Tax Planning for Your Business During COVID-19

While every year is different, this year is more different than most. Nations around the world are still dealing with the effects of COVID-19, and it appears this will be a continuing experience for some time to come. Something that has not changed is the importance of considering money-saving strategies that may minimize this year’s tax bill. A mid-year tax plan review gives you sufficient time to employ one or more of these four tax-limiting strategies. 1. Net Operating Losses (NOL) Acting in your favor, the CARES Act has temporarily limited the Tax Cuts and Jobs Act (TCJA) of 2017 by removing restrictions on NOLs. Under the authority of this new law, you are permitted to retroactively move losses you suffered between 2018 – 2020 back as much as five years, meaning you could shift a 2018 business loss as far back as 2013. Because 2017 tax rates were higher then and in previous years, moving a NOL retroactively could prove beneficial to your bottom line and increase your cash flow, which is a much better option than taking a loss in 2020. 2. Excess Business Losses The CARES Act also provided another tax-saving opportunity for businesses by retroactively eliminating the limits imposed on Excess Business Losses (EBLs) by the Tax Cuts and Jobs Act. Starting in 2018, the TCJA mandated that sole proprietorships and business organizations like S...

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Mid-Year Tax Planning in the Year of COVID-19

2020 is a year like no other. In the last six months our nation has seen the passage of three major pieces of legislation that made tax planning opportunities available and provided financial relief during extreme economic uncertainty. The COVID-19 pandemic is likely to change business practices at all levels and force the closure of many local businesses. In addition, 2020 is a national election year with the possibility of a presidential change. All of these unusual conditions make this year’s mid-year tax planning novel and extremely important for correctly positioning your finances and reducing your tax liabilities. Background These three significant legislative Acts may have an effect on the taxes you pay this year. 1. The Taxpayer Certainty and Disaster Tax Relief Act (Disaster Act). Passed in December 2019, this Act provided an extension of tax benefits that had either expired or were about to expire. 2. The Setting Every Community Up for Retirement Enhancement (SECURE) Act. Also passed in December 2019, the SECURE Act significantly changed many tax-saving retirement rules. 3. The Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act became legal on March 27, 2020 and provided immediate economic relief as well as a variety of tax saving opportunities. It’s also worth noting that if President Trump loses his office after this year’s election, there is a strong likelihood of considerable changes to...

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Crafting Your Portfolio

Your portfolio’s design is a reflection of your investment philosophy. Before you can begin to craft your portfolio, you must have clear investment goals and objectives. You must also have completed your investment policy statement, defining how you plan to identify and select the investments in your portfolio, as well as the actions you intend to take to achieve your required rate of return. Two general investment strategies can be used: 1. Strategic decisions contemplate the investor’s investment horizon, risk profile, required returns and cash flow needs, available assets, tax brackets, inflation rates, and the average returns of different asset classes. 2. Tactical decisions are made by investors who believe one asset class will perform better than another, such as expecting stocks to outperform bonds, or international equities to outperform domestic equities. Together, strategic and tactical decisions will result in a mix, or a weighting, of asset classes that are believed to maximize returns for the investor’s acceptable level of risk. These asset classes are also sector-weighted against an index that will be used to measure the portfolio’s performance, and/or with a bias toward a sector expected to outperform other sectors. When examining securities, investors try to identify securities that appear to be mispriced. There are many methods for gauging the desirability of the security, but all these methods fall into one of two main classifications: technical analysis, and...

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Top Tax Planning Opportunities for 2019, Part 5

Top Tax Tip #9: Choose Your Filing Status to Skirt the 3.8% NIIT Since married people can file either jointly or separately, this important financial decision might best be made, in part, on their vulnerability to the 3.8% NIIT (net investment income tax) they might have to pay. As a reminder, the amount of unearned income subject to the 3.8% NIIT is the lesser of either the net investment income (NII) or the excess over an applicable threshold amount (ATA) of the modified adjusted gross income (MAGI). Included in the NII is gross income from interest, dividends, annuities, royalties, and a trade or business considered a passive activity. Excluded from the NII are qualified retirement plans, wages and salaries, and self-employment income. Remember, too, that the ATA is $125,000 for married taxpayers that file separately, and $250,000 for married taxpayers that choose to file jointly. While initially it may appear that the effect of the 3.8% NIIT would make no difference because of the similarity of ATA for filing separately or jointly, a closer analysis shows individual circumstances could sway the decision one way or the other. Should one spouse have most of the NII and the other have less, filing separately might save significantly on the 3.8% NIIT tax. Deciding whether to file separately or jointly also depends on the 0.9% Additional Medicare Tax as either one, or...

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Top Tax Planning Opportunities for 2019, Part 4

Top Tax Tip #7. Intra-Family Loans For families with estates that would otherwise have to pay the wealth transfer tax, intra-family loans have the capacity, when interest rates are low, to provide substantial tax-free transfers. The key to taking advantage of this benefit is when parents loan money to their children at a low interest rate and the children then invest the loaned money at a higher rate. In effect, the difference between the loaned rate and the new income constitutes a tax-free transfer of wealth to the children. The minimum interest rate is defined as the applicable federal rate (AFR) for the month in which the loan takes place. If the loan is for three years or less, the short-term AFR is used; for loans with a length of 3 to 9 years, the midterm AFR is the right choice; and if the loan has a term that’s more than nine years, the long-term AFR is appropriate. In January 2019 the semiannual AFRs were: Short-term AFR 2.72% Midterm AFR 2.89% Long-term AFR 33.15% Here’s a good example: A father loans his son $1,000,000 in January 2019 with a 12-year, interest-only balloon note. The interest rate is 3.15%. The son invests the money and produces a 10% after-tax return. By the end of the 12-year period, the son’s investment has grown to $3,138,428. The amount due after 12 years...

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