or conversion) will backfire are lower marginal rates upon retirement or a major tax overhaul, such as ditching the income tax and changing to a system of a consumption tax (like the Fair Tax Act) that much of the rest of the world uses. Mike Piper, CPA and author of Oblivious Investor blog, points out that a conversion could push your client’s modified adjusted gross income (MAGI) to result in paying the 3.8% investment income tax, which is an argument not to convert. On the other hand, many states don’t tax parts of IRA withdrawals, including conversions to Roth’s. In Colorado (my home state), each person can recognize $20,000 annually state-tax-exempt between the ages of 55-64 and $24,000 annually if over age 64.

The first complexity – conversion and pay the taxes from a taxable account

Now let’s look at the same example (using five years). but assume it’s a conversion and the taxes are paid from a taxable account rather than the IRA. For simplification, let’s assume it’s invested in stocks with a 7% annual return (2% dividends and a 5% capital gains) and a 20% (state and federal) dividend and capital gains tax

Pay taxes from IRA: ($10,000 x (1.07)^5) x (1-.3) = $9,817.86 +$3,958.58.44 = $13,776.30

Pay taxes from taxable account: (10,000 x (1.07)^5 = $14,025.52

If one pays taxes from their IRA instead of their taxable account, they will have an additional $3,000 in their taxable account. After paying the 20% dividend tax each year and the 20% long-term capital gains tax at the end of five years, it grows to $3,958.44. Add the Roth value of $9,817.86 and it totals $13,776.30. But converting and paying the taxes from the taxable account doesn’t leave that after-tax $3,000 to grow outside of the Roth. Having it in the Roth allows for an extra $249.22 of money to live on after only five years. This extra return comes mainly from taxes avoided by having the $3,000 in the Roth instead of the taxable account. The difference

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Let’s say the client has a taxable estate and a large $4 million traditional IRA. If they convert $1 million, they might pay 40% (state and federal) in taxes or $400,000. This lowers the taxable estate by $400,000 and converts the $1 million into a far more tax-efficient Roth. The heirs will likely have to take it out – over a 10-year period, but they can leave it in that inherited Roth, growing tax free, until the last day of that 10-year period.

Conclusion

In helping a client decide to do partial or full conversions, I consider the following and lean toward converting to a Roth based on an affirmative answer to the following questions:

1. Is the Roth pot of money small compared to the taxable and tax-deferred pots?

2. Is the current marginal tax-bracket low? This could be the case if the client retired before taking Social Security or RMDs, or if they are starting a pass-through business (LLC or Sub-S) with very little income or even losses.

3. Will the client have high income in retirement, such as pension income?

4. Will the RMDs be burdensome if the client doesn’t convert some money to the Roth?

5. Does the client have any after-tax money in their tax-deferred accounts and, if all IRAs are converted, will that allow for future backdoor Roth contributions?

6. Will the client benefit from a possible state income tax-exemption for amounts converted?

7. Are there some estate planning benefits from conversions?

While answering “yes” in any of those cases favors a Roth conversion, this must be considered in the context of the dominant reason not to convert: A traditional IRA is better if the client’s marginal income tax rate will be lower than at the time funds are withdrawn than it is at the time of conversion.

But there are many tax traps. Make sure you are working with a tax expert on conversions. For example, Mike Piper points out that if the client uses her traditional account to pay the taxes and is under age 59.5, a 10% penalty on the amount withdrawn to pay taxes may apply. Another trap is that the income from a conversion may cause the client to be in a higher IRMAA Medicare premium situation. Piper also notes generating $1 too much in income could cost $1,000 per person. Further, income from a conversion may reduce or eliminate other opportunities, such as recognizing long-term capital gains at a zero federal tax rate. Many other tax traps exist, so work with the client’s tax-professional. Always phrase your argument using the term, “under current tax law.” I use that phrase early and often.

grows over time; at 20 years there is an extra $2,015 if taxes are paid from the taxable account ($38,697 vs. $36,682 or an extra 5.5%).

To understand why this happens, remember that the $10,000 in the traditional is really a partnership between the client and the state and federal governments. Using the 30% tax rate example (ordinary income), $7,000 is the client’s share of this tax-advantaged account. If the client pays $3,000 now from their taxable account to convert, they have effectively increased their tax-advantaged portion of the portfolio from $7K to $10K by buying the government’s share out with non-tax advantaged money. Now the difference would be less if capital gains taxes have to be paid to raise the $3,000 in the taxable account to pay the taxes.

It is preferable to pay the tax on a Roth conversion from a separate taxable account rather than from the IRA. This is true even if one assumes that a capital gains tax must be paid on the sale of securities from the taxable account that is used to pay those taxes.

The second complexity – Some of the tax-deferred accounts were funded with after-tax money.

This is easier to analyze. Some clients make after tax contributions to their IRAs. While I tell them to stop, it does strengthen the argument to convert. Let’s use the same $10,000 conversion example for five years but assume $6,000 came from after-tax dollars. If one converts, they have to pay taxes only on the $4,000 pre-tax amount to get all $10,000 after taxes. If left in the traditional IRA, gains on the entire $10,000 are taxed as ordinary income when withdrawn. This decision to convert is close to a no-brainer – just do it!

Furthermore, if one converts all of their IRA to a Roth, they also have the option of making “backdoor” Roth conversions each year to get more into the tax-free pot of money. Remember, however, that the aggregation and pro-rata rules apply. This means the IRS considers your client to have only one traditional IRA no matter how many accounts they may have. So, in the example above, if the client had a second IRA with $90,000 and all pre-tax dollars, the IRS considers the client has one $100,000 IRA with $6,000 after-tax so 94% of that conversion would be taxable.

But having any after-tax contributions in a traditional retirement account strengthens the argument for a Roth conversion.

The third complexity – estate planning

The estate tax exemption for a couple is over $23 million. But some of my clients have more than this and it’s quite possible that the exemption amount will be drastically lowered in the future. Amounts over the exemption are taxed at 40% federal plus possible state taxes. Also, under the Secure Act, a traditional tax-deferred account is even less attractive, as the heirs likely only have 10 years to withdraw the funds. If one has a taxable estate or is concerned about the size of the traditional accounts, conversions can help.

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Question of the Month

How Was Giving to Charity Affected by the CARES Act?

The inclusion of an expanded charitable giving incentive is a critical acknowledgement by Congress. It is the first time Congress has passed this type of giving incentive in response to disaster or national emergency.

Here’s How it Works

New Deduction Available: The bill makes a new deduction available for up to $300 per taxpayer in annual charitable contributions. This is particularly beneficial to people who take the standard deduction when filing their taxes (in other words for taxpayers who do not itemize their deductions). It is calculated by subtracting the amount of the donation from your gross income. It is an “above the line” adjustment to income that will reduce your AGI, and thereby reduce taxable income.

To qualify, you would have to give a donation to a qualified charity. If you have already made your donation since Jan. 1, that contribution counts toward the $300 cap. A donation to a donor-advised fund (DAF) does not qualify for this new deduction.

New Charitable Deduction Limits: Also part of the bill, individuals and corporations that itemize can deduct much greater amounts of their contributions.

Individuals can elect to deduct cash contributions, up to 100% of their 2020 adjusted gross income, on itemized 2020 tax returns. This is up from the previous limit of 60%.

Corporations may deduct up to 25% of taxable income, up from the previous limit of 10%.

The new deduction is only for cash gifts that go to a public charity. If you give cash to, say, your private foundation, the old deduction rules apply. And while the organizations that manage DAF’s are public charities, you do not get the higher deduction for donating cash to your DAF. These new limits do not apply to gifts of appreciated stock.

If your assets are substantial enough that you can give more than your income this year, you won’t lose the deduction for the excess amount. You can use it next year, as has always been the case.

If done right and under the right circumstances, Roths are a great tax-diversifier as part of your client’s tax strategies.

Allan Roth is the founder of Wealth Logic, LLC, a Colorado-based fee-only registered investment advisor. He has been working in the investment world with 25 years of corporate finance. Allan has served as corporate finance officer of two multi-billion dollar companies, and consulted with many others while at McKinsey & Company.

Practice Management

Tax Return Preparers Working Remotely May Be Security Risk

By Lauren Loricchio

The increased number of professional tax return preparers working from home because of the COVID-19 pandemic may be a cause for concern from a security perspective, a panelist said during the Southeastern Association of Tax Administrators’ annual conference.

“We have a lot of very special information and the tax information that criminals would love to get their hands on, so I think, going forward, that is really something we should address over the next 18 months,” Julie Magee, director of tax regulatory affairs at Credit Karma Tax, said August 24.

“I think we have [done a good job], but I’ll be curious to confirm that,” added Magee, who served as commissioner of the Alabama Department of Revenue from 2011 to 2017.

John Mollenkamp of Intuit Inc. expressed concern about payroll taxes due in jurisdictions that require payments to be made via check because there is no option for paying the taxes electronically.

“Obviously, we’re not taking the check stock and the check printers out to somebody’s garage — there was just no way we were going to do that,” said Mollenkamp, who served as acting director of the Missouri Department of Revenue in 2016. “It was a little bit of an eye opener.”

In some areas, local governments weren’t open, so if a payment was made via check, it may have sat in an envelope for weeks, according to another speaker.

“Thank goodness, though, as an industry, we are mainly electronic, so we are better off now than we were 20 years ago,” Magee said, adding that the public health crisis may drive states to adopt legislative changes that result in more electronic options for the tax industry."

"We do have some archaic . . . situations where a real signature is required versus an electronic [one]," Magee said.

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Required minimum distributions waived in 2020 for most donors: RMD for individuals over age 70 ½ are suspended until 2021. This includes distributions from defined benefit pension plans and 457 plans. The RMD is an attractive way for donors to make a significant charitable gift directly from their IRA to a charity through a qualified charitable contribution (QCD) while avoiding taxable income. The suspension of the RMD may dampen somewhat the incentive for a donor who makes a gift from their IRA to count toward that minimum. However, the tax benefit of the QCD remains. The takeaway - donors directing a QCD to charity this year (up to $100,000 per individual) will still reduce their taxable IRA balance. This allows all taxpayers, itemizers and non-itemizers alike, to direct gifts from their IRA to charities in a tax efficient manner.

Military News

Non-negotiable: All Military Members Will Be Subject to Trump’s Payroll Tax Deferral

By Nicole Ogrysko All active-duty military members as well as federal civilian employees will be subject to the president’s upcoming payroll tax deferral, a senior administration official told Federal News Network.

The president’s payroll tax deferral, which the administration said all payroll providers will launch in unison, has left federal employees, their unions and members of Congress scrambling for more details about the policy and its impact on the workforce.

The Coast Guard was the first military service to publicly inform its members that they’d be subject to the changes. In a message to the workforce, the service said it will defer a 6.2% tax on employee wages and basic pay for military members from September through December, and that the deferrals are “non-negotiable.”

The payroll tax deferral applies to all Coast Guard military members who make $8,666 a month or less, the notice said.

As Federal News Network previously reported, civilian employees whose gross, biweekly wages are $4,000 or less are also subject to the payroll tax deferral.

Private sector employers have the option of implementing the payroll tax deferral, which stems from an Aug. 8 presidential memorandum, for their employees. As the nation’s largest employer, the federal government is planning to implement it, though many questions remain about the plan and its potential impact on the workforce.

Like many agency notices on the president’s planned payroll tax deferral, the Coast Guard message is light on specifics. It does, however, give some more details to questions that federal employees have raised over the past week about the upcoming payroll tax deferral.

The Coast Guard notice, for example, reiterates the payroll tax deferral affords employees no opportunity to opt out.

The changes in payroll tax deductions are temporary, and federal employees will have to pay back deferred taxes starting in January. They’ll have until April to do so before penalties and interest may accrue, the IRS has said.

The Coast Guard suggested employees and military members will pay the deferred taxes back over the course of several months, as opposed to a lump sum.

“The deferred payments will be subtracted from paychecks in January, February, March and April 2021 in addition to regular withholding,” the notice reads.

“Many employees have asked if there’s a way to somehow opt out of the deferral,” Robin Bailey, chief human capital officer at the IRS, told agency employees in an email, which Federal News Network reviewed. “We have had many discussions with Treasury and they have confirmed that no eligible IRS employees can opt out since all Treasury payroll providers must adopt the deferral across the board. We’ll provide more specificity on who is eligible along with Q&As.”

The IRS is still confirming when exactly employees will be subject to the president’s payroll tax deferral, Bailey said.

A notice to Customs and Border Protection employees provided even fewer details. The email, which Federal News Network reviewed, only reiterated the details the National Finance Center provided in a notice to its customers.

“Employees should seek guidance from tax professionals to determine impacts on an individual basis,” the CBP notice reads.

Federal employee unions have spent much time pressing OMB for details on the president’s payroll tax deferral.

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The National Treasury Employees Union, which wrote to OMB Director Russ Vought with a long list of questions about the upcoming tax deferral, said it has not received a response.

“We are nearly four weeks out from the issuance of the president’s executive order on payroll tax deferral and the lack of information for federal employees is unconscionable,” Tony Reardon, NTEU’s national president, said in a statement. “They deserve to know the full impact of this deferral on their paychecks including whether the program has already begun and how these deferred taxes will be collected next year. There is a distinct lack of transparency and disclosure on the financial implications of this executive order. As we saw during the historic government shutdown, many federal employees live paycheck to paycheck, and the government should not change those checks without adequate notice and complete honesty about what it means to their families’ finances.”

A senior administration official told Federal News Network payroll providers were planning to implement the tax deferral in time for the second paycheck of the month. For many civilian employees, the second paycheck is scheduled on or around Sept. 18.

Military members are paid in the middle and at the end of the month, and their next paydates are scheduled for Sept. 15 and Oct. 1, according to a DFAS pay schedule for 2020.

Estate and Trust News

IRS Provides Final Regulations on Deductions for Estates and Non-grantor Trusts, Including Excess Deductions on Termination

The Internal Revenue Service issued final regulations that provide guidance for decedents’ estates and non-grantor trusts clarifying that certain deductions of such estates and non-grantor trusts are not miscellaneous itemized deductions.

The Tax Cuts and Jobs Acts (TCJA) prohibits individuals, estates, and non-grantor trusts from claiming miscellaneous itemized deductions for any taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2026.

Specifically, the final regulations clarify that the following deductions are allowable in figuring adjusted gross income and are not miscellaneous itemized deductions:

• Deductions for costs paid or incurred in connection with the administration of the estate or trust which would not have been incurred if the property were not held in such estate or non-grantor trust.

• The deduction concerning the personal exemption of an estate or non-grantor trust.

• The distribution deductions for trusts distributing current income.

• The distribution deductions for trusts accumulating income.

In addition, the final regulations provide guidance on determining the character and amount of, as well as the manner for allocating, excess deductions that beneficiaries succeeding to the property of a terminated estate or non-grantor trust may claim on their individual income tax returns.

Frequently Asked Questions on Gift Taxes Below are some of the more common questions and answers about Gift Tax issues. You may also find additional information in Publication 559 or some of the other forms and publications offered at irs.gov. Included in this area are the instructions to Forms 706 and 709. Within these instructions, you will find the tax rate schedules to the related returns. If the answers to your questions can not be found in these resources, we strongly recommend visiting with a tax practitioner.

Who pays the gift tax?

The donor is generally responsible for paying the gift tax.

Under special arrangements the donee may agree to pay the tax instead. Please visit with your tax professional if you are considering this type of arrangement.

What is considered a gift? Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

What can be excluded from gifts The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.

1. Gifts that are not more than the annual exclusion for the calendar year.

2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).

3. Gifts to your spouse.

4. Gifts to a political organization for its use.

In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.

May I deduct gifts on my income tax return? Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct

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the value of gifts you make (other than gifts that are deductible charitable contributions). If you are not sure whether the gift tax or the estate tax applies to your situation, refer to Publication 559, Survivors, Executors, and Administrators.

How many annual exclusions are available? The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, $13,000 in 2009-2012 and $14,000 on or after January 1, 2013, the annual exclusion applies to each gift. The annual exclusion for 2014, 2015, 2016 and 2017 is $14,000. For 2018, 2019, and 2020, the annual exclusion is $15,000.

What if my spouse and I want to give away property that we own together? You are each entitled to the annual exclusion amount on the gift. Together, you can give $22,000 to each donee (2002-2005) or $24,000 (2006-2008), $26,000 (2009-2012) and $28,000 on or after January 1, 2013 (including 2014, 2015, 2016 and 2017). In 2018, 2019, and 2020, the total for you and your spouse is $30,000.

What other information do I need to include with the return? Refer to Form 709 (PDF) PDF, 709 Instructions and Publication 559. Among other items listed:

1. Copies of appraisals.

2. Copies of relevant documents regarding the transfer.

3. Documentation of any unusual items shown on the return (partially-gifted assets, other items relevant to the transfer(s)).

What is "Fair Market Value?" Fair Market Value is defined as: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate." Regulation §20.2031-1.

Whom should I hire to represent me and prepare and file the return? The Internal Revenue Service cannot make recommendations about specific individuals, but there are several factors to consider:

1. How complex is the transfer?2. How large is the transfer?

3. Do I need an attorney, CPA, Enrolled Agent (EA) or other professional(s)?

For most simple, small transfers (less than the annual exclusion amount) you may not need the services of a professional.

However, if the transfer is large or complicated or both, then these actions should be considered; It is a good idea to discuss the matter with several attorneys and CPAs or EAs. Ask about how much experience they have had and ask for referrals. This process should be similar to locating a good physician. Locate other individuals that have had similar experiences and ask for recommendations. Finally, after the individual(s) are employed and begin to work on transfer matters, make sure the lines of communication remain open so that there are no surprises.

Finally, people who make gifts as a part of their overall estate and financial plan often engage the services of both attorneys and CPAs, EAs and other professionals. The attorney usually handles wills, trusts and transfer documents that are involved and reviews the impact of documents on the gift tax return and overall plan. The CPA or EA often handles the actual return preparation and some representation of the donor in matters with the IRS. However, some attorneys handle all of the work. CPAs or EAs may also handle most of the work, but cannot take care of wills, trusts, deeds and other matters where a law license is required. In addition, other professionals (such as appraisers, surveyors, financial advisors and others) may need to be engaged during this time

Do I have to talk to the IRS during an examination? You do not have to be present during an examination unless IRS representatives need to ask specific questions. Although you may represent yourself during an examination, most donors prefer that the professional(s) they have employed handle this phase of the examination. You may delegate authority for this by executing Form 2848 "Power of Attorney."

What if I disagree with the examination proposals? You have many rights and avenues of appeal if you disagree with any proposals made by the IRS. See Publication 1 and Publication 5 (PDF) PDFfor an explanation of these options.

What if I sell property that has been given to me? The general rule is that your basis in the property is the same as the basis of the donor. For example, if you were given stock that the donor had purchased for $10 per share (and that was his/her basis), and you later sold it for $100 per share, you would pay income tax on a gain of $90 per share. (Note: The rules are different for property acquired from an estate).

Most information for this page came from the Internal Revenue Code: Chapter 12--Gift Tax (generally Internal Revenue Code

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The address provided must match the official IRS record.Line 4: Leave blank.

Line 6: Enter "Form 709."

Line 6 a-c: The ONLY option available for gift tax is 6b. DO NOT make any other selections in items 6-8.

Line 9: Enter the tax period (MMDDYYYY). If the tax period is unknown, refer to the "Written Requests" section below.

Line for Attestation Clause: The requester must read and agree to the attestation clause on Form 4506-T. This box must be checked to have Form 4506-T processed.

Signature/Title Requirements: The Requester must be authorized to receive the information. If the taxpayer listed on Line 1 is the Requester, no further documentation is necessary. If the Requester is other than the taxpayer shown in Line 1, the Title portion of the signature section must be completed and substantiated; see Documentation below.

Documentation: Please note that in every situation, the individual making the request for information must be authenticated.

1. If a Personal Representative/Executor/Executrix is signing the information request, then, Letters Testamentary, Letters of General Administration or another similar document from the Court must be provided with the request for information. Enter either "Personal Representative" or "Executor" or "Executrix" in the Title section.

2. If there is no probate and a surviving spouse is requesting the data, then a statement that no probate will be commenced, and a copy of a marriage certificate or other similar document is necessary to be provided with the request for information. Enter "Spouse" in the Title section.

3. If there is no probate and the estate is administered under the control of a Trustee, then a statement that no probate will be commenced and a Certificate of Trust or a copy of the complete Trust Instrument must be provided with the request for information. Enter "Trustee of the _______ Trust" in the Title section.

4. If a Trust Officer signs the request for information, the Bank and/or Trust Company must substantiate its authorization to receive taxpayer information, including identification the specific Trust Officer. Enter "Trust Officer" in the Title section.

5. If a tax professional signs the request for information, provide a copy of the initial Form 2848 submitted to the IRS for the same taxpayer and the same tax year. A new Power of Attorney is not enough; the record must be established on CAF prior to sending the request for information. For additional information, refer to the "A Note about Form 2848, Power of Attorney" section below. Enter "Power of Attorney" in the Title section.

§2501 and following, related regulations and other sources)Can a married same sex donor claim the gift tax marital deduction for a transfer to his or her spouse? For federal tax purposes, the terms “spouse,” “husband,” and “wife” includes individuals of the same sex who were lawfully married under the laws of a state whose laws authorize the marriage of two individuals of the same sex and who remain married. Also, the Service will recognize a marriage of individuals of the same sex that was validly created under the laws of the state of celebration even if the married couple resides in a state that does not recognize the validity of same-sex marriages.

However, the terms “spouse,” “husband and wife,” “husband,” and “wife” do not include individuals (whether of the opposite sex or the same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state, and the term “marriage” does not include such formal relationships.

Gifts to your spouse are eligible for the marital deduction.

For further information, including the timeframes regarding filing claims or amended returns, see Revenue Ruling 2013-17 PDF.

Revenue Ruling 2013-17 PDF, along with updated Frequently Asked Questions for same-sex couples and updated FAQs for registered domestic partners and individuals in civil unions, are available today on IRS.gov. See also Publication 555, Community Property.

How do I secure a gift tax return account transcript? The IRS will provide an account transcript for gift tax returns when Form 4506-T, Request for Transcript of Tax Return, is properly completed and submitted with substantiation. The transcript may be requested via fax or by mail using Form 4506-T. Upon receipt and verification (including matching current taxpayer and taxpayer representative records with the information on the submitted Form 4506-T), a hardcopy transcript will be mailed to the address of record. Incomplete or unsubstantiated requests will be rejected, and a Notice will be sent to the Requester. No fees apply.

Form 4506-T, Request for Transcript of Return, and instructions PDF are available on IRS.gov. Form 4506-T has multiple uses and special attention must be taken when completing the form for a gift tax inquiry. Complete the form using the printed instructions paying close attention to the following:

Lines 1a and 1b: Enter the D